Professional Documents
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GROWTH OR VALUE?
An ETF rotation strategy 8
BUILDING A TREND-
FOLLOWING SYSTEM
A crossover strategy 24
A DIRECTIONAL PATTERN
TO RIDE THE WAVE
The 2HL+ pattern 32
N-CAMA: COMBINING
ARTIFICIAL INTELLIGENCE
WITH A TIME-TESTED
INDICATOR
A dynamic trading model 36
INTERVIEW
Teresa Lo 42
DECEMBER 2023
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CONTENTS DECEMBER 2023, VOLUME 41 NUMBER 13
Authorization to photocopy items for internal or personal 30 Market Rap 60 Explore Your Options
by Jay Kaeppel
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52 Traders’ Tips
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by CCC, a separate system of payment has been arranged.
32 A Directional Pattern To Ride 57 Advertisers’ Index
The fee code for users of the Transactional Reporting Service The Wave 57 Editorial Resource Index
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to be reliable but not guaranteed by us without further Technical Analysis Indicator
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Traditional technical analysis
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Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
risk capital should be used for trading and only those with sufficient risk capital should consider trading.
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
CRUDE OIL OPTIONS NOW EXPIRE search for “protection functionality pm Eastern, to the distance between
THREE TIMES PER WEEK; SHOULD for market and stop orders.” the strike price of the long put option
RETAIL TRADERS CONSIDER THEM On the morning of October 4th, and the futures entry price, plus the
FOR SPECULATION? (PART 3 OF 3) crude oil futures were trading about premium paid for the put. Assuming it
Last month, we discussed the prac- $3.00 below the previous day’s close was possible to execute the trade at the
tice of using long calls and puts with at $86.00 per barrel. This price might clean and simple figures noted (long
proximal expirations (a day or two have seemed like a bargain after the the futures contract from $86.00 even
away rather than a month or two) to previous week’s high closer to the and long an $85.00 put option from
speculate on short-term price moves. mid-$90.00s. However, speculators $0.50), the trader would be on the
This month, we will talk about us- looking for a bounce, or something hook for a maximum potential loss
ing long weekly expiration calls and more, might have been hesitant of $1.50, or $1,500. Not necessarily
puts to limit the price risk of trading to catch a falling knife via a long chump change, but not unlimited risk,
futures. futures contract due to the unlimited either. This protection is absolute
Buying weekly options against until the option expires. Unlike stop-
futures contracts is a risk management Unlike stop-loss loss slippage and malfunctioning
tool that replaces the more common markets that expose a trader to far
stop-loss order, which can be fraught slippage and more downside risk than expected,
with complications such as premature malfunctioning this strategy is fail-safe. If oil goes
stop-outs, slippage, or even failure to markets that expose to zero or lower before expiration, the
fill if liquidity dries up. As a reminder, a trader to far more protection is in place and working as
stop-losses are not guaranteed to expected. Even more important is the
be filled at the stated price; they
downside risk than reality that the trade is still alive. If
become market orders once the price expected, this strategy oil drops to $80.00, the trader will
is reached and are, therefore, subject is fail-safe. be staring at a large loss, but there
to slippage. Further, the exchange has is hope as long as there is time to
a mechanism that essentially turns a risk that comes with trading futures option expiration. Anything can
stop order into a stop-limit order; this outright and the snags that come happen in a day or two; this strategy
means if the ability to fill the order with stop-loss orders. A better way gives traders far more lasting power
within the exchange’s reasonable to play the upside, with the quick and than simply buying a futures contract
price window, the stop order becomes intense profit potential long futures and placing a stop-loss order. Once
a limit order at the stated price. This contracts deliver but with absolutely a trader is stopped out, it is difficult
order might or might not ever be limited risk, would be to go long a to get back into the market without
filled, so it is possible the stop-loss futures contract at or near $86.00 chaos, losses, or both.
order a trader intended to protect their and then purchase a Friday weekly Long options with proximal
position from runaway losses doesn’t expiration (2.5 days) $85.00 put for expiration dates can be used to
limit or even mitigate loss at all. If 50 cents or $500. Doing so limits the hedge day trades or swing trades
you are interested in the logistics and risk to the trader, at least until option (speculations intended to be held
details, visit the CME website and expiration on Friday afternoon at 2:30 for a few days but not beyond the
6 • December 2023 • Technical Analysis of Stocks & Commodities
Futures
ABLETREND 8.0
the Major Upgrade Since 2007
Options are Featuring Award-Winning Signals
depreciating assets;
they are nice to have
when needed but
also work against a
trader in a sideways or
favorable market.
expiration of the protective option).
I’ve pointed out the advantages of
this approach, but it is my job to
ensure that the disadvantages are
equally represented. The primary
drag of using a long option to hedge a
futures position is time value erosion.
Options are depreciating assets; they
are nice to have when needed but also
work against a trader in a sideways or Multi data source support Enhanced AutoScan
favorable market. Using the previous Multiple monitors support 30+ workspaces simultaneous
example, the trader would only be Ichimoku Cloud 40+ charts in one workspace
profitable if the gains from the long Oscillator Blue/Red confirmation Portfolio Performance module
futures contract surpass the losses
on the long put option. If held to
expiration, the futures price would Traders Rave Over AbleTrend
need to be at $86.50 to break even
because the 50 cents in premium
paid for the $85.00 put option must
be overcome. A futures trader using SINCE 1994
ABLETREND 7.0 COLLECTED BY
a stop-loss order would be profitable
at $86.01, not $86.51. Similarly, if the
futures price on Friday afternoon is
$86.00, the trader using a long put
to limit risk absolutely would be
suffering a loss of $500 (50 cents in
premium x $10). Assuming he wasn’t
stopped out prematurely at some
point between entry of the trade and
Friday afternoon, the futures trader
would be breaking even at $86.00.
In truth, there isn’t a perfect
approach to trading. If there were,
it would be easy…and everyone TEST DRIVE THE LATEST SIGNALS
would do it. Each trader must find
what works best for them, based
on their personality, risk tolerance,
and trading capital, and proceed
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-
LY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF
accordingly. 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.
Growth Or Value?
Choosing between growth or value stocks presents Generally, growth stocks tend to outperform in bull
a challenging dilemma for every investor. Here is a markets when investors are optimistic about the
strategy that will help you beat the market by rotating economy and earnings growth. On the other hand,
between Vanguard’s value and growth ETFs accord- value stocks tend to outperform, or at least have less
ing to market conditions. risk, during bear markets or periods of rising interest
rates when investors are looking for steady earnings
V
alue and growth investing are two completely and dividends.
different investing styles. Growth investing For example, the largest growth ETF, Vanguard
involves investing in companies that have Growth (VUG), had gains of 75% in the 2020–2021
high potential for future growth, even if bull market when growth stocks were in favor (Figure
they are trading at a high price relative to their cur- 1). In contrast, Vanguard Value (VTV) had much
rent earnings. smaller gains of 22.7% during that period. But when
Some of the best stocks that have outperformed the bear market hit in 2022, VTV declined only 4.7%
the market recently belong to growth industries such versus VUG’s 25% sharp drop.
as artificial intelligence (AI), electric vehicles, cloud It is therefore important to have a versatile portfolio
computing, cybersecurity, etc. and switch between growth and value stocks according
Value investing, on the other hand, involves in- to market conditions in order to minimize risk and
vesting in companies that are currently trading at a maximize returns over the long term.
discount relative to their intrinsic value, even if they It is easy to see when value or growth are outper-
are not necessarily growing as quickly as growth forming in retrospect, but how can you figure out
companies. Both investing styles have advantages the right time for switching in real time? In the next
and disadvantages. Growth stocks have more risk and sections, I will present a strategy that will help you
volatility because it is notoriously difficult to price avoid having to make any subjective decisions and
them correctly, especially when they have little or which, by the way, beat the market by a wide margin
no current earnings. Value stocks, however, can also by trading value and growth ETFs.
be risky and you should try to avoid the
so-called “value traps” where stocks may
look cheap but they can become even
cheaper because of stagnant growth or
deteriorating fundamentals.
The performance of growth or value
stocks can vary widely from year to
year and can depend on a variety of
factors, including the overall state of
WAN WEI/SHUTTERSTOCK
may outperform value stocks, while in FIGURE 1: GROWTH VS. VALUE (VANGUARD). This daily chart shows the Vanguard Growth ETF (VUG)
other years, the opposite may be true. in red with the Vanguard Value ETF (VTV) superimposed in black, from 3/1/2020 until 7/21/2023.
by Markos Katsanos
December 2023 • Technical Analysis of Stocks & Commodities • 9
But f i r st, I Ticker Name
AUM Expense Average P/E
Yield
Total Annualized Return
thought it would (billions) Ratio Volume Ratio 3-Year 5-Year 10-Year 15-Year
be helpful to VUG Vanguard Growth $95.3 0.04% 918,000 35.5 0.59% 10.7% 14.1% 14.5% 11.8%
Growth
Growth
i n for mation VBK
Vanguard Small-
$14.8 0.07% 166,000 117.0 0.66% 4.7% 5.9% 8.7% 9.5%
about value and Cap Growth
growth ETFs.
iShares Russell
IWO $10.5 0.23% 365,000 37.6 0.77% 5.7% 3.9% 8.4% 9.0%
2000 Growth
VTV Vanguard Value $101.8 0.04% 2,093,000 15.2 2.53% 15.2% 9.3% 10.2% 9.2%
ETF IVE
iShares S&P 500
$26.3 0.18% 559,000 20.5 1.81% 16.5% 10.5% 10.0% 8.4%
statistics Value
Value
Vanguard Small-
In the table in VBR Cap Value
$26.2
0.07% 396,000 12.7 2.14% 19.4% 6.6% 9.0% 9.5%
Figure 2 you IWN iShares Russell
$11.9
0.23% 1,647,000 22.6 2.15% 17.4% 4.0% 6.9% 7.8%
can see some 2000 Value
useful statistics
SPY SPDR S&P 500 $426.6
0.09% 79,124,000 21.2 1.44% 13.4% 12.0% 12.4% 10.3%
for value and FIGURE 2: GROWTH VS. VALUE (VANGUARD & ISHARES). This table shows statistics for eight ETFs (four value ETFs and four growth ETFs
from Vanguard and iShares by Blackrock) plus SPY. Assets under management (AUM) and average three-month volume are as of 7/21/2023.
growth ETFs
In the bottom line you can see, for comparison purposes, the corresponding SPY ETF statistics. In the last four columns you can see the 3-,
from Vanguard 5-, 10-, and 15-year total (including dividends and distributions) annualized performance. Large-cap growth ETFs outperformed both value
and Blackrock. and small-cap growth ETFs during all time segments except the most recent 3-year period.
As you can see,
large-cap growth ETFs (Vanguard’s VUG and Blackrock’s In Figures 3 & 4 you can see the top 10 holdings of each
iShares IVW) outperformed both value and small-cap ETF and their P/E ratios.
growth ETFs during all time segments except for the most I was surprised to see that 7 out of 10 stocks of Black-
recent three-year period, most probably because of the rock’s iShares Value ETF (IVE) top 10 holdings (which
Fed’s 2022–2023 interest rate hikes induced bear market, includes AMZN, CRM, and NFLX) had a P/E higher
which impacted mainly growth stocks. This is because than 37, so perhaps it would make more sense to classify
growth stocks are more vulnerable to rising interest rates, them as growth rather than value stocks. This motivated
as these companies may have high levels of debt and tend me to check on the method that each fund uses to select
to have longer-term cash flow horizons than do value the ETF’s holdings.
stocks, making them more susceptible to rising borrow- The Vanguard ETFs track the Center For Research In
ing costs. Another noteworthy statistic is that large-cap Security Prices LLC (CRSP) Indexes, while the iShares
growth ETFs outperformed the corresponding small-cap ETFs use the S&P value and growth indexes. The CRSP,
ETFs by a wide margin. which is a research center at the University of Chicago
There was no clear winner, however, in the value ETF Booth School of Business, classifies, according to its
group. website, growth securities using six factors (see “Further
E-Trade 13.70%
Fidelity 13.08%
Schwab 13.08%
Vanguard 13.25%
ibkr.com/iwantmore
• Book to price
• Forward earnings to price
• Historic earnings to price
• Dividend-to-price ratio
• Sales-to-price ratio
On the other hand, the S&P value index FIGURE 5: VANGUARD GROWTH VS. VALUE ETFS, WEEKLY. This displays a weekly chart of the
uses only three factors to classify value VTV and VUG ETFs during the last five years from 2018 until August 2023. The 15-week VUG and VTV
RSMK indicators are plotted below the price pane and the 30-week VFI (applied only to VUG) is in the
stocks: book value to price ratio, earnings
bottom window. Positive values are plotted in green and negative in red. Notice that the VFI crossed
to price, and sales to price ratio, and the under zero in January 2022 and remained in negative territory until January 2023. The VFI applied on
following three factors to classify growth: the VTV (not shown) was negative only half the time from June until November 2022. As you can see
three-year net change in earnings per share by the blue vertical lines under the buy signals, the corresponding RS indicator difference triggered
over current price, three-year sales per share the switching from the weaker to the stronger ETF.
growth rate, and momentum (12-month %
price change). Another reason for the disparity is that Growth and value switching system:
the last criterion is technical and not fundamental. The Trading rules
VUG’s better performance provides evidence that the As I mentioned above, investing is dynamic, and different
CRSP six-factor method for selecting growth stocks is market conditions call for different strategies that favor
rather better. either growth or value stocks.
As you can see in Figure 3, both growth selection What’s an investor to do? Here, I will present a momen-
methods resulted in predominance of mega-cap stocks tum trading system that rotates between the two. My main
like Apple, Microsoft, and Amazon. This wasn’t the case objective in designing this system was to beat the broader
with Vanguard’s Value ETF (VTV), where the top three market and minimize drawdowns by switching between
holdings had a market cap only 25% of the correspond- Vanguard’s value and growth ETFs (VUG and VTV).
ing top three VUG holdings. You might have noticed in The strategy is pretty simple. In order to select the best
Figures 3 & 4 that there are some common names in both ETF that was more likely to outperform, I decided to use
growth and value ETF. This is because, even though the relative strength.
investing styles are perceived as being in opposition to The classic relative strength indicator (RS), which is
each other, there are some similarities between the two
types of stocks. Warren Buffett, the most famous pro-
ponent of value investing, wrote in his 1992 Berkshire
Hathaway letter to shareholders: “In our opinion, these It is easy to see when value or
two approaches are joined at the hip: Growth is always growth are outperforming in
a component of the calculation of value, constituting a retrospect, but how can you
variable whose importance can range from negligible to figure out the right time for
enormous.”
switching in real time?
• Bear market filter. All VUG 09/06/13 82.67 04/04/14 92.7 12.13% $11,962 $10,778 31 −1.73% 16.80%
trades were blocked if the VTV 04/04/14 78.04 07/11/14 81.3 4.18% $4,598 $15,376 15 −2.59% 5.07%
30-week VFI indicator VUG 07/11/14 99.15 06/19/15 109.61 10.55% $12,142 $27,518 50 −7.41% 11.73%
was negative, indicating VTV 12/31/15 81.52 05/27/16 84.66 3.85% $4,880 $32,397 22 −11.09% 4.39%
that money was flowing VUG 08/05/16 112.84 11/11/16 109.53 −2.93% −$3,906 $28,491 15 −5.29% 0.72%
out of the ETF. VUG 02/24/17 120.61 12/15/17 141.54 17.35% $22,269 $50,760 43 −0.99% 17.35%
VUG 01/19/18 149.15 10/05/18 157.26 5.44% $8,171 $58,931 38 −9.76% 8.64%
Sell rules VUG 03/01/19 153.44 11/08/19 172.33 12.31% $19,530 $78,462 37 −3.09% 12.70%
• Relative strength. The VTV 11/08/19 116.7 01/03/20 119.48 2.38% $4,220 $82,682 9 −1.17% 3.70%
trade was closed if the VUG 03/20/20 139.61 12/04/20 247 76.92% $140,440 $223,122 38 −4.33% 77.48%
relative strength of the VTV 12/04/20 119.15 06/25/21 137.86 15.70% $50,669 $273,790 30 −3.18% 19.41%
current open trade ETF VTV 12/31/21 147.11 08/12/22 142.59 −3.07% −$11,532 $262,259 33 −13.56% 3.25%
was below the relative VTV 11/18/22 142.38 02/10/23 143.75 0.96% $3,434 $265,693 13 −3.61% 3.32%
strength of the other one VUG 02/10/23 238.13 08/11/23 280.01 17.59% $64,255 $329,948 28 −5.93% 23.91%
for two consecutive weeks FIGURE 7: 10-YEAR BACKTEST FOR RS SWITCHING SYSTEM. This shows the list of trades signaled in a 10-year
and was also below its 20- simulation test from 2013 to 2023. The maximum drawdown that occurred in 2022 was due to a long trade in VTV at
week moving average. the end of 2021.
• Stop-loss. The trade was
closed if the ETF was down 7% or more below the respectively, with considerably less risk, thus producing
previous week’s closing price. This stop was deployed a smoother equity curve. The maximum drawdown was
only in bear markets when the ETF was below its only 15% versus VUG’s 50% and VTV’s 60%. It is inter-
40-week (200-day) moving average. esting that the VUG buy & hold test outperformed both
VTV and SPY, producing more than double the VTV net
In the sidebar titled “Code For Indicators And ETF profit and 1.6 times the SPY profit. Not surprisingly, the
Rotation Strategy, In Amibroker Formula Language,” I maximum drawdown (50–60%) of all buy & hold tests
provide a code listing for my switching system as well as occurred during the 2008 bear market.
for the indicators I used in the system (that is, my custom The worst drawdown of the system occurred in June
relative strength indicator (RSMK) and the volume flow 2022 because of a VTV long trade on 12/31/2021 (see
indicator). Figures 5 and 7), a few days before the start of the 2022
bear market. This trade was triggered because of VTV’s
Testing method superior relative strength compared to VUG. The trade
The VUG and VTV ETF started trading in February 2004 was marginally profitable for the first four months until
so for the current simulation, I used historical data for the April 2022, when VTV reversed direction and followed
last 19-year period until 8/11/2023. the general market’s summer slide.
In order to compare the system objectively with the buy In the chart in Figure 5 you can see the signals produced
& hold results, I specified the trade size as a percent of by the system during the last five-year period. Notice that
equity. For the sake of simplicity, dividends are not ac- there were no VUG trades during the 2022 bear market,
counted for in the performance. Typical current discount as the VFI was negative during the entire period. The
commission rates (0.01 per share) were used throughout VFI also managed to block all trades during the 2008
the test and the initial investment amount was $100,000.
This is a weekly trading system so I used weekly bars.
History shows that the stock market
System evaluation goes through cycles of varying
In the table in Figure 6 you can see the test simulation length that favor either growth or
results of the 5-, 10-, and 19-year backtests.
The relative strength system managed to beat all buy
value stocks, and this calls for an
& hold strategies easily, producing five, three, and two appropriate rotation strategy.
times more profits than holding VTV, SPY, and VUG,
14 • December 2023 • Technical Analysis of Stocks & Commodities
CODE FOR INDICATORS AND ETF ROTATION STRATEGY, IN AMIBROKER FORMULA LANGUAGE
RELATIVE STRENGTH INDICATOR (RSMK)
/******************************************************************** SetBacktestMode( backtestRegular );
CUSTOM RELATIVE STRENGTH INDICATOR (RSMK) PosQty = 1; SetOption( "MaxOpenPositions", PosQty );
Provided By : MARKOS KATSANOS Copyright 2020 IE= 100000;SetOPTION( "INITIALEQUITY", IE );
********************************************************************} SetPositionSize( 100, spsPercentOfEquity);
For more information see Markos Katsanos's articles in the RoundLotSize = 1; SetOption("MinShares",1);
March 2020 issue of Technical Analysis of Stocks & Commodities SetOption("AllowPositionShrinking", True );
magazine. SetOption("CommissionMode",3);
*/ SetOption("CommissionAmount",.01); //$.01 per share
SetOption("MinPosValue",1000);
RSBARS = Param("RS BARS", 90, 10, 500, 10 ); SetTradeDelays( 0, 0, 0, 0 );
SK = Param("SMOOTHING CONSTANT", 3, 1, 50, 1 ); BuyPrice = CLOSE;SellPrice =CLOSE;
MAB = Param("RS MA BARS", 20, 10, 150, 10 );
VPERIOD=Optimize("VPERIOD",30,26,30,4); //VFI Period
SYMBOL1 = ParamStr( "Symbol", "VUG" ); RSBARS=Optimize("RSBARS",15,13,15,2); // Rel. Strength Bars
BASE = Foreign( SYMBOL1, "C" ); MARSBARS=Optimize("MARSBARS",20,15,25,5); // Rel. Strength MA bars
SYMBOL2 = ParamStr( "Index", "SPY" ); maxlossperc=Optimize("MAXLOSSPERC",7,5,9,2); // Stop Loss
IM = Foreign( SYMBOL2, "C" );
//ETF
//RSMK SYMBOL1 = ParamStr( "ETF1", "VUG" );
R12=BASE/(IM); VUG = Foreign( SYMBOL1, "C" );
RS1=log(R12)-log(Ref(R12,-RSBARS)); SYMBOL2 = ParamStr( "ETF2", "VTV" );
RS=EMA(RS1,SK)*100; VTV = Foreign( SYMBOL2, "C" );
MARS=MA(RS,MAB); //Comparison Index
dynamic_color = IIf( RS > 0 AND RS>MARS, colorGreen, COLORRED); IndexCode = ParamStr( "Index", "SPY" );
Plot(RS,"RSMK",dynamic_color); SPY = Foreign( IndexCode, "C" );
Plot(MARS,"MA",colorGreen,styleDashed); //RSMK Indicator (see also the March 2020 issue of TASC)
Plot(0,"",colorBLUE); RSMK1=EMA(log(VUG/(SPY))-log(Ref(VUG/(SPY),-RSBARS)),2)*100;
RSMK2=EMA(log(VTV/(SPY))-log(Ref(VTV/(SPY),-RSBARS)),2)*100;
VFI INDICATOR //VFI Calculaltion
/********************************************************************
Coef = 0.2;VCoef = 2.5;
VOLUME FLOW INDICATOR (VFI)
inter = log( Avg)-log(Ref( Avg,-1));
Provided By : MARKOS KATSANOS Copyright 2004
Vinter = StDev(inter, 30 );
********************************************************************}
Cutoff = Coef * Vinter * Close;
{For more information see Markos Katsanos's articles in the
Vave = Ref( MA( V, VPeriod ),-1);
June 2004 and July 2004 issues of Technical Analysis of Stocks & Com-
Vmax = Vave * Vcoef;
modities magazine.
Vc = Min( V, VMax );
Period=days for VFI calculation. Default values are 130 for daily and
MF = Avg - Ref( Avg,-1 );
26-30 for weekly charts.
VCP = IIf( MF > Cutoff, VC, IIf(MF<-Cutoff,-VC, 0));
*/
VFI = Sum( VCP,VPeriod )/Vave;
VFI = WMA( VFI,2 );
Period = Param("VFI Period", 130, 2, 300, 10 );
Smooth=Param( "SMOOTH", 2, 1, 10, 1 );
//BUY
crit=Param( "critical", 0, -30, 30, 5 );
Buy1 = Name()==SYMBOL1 AND RSMK1>RSMK2 AND
MAP=Param( "MA Period", 30, 20, 100, 10 );
RSMK1>MA(RSMK1,MARSBARS);
Coef = 0.2;
Buy2 = Name()==SYMBOL2 AND RSMK2>RSMK1 AND
VCoef = Param("Vol Cutoff", 2.5, 1, 5, .5 );
RSMK2>MA(RSMK2,MARSBARS);
inter = log( Avg ) - log( Ref( Avg, -1 ) );
Buy=(BUY1 OR BUY2) AND VFI>0;
//SP=IIf(BarIndex()>30,30,BARINDEX());
//SELL
Vinter = StDev(inter, 30 );
SELL1 = Name()==SYMBOL1 AND RSMK1<RSMK2 AND
Cutoff = Coef * Vinter * Close;
RSMK1<MA(RSMK1,MARSBARS) AND RSMK1<Ref(RSMK2,-1);
//PERIOD=IIf(BarIndex()>PERIOD,PERIOD,BarIndex());
SELL2 = Name()==SYMBOL2 AND (RSMK2<RSMK1 AND
Vave = Ref( MA( V, Period ), -1 );Vave=IIF(Vave>0,Vave,1);
RSMK2<MA(RSMK2,MARSBARS) AND RSMK2<Ref(RSMK1,-1));
Vmax = Vave * Vcoef;Vc = Min( V, VMax );MF = Avg - Ref( Avg, -1 );
SELL3= C<MA(C,50) AND C<(1-MAXLOSSPERC/100)*Ref(C,-1);
VCP = IIf( MF > Cutoff, VC, IIf ( MF < -Cutoff, -VC, 0 ) );
Sell=SELL1 OR SELL2 OR SELL3;
VFI1 = SUM( VCP , Period )/Vave;
Short=False;Cover=False;
VFI =WMA( VFI1, smooth ); MAVFI=MA(VFI,MAP);
//PLOT
dynamic_color = IIf( VFI >= CRIT, colorGreen, colorRed );
SetChartOptions( 0, chartShowArrows | chartShowDates );
Plot( VFI, "VFI(" + PERIOD + ")", dynamic_color, ParamStyle("Histogram
Equity(1); // evaluate stops, all quotes
style", styleHistogram | styleNoLabel, maskHistogram ) );
SetOption("EveryBarNullCheck", True );
PlotGrid( CRIT, colorBLACK );
Plot( C, "Price", colorDefault, stylecandle | styleThick);
Plot( MAVFI, "",colorGREEN, styleDashed );
PlotShapes( IIf( Buy, shapeUPTRIANGLE, 0 ),colorBlue,0,Low);
PlotShapes( IIf( Sell, shapeDownTRIANGLE, 0 ), colorOrange,0,High);
VALUE OR GROWTH RS SWITCHING SYSTEM
//VUG VTV ETF RS SWITCHING WEEKLY LONG SYSTEM // Custom text labels displayed with PlotText
//COPYRIGHT MARKOS KATSANOS 2023 dist = 2*ATR(10);
//To be applied on a weekly chart of VUG OR VTV ETFs for( i =0; i<BarCount;i++ )
//The exploration or Backtest should be run on a watch list containing {if( BUY[i] ) PlotTextSetFont("BUY","ARIAL",10,i,L[ i ]-dist[i], colorBLUE,
//only VUG and VTV. colorDefault,0);
bear market (not shown in the chart). The most profitable The backtest results indicate that this simple strategy
trade was triggered on 3/20/2020, at the bottom of the produced higher returns with less volatility and draw-
Covid-19 crisis when the fiscal stimulus payments found down than holding either of the value or growth ETF
their way into the stock market and helped propel growth independently.
and speculative names. This trade wasn’t blocked by VFI You should, however, keep in mind that this was achieved
since it was still positive at that time. In observing the VUG with the benefit of hindsight and it is possible that the
chart in isolation, I noticed that this trade was closed rather performance could not be as good in the future.
prematurely in December 2020, leaving a lot of money on Nevertheless, I recommend this strategy to long-term
the table. The system, however, was still in the market and index investors and believe that switching ETFs using a
only replaced VUG by VTV, which, by the way, performed relative strength approach will help bring more profits to
better during the next six-month period. your investments.
A rather surprising statistic was that the volatility and I hope you found this article helpful. If you have any
drawdown of buying and holding VUG was less than either questions or suggestions, don’t hesitate to send me an
VTV or SPY (see the first three columns in Figure 6). email.
This is because VUG’s portfolio is less risky than typical
speculative tech names due to diversification across mul- Markos Katsanos is the author of Intermarket Trading
tiple sectors, as it includes growth stocks from healthcare, Strategies and is a Stocks & Commodities Contributing
financials, industrials, and consumer defensive sectors, Writer. He can be reached at markos.katsanos@gmail.
which help lower portfolio volatility. VUG, therefore, of- com or through his website at http://mkatsanos.com.
fers a better choice for the buy & hold investor than either The code given in this article is available in the S&C
VTV or SPY, since it will benefit from tech-driven growth Article Code section of our website, Traders.com.
bull runs (such as the recent AI parabolic uptrend), while
diversification will lower the risk in the case of downtrends. See our Traders’ Tips section beginning on page 52 for
Moreover, its lower expense ratio and liquidity also make implementation of Markos Katsanos’ technique in vari-
it a better long-term investment option. ous technical analysis programs and trading platforms.
Accompanying program code can be found in the Traders’
Final thoughts Tips area at Traders.com.
History shows that the stock market goes through cycles
of varying length that favor either growth or value stocks, Further reading
and this calls for an appropriate rotating strategy. Katsanos, Markos [2008]. Intermarket Trading Strategies,
In this article, I presented a trading strategy that uses John Wiley & Sons.
short-term momentum to follow the market action and Katsanos, Markos [2020], “Using Relative Strength To
bring more clarity to your investing by removing the Outperform The Market,” Technical Analysis of Stocks
guesswork in deciding when to switch between value and & Commodities, Volume 38: March.
growth. In the stock market, however, nothing works 100% Katsanos, Markos [2004], “Using Money Flow To Stay
of the time and the relative strength condition, when used With The Trend” Technical Analysis of Stocks &
on its own, will fail in protracted bear markets when both Commodities, Volume 22: June.
value and growth are in a downtrend. In these cases, the CRSP Market Indexes Methodology, https://www.crsp.org/
strategy blocks all signals automatically and switches to indexes-pages/crsp-market-indexes-methodology
cash in order to reduce risk and drawdown.
16 • December 2023 • Technical Analysis of Stocks & Commodities
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
ALGO OVERRIDE and they might perform worse. But The second is with your psychology
When is it appropriate to override you do not know what will happen. or emotions. Let’s say you get very
an algo’s signals? To use the architect analogy, maybe nervous around every regularly
Imagine you are an architect. You the changes you made will make a scheduled Fed meeting. You always
spend years in university, learning the better house, or maybe the house consider overriding your algo at
principles, rules, etc of architecture. will now be structurally unstable such times. Such announcements
After you graduate with a degree, you and will collapse. cause you a great deal of stress
likely spend years working alongside So ideally, you never override the and worry over your algos. In this
a master architect. Eventually, you go algo signals. situation, ask yourself if the stress
off on your own, and you are awarded That being said, I can think of is really worth the potential gain.
a contract to design your first house. two cases where you might consider Maybe it is better to just turn off
Do you design it using the principles overriding your algo. The first the algo for such announcements.
you have learned and trusted over A better solution to this situation
the years, or do you decide to “wing is to never trade announcements
it”—to go against the established I strongly feel that at all, even during the backtest.
rules and try out untested new ideas if you believe in the Simply turn off trading during the
and concepts? concept of backtesting announcement dates/times when
If you did the latter, you likely you first run your backtest. Then
would not remain an architect for
to “prove” an algo the backtest will reflect what you
long. Your desire to go against the strategy’s effectiveness, really desire—no trading during Fed
rules will eventually lead to problems you should follow those announcements.
in your designs. same rules in your live As you can guess, I am not a fan
It is the same idea as going against trading. of overriding algo signals at all. I
the signals of your algos. strongly feel that if you believe in
With an algo, you likely have the concept of backtesting to “prove”
already spent a great deal of time is a major change in the market an algo strategy’s effectiveness, you
honing your development process conditions. Let’s say some drastic should follow those same rules in
and properly testing and vetting your change happens in the markets. your live trading. Otherwise, why
algo. You likely have an historical An example would be the US bother backtesting at all? At the same
backtest, which of course exactly government enacting a 50% tax on time, though, I realize the mental
follows the rules you programmed. all stock market capital gains. That and psychological considerations
And presumably, you approve of the would have a profound impact on in always following your algo. That
backtest’s performance. the performance of stocks. It would can be stressful at times. The trick,
By overriding the signals of probably invalidate your backtest, then, is to develop algos that you feel
the algo, you now are going “off and overriding the algo (or preferably comfortable with, and only trade
script.” You can’t expect to rely turning it off completely) would be them live if you know you will stick
on the backtest, because you are advisable. Since your backtest was to them.
trading now with different rules. based on a “different” market world,
Of course, your new rules might you should not expect the same algo
perform better than the backtest, performance going forward.
December 2023 • Technical Analysis of Stocks & Commodities • 17
Consistency And Diversification
S
by Perry J. Kaufman crop to extreme weather—heat, drought, and rain—and the
ability to store more at harvest to avoid the sales glut.
easonal patterns are appealing because they Farmers have also gotten more sophisticated, planting
are real, not found by manipulating data, but crops that are likely to yield higher prices, but reporting
by centuries of crop production modified by the opposite to the USDA. On the other hand, the USDA
the evolution of agribusiness and technology. is able to estimate the extent of this misrepresentation,
They offer consistency and diversification for traders. so it becomes a cat-and-mouse game.
Some years back, I was a partner in a large farming Here, we’ll look at seasonal and non-seasonal patterns.
operation in central Illinois. I developed the opinion These patterns are influenced by weather, export agree-
that grain prices rallied in the mid-summer due to “crop ments, and technology. Unfortunately for the farmers,
scares,” that is, lack of rain, too much rain, bugs, and a technology has steadily improved the yields (using hybrids
FGC/SHUTTERSTOCK
variety of nasty things. Since then, I have taken a care- and fertilizer), so the inflation-adjusted return to them
ful look at the price patterns and they are surprisingly has actually declined. We haven’t seen a bad crop year
different. in quite some time.
18 • December 2023 • Technical Analysis of Stocks & Commodities
TRADING STRATEGIES
MICROSOFT EXCEL
Seasonality of wheat, corn, and soybeans
You’ve seen seasonal charts, so I won’t belabor this, but
we need to see these patterns in order to exploit them.
Figure 1 shows the seasonality of feedgrain futures, FIGURE 1: SEASONALITY OF WHEAT, CORN, AND SOYBEAN FUTURES.
wheat, corn, and soybeans using nearest futures data This chart shows feedgrain seasonality, nearest futures, 20 years through
August 2022.
for the past 20 years, through July 2022. For those of
you who are not in agriculture, the wheat traded on the
Board of Trade is feed, not meant for bread. That would Turning seasonal patterns into rules
be Kansas hard red winter wheat, among others. We can define a “seasonal pattern” as one that starts low
I’ve used the method of yearly averages, which aver- in the winter, increases into the summer, then declines
ages the month-end prices for each year, then finds each into harvest. It uses these rules:
monthly return relative to its yearly average, dividing
the end-of-month price by the yearly average of those • Average the previous five years of monthly re-
month-end prices. While some methods use the average turns.
price for the month, the month-end price is more practi- • If the end-of-April price (the month for planting)
cal and avoids a lag. is below the 5-year average, we have a “seasonal”
The EasyLanguage code given in the sidebar, “Seasonal pattern.
End-Of-Month Prices And Returns, In EasyLanguage,” • If the end-of-April price is above the 5-year average,
creates two tables, the month-end prices and the monthly we have a “non-seasonal” pattern.
returns. You can import them to an Excel file and average
the returns each month, then plot the seasonal pattern Once we have identified the regime, we apply the
from the monthly averages. It will work for any futures rules:
or stock market.
• If “seasonal,” then buy the end-of-April closing
Seasonal patterns in grains price.
The three grains show similarity, starting high at planting • If this year’s price is above the July average, we exit
and ending low at harvest, generally September and Octo- the long position at the end of July and go short.
ber. Soybeans show a mid-summer rally before declining • If we do not exit in July, we always exit at the end
into harvest, but all three grains can spike in the summer of August and go short.
even though the averages smooth out that move. • We exit all positions at the end of September.
Soybeans have slightly different dynamics because • If “non-seasonal,” we sell the end-of-April closing
they can be planted later and harvested sooner. Farmers price.
may switch from corn to soybeans if weather delays corn • We exit at the end of September.
planting. Even in 2022, when prices soared, the seasonal
pattern seemed to hold. Using these rules, we get the results shown in Figures
2, 3, and 4.
A trading system
Now that we see the seasonal pattern, can we profit from
it? It looks straightforward, but it’s not. We will see that
in most years, grain prices simply decline from spring Seasonal patterns are appealing
to harvest. A few years spike in mid-summer, enough because they are real.
to be seen on the chart, but it is far less often than you
would expect.
December 2023 • Technical Analysis of Stocks & Commodities • 19
FIGURE 2: RESULTS FOR WHEAT FUTURES. This shows the returns after FIGURE 4: RESULTS FOR SOYBEAN FUTURES. This shows the returns after
applying the trading strategy to wheat futures. applying the trading strategy to soybean futures.
FIGURE 3 RESULTS FOR CORN FUTURES. This shows the returns after applying FIGURE 5: MAKING THE ENTRY CONDITION MORE RESTRICTIVE. This
the trading strategy to corn futures. shows results for corn using a 5% entry threshold (that is, going long if the
current monthly price is 5% lower than the average and short if it is 5% higher
Making the entry condition more than the average).
restrictive
In the performance above, we went long when the monthly cause, but that would not increase carryover stocks.
return was below the average and short when it was above We then have higher prices and more grain, an unusual
the average. Now we can see if the results are more reli- combination.
able if we only go long if the current monthly price is The only explanation would be higher demand. Even
5% lower than the average, and short if it is 5% higher with higher stocks, grain in storage disappears before the
than the average. Figure 5 shows the results for corn. new crop is harvested. You can confirm this by looking
The other grains were not as good with a 5% threshold, at the December stocks and the stocks the following
but you might want to test other levels. August, as shown in Figure 6.
FIGURE 6: CARRYOVER STOCKS, SOYBEANS. Does supply run low or high in down into harvest. High stocks in 2020 resulted in very
this agricultural product? Carryover stocks can tell you. This chart shows carryover quiet, declining prices.
stocks in soybeans as of July each year. We can see that the stocks for 2011–2012 As for the strategy, low stocks would change a non-
are low while the stocks for 2019–2020 are high.
seasonal (selling) year into a seasonal (buying) year,
anticipating a rally in the summer. The continued in-
at the first weather scare. Large stocks will dampen crease in carryover stocks should also be attributed to
those concerns. technology.
Figure 6 shows the stocks for soybeans as of June
of each year. You will need to find a similar chart for How to calculate the 5-year average
December. It used to be easy to find on the internet but I programmed this in a computer language that allowed
seems to have disappeared, so you would need to find a me to manipulate arrays. It can be done on most program-
similar chart as the one shown. mable trading platforms, but it will be tricky. Instead, you
Looking at two of the years, the stocks for 2011–2012 can create the seasonal prices and the monthly return
are low, while the stocks for 2019–2020 are high. Figure tables, then average the monthly returns for the last five
7 shows the price patterns for 2012 and 2020. Low stocks years, not including the current year. You only need to
in 2012 caused a spike in the summer but then traded do that once each year.
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg
2001 622 618.25 603.5 600 621.5 621.75 604 595 598.25 586.75 607.1
2002 583.75 579 574 566 579.5 590.5 604.75 614 597.5 593.5 586 580.25 587.4
2003 582.75 575.75 579 574.5 587.5 571 553.25 581 559.5 586.5 583 580.25 576.17
2004 610.5 630.25 647.25 641.5 625.25 579.5 534.25 546 513.75 510.75 502 503 570.33
2005 495.25 513 503.25 494.75 503.25 493.75 508 474 463 453.75 446.25 460.25 484.04
2006 463.25 472.5 469.75 471.5 473.75 457 450 442.5 457 515.25 568.25 568 484.06
2007 581.75 601 540 522.5 545.25 485.75 471.5 468.5 501.5 504 512.5 566.5 525.06
2008 612.25 653.75 664.5 696 683 807 656.75 635.5 538 452 399.25 440.5 603.21
2009 412.5 383.5 429.25 419.5 452.25 363 348 332.5 346.75 368.75 404.25 401.25 388.46
2010 343.25 364.75 320.75 343.75 327.5 322.25 352.25 383.25 439.75 526 473.25 558.25 396.25
2011 588.75 649.5 611.75 669 660 577 594.5 682 507 561.5 515 553.5 597.46
2012 546 561.75 547.75 548 469 582 760 747 703.5 703 696 641.5 625.46
2013 683.75 654.75 646.5 622 634 599.5 551.25 549.5 509 495.75 485.5 483 576.21
2014 495 518.25 556.75 568 514.75 473 411.25 410 366 422 421 429.25 465.44
2015 402.25 417.5 400.5 386.5 371.75 436 385 377.75 390.25 384.75 368 354.5 389.56
2016 367.75 348 342.5 378 391 347.75 316.75 289 310.25 328.25 313 316.5 337.4
2017 324.25 331.25 321.75 317.25 322.75 323.5 313.25 285.25 282.75 273.25 270.25 265.25 302.56
2018 276 288.25 294 297.75 291 247.5 260.25 238.25 229.5 236.5 239 236.25 261.19
2019 237.75 222.5 208.25 204.5 269 261.25 236.75 196.5 214.75 216.75 197.75 204.25 222.5
2020 197.75 180.75 153.25 124.75 130.5 143 117.5 145.5 166.75 186.25 206.25 264.25 168.04
2021 327.25 329 345.75 477.75 461.25 510 457.75 447 449.5 481 475.25 501 438.54
2022 533.75 601 659 726 666 624.25 611.75 670.5 636.53
FIGURE 8: CORN MONTH-END PRICES. The table shows the end-of-month prices, output from the accompanying code listing. In the last column is the average
yearly price.
22 • December 2023 • Technical Analysis of Stocks & Commodities
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Avg
2001 0.025 0.018 −0.006 −0.012 0.024 0.024 −0.005 −0.02 −0.015 −0.034 607.1
2002 −0.006 −0.014 −0.023 −0.036 −0.013 0.005 0.03 0.045 0.017 0.01 −0.002 −0.012 587.4
2003 0.011 −0.001 0.005 −0.003 0.02 −0.009 −0.04 0.008 −0.029 0.018 0.012 0.007 576.17
2004 0.07 0.105 0.135 0.125 0.096 0.016 −0.063 −0.043 −0.099 −0.104 −0.12 −0.118 570.33
2005 0.023 0.06 0.04 0.022 0.04 0.02 0.049 −0.021 −0.043 −0.063 −0.078 −0.049 484.04
2006 −0.043 −0.024 −0.03 −0.026 −0.021 −0.056 −0.07 −0.086 −0.056 0.064 0.174 0.173 484.06
2007 0.108 0.145 0.028 −0.005 0.038 −0.075 −0.102 −0.108 −0.045 −0.04 −0.024 0.079 525.06
2008 0.015 0.084 0.102 0.154 0.132 0.338 0.089 0.054 −0.108 −0.251 −0.338 −0.27 603.21
2009 0.062 −0.013 0.105 0.08 0.164 −0.066 −0.104 −0.144 −0.107 −0.051 0.041 0.033 388.46
2010 −0.134 −0.079 −0.191 −0.132 −0.174 −0.187 −0.111 −0.033 0.11 0.327 0.194 0.409 396.25
2011 −0.015 0.087 0.024 0.12 0.105 −0.034 −0.005 0.142 −0.151 −0.06 −0.138 −0.074 597.46
2012 −0.127 −0.102 −0.124 −0.124 −0.25 −0.069 0.215 0.194 0.125 0.124 0.113 0.026 625.46
2013 0.187 0.136 0.122 0.079 0.1 0.04 −0.043 −0.046 −0.117 −0.14 −0.157 −0.162 576.21
2014 0.064 0.113 0.196 0.22 0.106 0.016 −0.116 −0.119 −0.214 −0.093 −0.095 −0.078 465.44
2015 0.033 0.072 0.028 −0.008 −0.046 0.119 −0.012 −0.03 0.002 −0.012 −0.055 −0.09 389.56
2016 0.09 0.031 0.015 0.12 0.159 0.031 −0.061 −0.143 −0.08 −0.027 −0.072 −0.062 337.4
2017 0.072 0.095 0.063 0.049 0.067 0.069 0.035 −0.057 −0.065 −0.097 −0.107 −0.123 302.56
2018 0.057 0.104 0.126 0.14 0.114 −0.052 −0.004 −0.088 −0.121 −0.095 −0.085 −0.095 261.19
2019 0.069 0 −0.064 −0.081 0.209 0.174 0.064 −0.117 −0.035 −0.026 −0.111 −0.082 222.5
2020 0.177 0.076 −0.088 −0.258 −0.223 −0.149 −0.301 −0.134 −0.008 0.108 0.227 0.573 168.04
2021 −0.254 −0.25 −0.212 0.089 0.052 0.163 0.044 0.019 0.025 0.097 0.084 0.142 438.54
2022 −0.161 −0.056 0.035 0.141 0.046 −0.019 −0.039 0.053
Average
0.024 0.005 −0.035 −0.012 0.044 0.041 −0.032 −0.075 −0.041 −0.003 0.002 0.083 636.53
2017–2021
FIGURE 9: CORN MONTH-END RETURNS. The table is the result of dividing the month-end price by the average of the year, minus 1, to give us the month-end
returns.
The table in Figure 8 shows end-of-month prices, Perry J. Kaufman is a trader and financial engineer.
output from the code in the sidebar “Seasonal End-Of- He is the author of many books on trading and market
Month Prices And Returns, In EasyLanguage.” It also analysis, including the sixth edition (2020) of Trading
includes the average yearly price in the last column. The Systems and Methods (with the first edition published in
table in Figure 9 shows monthly returns, output from 1978 as a seminal book in the field of technical analysis),
the same code. as well as Kaufman Constructs Trading Systems (2020),
and Learn To Trade (2022). For questions or comments,
Summary please go to www.kaufmansignals.com.
While the returns of this strategy are not as good as
an optimized trend system, this strategy offers a way The code given in this article is available in the S&C
to diversify based on the natural phenomenon of sea- Article Code section of our website, Traders.com.
sonality. By including carryover stocks and daily data,
the results can be improved. And, the concept can be
applied to any agricultural market. It seems consistent
idea that, at harvest, prices, whether in a seasonal or
nonseasonal pattern, (almost) always decline at the end.
Nature plays its part.
Building A Trend-Following
System
Does filtering trade entries with a volume flow indicator Testing procedure
improve the performance of a moving average crossover For the testing, I will use futures markets, specifically:
system when used in a trend-following strategy? Here’s the emini S&P 500, emini NASDAQ, mini Dow Jones,
a test to find out. mini Russell 2000, Australian dollar, Canadian dollar,
euro currency, eurodollar, Japanese yen, Mexican peso,
by Dillon Figueredo Swiss Franc, two-year note, five-year note, 10-year note,
S
30-year T-bond, crude oil, natural gas, heating oil, RBOB
ince I started developing trading strategies, gasoline, wheat, hard winter wheat, corn, soybean oil,
trend-following systems have always cap- rough rice, coffee, cocoa, lean hogs, and lumber.
tivated my interest. However, such systems I will test daily charts all the way down to 15-minute
typically do not boast high win rates. I find charts in no specific increment. My testing range will be
comfort in a system designed with expected from 1/1/2007 to 12/25/2023. The backtest will consist
losses because it’s easier to manage a predict- of optimized inputs from EasyLanguage code. Strategies
ALEXANDER SUPERTRAMP/SHUTTERSTOCK
able setback than to be blindsided by an unexpected that have great performance metrics will be considered
large loss. for evaluation.
In this article, I will dissect a moving average system
to assess its profitability potential when employed in a Using a Monte Carlo simulation for
trend-following strategy and see if we can improve the analyzing system metrics
performance by adding a money flow indicator to filter Monte Carlo simulation is a helpful tool for analyzing
out unprofitable trades. trading systems. Monte Carlo methods are used to obtain
24 • December 2023 • Technical Analysis of Stocks & Commodities
TRADING SYSTEMS
Vinter = StandardDev(inter, 30,2); Vars: Avg(0), Vinter(0), Cutoff(0), Vave(0), Vmax(0), Vc(0), MF(0), VCP(0),
Cutoff = Coef * Vinter * Close; VFI1(0), VFI(0), MAVFI(0), dynamic_color(0),Lso(0);
Vave = Average(V, Period)[1]; Vars: inter(0),DailyVol(0);
Vmax = Vave * VCoef; Vars: epsilon(0.00001);
Vc = MinList(V, VMax);
MF = Avg - Avg[1]; Lso = Lo + So;
VCP = IFF(MF > Cutoff, Vc, IFF(MF < -Cutoff, -Vc, 0));
VFI1 = Summation(VCP, Period)/Vave; If (High + Low + Close) > 0 then Begin
VFI = XAverage(VFI1, Smooth);
MAVFI = Average(VFI, MAP); Avg = (High + Low + Close)/3;
end;
inter = Log(Avg + epsilon) - Log(Avg[1] + epsilon);
{Calculation Module}
Vinter = StandardDev(inter, 30,2);
SysSum = Lo + So; Cutoff = Coef * Vinter * Close;
advantage of a trend-following system is that it generally to cover (closing out the short).
holds onto winning trades longer and exits losing trades
more swiftly. If both Lo and So = 0, the system will be set to only buy
Despite identifying eight potential candidates, none and sell short.
proved robust enough to be considered viable trading Let’s move on to optimization. Think of optimization
systems. (A spreadsheet of out-of-sample results is not as fine-tuning your car for better performance. But here’s
shown here due to its size.) the thing: if the car (or our trading system in this case) is
Several reasons underpin my decision to discard these fundamentally good, you don’t need to spend ages fine-
systems: tuning. A bit of tweaking here and there is enough.
1. The sheer volume of trades in certain strategies ExitCross = 1: This will make the system exit positions
meant that, once slippage and commissions were from crossovers only.
taken into account, the potential annual returns
were underwhelming. Here are the settings I optimized for the 55-minute chart
2. Some strategies displayed extended periods of of the 10-year treasury yield (@TY.D) when using the
sideways trading without much profit or loss. crossover with volume flow system:
3. Certain strategies failed to capitalize on significant
bull or bear market movements. Period: Fixed at 130
Smooth: Fixed at 3
In conclusion, the moving average crossover system MAP: Fixed at 30
using only the crossover as the exit signal did not show Coef: Fixed at 0.2
much potential.
Continued on page 31
Steps for replicating the studies
When setting up a trading system, the trader has some
options on how the system will operate. Here is a list of
some of the parameters I used and what they mean:
I was intrigued to determine
whether the volume flow,
Lo = 1: T
his setting allows the system to buy and then when isolated, exhibits any
sell. trading potential.
So = 1: W
ith this, the system will short (basically,
betting the price will go down) and then buy
December 2023 • Technical Analysis of Stocks & Commodities • 29
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.
WHAT IS GOOD FINANCIAL responded that he only dealt with if you wanted something, you had
INFORMATION ? (PART 2 OF 2) “serious” topics. You see, even in the to take a piece of paper, write what
Last month, I discussed what true academic world, there are trends, just information you desired, politely
financial information is as opposed as in fashion and cosmetics. Back request a complimentary copy, put
to financial hearsay and gossip. For then, for decades, technical analy- it in an envelope, affix a stamp, and
writing that piece, I looked back over sis was compared to sorcery, and a drop it in a mailbox.
my career in the world of journalism trendline held the same weight as a I still vividly recall the day the first
and how I got started in it at age 14, fortune-teller reading coffee grounds. printed copy of Technical Analysis of
and I became nostalgic. I believe some It was only with the advent of behav- Stocks & Commodities magazine
readers will identify with my story of ioral finance and the various Nobel arrived at my home in the distant Ital-
how I came to find out about technical Prizes awarded to economists who ian province. It was a magazine with
analysis and how that changed my debunked the belief in rational finan- glossy paper and articles that delved
direction in life. My story may be a cial markets that technical analysis into that world I had only been able
lot like yours. began to be viewed benevolently. to peek at through a keyhole until
I first delved into technical analysis Let’s just say I was unintentionally that moment. It was like a child step-
in 1987. It was a late night in a disco ahead of the curve. ping into a candy store. I remember
when a friend of mine began to talk my father observing me, intrigued
about stocks and how a person could With just a chart, you by my passion, and commenting,
earn substantial profits by investing “The Americans are always one
in the stock market. His words fas- could stand toe-to- step ahead. I want you to subscribe
cinated me and within a few days, I toe with the financial to this magazine. If you read it and
went to a bookstore and purchased the market professionals. keep it, it will be a treasure trove of
only Italian book on technical analy- knowledge.” My father, Ercole, born
sis. That book hit me like a lightning Because of my stubborn nature, in 1921, had fought in World War II,
bolt, and at that moment, I decided I didn’t give up. After complet- but as an entrepreneur, he had a knack
it would be my calling because of ing my doctoral dissertation at the for innovation. I can only thank him
the sense of freedom emanating University of Reading in the United today for buying me a subscription
from those pages. With just a chart, Kingdom (where they were more to this magazine.
you could stand toe-to-toe with the tolerant of new ideas), I decided to I had collected every printed copy
financial market professionals. It was attend a technical analysis course of the magazine until I had to succumb
like a showdown at the OK Corral, for institutional investors in Milan. to space constraints and I switched
and may the best person win. It was there, sitting among my class- to using the digital archive of past
From that point on, during my mates, that I caught a glimpse of a issues, where the entire collection of
years as a university student, I strived trader from a major bank with an magazine content is just a click away
to build an academic path that in- English-language technical analysis (at Traders.com). I still remember my
cluded courses in finance. When I magazine. I distinctly remember writ- astonishment when, driven by my
approached my finance professor to ing down, with trembling hands, the insatiable entrepreneurial curiosity,
propose writing my final dissertation magazine’s title and mailing address. I contacted the magazine via email
on technical analysis, he dismissively Back then, there was no internet, so to ask how many other subscribers
30 • December 2023 • Technical Analysis of Stocks & Commodities
MARKET RAP
they had in Italy, and they informed sion through the front door into the
me they had over 900 subscribers temple of finance. Some readers will
throughout Italy. That was a mas- I owe a great deal to Technical identify with my story
sive number for that point in time Analysis of Stocks & Commodities of how I came to find
and it demonstrates the demand that magazine because, even in those ear-
existed for quality information in lier skeptical times, it gave me a sense
out about technical
the field of technical analysis. I also of discipline that was anything but analysis and how that
distinctly remember the moment charlatanism. This magazine made changed my direction
when the beautifully colored covers its mark on financial publishing, and in life.
of this magazine suddenly appeared today, I proudly sign this editorial.
in university libraries all over Europe. There is an ancient pact that goes: I hope to give back some of what
The academic world, riding the wave When fate gives you something, it is I’ve taken from these pages over the
of behavioral finance’s success, had your duty, if possible, to give back. years. I wish everyone reading this
begun to embrace technical analysis, And with all my writings, in which I good investing and trading.
and the subject’s most well-known try to share some of what I’ve learned
magazine had been granted admis- as well as what I’ve learned to avoid,
FIGUEREDO/TREND-FOLLOWING
Continued from page 29
Smaller timeframes generally
showed less promise, a
VCoef: Fixed at 2.5
Lo: Fixed at 0
pattern I’ve observed with
So: Fixed at 0 many strategies I test.
Some of the values could be played around with to see
which works best. Following are some optimizations I “Coding For Demonstration Trading Systems, In Easy-
tried: Language,” to see these performances firsthand. While
there was potential in the equity markets, none seemed
My optimizations significant enough to warrant close attention. However, I
Fast: Anywhere between 10 and 30, moving in suggest checking them out and assessing if they fit your
steps of 5 (such as 10, 15, 20...) risk tolerance. On another note, smaller timeframes gen-
Slow: Anywhere between 30 and 80, moving in erally showed less promise, a pattern I’ve observed with
steps of 5 many strategies I test. Remember, always do your own
ExitCross: Fixed at 1 research before implementing any trading strategy.
DaysBack: Choose any value between 14 and 60,
adjusting in steps of 10. Dillon Figueredo is university student set to graduate
in 2025. He is pursuing opportunities for entering the
Think of these settings as the various dials and but- field. He can be reached at dillon.figueredo@gmail.com
tons in your car. or 816 896-8959.
A Directional Pattern
To Ride The Wave
Here is a price pattern you can use with a trading strategy and bearish. Figure 1 depicts the bullish 2HL+ pattern
to filter trades and ride a price wave. We’ll explain the and the bearish 2HL+ pattern.
logic and show step-by-step how to do it. The bullish 2HL+ pattern occurs when:
by Andrea Unger • Two sessions ago, prices closed higher than the
Is
previous close
it possible to use a pattern to ride a price • In the last session, prices closed higher than the
wave? Let’s see how! previous close
At Unger Academy, we teach how to use • The current session opened at a price higher than
price patterns to filter market entries and the previous close
make our trading strategies more profitable
and robust. In this article, we will discuss the The bearish 2HL+ pattern occurs when:
pattern we call “2HL+.” It is a directional filter that looks
for two consecutive up/down market closes and requires • Two sessions ago, prices closed down from the
additional confirmation of the price direction. previous close
We will test it with a real strategy on one of the most • In the last session, prices closed down from the
HUZA STUDIO/SHUTTERSTOCK
MULTICHARTS
var: highd1(0), lowd1(0);
var: opend0(0), closed1(0), closed2(0), closed3(0);
var: mp(0), daysintrade(0);
Avg. Trade # of Trades NetProfit Max DD
highd1 = highS(1); lowd1 = lowS(1); opend0 = openS(0); $126 2,374 $298,611 −$38,728
closed1 = closeS(1); closed2 = closeS(2); closed3 = closeS(3); FIGURE 3: SIMPLE TRADING STRATEGY. A simple breakout system is used to
trade RBOB gasoline futures, and the starting equity curve and system metrics
if tw(MyStartTrade,MyEndTrade) then begin are shown here. The equity curve is positive but the average trade profit is too
low to cover trading costs and the number of trades is very high.
buy next bar at highd1 stop;
sellshort next bar at lowd1 stop; if Myprofit > 0 then setprofittarget(MyProfit);
With the updated order engine and the new time win-
dow, we get the equity and metrics shown in Figure 4.
We note that the number of total trades has been greatly
reduced. We require that the last two session closes were
both up/down, as a necessary condition before entering
the market long/short. In addition, we only allow entry
if the highd1 and lowd1 levels are broken between 1:00
pm to 5:00 pm.
The profit curve slopes upward, and we have increased Avg. Trade # of Trades NetProfit Max DD
the average trade from $126 to $220, which seems decid- $220 515 $113,329 −$29,576
edly attractive for gasoline futures. FIGURE 4: FILTERING TRADE ENTRIES WITH CONDITIONS. To reduce the
Based on the results achieved, we continue in this number of trade signals in the breakout system, a condition similar to the 2HL+
direction and add our 2HL+ pattern to the starter script. pattern is applied and the entry time window is restricted. This initial attempt
The two lines of code will look like this: to filter market entries shows improved average profit per trade and greatly
reduced the number of trades.
if closed1>closed2 and closed2>closed3 and
opend0>closed1 then buy next bar at highd1 stop;
if closed1<closed2 and closed2<closed3 and
opend0<closed1 then sellshort next bar at lowd1 stop;
• The profit curve has remained upward Avg. Trade # of Trades NetProfit Max DD
• NetProfit has remained more or less the same $378 297 $112,232 −$20,559
• Max DD dropped from $30K to $21K FIGURE 5: FILTERING TRADE ENTRIES WITH THE 2HL+ PATTERN. When
• The average trade of the system increased con- the 2HL+ pattern and an additional entry condition is added to the starter script,
siderably, from $220 to $378. The latter value is the number of trades is further reduced, drawdowns dropped, and average
undoubtedly excellent for trading this instrument. profit per trade increased considerably.
It allows us to comfortably cover all the trading
costs while making a good profit margin. pattern significantly reduces the number of trades, and
adding other conditions would further reduce the number
Can we improve the system further? of remaining trades and risk to deprive our test results
We can say that we have reached a “limit” number
for this strategy. As we know now, adopting the 2HL+ Continued on page 51
December 2023 • Technical Analysis of Stocks & Commodities • 35
Using Neural Network Technology To Create A Dynamic Trading Model
In
happened to be the 20-day moving average for the cases
my previous article, “The Time-Tested Ad- of the Hang Seng Index futures, KOSPI futures, and
justable Moving Average,” I discussed the SiMSCI futures). The AMA significantly outperformed
adjustable moving average (AMA) as a very the 20-day moving average and the threshold benchmark
good tool to use in today’s fast-changing passive buy-and-hold strategy in these markets in the
WHO IS DANNY/SHUTTTERSTOCK
markets. I explained how it is calculated past decade for HSIF and KOSPIF. (However, for the
and I presented some research that showed SiMSCIF, AMA’s performance was only marginally
it boosted returns in several stock index futures markets better than the 20-day moving average.)
that I backtested. This calls for a more dynamic algorithm that generates
In this article, I’ll demonstrate how you can take this superior trading results.
36 • December 2023 • Technical Analysis of Stocks & Commodities
TRADING TECHNIQUES
Methodology
As markets mature, many technical
tools such as moving averages that
used to be popular have failed to
perform well because mature mar-
kets are saturated with sophisticated
MATLAB R2023A
program trading, as much published
literature shows. Some studies found
in the literature show that abnormal FIGURE 1: THE BACKPROPAGATION NEURAL NETWORK
returns using basic technical indica-
tors of yesteryear are fast declining. A 2004 article in y(t) = f(y(t−1), y(t−2),..., y(t−d), x(t−1), x(t−2),...,x(t−d)
the Journal Of Banking & Finance by D. Olson (“Have Eq. 1
Trading Rule Profits In The Currency Markets Declined
Over Time?”) found empirical evidence that financial where the obtained value of the dependent output signal
markets are evolving and increasing their efficiency y(t) is regressed on d former values of the target signal
over time. With increasing efficiency, abnormal profits y(t) and d previous values of exogenous (independent)
are harder to come by. input signals x(t). The weights and biases will be adjusted
As traditional statistical methods reach their limita- continuously to minimize the error term between output
tions, artificial intelligence and machine learning are (y*(t + 1)) and target value (y(t + 1)) to achieve the lowest
popularly being used in forecasting financial time series mean of the error terms.
today. Artificial neural networks are a capable prediction The backpropagation neural network (Figure 1) em-
tool, and they outperform most single and fixed moving- ploys a training process of error backpropagation that
average rules and other traditional statistical methods uses recursive gradient descent method that minimizes
(as reported in many academic studies and articles; see the sum of squared errors of the system by moving down
“Further reading” at end for several that I reference). the gradient error curve. The values of the weights are
Some studies have shown significant profits on stocks determined by an iterative learning process. Siegelmann
using ANNs. My research using a dynamic trading model et al. show that NARX networks perform better on prob-
I call the N-CAMA confirms these findings. lems involving long-term dependencies and is used to
establish a one-step-ahead prediction model.
Artificial neural networks However, literature review shows technical trading
Artificial neural networks (ANNs) are sets of simple techniques are still lacking in accounting for varying
interconnected factors processing information. Here’s volatility clustering found in most financial time-series
how it works: Each connection of the neural network data. In view of this deficiency, this research introduces
gets a weight attached to it. The elements in the net- neural networks that use an innovated technical indicator
work are linked in a feedforward style. The error term as an input to predict the next output. The neural network
between the actual value and the predicted output value can train itself by making the comparison between the
is backpropagated across the network for the weights to predicted output and the actual data of the time series,
be revised in order to minimize the error between the which is destined the target.
predicted and the actual value. The descriptive statistics for these series were presented
In a 1997 IEEE article by H. Siegelmann et al. (“Com- and analyzed in my previous article. It has been found that
putational Capabilities Of Recurrent NARX Neural Net- all of the stock indexes futures possess excess kurtosis,
works”), the authors show their work on a different type
of ANN that takes feedback from the output neuron, the
target. They call it nonlinear autoregressive models with
exogenous inputs (NARX). NARX is a kind of recurrent
In view of the growing efficiency
dynamic backpropagation neural network with feedback of financial markets, traditional
links connecting some layers of the network. The NARX technical analysis tools will need
model is built on the linear auto regressive exogenous the aid of machine learning to
(ARX) method, which is generally applied in time series trade in the future.
modeling. NARX can be modeled as follows:
EIKON DATASTREAM
to work well in recent Asian futures markets.
The goal of my research has been to develop an in-
novative technical indicator that performs well in the
post-pandemic East Asian markets. It is well known that FIGURE 2: AMA AND N-CAMA, HANG SENG INDEX FUTURES. This demon-
strates the adjustable moving average (AMA) and neural-network-trained AMA
it is extremely difficult to consistently forecast future
(N-CAMA) applied to HSIF closing prices.
prices accurately based on past time series. Trading in
the post-pandemic Asian markets has born this out, where
making investment timing decisions has become more
difficult than before. This is why I set out to develop my
trading model.
Eq. 2
where: FIGURE 4: AMA AND N-CAMA, SINGAPORE MSCI FUTURES. This demon-
strates the AMA and N-CAMA applied to SiMSCIF closing prices.
Efficacy ratio = L
ong-term std. dev./
Short-term std. dev.
The inputs are the daily close and the AMA for the
and stock index futures for eight years from January 2, 2013
to December 31, 2020 for training.
Ct is the daily close. Matlab’s “narxnet” is used to establish a one-step-ahead
prediction mode. (The code generated from Matlab is
Nonlinear autoregressive with exogeneous input shown in the sidebar, “Script Generated By Matlab For
(NARX) neural networks, which are available in Matlab, NARX Network.”) The architecture of a NARX network
are used in this research because it has the benefits of includes the number of hidden layers, the number of
multilayered perceptrons and back-propagation neural delays (the number of past data of that network that ac-
networks. count for training), and portions of training, validation,
38 • December 2023 • Technical Analysis of Stocks & Commodities
HSIF KOSPIF SiMSCIF
Year Buy & Hold MA20 AMA' NCAMA' Buy & Hold MA20 AMA' NCAMA' Buy & Hold MA20 AMA' NCAMA'
2013 −1.22% −0.70% 1.21% 42.19% −2.05% 7.82% −3.96% 27.58% −0.05% 10.12% 13.98% 6.68%
2014 7.19% −4.77% −0.07% 15.37% −8.37% −8.45% −11.12% −0.11% 4.58% 3.92% −0.41% 6.21%
2015 −12.70% 21.12% 46.51% 26.76% −1.45% −0.49% 14.80% 7.19% −15.83% 6.48% 25.95% 10.89%
2016 28.69% −3.11% 7.85% −27.96% 8.15% −17.26% −15.85% 16.07% −0.83% −9.75% −11.66% 2.08%
2017 24.72% 14.09% 14.69% 2.81% 25.40% 18.71% 24.00% 5.43% 20.48% −1.85% −10.26% 6.88%
2018 −18.12% −32.35% −1.11% 26.39% −19.75% −20.82% −22.05% 1.65% −10.94% −2.25% 5.14% 5.86%
2019 −4.79% 21.11% 1.79% 2.68% 12.67% 12.23% 22.25% 6.09% 11.34% 16.12% 8.31% 14.95%
2020 5.76% −8.09% −14.54% −20.22% 31.83% 32.28% 21.75% −14.00% −12.52% 14.50% 5.71% 2.66%
Average 3.69% 0.91% 7.04% 8.50% 5.80% 3.00% 3.73% 6.24% −0.47% 4.66% 4.59% 7.03%
FIGURE 5: IN-SAMPLE TRAINING RESULTS, 2013–2020. This table compares the percentage returns for the in-sample period 2013–2020 for the four strate-
gies: AMA, MA20, N-CAMA, and buy-and-hold, for the HSIF, KOSPIF, and SiMSCIF markets.
HSIF KOSPIF SiMSCIF
Year Buy & Hold MA20 AMA' NCAMA' Buy & Hold MA20 AMA' NCAMA' Buy & Hold MA20 AMA' NCAMA'
2021 −15.82% −8.14% 1.48% −2.26% 1.31% −12.95% 5.41% 24.49% 4.38% −3.31% −0.64% 11.64%
2022 −6.54% 6.48% 2.89% 51.81% −25.58% 7.14% 17.59% 26.50% −14.54% 17.39% 16.71% 2.81%
Average −11.18% −0.83% 2.19% 24.78% −12.13% −2.91% 11.50% 25.50% −5.08% 7.04% 8.04% 7.22%
FIGURE 6: OUT-OF-SAMPLE TRAINING RESULTS AND VALIDATION, 2021–2022. This table compares the out-of-sample percentage returns (pilot run) for
the period 2021–2022 for the four strategies AMA, MA20, N-CAMA, and buy-and-hold, for HSIF, KOSPIF, and SiMSCIF.
and testing. NARX networks divide the data into three Even after taking transaction costs of 0.005 index
subsets: training set, validation set, and testing set, with point for each transaction, the trading result confirms
a configured percentage for each of them; in this study, that N-CAMA outperforms the threshold buy-and-hold
the proportions are training 75%, validation 15%, and strategy as well as the two tested trading systems for all
testing 15%. the futures contracts for the in-sample period (Figure
N-CAMA uses the current close price and AMA to 5). N-CAMA outperforms buy-and-hold, the fixed and
predict the next period’s close. This output will be used adjustable moving averages for HSIF and KOSPIF in
in the modeling stage to generate automated buy or sell the out-of-sample period (Figure 6). N-CAMA on the
signals. Comparing this predicted future close against average did not perform better than AMA in the out-of-
the current close, this approach is similar to that of the sample period for SiMSCIF.
one written about in 1999 by Yao et al., which is to buy Therefore, it can be concluded that N-CAMA works
at the next day’s open when the predicted close is higher well to generate abnormal profits for HSIF and KO-
than the current close. SPIF. However, given the suboptimal out-of-sample
The N-CAMA trading rules are as follows: performance for SiMSCIF, it is advisable to analyze
the performances of N-CAMA and AMA on SiMSCIF,
• Buy at the next market open (Ot+1) if C*t+1 > Ct especially on recent performance. We should look at the
• Sell at the next market open (Ot+1) if C*t+1 < Ct significance of the overall returns including the pilot
trading returns and the maximum consecutive losses to
where Ct is the current market close, Ot+1 is the following determine how to place the stop-losses.
market day’s open, and C*t+1 is the predicted value for The positive results are in support of academic literature
the following market day.
Results
N-CAMA predicts the value of the next day. If the
I will present a dynamic
predicted value is higher than the closing price, then trading model using a
the trading signal is to buy at the next day’s open. N- neural network. I call this
CAMA seems to predict the values quite well and the model the N-CAMA.
actual prices follow the predicted values, as can be seen
in Figures 2 through 4.
December 2023 • Technical Analysis of Stocks & Commodities • 39
previously published (see “Further reading” at end), which the passive buy-and-hold strategy.
provides evidence that automated artificial intelligent N-CAMA shows the highest return among the three
trading performs somewhat better than a fixed-length trading models, which lends support to current literature
moving average, the adjustable moving average, and also that suggests that artificial neural networks allow the
You’ve had an extensive and Briefly, why do you think there were trading arena?
varied career in the markets so many steps in your journey prior Like many investment advisors I
since the 1980s with several firms, to making educational and software know, I graduated from college during
startups, and your own websites. contributions to the investment and a huge bull market when firms were
42 • December 2023 • Technical Analysis of Stocks & Commodities
on hiring sprees. My background as because the knowledge
a science student turned out to be a and skill I acquired was
great asset because I was already used something I could keep To my mind, there are three
to learning about subjects I wasn’t and would be of value. types of risk: diversifiable
necessarily interested in, and doing risk, systematic market risk,
hard things. Problems were there to As a teenager, you invest
be solved, and if I didn’t have the ed in mutual funds based
and unpriceable risk.
tools or the understanding, I would on using fundamentals.
acquire knowledge, gain insight, and What got you interested
come up with solutions. in investing? based on technical analysis?
I happened to live in Vancouver, One of my friends was a model at At the brokerage firms, some bro-
Canada, where the local stock ex- the top local agency, so I stumbled kers subscribed to thick chartbooks.
change had a notorious reputation into modeling as well, and when those They were like a shopping catalog
thanks to its role in financing penny paychecks started to add up, I thought featuring one stock per page with
stocks, the so-called “junior resource about investing the money. My dad some key fundamental metrics and
stocks.” In 1989, Forbes magazine had taken large losses speculating in a chart. I noticed people paid much
even called the Vancouver Stock gold bullion during the 1980 bubble, more attention to the charts than to
Exchange the “scam capital of the and so the business section of the the fundamentals, so I learned about
world.” newspaper was always on the dinner chart reading mostly by looking over
My first job offer was from an table. That’s how I learned about mu- people’s shoulders as they studied
infamous stock promoter who shall tual funds. At the time, I had no idea chartbooks.
remain nameless. The second one technical analysis was a thing.
was from the executive vice president How did you eventually learn about
of the second-largest firm, and so Why did you decide to use and use technical analysis?
I spent my first summer gathering fundamentals as the basis for The charts in the William O’Neil
documents from an offsite storage your decision-making, and what Daily Graphs books were simple
facility fulfilling requests from the fundamentals were you using? bar charts with a moving average
Royal Canadian Mounted Police in The newspaper featured articles and a line that showed the price
their investigation into the collapse about how to select mutual funds, and performance against the S&P 500
of International Tillex. It was just me I simply picked a fund from the list labeled “relative strength,” which
in the vault, so I read every piece of based on the statistics in the paper. might have been better described as
paper I handled. As it turned out, 1982 marked the relative performance to avoid confu-
My early experiences in the indus- beginning of the biggest asset bubble sion with the relative strength index
try really opened my eyes. I saw for in history, so anything I picked would (RSI) developed by J. Welles Wilder.
myself that financial gain was often have worked out fine. As traders What fascinated me was how various
at the expense of investors. I can’t like to say, better to be lucky than people would look at the same chart
recall meeting a single person who smart. Back then, mutual funds were and come to different conclusions.
traded for a living. The big money distributed by financial planners, I didn’t think much of technical
came from manufacturing endless not stock brokers. I had to make an analysis at that time because these
amounts of paper, flogging it to the appointment with a firm, and when judgments seemed so subjective,
public and churning their accounts, a I showed up, the woman was very which didn’t sit well with someone
process filled with markups, commis- stern and grilled the client in front with my academic background.
sion and fees. Everyone in the value of her before saying there was a 5 At the same time, though, I got to
chain extracted something from the percent commission up front. That know people’s thought processes,
investor, capitalizing on their hopes made for a poor first impression that what they were looking for, and how
and dreams. never left me. they tried to time entries by reading
As an outsider and a female, I had chart patterns, which is not the same
no chance to get on that gravy train Years later you focused on simple as using an indicator. Patterns made
even if I had wanted to, so right away, technical trading using price and more sense to me, because a chart is
I knew trading was the way out, not volume. Can you explain why you literally a graphical representation of
only because it’s an honorable job, but changed your trading approach prices paid and volume traded. People
December 2023 • Technical Analysis of Stocks & Commodities • 43
are only human, and very early in life, from the movie Trading Places. ity. In the world of promoted stocks,
I saw that they were irrational, even His young assistant was a college there was literally a new mania every
crazy, yet the episodes were somehow student with a background in en- month and there was a pattern to
predictable. Right away, I realized gineering and computer science. A the investor sentiment every time. I
all the hot stocks had something in month later, Winthorpe was gone and made money scalping these stocks,
common: investor sentiment. the young assistant took over, whom but trading profits were never a topic
My last and longest job was work- we dubbed “The Quant.” We immedi- of discussion since the big money
ing in a group headed by a legendary ately switched to TradeStation, which was in extracting fees and charging
trader and partner at Canada’s largest was my official entry into real-time commissions.
independent investment dealer. I wore technical analysis, and we also played Our firm had a U.S. trading desk,
a bunch of hats, one of which was around with NeuroShell. and a couple of times a year, the rumor
being the CFO for a charting service I’m not sure if we ever came up mill would go into overdrive that they
he owned with Ian Notley, who wrote with ideas that my boss thought were had “blown up”—again—shorting
a book on trend and cycle analysis. good. The war room itself was prob- something for their own account.
We distributed Notley’s Notes every ably more of a vanity project than There would be much finger-wagging
week and I sort of became a resource anything. The most valuable insight at the greed of the group because why
for those wanting to print charts from he imparted on us was that our job even bother to trade when they were
the “Notley terminal.” was “to keep ’em alive until they already pocketing the spread? Risk
Ian had his own indicator, the Not- get lucky, because there’s one born was considered something to be borne
ley curve. The firm’s technical analyst every minute.” If you think about it, by retail traders and investors.
told me it was a modified Coppock that is the essence of trend trading. That said, there is actually one trade
curve. Thinking about it now, there I convinced The Quant to finish worth mentioning, not just because
seems to be a group of indicators that school, and one honors math degree, I made a lot of money, but it goes to
are similar in nature such as RSI and one MBA, and a CFA designation show how things work in the busi-
MACD. They’re nice to look at, but later, he went on to do great things ness. The year was 1997. The stock
I’m not sure if they offer much value in risk management where he is still was Bre-X Minerals Ltd. I never paid
in terms of generating signals. working today. much attention to it, but at some point,
When the Vancouver Stock Ex- Along the way he worked at one this exploration play in Indonesia
change trading floor closed down, of the largest firms in the world and became the biggest underwriting
the firm’s head trader and his group discovered there was no reason to do bonanza around. Only the top mining
joined us, which meant we had our proprietary trading because market analysts from blue chip firms were
own trading desk. Our floor was making came with a guaranteed 20 invited to visit, and the share price,
reorganized and the remodeled percent return for the firm, confirm- based on speculation as to the size
conference room became a classic, ing once again my early observations of the deposit in the ground, was
high-tech “war room,” complete with that nobody in the investment dealer astronomical.
the big projection screen, dimmed value chain even needs to trade. Of course, investors expected that
lights, dark wood paneling, and so it would later be bought out for even
on. The occupants would be tasked In 1998, after working a dozen more insane prices by a major mining
with coming up with trading ideas, years at various brokerage firms, company rumored to be Freeport-
and of course, I immediately staked you retired at a young age. What McMoRan. Then on one fine day,
out a spot. instruments did you trade on the the chief geologist simply fell out
A couple of guys from outside the job and how successful were you of a helicopter while flying over the
firm showed up one day with a com- compared to your associates? property. There happened to be a
puter, set it up and demonstrated a At every firm I worked in, employ- group of broker-trainees in the war
charting program. Real-time stream- ees paid no commission, only a ticket room discussing the stock, which
ing data going into a PC was a new fee, so I traded for my own account was in a holding pattern just off the
thing then, and of course, we had to be like everyone else. I learned from highs trading on low volume as if
on the bleeding edge, right? The guy the floor traders to trade only what the buyout offer would be coming. I
who provided the charting program was hot and avoid what was “dead.” finally could take no more, printed
turned out to be a real-life version of Thinking about it now, “hot” meant off a chart and said listen up, this is
Louis Winthorpe III, the character anything with volume and volatil- not the best-looking chart in history,
44 • December 2023 • Technical Analysis of Stocks & Commodities
and if all this turns out to be a fraud, that episode I learned
the clients will be wiped out. about position sizing, and
They objected and protested, but I never looked back. I don’t think it’s possible
said there was one crucial problem to manage an investment
with Bre-X, which was the fact that Was one of the reasons
the shares were listed on every single you decided to quit the
portfolio by gut feel.
exchange except Forbes’ “scam brokerage industry the
capital of the world”—having been desire to trade for your
burned before, the Vancouver Stock own account and keep all the profits, real-time coaching focused on
Exchange required all analysis to or was it other factors? daytrading stocks and S&P futures.
be done by fire-assay, no exceptions Our boss left to start his own firm. Did most of your subscribers achieve
allowed, and Bre-X had only ever This was the year after my Bre-X their goals? If not, why not?
provided some newfangled cyanide- trades. With money in the bank, I 1999 was when stocks began to
leach analysis. An hour later, the decided to go home to raise my five- display extraordinary volatility while
sales manager, an acquaintance from year-old daughter. It was then that I going up in price—upward crashes,
college, stormed into the war room to set off on the road to where I am now if you will—to the point where a
demand the reason for my speaking with trading and investing. typical day’s price range could be
to the trainees. compressed into an hour. In order
They were in my space, after all, Yo u s t a r t e d a n d h o s t e d to maintain proper position sizing,
and I suggested that by learning when IntelligentSpeculator.com in 1998 we literally had to trade ever-smaller
to sell, the trainees could spend less to help traders learn the real truths amounts or trade much smaller time-
time prospecting for new clients if about the brokerage industry and frames. Making that many decisions
they would simply stop laying out trading that were not available per time unit on an intraday basis was
or blowing up the last batch. It then elsewhere. You felt morally obligated very difficult for subscribers. The
occurred to me if I was so sure the to tell the truth about the industry. feedback I received was that I was
Bre-X situation looked bad, I should It seems you were always thinking not able to help them deal with fear,
just buy some puts. The stock was about educating investors and which isn’t surprising because their
trading at maybe $250 per share, traders as an undercurrent in brain was right to tell them they were
down from the high of around $280. all your endeavors over the past in danger. Hopefully, I prevented a
The puts were incredibly cheap and two decades. Was that website bunch of bankruptcies.
based on my normal position sizing, successful in meeting your goals
I got a ton for almost nothing. I kept and that of your subscribers? How long did that website stay
rolling them down until the stock was I had been part of a big group active, and when and why did you
around $5. Later on, when it was trad- chat at another website that went decide to close shop?
ing in the pennies, I bought a bunch, sideways, and started my own trader We did it for a couple of years dur-
took delivery of the certificates, and chat group to find others to discuss ing the peak of the dot-com bubble,
distributed them as gifts. trading with. As it turned out, most after which people lost interest in
people who came were looking for daytrading.
What did you learn about yourself advice and I answered all of their
and about trading through that questions, for free. At the time, I still Around that time, you were also on
experience? had things like MACD and RSI on SiliconInvestor.com and worked
I learned that proprietary trading my charts, even though I knew not to with IQ Chart. Were your responsi
was a risk not worth taking. For ex- rely on them for signals. At around bilities focused on developing chart
ample, a firm’s desk traders needed the same time, Steve Nison’s book ing packages and their chatroom?
no charts; they had order flow in their on Japanese candlestick charting Due to a quick succession of merg-
hands and worked the spreads. What I was gaining traction. That was the ers, SI and IQ Chart came to be owned
learned about trading, I did in my own first time I actually looked at price by the same company, and so they
account. Early on, I made a disastrous action bar by bar. thought there would be an audience
gold trade that became a chapter in for the charting program with me
Art Collins’ book, When Supertrad- Your first website morphed into promoting it. The plan was to have
ers Meet Kryptonite. Luckily, from TrendVue in 1999 and offered me put together a set of indicators
December 2023 • Technical Analysis of Stocks & Commodities • 45
and promote it at the site. an academic in Vienna who needed forms after a downtrend (or a top
some help to write the English version that forms after an uptrend) has
How did that work out? of his master’s thesis. already been in place for a long
That was the top for the dot-com It was the perfect introduction into time—especially in periods of
bubble. When the market went bust, the world of central banking, hedge high volatility and uncertainty—is
my guess is a lot of the Silicon Inves- fund conferences, and econometrics, relatively straightforward.” Any
tor population took substantial losses. which the IMF defines as using additional thoughts about that
FINRA also established the pattern “economic theory, mathematics, and turbulent market?
daytrader rule in February 2001, statistical inference to quantify eco- I think it was Justin Mamis who
making it so that accounts with less nomic phenomena.” Most important- said that tops take time, but bottoms
than $25,000 in equity were limited ly, I learned about exploratory data can be made in a day. There is a big
in how often trades could be made. analysis, a topic seldom mentioned in difference between seeing and trad-
This plus the bear market effectively the world of technical analysis. ing, and even more between how to
ended the adventures of a lot of indi- trade tops and bottoms.
vidual daytraders. On March 11, 2009 you wrote
IQ Chart was spun off and pur- a market commentary that was You launched InVivoAnalytics in
chased by one of the senior employ- published by Jason Kelly on late 2007 to support trading tools
ees. We actually delivered the product SeekingAlpha titled “How To Know you developed for eSignal and
and the partnership went on for a A Bottom When You Don’t See One” TradeStation. Are they still available
number of years. In the end, they in which you identified the market on those two platforms and can you
were not in a position to improve the bottom. How did the timing of that describe their purpose?
platform, and they made the decision article work out? The academic research I was privy
to let the user base shrink until it I had identified this sort of thing to in Vienna was basically a crash
was unprofitable and then they shut before at tops, such as in QCOM in course in quantitative methods ap-
it down. January 2000. Spike tops and bot- plied to nonstationary data, and
toms are not that difficult to see but when I evaluated the classic techni-
During the years 2003 to 2006 they must be confirmed by sentiment. cal analysis indicators, I realized
you were a young-ish mother of After a prolonged downtrend and a why none of them had ever worked
a 3- and 9-year-old, trading S&P scary close on a Friday, an interviewer particularly well. The fact is they
futures from home. You became will ask every guest on TV the same only worked by coincidence, and the
proficient at reading and trading question: “How much lower will it human mind being what it is, saw
bar and candlestick patterns as go?” and when the expert technical patterns that weren’t actually there.
well as market sentiment. In 2007 analyst projects an ever-lower price For quants, there is such a thing as
you traveled overseas to expand that works out to another big percent first principles and stylized facts of
your knowledge of monetary policy, downward move, that’s when the bell asset price returns. The bottom line
macroeconomics, and history. What goes off. The process works in reverse for traders is to know that volatil-
was your objective and how did it for uptrends. ity is always bad, and I continue to
enlighten you regarding the world refine my work in this area using
and the markets? You also wrote an article that TradeStation.
Traders usually think about techni- appeared in the September 2009
cal versus fundamental analysis of issue of this magazine in which For investing your own money,
individual stocks or commodities. you provided an assessment of the you developed model investment
Investment managers, on the other March 2009 ultimate bear market portfolios that you also shared with
hand, think about allocating assets low. In that article, you wrote: “How your subscribers. How have those
based on a financial model (such was it possible to accurately analyze models performed over the years?
CAPM or later on, risk parity) versus and capitalize on these chaotic The objective of investing is to
“global macro” strategy where PhD market conditions? Actually, it is compound capital efficiently, which
economists peer into their crystal easier than it looks because of a means drawdown must be as small
balls to make bets on the future. I simple paradox. Compared to the as possible. In directional trading,
happened to become friends with difficulty of timing the market the win–loss ratio is typically poor,
a high-profile economics blogger, on a daily basis, a bottom that so the trader must be prepared for a
46 • December 2023 • Technical Analysis of Stocks & Commodities
string of small losses and the result- You have spent consider
ing drawdown before hitting a home able time understanding
run with a big trend trade. In order the nature of volatility Defending against drawdown
to reduce drawdown in an investment and measuring it prop
portfolio, I use volatility measure- erly. Applying the knowl
does not require us to make
ments to calculate position size and edge you have gained all-or-nothing decisions.
then limit drawdown by raising cash from this research, how
when the portfolio’s overall volatil- has it contributed to your
ity goes beyond a certain point. The trading success? 0.4149 as of September 14, 2023. Us-
models have done well over the years Volatility is one of the most-studied ing the rule of 16, we divide 41.19%
because as volatility rises, we tacti- empirical properties of what aca- by 16 which gets us 2.57%. Multiply
cally cut exposure. Of course, there demics call asset price returns. By that by the September 15 closing price
is also the question of deciding what quantifying volatility, we can calcu- of $439.00, we can expect NVDA to
goes into the investment portfolio— late position size or asset allocation, fluctuate around $11.30 per day. This
the strategic asset allocation. reduce systemic risk to an investment number can be used to help calculate
portfolio, and determine risk-adjusted position size based on the trader’s
In 2018 to 2020, your interest in performance. Volatility happens bankroll.
macroeconomics resulted in a in clusters and is highly correlated The Nasdaq trading day is 390
three-part article you published with volume. We can also use these minutes long: dividing $11.30 by 6
for your subscribers titled “How stylized facts to rank and sort entire bars (of 65-minutes each) means the
The Bond Market Ends.” What watchlists of stocks to find the ones average bar should be about $1.88 tall.
were your main points and did that are of interest. To me, volatility If for some reason the bars are much
you foresee the 2022 bond market is simply a succinct measurement of shorter than that and barely overlap,
debacle? the herd stampeding in and out of volatility has decreased and it’s time
Even though the U.S. twin deficits stocks and markets. to move to a larger timeframe. Some
and national debt problems were indicators such as ADX serve a simi-
well-known, it wasn’t until a few How should volatility be interpreted lar purpose, but quantifying volatility
months into 2018 that I observed and used to make market timing down to percentages seems to be more
treasuries failing to do their job. To decisions? practical and can be directly used to
my mind, there are three types of risk: The March 2009 low was a good compare against another stock.
diversifiable risk, systematic market example of how a spike in volatility
risk, and unpriceable risk. The start can be used to help identify bottoms, You are a firm believer in using
of the trade war had the potential but in my opinion, volatility is more a mechanical/systematic trading
to upend the role of treasuries as a helpful as a metric, rather than as an approach with appropriate bet sizes,
recycling mechanism, first for Saudi indicator. Because I started off read- and defending against excessive
petrodollars, and later on, for the trade ing chart patterns and, later on, visu- drawdowns. Did that approach work
deficit with China, used to finance ally trading in real time, it’s second out well for you?
U.S. deficit spending. The end of this nature to think of the action of price Yes. I don’t think it’s possible to
paradigm was simply not something I bars as expansions and contractions in manage an investment portfolio by
could put a price on, and if treasuries volatility. In my experience, I found gut feel. Defending against draw-
could no longer serve the function many undercapitalized traders go down does not require us to make
as a “flight to quality” asset that for intraday timeframes that are too all-or-nothing decisions. It’s a matter
insulated stocks during downturns, small and too illiquid, not to men- of calculating how to divide the pie
what was the point of owning them? tion dangerous. The counterintuitive and how much cash to hold. For the
In 2019 I updated the models with solution is to use larger timeframes, trader, trading smaller size is always
shorter-duration bonds, and before like daily charts, and trade smaller better than trading too large.
the 2022 debacle, I had models with positions.
no bonds since the macroeconomic Any number of websites provide My understanding is that when
and geopolitical situation just kept historical, realized volatility for free. you were trading, you used two
deteriorating. For example, the 60-day annualized basic charts—a candlestick chart
historical volatility for NVDA is and a bar chart with volume. You
December 2023 • Technical Analysis of Stocks & Commodities • 47
draw trendlines and look You are not a fan of using
for breaches, as well as the most popular technical
pattern breaches. You indicators. Why is that?
observe, but don’t trade, At the office, everyone
patterns such as triangles, used the standard indicators
wedges, and massive head- and little has changed since
and-shoulders because then. When I look into the
you don’t want to get in actual calculations, it’s not
there and be trapped. Can clear to me what the rationale
you expand a bit on your is for these indicators. This
approach? is coming from a person
If you plot the one-month who bought and read all
or three-month volatility these books by the original
on a daily bar chart and authors.
TRADESTATION
squeeze the bars together,
these patterns will stand What charting software
out as areas of contracting FIGURE 1: NVDA SEMI-LOG DAILY CHART. On the right side of the chart, and brokerage firms do you
volatility. In fact, we can NVDA moves above the trendline for two days after falling below it for six days. use in your work?
use declining volatility to Many traders got shaken out, and then the price reversed upward. I use TradeStation for
help us draw lines around charting, I download eSignal
these trading ranges and the patterns the uptrend has ended and a reversal data for spreadsheets, and I execute
will identify themselves. It might be is in place, then the bounce should trades with Interactive Brokers.
more profitable to ride a portion of a fail and head down from here. One
trend rather than repeatedly position potential entry point to initiate a short You capitalized on observing
for a breakout. position would be on the break of a pattern or setup failures to make
two-day low, and then use the cyan- your move. You felt that if a market
Could you provide a chart example colored dots above the price bars as doesn’t go where it should, then you
using volatility and walk us through a trailing stop-loss. concluded that some traders will
how it helps you make decisions? When it comes to reading indi- be on the wrong side of the trade
Let’s look at the semi-log daily vidual price bars, my best recom- and need to exit the trade. That is
chart of NVDA (Figure 1) with data mendation for a book about this good information to capitalize on,
to September 29, 2023. Outperfor- is William Dunnigan’s One-Way right?
mance against the S&P 500 index Formula For Trading In Stocks And Linda Bradford Raschke used to
on a risk-adjusted basis is shown by Commodities. do a free day in her S&P futures chat
the cyan-colored price bars, while room every month. She used the CQG
underperformance against the bench- On your typical chart layout, you charting platform and liked to apply
mark is colored magenta. The 50-day use moving averages, candlesticks, ADX (average directional movement
moving average is there because ev- patterns, and trendlines for support index) to intraday charts. The thesis
eryone uses it. Most traders probably and resistance levels. Is that more behind the ADX, a J. Welles Wilder
have that line drawn below all the or less a complete picture of your creation, was that it somehow mea-
price action above the May 2023 gap charting approach? sured volatility and so it could be used
up. The close below the “neckline” I’ve looked at candlestick charts to delineate areas of consolidation.
on September 21 did not lead to an for so long that I can “see” them I noticed traders always seem to be
immediate breakdown; instead, it on bar charts. Candlesticks take up fixated on positioning for breakouts
predictably bounced upward after room, which can make it difficult to and spend a lot of time betting on
the breach, trapping some breakout identify patterns easily. For example, the direction. If the breakout goes
players. my preferred configuration for a daily against them, not only do the existing
At this point, the bounce is six days bar chart includes volume, the 21- and positions need to be closed, but new
old, trading below the 50-day mov- 63-day realized volatility, and the 50- positions are likely to be initiated,
ing average, which acts as “overhead day moving average, since everyone which means there are twice the or-
resistance.” The trader lies in wait: If else is watching it. ders going in the opposite direction,
48 • December 2023 • Technical Analysis of Stocks & Commodities
giving the move impetus and thrust. probably not that much
The process repeats, which can often of a difference between a
be seen as a triangle that just keeps “retail” versus a “profes- It might be more profitable
getting bigger, and when all these sional” daytrader. Firms to ride a portion of a trend
traders are finally exhausted, the real don’t have titles to that
trend starts going. effect. Personally, I think
rather than repeatedly
it’s a myth that the aver- position for a breakout.
You prefer looking for fake breakouts age person can trade for a
and then taking advantage of them. living. The good news is
Briefly, how did you do that? that almost anyone can accumulate investing than daytrading. What
I know of no method of determining a decent amount by investing over happened to change your mind?
if a breakout will be successful or not, time if they put their mind to it by After the dot-com bust, volatility
so the way I prefer to do it is simple. capturing and compounding the to- completely dried up, making day-
For a triangle, a wedge, a head-and- tal return which includes dividends, trading uneconomical in terms of
shoulders pattern—basically any rather than just the price return from the time commitment. Also, as one’s
large consolidation—just wait until short-term trading. capital increases, it becomes more
the breakout happens on volume, then efficient to deploy it as an investment
get on the first pullback, especially If an individual was interested in portfolio. The best thing I ever did
the small and scary two- to four-bar becoming a daytrader in 2023, what was to devise my own asset allocation
bull or bear flag; sometimes, there’s would you tell them to be aware of, as algorithm, one that could put lots of
only a tiny pause, a single “inside” compared to the 1990s to early 2000 dollars to work.
bar after a thrust in the direction of timeframe when you daytraded?
the breakout, to capitalize on failed I would probably tell them what Can you walk us through the
breakouts of a recent high or low. I’ve already spoken about here, which components of that algorithm?
Victor Sperandeo called it the “2B” is that nobody in the investment While there are a number of ways to
in chapter 7 his book, Trader Vic— industry trades for a living. Brokers measure and quantify price volatility,
Methods Of A Wall Street Master. earn a commission. Market makers the principle is always the same. If
get a spread. Fund managers charge Asset A is twice as volatile as Asset
Is there any difference in today’s management fees. B, then you will want to own one unit
trading methods as compared to of Asset A and two units of Asset B.
two decades ago? Do you still believe that a trading You could take this one step further
For trading patterns, no, because journal is helpful, at least for by targeting volatility on a portfolio
human nature never seems to change. beginning traders, to track their basis to mitigate risk. For example,
We know from Kahneman and Tver- results, as well as to review and if the price volatility of the portfolio
sky’s Prospect Theory that human learn from their mistakes to become that contains Asset A and Asset B
nature operates to maximize the successful? exceeds 10 percent, then raise cash.
chance of a gain, not the actual gain. I think it’s a good idea to prac- This practice would have safeguarded
For example, traders keep taking tice paper trading until you have capital during 2022 when both stocks
“stabs” inside consolidation patterns your analysis and execution locked and bonds went down together.
rather than getting on board on the down.
first opportunity of a new trend. When As we speak, you have just
it comes to technical indicators, all I You once said that “trading should launched your latest endeavor,
can say is the same old ones seem to never be used as a sole source of ActiveInvestorMag.com, on the 25th
pop up on most charts. Let’s hope the income.” Do you still hold that anniversary of your first market-
quants have something better. view today? related website. Why did you launch
Yes, because none of the industry it, and what are the benefits to
What is your view of the difference professionals do it. They don’t worry subscribers?
between a retail daytrader versus a about how to make rent or pay the I would like to curate useful in-
professional daytrader? next mortgage payment. formation from credible sources for
If the trader uses his own capital, those interested in trading and invest-
or isn’t paid by a fund to do it, there’s Over time, you pivoted more to ing. There is so much information out
December 2023 • Technical Analysis of Stocks & Commodities • 49
there it’s difficult to figure out where SUNW, VRTS, and VSTR.
to start, what’s important and why. As As of September 15, 2023, It’s second nature to think
a public service, I plan to publish a the top ten are AAPL, of the action of price
model investment portfolio that any- MSFT, NVDA, AVGO,
one can put to use, regardless of the ADBE, CSCO, AMD, bars as expansions and
amount of money being invested. INTC, INTU, and TXN. contractions in volatility.
Because the Nasdaq-100
Do you have any plans or interest in index is a modified mar-
writing a book about your trading ket capitalization-weighted index, Cont, Rama [2001]. “Empirical
and investing approach? adjusted quarterly, the no-brainer Properties Of Asset Returns:
I started on one, but I’m not sure way to own the future winners is by Stylized Facts And Statistical Is-
people even bother to read anymore. owning the Nasdaq-100 ETF. sues,” Quantitative Finance, Vol.
From the popular stock market apps 1., Institute Of Physics Publishing,
I’ve checked out, it sure seems people Are there any concluding remarks quant.iop.org.
just buy the names they know and you’d like to make? Dunnigan, William [2005]. One-Way
hope for the best. Some of these Quantifying volatility allows us to Formula For Trading In Stocks
apps don’t even bother to display gauge risk on an objective basis, to And Commodities, Harriman
price bars. determine position size and calcu- House.
late stop-losses; we can buy and sell Gopalakrishnan, Jayanthi [2002].
Since it’s mid-September 2023 as incrementally rather than making “Teresa Lo Of TrendVue.com,”
we speak, what is your take on the all-or-nothing decisions. We can interview, Technical Analysis of
market’s outlook for the remainder even incorporate volatility into stock Stocks & Commodities, Volume
of the year? picking by constructing an indica- 20: November.
Bloomberg reported in July that tor of risk-adjusted returns against Lo, Teresa [2004]. “Swing Trading
the cost of servicing government debt a benchmark such as the S&P 500, With Swing Charts,” Technical
reached $652 billion, which was up 25 coming full circle from the days of Analysis of Stocks & Commodi-
percent in the first nine months of the the William O’Neil chartbooks. As ties, Volume 22: February.
fiscal year. Higher interest rates drive someone who spent the first half of [2004]. “Set Up Your Trades
up the cost of debt service, something their time in the markets focused on With The Swing Indicator,”
we haven’t seen in decades. At some trading based on price action and Technical Analysis of Stocks
point, the powers that be might quietly investor sentiment, I have to say that & Commodities, Volume 22:
concede that 5 percent inflation is the second half focused on studying September.
the means to devalue the debt. The volatility has made making decisions [2009]. “Where We Are In
country is at a crossroads; political completely stress-free. The Cycle,” guest column, www.
instability and partisan gridlock will jasonkelly.com.
only exacerbate the U.S. debt spiral. Leslie N. Masonson is president of [2009]. “Looked At Market
This doesn’t exactly look bullish for Cash Management Resources, a fi- Sentiment Lately?” Technical
bonds, and with cash now yielding nancial consulting firm focusing on Analysis of Stocks & Com-
more than stocks, I can see why ETF strategies. He is an active ETF modities, Volume 27: September,
market participants might book some and Nasdaq futures trader, and the https://traders.com/Documenta-
profits. author of Buy—Don’t Hold: Investing tion/FEEDbk_docs/2009/09/
With ETFs Using Relative Strength close.html
What is your insight on whether To Increase Returns With Less Risk; Kahneman, Daniel, and Amos Tver-
or not the “magnificent 7” can and All About Market Timing, as sky [1979]. “Prospect Theory: An
continue to outpace the market in well as Day Trading On The Edge. Analysis Of Decision Under Risk,”
the next decade and beyond or will He can be reached at lesmasonson@ research paper.
there be other stock replacements yahoo.com or 845 323-7276. Sperandeo, Victor [1993]. Trader
along the way? Vic—Methods Of A Wall Street
At the peak in March 2000, the Further reading Master, John Wiley & Sons.
top ten were MSFT, INTC, CSCO, Collins, Art [2009]. When Supertraders
QCOM, ORCL, JDSU, AMGN, Meet Kryptonite, Traders Press.
50 • December 2023 • Technical Analysis of Stocks & Commodities
UNGER/DIRECTIONAL PATTERN Asia. He may be reached at Andrea@ UngerAcademy.
Continued from page 35 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
of statistical value. We therefore decide to consider our https://autc.pro/tasc8).
strategy terminated.
The code given in this article is available in the S&C
Conclusions Article Code section of our website, Traders.com.
In this article, we have shown the results of a simple
strategy applying this filter: Further reading
Unger, Andrea [2021]. The Successful Trader’s Guide To
if closed1>closed2 and closed2>closed3 then buy ... Money Management: Proven Strategies, Applications,
if closed1<closed2 and closed2<closed3 then sellshort ... And Management Techniques, Wiley Trading.
[2021]. The Unger Method: The Winning Strategy
as well as the complete 2HL+ pattern: Of The 4-Time World Trading Champion, The Boss
Books.
if closed1>closed2 and closed2>closed3 and
opend0>closed1 then buy ... ‡MultiCharts
if closed1<closed2 and closed2<closed3 and ‡See Editorial Resource Index
opend0<closed1 then sellshort ...
inputs:
Coef( 0.2 ),
VCoef( 2.5 ),
F TRADESTATION: DECEMBER 2023 TRADERS’ TIPS CODE VPeriod( 30 ),
Since market conditions continually change and may favor RSBARS( 15 ),
either growth or value stocks, investors often find themselves MARSBARS( 20 ),
at a crossroads. In response to this dilemma, author Markos MAXLOSSPERC( 7 );
if Ratio1[RSBARS] > 0
and Ratio2[RSBARS] > 0 then
begin
MyVol = IFF( BarType >= 2 and BarType < 5,
FIGURE 1: TRADESTATION. This TradeStation weekly chart demonstrates the strategy ap- Volume, Ticks );
Inter = Log(TypicalPrice) - Log(TypicalPrice[1]);
plied to the Vanguard ETF VUG. Data2 is VTV and Data3 is SPY.
52 • December 2023 • Technical Analysis of Stocks & Commodities
VInter = StdDev(Inter, 30);
CutOff = Coef * VInter * Close;
VAve = Average(MyVol, VPeriod)[1];
VMax = VAve * VCoef;
VC = MinList(MyVol, VMax);
MF = AvgPrice - AvgPrice[1];
Diff1 = Log(Ratio1) - Log(Ratio1[RSBARS]); Fortunately, Wealth-Lab has long included the indicators
Diff2 = Log(Ratio2) - Log(Ratio2[RSBars]); developed by Markos Katsanos: both the custom relative
RSMK1 = XAverage(Diff1, 2) * 100; strength indicator (RSMK) and the volume flow indicator
RSMK2 = XAverage(Diff2, 2) * 100;
(VFI). As usual, this means that they can be used universally
BUY1 = Symbol = VUG and RSMK1 > RSMK2 throughout our program features. These include the Build-
and RSMK1 > Average(RSMK1, MARSBARS); ing Blocks feature (which offer an easy way to create trading
strategies without having to code them), the indicator pro-
BUY2 = Symbol = VTV and RSMK2 > RSMK1
and RSMK2 > Average(RSMK2, MARSBARS); filer (which tells how much of an edge an indicator provides),
a strategy optimization tool, and many more.
if (BUY1 OR BUY2) and VFI > 0 then The chart in Figure 2 demonstrates implementing the
Buy this bar at close;
trading system on a weekly chart of VUG.
SELL1 = Symbol = VUG and RSMK1 < RSMK2 and Coding in C# for use in Wealth-Lab 8 is shown here:
RSMK1 < Average(RSMK1,MARSBARS) and RSMK1 < RSMK2[1];
using WealthLab.Backtest;
SELL2 = Symbol = VTV and RSMK2 < RSMK1 and using System;
RSMK2 < Average(RSMK2, MARSBARS) and RSMK2 < RSMK1[1]; using WealthLab.Core;
using WealthLab.Data;
SELL3 = Close < Average(Close, 50) and using WealthLab.Indicators;
Close < (1 - MAXLOSSPERC / 100) * Close[1]; using System.Collections.Generic;
using WealthLab.TASC;
if SELL1 or SELL2 or SELL3 then
Sell this bar at close; namespace WealthScript1
end; {
public class GrowthOrValue : UserStrategyBase
A sample chart is shown in Figure 1.
{
string symbol1 = "VUG", symbol2 = "VTV", indexSymbol = "SPY";
This article is for informational purposes. No type of BarHistory etf1, etf2, index;
trading or investment recommendation, advice, or strategy RSMK rsmk1, rsmk2;
is being made, given, or in any manner provided by TradeS- SMA ma1, ma2, etfMA1, etfMA2;
VFI vfi1, vfi2;
tation Securities or its affiliates. double pctMaxLoss;
—John Robinson
TradeStation Securities, Inc. public GrowthOrValue()
www.TradeStation.com {
AddParameter("VFI Period", ParameterType.Int32, 30, 26, 30,
4);
AddParameter("Rel. Strength Bars", ParameterType.Int32, 15,
13, 15, 2);
AddParameter("Rel. Strength MA Bars", ParameterType.Int32,
20, 15, 25, 5);
F WEALTH-LAB: DECEMBER 2023 TRADERS’ TIPS CODE AddParameter("MA Period", ParameterType.Int32, 30, 20, 100,
In his article in this issue, “Growth Or Value?”, author Markos 10);
Katsanos once again explores his intermarket edge with a AddParameter("Stop Loss", ParameterType.Int32, 7, 5, 9, 2);
rotation-like system that switches between two growth and }
value ETFs according to market conditions. To assist his trad- public override void Initialize(BarHistory bars)
ing decisions, he uses two indicators of his own construction {
to measure relative strength and detect bear markets. int vfiPeriod = Parameters[0].AsInt;
int rsBars = Parameters[1].AsInt;
// Plot
plotshape(long1, 'L1', shape.triangleup, location.
FIGURE 5: TRADINGVIEW. This demonstrates the growth and value switching system belowbar,
color.purple, text = 'long Growth',size=size.small)
on a chart of the Vanguard Growth ETF. plotshape(long2, 'L2', shape.triangleup, location.
belowbar,
// @param avg Input time series (hlc3) color.green, text = 'long Value', size=size.small)
// @param vol Input time series (volume) plotshape(exit1 or SL1, 'E1',shape.xcross,location.abovebar,
// @param period N bars for VFI calculation color.purple, text = 'exit Growth',size=size.tiny)
// @param Coef VFI coefficient plotshape(exit2 or SL2, 'E2',shape.xcross,location.abovebar,
// @param VCoef Volume cutoff color.green, text = 'exit Value', size=size.tiny)
// @returns Volume Flow Indicator
VFI (float avg, float vol, int period, // --- Exploration ----
float Coef=0.2, float VCoef=2.5, int smooth=2) => var table T = table.new(position.bottom_right,2,8,ic1)
// T.cell(0, 0, 'G&V Switching System',
float inter = math.log(avg) - math.log(nz(avg[1])) text_color = #FFFFFF, bgcolor = ic2)
float Cuttoff = Coef * ta.stdev(inter, 30) * close T.merge_cells(0, 0, 1, 0)
float Vave = nz(ta.sma(volume, period)[1], 1.0) T.cell(0, 1, 'Created by Markos Katsanos',
float Vc = math.min(volume, Vave * VCoef ) bgcolor = ic3)
float MF = ta.change(avg) T.merge_cells(0, 1, 1, 1)
float VCP = switch T.cell(0, 2, 'Growth Equity:', bgcolor = ic5)
MF > Cuttoff => Vc T.cell(1, 2, iSym1, bgcolor = ic5)
MF < -Cuttoff => -Vc T.cell(0, 3, 'Value Equity:', bgcolor = ic5)
=> 0.0 T.cell(1, 3, iSym2, bgcolor = ic5)
float vfi1 = math.sum(VCP, period) / Vave T.cell(0, 4, 'RS Growth:')
ta.wma(vfi1, smooth) T.cell(1, 4, str.format('{0}', rsmk1),bgcolor = ic4)
T.cell(0, 5, 'RS Value:')
// --- Calculations --- T.cell(1, 5, str.format('{0}', rsmk2),bgcolor = ic4)
float ci = request.security(iSymI, timeframe.period, close) T.cell(0, 6, 'VFI Growth:')
float c1 = request.security(iSym1, timeframe.period, close) T.cell(1, 6, str.format('{0}', vfi), bgcolor = ic4)
float h1 = request.security(iSym1, timeframe.period, hlc3) T.cell(0, 7, 'Current Position:')
float v1 = request.security(iSym1, timeframe.period, volume) T.cell(1, 7, opPos, bgcolor = ic4)
float c2 = request.security(iSym2, timeframe.period, close)
float h2 = request.security(iSym2, timeframe.period, hlc3)
float v2 = request.security(iSym2, timeframe.period, volume) The indicator is available on TradingView from the Pine-
CodersTASC account:
float rsmk1 = RS(c1, ci, iRSBars, 2)
float rsmk2 = RS(c2, ci, iRSBars, 2) https://www.tradingview.com/u/PineCodersTASC/#published-scripts
float vfi = VFI(h1, v1, iPeriod, 0.2, 2.5)
float mars1 = ta.sma(rsmk1, iMABars) —PineCoders, for TradingView
float mars2 = ta.sma(rsmk2, iMABars) www.TradingView.com
float dist = 2.0 * ta.atr(10)
T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.
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OPTIONSANALYSIS.COM
option expiration
• If the put option is exercised, the
option seller would be obligated
to buy 100 shares of SAVE at FIGURE 2: IMPLIED OPTION VOLATILITY. As seen here, the option IV (black line) on SAVE stock spiked.
$12.50 a share High IV means time premium is built into the price of SAVE options, to the benefit of the put seller.
Remember, automatic
exercise only occurs at
option expiration.
to take out its recent low of $14.08
and fall to $12.25—depending on
how soon that happened—we might
be able to exit with anywhere from
a breakeven result (if much time has
gone by and time decay has eaten
away enough of the premium) to a FIGURE 5: RISK CURVES DETAIL, PUT SALE. If the underlying stock were to drop below $12.50, in this sce-
loss of roughly −$125 (if the decline nario the trader might be able to exit with anywhere from a breakeven result to a loss of roughly −$125.
takes place immediately).
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