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SHORT-TERM
PATTERNS
Which work best? 8

GOLD MOMENTUM
STRATEGY
International evidence 18

MANAGING TRADING
FEAR AND STRESS
Understanding the biological
processes 20

ETF MIDCAP GROWTH

INVESTING
Outperforming in
the midcap space 24

INTERVIEW
Kyle Crystal 32

QUICK-SCAN
n Target Rich Trades 38

JANUARY 2021
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 CONTENTS JANUARY 2021, VOLUME 39 NUMBER 1

7 Algo Q&A
by Kevin J. Davey
The Traders’ MagazineTM Got a question about system or algo
trading?
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 The editors of S&C invite readers to submit their opinions and information on subjects Editor: There is a new feature at our
relating to technical analysis and this magazine. This column is our means of communi- website where visitors can review past
cation with our readers. Is there something you would like to know more (or less) about? Readers’ Choice Awards given and
Tell us about it. Without a source of new ideas and subjects coming from our readers, this browse a list of historical recipients.
magazine would not exist. We are offering this information to help
Email your correspondence to Editor@Traders.com or address your correspondence users verify the winners of the awards
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All and to help users research products that
letters become the property of Technical Analysis, Inc. Letter-writers must include their full may be of interest to them. We believe it’s
name and address for verification. Letters may be edited for length or clarity. The opinions helpful for readers to know what other
expressed in this column do not necessarily represent those of the magazine.—Editor readers of this magazine have found to
be useful in their trading.
This feature can be found on our
TREND DIRECTION AND PROBABILITY: MORE ON TREND DIRECTION AND homepage at www.traders.com under
THE BULL BEAR INDEX PROBABILITY: THE BULL BEAR INDEX “Readers’ Choice Awards—Historical
Editor, Editor, Winners.” We hope this helps.
I thoroughly I’m writing about the article in the No-
e nj oye d M i k e vember 2020 issue, “Trend Direction
Siroky’s article on And Probability: The Bull Bear Index,”
the “Bull Bear In- by Mike Siroky. I would like to pursue
dex” in the Novem- using his technique.
ber 2020 issue of I was wondering if there is coding
Technical Analy- available for this indicator so I can use
sis of Stocks & it on my trading platform?
Commodities and I would like to use Thanks a lot for your help.
it in my own trading. Antonio
However, I don’t understand how to
set up the Excel formula for the t.dist Editor: We asked a platform developer On a related note, we’d like subscrib-
function in Excel; perhaps you could about possible implementation on a ers to this magazine to know that voting
persuade Dr. Siroky to provide the trading platform, and they offered the in our annual Readers’ Choice survey is
Excel code. following thought. now underway! Results of this survey are
Thank you. One way to implement it could be used to determine the next set of Readers’
Tony for motivated readers to download and Choice Award recipients. Recipients of
use a third-party library such AlgLib, the awards will be revealed in our Bonus
Author Mike Siroky replies: MathNet, or MetaNumerics to imple- Issue of Technical Analysis of Stocks &
Here is the Excel command for the ment the “student’s distribution” used Commodities magazine, to be published
cumulative t-distribution: in the calculation of the technique. in February.
You first need the difference between Maybe someone reading this will Voting ends December 31, 2020. Visit
high and low probability normalized also have some suggestions or thoughts our website at www.traders.com to cast
by the combined standard deviation, to offer. your vote! We want to hear from you.
as described in the article. We can call
this normalized value x. You also need VERIFYING READERS’ CHOICE
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For a time window of 25 days, degrees I am interested in purchasing a particu-
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Type into a blank box: the product from other users and try trading systems, money
management, intraday trading,
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6 • January 2021 • Technical Analysis of Stocks & Commodities
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 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over 25 years
of system trading experience. Davey is a full-time trader, and he also teaches
and consults via his Strategy Factory online workshop (https://kjtradingsystems.
com). He is the author of several bestselling trading books, including Building
Winning Algorithmic Trading Systems and Introduction To Algo Trading. 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

CLOSING TIME(S) Confused yet? Maybe an example after 5:00 pm—when the exchange
I have a gold algo, and I was calculat- will help. determines the settlement price—the
ing values today after the close at 5 pm Here is how the data is presented in daily bar closing price will “jump” to
and got an entry signal. But at 6 pm, TradeStation: reflect the settlement price.
the closing price had changed signifi-
cantly, making my signal invalid. What XX minute bars: Closing price is For some markets (like the mini S&P),
went wrong? always the last price traded. So, with a this difference is usually minor. But for
Based on your question, I would guess 1440-minute bar, the closing price will markets like gold and crude oil, the dif-
that you have fallen victim to the “last be the last price traded at 5:00 pm ference can be huge.
vs. settlement closing price” issue. Let Figure 1 shows an example—the
me explain it, and I’ll give you some Daily bars: Closing price during the
workarounds. day will be the last price traded. But, Continued on page 17
Back in the old days, all futures and
commodities were traded in pits, via
open outcry. There was no electronic
market, and there were limited trading
hours—not the near 24-hour markets
we enjoy today.
To further confuse the issue, many
markets closed at different times of the
day. Gold, for example, closed at 1:30 pm.
The exchange then determined the settle-
ment (closing) price for the day based on
the last minute or two of trading. That is

TRADESTATION
the price you’d see on your daily equity
brokerage statements.
When markets transitioned away from FIGURE 1: GOLD, LAST PRICE TRADED VS. DAILY SETTLEMENT PRICE. The 1440-minute bar close is the
pit trading, the market hours expanded last price traded, while the daily bar close is the daily settlement price.
(gold now closes at 5:00 pm), but the
settlement price time fix did not. Gold
still has a settlement price calculated at
1:30 pm, even though the market is open
until 5:00 pm. For reference, you can find
a list of settlement times for the CME
futures exchange here: https://www.
cmegroup.com/market-data/settlements/
settlements-details.html
This means we have two possible
closing prices: the last price traded at
5:00 pm, and the settlement price of
around 1:30 pm. This creates an issue
of how the data is presented to the user.
Is the closing price shown the last price FIGURE 2: DIFFERENCE IN LAST PRICE TRADED VS. SETTLEMENT PRICE. The price of gold plummeted
traded, or the settlement price? And does in the last few hours of the trading day, after the settlement time. This causes the 1440-minute and daily bars
this even matter? to be dramatically different.

January 2021 • Technical Analysis of Stocks & Commodities • 7

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8 • January 2021 • Technical Analysis of Stocks & Commodities
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 PRICE PATTERNS

With (And Without) A Trend Filter

A Fresh Look At
Short-Term Patterns
You may be familiar with some of the most popular
short-term patterns, but do you know which work
best? These test results may help you find out.
• Key reversals, a higher high followed by a lower
close. We sell the lower close. The opposite for
buy signals.

I
have always liked short-term price patterns.
The simplest, such as an island reversal,
seem intuitively correct. The best study of
chart patterns I’ve seen is by Thomas Bulkowski,
who ranked the three top bullish patterns as
follows:
1. Upward breakout of a rectangular top (this is
the same as a breakout above a horizontal re-
sistance line)
2. Upward breakout from a falling wedge
3. Upward breakout from an ascending triangle
and the three best bearish patterns as:
1. Descending scallop (a series of failed attempts
at recovery)
2. Downward breakout of a symmetric triangle in
a downtrend
3. Downward breakout of a broadening top
• Island reversals, a gap higher followed by a lower
close, but not filling the gap. We sell the lower
close. The opposite for buy signals.
• Outside days, a higher high and a lower low, but
the close in the upper or lower 25% of the range.
We buy if upper, sell if lower.
• Wide-ranging days, the same as outside days,
but the true range must exceed 1.5 × 20-day
average true range.
• Compression, the most recent 3 days must each
have a true range smaller than the 4th previous
day. We buy a breakout above the highest high
of the last 3 days and sell a breakout below the
lowest low of the past 3 days.
• Gap openings, must be larger than 0.5 × 20-day
ATR. We buy or sell the close of the gap day in
the direction of the opening gap.
All of these require no more than three days to
identify and generate a trading signal. That fits my
idea of instant gratification.

Patterns can range from simple to complex. The The test

most complex one that I know of can take 22 days to I will select a small set of ETFs and stocks that I think
produce a signal. But most traders, including myself, are a representative sample and of interest to investors:
want something faster. The question is, “Are there SPY (S&P 500), QQQ (Nasdaq), IWM (Russell small
short-term patterns that work?” caps), AAPL (Apple), AMZN (Amazon), GE (Gen-
eral Electric), WMT (Walmart), and TSLA (Tesla).
A selection of short-term patterns Hopefully, we can draw some valid conclusions. One
Most of us are familiar with the popular short-term problem with testing a large number of stocks is that
patterns, but not necessarily which are better and the averages hide many of the good results.
which are worse. In this article, I’ll take a look at the I will test from January 2000 through July 2020, a
LISA HANEY

following patterns: sample that includes a wide variety of trends, price

by Perry J. Kaufman
January 2021 • Technical Analysis of Stocks & Commodities • 9
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FIGURE 1: KEY REVERSAL PATTERN. In this example, cumulative returns following
a key reversal day are shown.
FIGURE 2: KEY REVERSAL PATTERN. The same data from Figure 1 is shown
graphically here, cumulative returns following a key reversal day.
FIGURE 3: TREND FILTER. Cumulative returns using a key reversal plus a trend
filter.
shocks, and market confusion.
The position size is always $10,000 divided by the closing
price. That will come close to making each trade equal risk so
that a trade taken in 2020 at a high price will not overwhelm
a trade taken in 2000 at a lower price.
In addition to the results of these patterns, I will also apply
an 80-day moving average trend filter, typical of a macrotrend
system. We will buy only when the moving average is up and
sell when it is down.
Example
Let’s look at the first pattern, a key reversal, applied to SPY
and TSLA, two extremes. Because the SPY is the cap-weighted
average of 500 stocks, it will always be less volatile than an
individual active stock such as TSLA. The table in Figure 1
separates the upward reversals (“bull moves”) from the down-
ward ones (“bear moves”). The numbers are the cumulative
profits and losses from the entry on the close of the day of the
reversal. Figure 2 shows the same returns on a chart.
10 • January 2021 • Technical Analysis of Stocks & Commodities
FIGURE 4: KEY REVERSAL BULL. Key reversal bull moves (top) and summary
(bottom).
FIGURE 5: KEY REVERSAL BEAR. Key reversal bear moves (top) and summary
(bottom).
Peak returns for TSLA occur on the second close after enter-
ing a key reversal upward. But then, TSLA has been in a strong
uptrend, so we would expect the upside to be more profitable
than the downside. SPY shows no gains at all, for either the
upward (bull) or downward (bear) reversal.
What if we filter these reversals with a trend, taking the
reversal only in the direction of the trend? To avoid massive
testing, we will only look at the 80-day moving average, which
I consider representative of a macrotrend strategy. Figure 3
shows the results.
While the trend does not seem to change the returns of TSLA
except to make days 3, 4, and 5 similar, it drops the number of
bull trades from 54 to 32, a reduction of 40%. That makes the
profits per trade 40% larger, a significant benefit. The trend
improved the downward reversals but not by enough to make
them an interesting trade.
A broader view of the key reversal
When we look at our set of 3 ETFs and 5 stocks, we see a pat-
tern that is different for ETFs and stocks. Because the ETFs
are an index, the results are muted compared to stocks. QQQ
and IWM are more volatile than SPY and show gains on days
3 and 4 for upward moves. Our selected stocks perform much
better on those days. This can be seen in Figure 4 and in the
averages in the lower section.
The lower table clearly shows that the stock returns increase
and peak on day 4. The equity index ETFs have small, positive
returns on days 3 and 4.
The bear market scenario is different, as seen in Figure 5.
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FIGURE 6: KEY REVERSAL. Key reversal results using an 80-day moving average
trend filter.
FIGURE 7: ISLAND REVERSALS. (Top to bottom): Bull moves without and with a
trend filter; bear moves without and with a trend filter.
Again, stocks outperform the index markets, but this time all but
GE and TSLA are negative, with the least negative being day 1
and day 2. We can guess that the upward bias of the stock market
makes it difficult to profit from moves to the downside.
Adding a trend filter
Normally, trading only in the direction of a macrotrend will
improve returns. It will also reduce the number of trades. Con-
tinuing with the key reversal example, but only showing the
summary, the results of the bull moves (up) are similar to the
results without a trend filter, but using the trend filter (Figure
6) reduces the number of trades by about 37%, which makes
the profits per trade that much bigger and reduces the time in
the market. Less time in the market means less risk.
All of these require no more
than three days to identify
and generate a trading
signal. That fits my idea of
instant gratification.
12 • January 2021 • Technical Analysis of Stocks & Commodities
FIGURE 8: 3-DAY COMPRESSION. (Top to bottom): Bull moves with and without a
trend filter; bear moves with and without a trend filter.
Island reversal
The island reversal is more specific than the key reversal; there-
fore, it has only a few trades per year. That would be fine if it
produces more consistent or more profitable returns. Figure 7
shows the summary of bull and bear island reversals, with and
without the trend filter.
Unlike the key reversal, this pattern shows profits for the
index markets. For stocks, WMT and TSLA were profitable for
upward moves without the trend, but the averages reflect large
losses from AAPL. An island reversal in the index markets
would indicate a broad economic event.
Compression
The 3-day compression represents a market that is consolidat-
ing, and the trading signal is a breakout of the high or low of
those 3 days. The highs and lows of the 3 days do not have to be
inside the larger range of the 4th day back, only the true ranges
must be smaller. It is interesting because it seems to identify
more frequent and more reliable moves to the upside when
compared to the previous patterns. Toby Crabel referenced
this as one of the best patterns for intraday trading. Results are
shown in Figure 8. This formation does not work well with a
trend filter. AAPL and TSLA had strong returns when taking
upward breakouts.
Outside day
An outside day indicates volatility, a much more active day. In
our test, we go long if the close is in the upper 25% of the range.
We sell short if the close is in the lower 25% of the range.
Figure 9 shows the four summary results. Bull moves, that
is, upward breakouts, are profitable for both index ETFs and
stocks, with all markets net positive after 4 days. Breakouts to
the downside posted losses everywhere.
Adding a trend filter gave results similar to the key reversal.
The net returns were slightly lower but the reduction in the
number of trades made the profits per trade higher.
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FIGURE 9: OUTSIDE DAY BREAKOUT. Outside day (top to bottom) upward breakout
with and without a trend filter; downward breakouts with and without a trend filter.
FIGURE 10: WIDE-RANGING DAY. Wide-ranging day (top to bottom) upward breakout
with and without a trend filter; downward breakouts with and without a trend filter.
Wide-ranging day
A wide-ranging day does not need to be an outside day, only
a very volatile one, 50% bigger than the average range. We go
long if the close is in the upper 25% of the range and sell short
if the close is in the lower 25% of the range.
Although individual stocks show a profitable average, all
results are very small. Adding a trend improved results in
some places and lowered results in others, as shown in Figure
10. Overall, this pattern is not working, or our breakout rule
is wrong.
Gap openings
And now for our old friend, the gap opening. We want to believe
that a gap opening, at least a large one, is important. We defined
our minimum gap as 50% of the 20-day average true range, so
that a stock trading at $100 with an ATR of $2.00 will need to
FIGURE 11: GAP OPENING. Gap opening (top to bottom) upward with and without
a trend filter; downward with and without a trend filter.
open up or down $1.00 to qualify. That turns out to be about
125 cases over the past 20 years. Hopefully, these larger gaps
will have a predictable pattern.
Our rule is to go long or short on the close of the day with the
gap, not on the opening gap, and take a position in the direction
of the gap opening. We are looking for some continuation over
the next 5 days, and this makes it easier to compare the gap
opening with the other patterns.
Figure 11 shows that an upward breakout is followed by up-
ward moves, for both index ETFs and stocks, with the higher
returns on day 5. The best performers were AAPL, TSLA, and
AMZN, in that order. The only loss was in the SPY, a market
dominated by noise.
Gaps to the downside were also profitable, but only during
the first two days, then those gains drifted away. The trend filter
improved the stock returns everywhere but hurt the index returns.
The upward bias of the stock market seems to be a better trend
indicator. Applying the trend filter to the downward gaps did
not improve returns.
Conclusions
Trading would be easy if all of these patterns were profitable.
But the stock market is biased to the upside, so it is not surpris-
ing that upward breakouts (bull moves) are more successful.
In addition to the results of
these patterns, I will also
apply an 80-day moving
average trend filter, typical of
a macrotrend system.
January 2021 • Technical Analysis of Stocks & Commodities • 13
https://libta.org
 UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

HARRY PLOSS, as Trustee for the HARRY PLOSS TRUST

DTD 8/16/1993, on behalf of himself and a proposed class, et al., No. 1:15-cv-02937
Plaintiffs Judge John F. Kness
v.
KRAFT FOODS GROUP, INC. and MONDELĒZ GLOBAL LLC,
Defendants

SUMMARY NOTICE OF PENDENCY OF CLASS ACTION

TO: All persons and entities who purchased a Chicago Board of Trade (“CBT”) December 2011 soft red wheat futures contract or a
CBT March 2012 soft red wheat futures contract after October 31, 2011, or sold a put option or purchased a call option on one or
both of these contracts after October 31, 2011. The precise definition of the certified class appears below.
If you are a clearing firm, futures commission merchant, brokerage firm or trustee through which CBT December 2011 soft red wheat
futures contracts or CBT March 2012 soft red wheat futures contracts were traded after October 31, 2011, or through which put options
were sold or call options were purchased on one or both of these futures contracts after October 31, 2011, please provide the name(s) and
last known address(es) of such customers to the Notice Administrator, A.B. Data, Ltd. at the address listed below within one week of
receiving this Notice. Alternatively, you may mail or email copies of this Notice to such persons or entities that are members of the Class
within two weeks of receiving this Notice. Please preserve your clients’ transaction records in CBT December 2011 and CBT March 2012
soft red wheat futures contracts (and options on such futures contracts) traded after October 31, 2011.
This Summary Notice seeks to alert you to a certified class action lawsuit called Ploss v. Kraft Foods Group, Inc. et al., Case No.
1:15-cv-02937, pending in the United States District Court for the Northern District of Illinois in Chicago before the Honorable John F.
Kness. Plaintiffs Harry Ploss, Richard Dennis, Budicak Inc., Joseph Caprino, Kevin Brown, White Oak Fund LP, and Robert Wallace
(collectively, “Plaintiffs”) brought a lawsuit on behalf of themselves and other similarly situated persons against Kraft Foods Group, Inc.
and Mondelēz Global LLC (collectively, “Kraft”).
The lawsuit alleges that Kraft manipulated the prices of the CBT December 2011 soft red wheat futures contract (“CBT December 2011
Contract”) and the CBT March 2012 soft red wheat futures contract (“CBT March 2012 Contract”) by buying and maintaining a 3,000 contract
position (approximately 15 million bushels) in the CBT December 2011 Contract for the purpose of influencing prices, rather than because of
any legitimate need for that quantity of wheat. Plaintiffs assert claims against Kraft under the Commodity Exchange Act, 7 U.S.C. §1 et seq.
(“CEA”), the Sherman Antitrust Act, 15 U.S.C. § 2, et seq. (“Sherman Act”) and the common law regarding unjust enrichment.
Kraft denies that it did anything wrong and asserts that Plaintiffs’ claims have no merit. Kraft asserts that its futures position was well within
applicable limits, and did not impact any futures prices throughout November 2011 or thereafter. Kraft also asserts there was nothing
improper about standing for delivery in the futures market given that cash market prices were high and Kraft had a real need for wheat.
The Court has appointed the lawyers listed below to represent the Class in this lawsuit (“Class Counsel”). You may hire your own lawyer
to appear in Court for you, but if you do, you are responsible for paying that lawyer.
Christopher Lovell Vincent Briganti
Christopher McGrath Raymond Girnys
LOVELL STEWART HALEBIAN LOWEY DANNENBERG, P.C.
JACOBSON LLP 44 South Broadway, Suite 1100
500 Fifth Avenue, Suite 2440 White Plains, New York 10601
New York, New York 10110 Telephone: (914) 997-0500
Telephone: (212) 608-1900

WHO IS A MEMBER OF THE CLASS?

The Class certified by the Court is defined as all persons or entities who either:
a. purchased a CBT December 2011 Contract or a CBT March 2012 Contract after October 31, 2011 except that purchases of
CBT March 2012 Contracts made after December 14, 2011 qualify for inclusion in the Class only to the extent they were made
in liquidation of a short position in the CBT March 2012 Contract (whether an outright short position or as part of a spread
position) which was sold between November 1 and December 14, 2011 inclusive; or
b. sold put options or purchased call options on the CBT December 2011 Contract or on the CBT March 2012 Contract after
October 31, 2011 except that sales of put options or purchases of call options on the CBT March 2012 Contracts made after
December 14, 2011 qualify for inclusion in the Class only to the extent they were made in liquidation of a position in the CBT
March 2012 Contract (whether an outright position or as part of a spread position) which was initiated between November 1 and
December 14, 2011 inclusive.
Excluded from the Class are Cargill, Inc., the Defendants and any parent, subsidiary, affiliate or agent of any Defendant.

YOUR LEGAL RIGHTS AND OPTIONS IN THIS LAWSUIT

If you are a member of the Class, you will need to decide whether to (a) remain in the Class or (b) request to be excluded from the Class.
To remain in the Class, you do not need to do anything at this time. If you remain in the Class, you will give up the right to file (or continue)

Continued on Next Page

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Continued from Previous Page
SUMMARY NOTICE OF PENDENCY
OF CLASS ACTION
your own lawsuit or seek any other form of resolution of claims
you might have against Kraft concerning the claims in this
lawsuit, and you will be legally bound by all court orders,
judgements, or settlements approved by the Court. If money or
benefits are obtained for the Class as a result of judgment or
settlement, you may be entitled to share in a portion of such
money or benefits. If money or benefits are obtained in this
class action, the Class will be separately notified as to how to
make a claim to participate and request a share of any money or
benefits recovered for the Class.
Class members may be required to produce trading records for
all accounts in which they have a financial interest, showing all
trades in the CBT December 2011 or March 2012 Contracts
made after October 31, 2011. Class members should preserve
records of their transactions in CBT December 2011 and CBT
March 2012 Contracts (and options on such futures contracts)
traded after October 31, 2011 (including any monthly
statements for October 2011). Class members should also
preserve records of any purchases and/or sales of physical
wheat in the cash market between November 1, 2011 and
March 14, 2012.
If you do not want to participate in this lawsuit, you can opt out
of the Class and request to exclude yourself. If you choose to
exercise your right to opt out of the Class, you will not be
bound by any court orders, judgments, jury verdicts, or
settlements approved by the Court, but you keep your right to
sue or otherwise resolve your potential claims against Kraft on
your own. If you opt out, you cannot make a claim against any
money or benefits that might be recovered by the Class from
Kraft in a settlement or as a result of a judgment, if any.
To opt out of the Class, you must mail, e-mail or submit
through the case website a written statement to A.B. Data,
Ltd. (mailing address, e-mail address and case website
address referenced below) no later than February 11, 2021
stating: (1) you are a member of the Class in Ploss v. Kraft
Foods Group, Inc. et al. and (2) you request to be excluded
from the Class. Your written request for exclusion must also
include your full name, address, telephone number, e-mail
address (if any) and signature. A sample opt-out form is
available on the case website address referenced below. The
Court will exclude from the Class any member who submits a
valid and timely request for exclusion.
2011 Wheat Futures Class Action
Exclusions
c/o A.B. Data, Ltd.
P.O. Box 173001
Milwaukee, WI 53217
877-883-8949
info@2011wheatfuturesclassaction.com
HOW CAN I GET MORE INFORMATION?
If you have questions related to this lawsuit, your rights or wish
to review other documents related to this lawsuit, you may visit
www.2011wheatfuturesclassaction.com or call 877-883-8949.
You may also contact Class Counsel with any questions.
PLEASE DO NOT CALL OR CONTACT
THE COURT OR THE CLERK’S OFFICE
REGARDING THIS NOTICE OR FOR
ADDITIONAL INFORMATION.
QUESTIONS?
VISIT www.2011wheatfuturesclassaction.com
or CALL 877-883-8949 TOLL FREE
Because the index ETFs include a large set of stocks, we would
expect them to be less volatile, but when they gap open, have an
island reversal, or break out of a compression formation, they
tend to reflect a broader economic event.
Island reversals, gaps, outside days, and key reversals are best
with stocks because of their higher volatility.
While the gains from any one of these patterns may be small,
they are not likely to occur on the same day, so you can trade
more than one pattern and add the returns together. Be sure
to test these yourself. The more volatile stocks offer the best
opportunities.
Perry J. Kaufman is a trader and financial engineer. He is
the author of many books on trading and market analysis,
including the new sixth edition (2020) of Trading Systems and
Methods (with the first edition published in 1978 as a seminal
book in the field of technical analysis), and the newly released
Kaufman Constructs Trading Systems (2020). For questions or
comments, please go to www.kaufmansignals.com.
The code given in this article is available in the Article Code
section of our website, Traders.com.
See our Traders’ Tips section beginning on page 46 for com-
mentary and implementation of Perry Kaufman’s technique in
various technical analysis programs. Accompanying program
code can be found in the Traders’ Tips area at Traders.com.
Further reading
Bulkowski, Thomas N. [2005]. Encyclopedia Of Chart Patterns,
2nd. Edition, Wiley Trading.
[2016]. Chart Patterns: After The Buy, Wiley Trad-
ing)
Kaufman, Perry J. [2020]. Kaufman Constructs Trading Systems
(print and ebook editions), Amazon.
[2020]. Trading Systems and Methods, 6th Edition,
Wiley.
[2003]. A Short Course In Technical Trading, Wiley.
[1995]. Smarter Trading, McGraw-Hill.
‡TradeStation
‡See Editorial Resource Index
EASYLANGUAGE CODE FOR PRICE PATTERNS
WITH AND WITHOUT TREND FILTER
// PJK Short-Term patterns
// Look at reliability of short-term patterns with and without a
// trend filter.
// Look at using noise as a qualifier
// Copyright 2020, P.J.Kaufman. All rights reserverd
inputs: trendper(0), usekeyreversal(false),
useislandreveral(false), usecompression(0),
usegaps(0), useoutsideday(false), usewideranging-
day(0), forecast(5),
investment(10000);
vars: trend(0), pattern(" "), bullcases(0), bearcases(0),
keyreversal(false), islandreversal(false),
January 2021 • Technical Analysis of Stocks & Commodities • 15
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 compression(false), bulltrend = true;
gap(false), outsideday(false), widerangingday(false), bulltrendcases = bulltrendcases + 1;
bullpattern(false), end;
bearpattern(false), bulltrend(false), beartrend(false), bull- end;
trendcases(0), end;
beartrendcases(0), cday(0), comphigh(0), // compression =====================================
complow(0), outsidebull(false), outsidebear(false), ratio(0), if usecompression > 0 and ndays = 0 then begin
ndays(0), ix(0), lookahead(0), adate(" "), size(0), back1(0), pattern = "3-Day compression";
back2(0), back4 = truerange[4];
back3(0), back4(0); back3 = truerange[3];
arrays: bullreturns[6](0), bearreturns[6](0), bulltrendreturns[6](0), back2 = truerange[2];
beartrendreturns[6](0); back1 = truerange[1];
// trend compression = back4 > back3 and back4 > back2 and back4
if trendper > 0 then begin > back1;
trend = average(close,trendper); if compression then begin
end; comphigh = highest(high[1],usecompression);
// 3-day compression complow = lowest(low[1],usecompression);
if usecompression = 3 then begin // bearcases compression
cday = truerange[3]; if close < complow then begin
compression = truerange < cday and truerange[1] < cday ndays = 1;
and truerange[2] < cday; bearcases = bearcases + 1;
end; bearpattern = true;
// key reversals =================================== size = investment/close;
if usekeyreversal and ndays = 0 then begin if trend < trend[1] then begin
keyreversal = true; beartrend = true;
pattern = "Key Reversal"; beartrendcases = beartrendcases + 1;
// without trend end;
// key bearcases reversal end
if high > high[1] and low < low[1] and close < low[1] then // bullcases island reversal
begin else if close > comphigh then begin
ndays = 1; ndays = 1;
bearcases = bearcases + 1; bullcases = bullcases + 1;
bearpattern = true; bullpattern = true;
size = investment/close; size = investment/close;
if trend < trend[1] then begin if trend > trend[1] then begin
beartrend = true; bulltrend = true;
beartrendcases = beartrendcases + 1; bulltrendcases = bulltrendcases + 1;
end; end;
end end;
// key bullcases reversal end;
else if high > high[1] and low < low[1] and close > high[1] end;
then begin // Outside day (or wide ranging day) with close in upper/lower
ndays = 1; // 25% ===========================================
bullcases = bullcases + 1; if (useoutsideday or usewiderangingday <> 0) and ndays = 0
bullpattern = true; then begin
if trend > trend[1] then begin if useoutsideday then pattern = "Outside Day"
bulltrend = true; else pattern = "Wide Ranging Day";
bulltrendcases = bulltrendcases + 1; outsidebull = high > high[1] and low < low[1] and close >
end; 0.75*(high - low) + low;
end; outsidebear = high > high[1] and low < low[1] and close <
end; 0.25*(high - low) + low;
// island reversals ================================= ratio = 0;
if useislandreveral and ndays = 0 then begin if usewiderangingday <> 0 then begin
keyreversal = true; ratio = truerange/avgtruerange(20);
pattern = "Island Reversal"; end;
// without trend // bearcases outside day
// bearcases island reversal if outsidebear and (ratio = 0 or ratio > usewiderangingday)
if low > high[1] and close < open then begin then begin
ndays = 1; ndays = 1;
bearcases = bearcases + 1; bearcases = bearcases + 1;
bearpattern = true; bearpattern = true;
size = investment/close; size = investment/close;
if trend < trend[1] then begin if trend < trend[1] then begin
beartrend = true; beartrend = true;
beartrendcases = beartrendcases + 1; beartrendcases = beartrendcases + 1;
end; end;
end end
// bullcases island reversal // bullcases island reversal
else if high < low[1] and close > open then begin else if outsidebull and (ratio = 0 or ratio > usewideranging-
ndays = 1; day) then begin
bullcases = bullcases + 1; ndays = 1;
bullpattern = true; bullcases = bullcases + 1;
size = investment/close; bullpattern = true;
if trend > trend[1] then begin size = investment/close;

16 • January 2021 • Technical Analysis of Stocks & Commodities

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 if trend > trend[1] then begin if ndays > 0 then begin
bulltrend = true; ndays = ndays + 1;
bulltrendcases = bulltrendcases + 1; end;
end; // summary
end; if lastbaronchart then begin
end; adate = ELdatetostring(date);
// Gap opening with profits in the direction of the gap ====== print(file("c:\tradestation\Short-Term Patterns.csv"),
if usegaps > 0 and ndays = 0 then begin "Date,Pattern,Cases,Bull Cases,BullPL1,BullPL2,BullPL
pattern = "Gap Opening"; 3,BullPL4,BullPL5,Bear Cases,",
ratio = (open - close[1])/avgtruerange(20)[1]; "BearPL1,BearPL2,BearPL3,BearPL4,BearPL5,,Trend
// downward gap Cases,",
if ratio < 0 and -ratio >= usegaps then begin "Bull Trend Cases,BullTrPL1,BullTrPL2,BullTrPL3,BullTr
ndays = 1; PL4,BullTrPL5,",
bearcases = bearcases + 1; "Bear Trend Cases,BearTrPL1,BearTrPL2,BearTrPL3,B
bearpattern = true; earTrPL4,BearTrPL5");
size = investment/close; print(file("c:\tradestation\Short-Term Patterns.csv"),adate, ",",
if trend < trend[1] then begin pattern, ",",
beartrend = true; bullcases+bearcases:8:0, ",", bullcases:8:0, ",", Bullre-
beartrendcases = beartrendcases + 1; turns[2]:8:0, ",", Bullreturns[3]:8:0, ",",
end; Bullreturns[4]:8:0, ",", Bullreturns[5]:8:0, ",", Bullre-
end turns[6]:8:0, ",",
// bullcases island reversal bearcases:5:0, ",", Bearreturns[2]:8:0, ",", Bearre-
else if ratio >= usegaps then begin turns[3]:8:0, ",",
ndays = 1; Bearreturns[4]:8:0, ",", Bearreturns[5]:8:0, ",", Bear-
bullcases = bullcases + 1; returns[6]:8:0, ",,",
bullpattern = true; bulltrendcases+beartrendcases:5:0, ",", bulltrendcas-
size = investment/close; es:5:0, ",", Bulltrendreturns[2]:8:0, ",",
if trend > trend[1] then begin Bulltrendreturns[3]:8:0, ",",
bulltrend = true; Bulltrendreturns[4]:8:0, ",", Bulltrendreturns[5]:8:0, ",",
bulltrendcases = bulltrendcases + 1; Bulltrendreturns[6]:8:0, ",",
end; beartrendcases:5:0, ",", Beartrendreturns[2]:8:0, ",",
end; Beartrendreturns[3]:8:0, ",",
end; Beartrendreturns[4]:8:0, ",", Beartrendreturns[5]:8:0,
// accumulated profits over next 5 days ================== ",", Beartrendreturns[6]:8:0);
if ndays > 1 then begin end;
if bullpattern then bullreturns[ndays] = bullreturns[ndays] + // end of trade
size*(close - close[ndays-1]); if ndays > 6 then begin
if bearpattern then bearreturns[ndays] = bearreturns[ndays] bullpattern = false;
+ size*(close[ndays-1] - close); bearpattern = false;
if bulltrend then bulltrendreturns[ndays] = bulltrend = false;
bulltrendreturns[ndays] + size*(close - close[ndays-1]); beartrend = false;
if beartrend then beartrendreturns[ndays] = ndays = 0;
beartrendreturns[ndays] + size*(close[ndays-1] - close); end;

Algo Q&A
end;

DAVEY To further confuse the issue, not all

Continued from page 7
1440-minute bar close is the last price
traded, and the daily bar close is the daily
settlement price. Some days the differ-
ence is small, other days it is huge. But,
it is almost never exactly zero.
Take August 19 as an example. The
1440-minute bar has a close of 1934.2,
while the daily settlement price was
1970.3, a difference of 36.1, over $3,600
per contract! What happened here?
As shown in Figure 2, the price of gold
plummeted in the last few hours of the
trading day, after the settlement time.
So the 1440-minute and daily bars are
dramatically different.
data vendors do what TradeStation does. For algo traders relying
Some vendors use last price traded for on accurate backtesting
closing prices, and ignore the settlement
prices.
and real-time signal
All this is a long way of explaining generation, it can be
why you had a gold signal suddenly critical to understand
change on you. the “last vs. settlement
Now admittedly, for many traders, this
issue might seem trivial. But for algo
closing price” issue.
traders relying on accurate backtesting
and real-time signal generation, it can you consistently use the same approach
be critical to understand the “last vs. in your studies.
settlement closing price” issue. A data issue like this is just one of
The workaround for this issue is to the many tricks and pitfalls that algo
make sure you understand what data you traders can fall into. It definitely pays to
have before testing and trading. You can understand your data before backtesting
use either last price or settlement price and trading.
and get correct calculations, as long as
January 2021 • Technical Analysis of Stocks & Commodities • 17
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 Keeping The Momentum Going
Semi-Annual Gold Momentum
Strategy: International Evidence
If you find an investing strategy with an edge, it’s worth
looking to see if you can broaden the strategy for more op-
portunities. Here, we’ll revisit the gold momentum strategy to
test it on some worldwide markets this time. We think you’ll
like the results.
by Massoud Metghalchi, PhD, with Ahsan Baig
In
the December 2019 issue of Technical Analy-
sis of Stocks & Commodities, an article by
Robert Tang proposed a yearly-based gold
momentum strategy as follows: If the S&P
500 index performed better than gold in the
current year, then in the next year, invest in the
S&P 500; but if gold performed better, then
the next year, invest in gold.
(For his article, Tang used S&P 500 index data from Yahoo
Finance and gold spot price from TheBalance.com. He further
tested his strategy using SPY and GLD ETFs from 2006 to
2018, which showed similar results as for the index data.)
Then, in the May 2020 issue of Technical Analysis of
Stocks & Commodities, in my article “Variations On The
Gold Momentum Strategy,” I applied Tang’s gold momentum
18 • January 2021 • Technical Analysis of Stocks & Commodities
strategy semi-annually, or every six months, as follows:
• If the S&P 500 index performed better than gold in a
six-month period, then in the next six-month period,
invest in the S&P 500
• If gold performed better in a six-month period, for the
next six-month period, invest in gold.
This assumes that a trader can estimate the returns of the
stock index and gold bullion a few minutes before the end
of the six-month period, and that based on the performance
of the stock index and gold bullion, the trader buys the best
GOLD DRAGON: HELLORF ZCOOL/EURO CONTINENT: HARVEPINA
performer at the close of the last day of the sixth month. This
process is repeated every six months.
Broadening the opportunities:
An international look
For this article, we will apply the gold momentum strategy
COLLAGE: CHRISTINE MORRISON
(GMS) semi-annually to several stock market indexes in in-
dustrialized countries, as well as to some well-known world
indexes, in addition to the S&P 500 index.
The stock indexes we will use are: Britain’s FTSE 100,
France’s CAC 40, Germany’s DAX30, Switzerland’s SMI,
https://libta.org
 TRADING STRATEGIES

Spain’s IBEX, Netherland’s AEX, Japan’s TOPIX, and the Annual Returns and Standard Deviation (%) 1992–2019
S&P 500. The well-known indexes we will use are Dow Country Index Gold GMS
Jones’s Euro Stoxx 50, MSCI’s Emerging Market, MSCI’s France
Return 7.06 7.49 8.07
EAFE, and Dow Jones’ World Index. The index data are 22.00 13.52 14.08
Stnd. Deviation
10.60 7.49 11.75
taken from Thomson Reuters’ DataStream from 1992 to 2019.
Return
Germany
Stnd. Deviation 21.28 13.52 17.24
The London gold bullion prices are taken from the Federal Return 2.80 5.60 6.86

DATA FROM THOMSON REUTERS DATASTREAM

Reserve Bank of Saint Louis. Each country’s price index is in Japan
Stnd. Deviation 20.97 10.97 14.19
the local currency. The MSCI indexes and the DJ world index Netherlands Return 6.79 6.93 13.85
prices are in US dollar (USD) currency, and the Euro Stoxx 1994–2019 Stnd. Deviation 19.55 13.64 14.46
9.12 7.49 12.87
50 index is in euro currency. The Federal Reserve Bank of
Return
Spain
Stnd. Deviation 25.19 13.52 19.65
Saint Louis provides gold bullion prices in USD, euro, and Return 7.59 5.38 7.76
pound sterling. Switzerland
Stnd. Deviation 17.07 11.96 14.42
Return 4.62 7.70 9.19
UK
Individual industrialized countries results Stnd. Deviation 13.43 13.71 12.61
In the table in Figure 1, we present our results for individual FIGURE 1: GOLD MOMENTUM STRATEGY, RESULTS FOR INDIVIDUAL INDUS-
TRIALIZED COUNTRIES. Shown here is the risk-return trade-off for the test on
industrialized countries. individual countries and the semi-annual gold momentum strategy.
Note: For France, Germany, the Netherlands, and Spain, the
country index and gold bullion index are in euro currency. Annual Returns and Standard Deviation (%) 1992–2019
For Japan, the Topix price index is in the local currency, yen; World Index Gold GMS
DJ Euro Stoxx Return 7.11 7.49 12.38
the gold bullion price index was converted to yen by using 50 Stnd. Deviation 18.80 13.52 15.16
the Datastream exchange rate between the US dollar and yen. Return 8.10 6.23 5.78
Similarly, for Switzerland, the SMI index is in local currency, MSCI EM
Stnd. Deviation 25.46 11.79 19.11
the Swiss franc, and the gold bullion index price has been MSCI EAFE
Return 5.29 6.23 6.66
converted from USD to Swiss francs. Stnd. Deviation 17.02 11.79 11.42
Let’s discuss the French case. If a trader followed the ef- 7.09 6.23 10.43
Return
DJ World Index
Stnd. Deviation 14.95 11.79 10.22
ficient market hypothesis (EMH), the trader would buy and Return 8.72 6.23 14.47
hold (B&H) the CAC 40 index; her average annual return S&P500 Index
Stnd. Deviation 13.95 11.79 10.72
would be 7.07 % over the 1992–2019 period with an annual FIGURE 2: GOLD MOMENTUM STRATEGY, RESULTS FOR WORLDWIDE IN-
standard deviation (risk) of 22.00%. If this trader only invested DEXES. Shown here is the risk-return trade-off for various world indexes and the
in gold, her annual average return would have been 7.49% semi-annual gold momentum strategy.

with a risk factor of 13.52%. Over this period, the gold return
has approximately the same return as the CAC 40 but has
lower risk. However, if this trader followed the semi-annual
GMS, this trader would have made an annual average return
of 8.07% with an annual standard deviation of 14.08%. The
risk-return trade-off for this trader using the semi-annual
GMS would be better than that of the CAC 40, with higher
return and lower risk.
For Germany, we reach a similar conclusion: The B&H
strategy has an annual average return of 10.60% with an an-
nual standard deviation of 21.28%, all in local currency, the
euro. Meanwhile, the semi-annual GMS for Germany has
higher return (11.75%) and lower risk (17.24 %) than the B&H
strategy for the DAX30 index.
The conclusion is the same for the Netherlands, Spain,
Switzerland, Japan, and the UK, in that a trader following the
semi-annual GMS could beat the B&H strategy, all in local
currency. The gain is very high for the Netherlands, Japan,
and the UK.
It should be noted that the annual average returns and the
annual standard deviation of returns are estimated from semi-
annual returns. The estimations are as follows:
Annual average = (1 + semi-annual average)2 - 1
Annual standard deviation = s emi-annual standard deviation
* SQRT(2)
Worldwide index results
In the table in Figure 2, we present the risk-return trade-off
for various world indexes and the semi-annual GMS.
As we can see from Figure 2, if a trader follows the EMH
and buys and holds the DJ Euro Stoxx 50 in euro currency,
her average annual return over the 1992 to 2019 period would
have been 7.11% with a measure of risk of 18.80%. Investing
in gold in euros would have generated an annual average
return of 7.49 % and a risk of 13.52%. However, if this trader
switched every six months between the index and gold bul-
lion index, this trader would have made an annual average
of 12.38 % and a risk measure of 15.16%. The semi-annual
Continued on page 37
Looking at the S&P 500 index
test results, we see a very
significant improvement in the
risk-return trade-off.
January 2021 • Technical Analysis of Stocks & Commodities • 19
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 Have No Fear
Managing Trading Fear
And Stress
Keeping emotion out of your trading decisions is always an
important part of managing your trading. Understanding the
biological processes behind our reactions to stimuli can help
us find ways to counter unproductive emotions.
by Stella Osoba
F
ear is the one universal emotion that torpedoes many
traders’ accounts. Unmanaged fear is the reason
traders will often eventually quit trading. Fear is the
underlying cause of many mistakes and countless
unforced errors traders will make. Fear permeates
our conscious and subconscious mind.
All humans have an amygdala, which is thought to be the
brain’s emotion center that governs our fear response. Thus,
we may not be able to dispose of all fear, but we can learn to
manage it intelligently so that it does not overwhelm us and
thereby sink our trading accounts.
What is fear?
Fear can be defined as an unpleasant emotional feeling
triggered by the perception of danger (in our case, trading
20 • January 2021 • Technical Analysis of Stocks & Commodities
losses). The danger can be real or imagined; the brain can-
not distinguish between the two. Its close cousins, stress and
anxiety, mimic fear in several ways. Stress is a reaction to
excessive pressures or demands. Anxiety is the dread one
feels when thinking about a potential threat; one which has
not yet and may not materialize. It is the perception of and
the belief in the imminence of the danger in all cases that
is important.
When it comes to trading, fear can arise as we debate whether
to enter, stay in, or exit a position. The idea of trading losses is
always very real, and for many of us it is often uppermost in
our minds. We come to trading with the plan to make profits
and to take money out of the market on a consistent basis. If
we are very good at it and very lucky, the hope is that not only
will we make money but also become rich in the process. For
many, that plan never comes to fruition, and one reason for
that is the handicap that fear exposes.
It is therefore essential that if we are to not only stay in this
trading game but also prosper, we must come to terms with the
RYZHI/SHUTTERSTOCK
idea of fear and its role in our lives. We must learn to manage
it and minimize its harmful expressions if we want to attain
optimum trading results.
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 TRADING PSYCHOLOGY
The biology of fear
Fear is an emotion that first appears as a thought in the
thinking mind. We perceive something, and thinking gives it
meaning. That meaning begins the process by which a series
of chemical reactions interpret what had first appeared in our
minds as a thought. Say for instance we are walking down a
darkened street and see an object move in front of us. At first,
we perceive it as possibly something that could be danger-
ous to us. The thoughts we ascribe to the situation before us
causes us to feel fear. That feeling causes a series of chemical
reactions to take place in the brain, weakening some network
connections and strengthening others.
The area in the front of the brain behind the cranium is called
the prefrontal cortex. This area is thought to govern executive
functions like short-term working memory, decision-making,
and so on. When we feel fear, the chemical reactions in the
brain cause the prefrontal cortex to shut down. Chemical
messengers—neurotransmitters—send a message to the older
regions at the back of the brain, such as the amygdala, that
cause it to take over, triggering a panicked tide of emotion.
Chemicals such as dopamine and norepinephrine switch off
circuits in the prefrontal area required for higher cognition,
while norepinephrine and cortisol cause the hypothalamus
and other earlier evolved structures such as the amygdala to
alert the rest of the nervous system to prepare for danger. This
floods us with memories that are related to fear.
The moment we realize that the object that moved in the
darkness on the street was simply a barrel being rolled by the
wind, we relax, and this causes enzymes to chew up those
neurotransmitters, so that the shutdown does not persist. We
then quickly return to our baseline, as the fear abates.
Thoughts are “ things”
The example just given is a simple illustration of why thoughts
are, in a very real sense, things. They exist in a physical way.
Thoughts control how our brains will react to outside stimuli.
Thoughts control the creation and amount of particular chemi-
cals created in our brains. Thoughts control how one region
of the brain talks to another region of our brain. Thoughts
control what region of the brain is currently in control or
dominant and therefore how we are receiving and processing
information from our environment.
And what we perceive does not have to be true in order
for the chemicals in our brains to trigger and react. We may
in fact be perceiving information incorrectly and still end
up with our amygdala on full alert, emotions taking control.
Rational thought, which is handled by our prefrontal cortex,
is shutting down.
Researchers cannot know definitively why the brain evolved
exactly the way it has. Why is it that our highest cognitive
functions are weakened at the first signs of stress or fear?
Why, during periods of stress or fear, does our orchestration
of responses shift from the prefrontal cortex to the more
primitive regions at the back of the brain?
The more primitive areas near the brain stem can turn on
a dime and set in motion the “fight-or-flight” response. This
Fear is an emotion that first
appears as a thought. We
perceive something, and
thinking gives it meaning.
might have developed as a mechanism to protect us from
dangers seen in nature such as a snake about to bite or a bear
about to attack. As we evolved, it was important for us to
be able to perceive a threat quickly and react to it, in order
to survive. This takes precedence over the deliberate, slow-
processing prefrontal cortex, which might make complex
cognitive calculations about the likelihood of a snake bite
killing us, or the best way to pacify a bear.
This brings us to the next problem. In our highly developed
present-day reality, we are far less likely to face the possibil-
ity that we may be eaten by a lion and far more likely to face
problems that require higher-level cognitive abilities to resolve.
The very same areas of the brain that tend to shut down during
periods of stress or fear are the same areas of the brain that
we need to solve many of the problems that confront us in
our more highly evolved everyday realities. Our modern-day
stresses most often involve situations that require us to make
choices with thoughtful, deliberative analysis instead of with
“fight-or-flight-or-freeze” reactions.
Stress: Chronic and acute
The effect of stress on the brain is much like that of fear.
Stress can be acute or chronic. Both affect the functioning
of our brain. Both acute stress and chronic stress lead to
alterations in the brain’s architecture, although the effects of
chronic stress are much more extensive and permanent than
for acute stress.
When we are unstressed, the circuitry in the brain connecting
the prefrontal cortex and amygdala hum along contentedly.
Our prefrontal cortex, or the executive center of the brain,
allows us to keep our baser emotions and impulses in check.
But studies have shown that keeping the circuitry of the brain
functioning as it should is a fragile process.
Even low levels of stress can create imbalances in the
neurochemical environment in the brain. This imbalance
weakens network connections, which in turn floods our brain
with arousal chemicals that are released by neurons in the
brain stem. As these signaling chemicals become elevated
in the prefrontal cortex, they shut off neuron firing as the
connection point between neurons is weakened. This causes
network activity in the brain to decline. When this happens,
the ability to regulate behavior is reduced. Oftentimes, our
unforced trading errors can be linked to periods when we
are under stress. Even small amounts of stress can affect our
decision-making.
Thus, when it comes to the myriad of factors we have to
January 2021 • Technical Analysis of Stocks & Commodities • 21
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Oftentimes, our unforced
trading errors can be
linked to periods when we
were under stress.
observe and process in order to make trading decisions, to
be able to handle them well and stay on task, we want to
reduce stressors and control our sense of fear that can give
rise to stress.
Cultivating a sense of control
Studies have shown that one of the best ways of counter-
ing the negative effects of fear and stress is to cultivate the
belief that you have a sense of control over your immediate
environment and over the choices available to you. In order
to believe this, it is essential that you rehearse the very con-
ditions that you fear happening, and rehearse what you will
do in those situations. Training yourself to handle fearful
situations can be habit-forming, and habits can change the
circuitry of the brain.
How does this work? Again, it is your thoughts that actually
trigger signals in the brain. These signals are neurotransmitters
in the prefrontal cortex communicating with the amygdala.
And your thoughts are not what is actually happening in your
environment; rather, your thoughts are your reaction to what
is happening in your environment.
Say for instance that you are in the market and get caught
up in a nasty market reaction. You may panic and feel fear,
and the brain will react by shutting down the prefrontal cor-
tex as the amygdala floods the brain with chemicals such as
catecholamine. That is the opposite of what you need to have
happen to competently handle the situation that has arisen.
You are no longer capable of rational thought.
Instead, as fear grips you, you might recall past instances
when you were fearful, and then you make highly emotional
decisions. You wind up selling out of your positions in a panic,
or you do nothing. Either way, you are not making calm,
rational decisions. At this point, you may fail to see signals
that could alert you as to the best course of action to take.
Maybe there was buying late in the day, pointing to a market
reaction as opposed to the start of a trend reversal. Because of
the high levels of chemicals released during stress, the brain
switches from the slower, more analytical regulation that is
performed by the prefrontal cortex to the rapid-fire, reflexive
response from the amygdala. Your emotions are now dictat-
ing your reactions.
Mindfulness
Mindfulness is focused attention. It is bringing our thoughts
to the present and staying there without judgment. It means
accepting what is happening in the present, moment by mo-
22 • January 2021 • Technical Analysis of Stocks & Commodities
ment, whether good or bad. It means cultivating the ability to
stay present, with an open mind and no concern or judgement
about how you are doing in the moment.
Most of the time we are not in the present, we are not being
mindful; we are either on autopilot or we are thinking about
the past or the future. So for most people, the ability to stay
mindful will take some work. But the ability to be mindful
with some regularity allows you to begin to see the habitual
pattern of negative thoughts and feelings that cause you to react
in ways that hurt your trading and cause you to experience
stress and/or fear. Being mindful of negative thought patterns
can help you learn to avoid falling into these patterns. And
this can help you to control your reactions.
Why you must sell to the sleeping point
It is much easier to practice mindfulness if we have prepared
ourselves for market plunges by not carrying risk of ruin or
almost-ruin positions in the first place. We must ensure that
our position sizing is not too large for the size of our accounts
so that whatever happens, we can weather the loss.
Pioneer trader Jesse Livermore tells a story, which he at-
tributes to Dickson G. Watts, that illustrates this point. The
story was about a man who was very nervous. When his friend
asked him what the matter was, he said:
“I can’t sleep.”
“Why not?” the friend asked.
“I am carrying so much cotton that I can’t sleep thinking
about it. It is wearing me out. What can I do?”
“Sell down to the sleeping point,” replied the friend.
The moral of the story is to avoid doing anything that can
and will interfere with your sense of equanimity and that will
keep you up at night. Trading is hard enough; don’t make it
any harder by allowing the chemicals in your brain to join
forces in the fight against your success.
The only thing to fear is fear itself?
The brain is a very powerful organ. It is made up of around
100 billion neurons. These neurons transmit messages to one
another through a process resulting in the release of neu-
rotransmitters. Neurotransmitters are chemical messengers
that speak to the neurons, causing a specific response in the
receiving neuron. The neuron is activated by the thoughts we
produce to communicate through the neurotransmitter with
other neurons. Sometimes neurotransmitters will stimulate
neurons, making them more active, and other times the neu-
rotransmitters will inhibit neurons, making them less active.
What the neurons do depends on the signal that is received
through your thoughts.
Much is still unknown about how this complex organ called
the human brain works, but research has shown that neurons
control everything we do. It can therefore be liberating to
know that we are in control. That is, we can choose to think
the thoughts that will maximize our potential for right action
when we trade. We can take control when we experience pe-
Continued on page 56
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 Outperforming In The Midcap Space
ETF Midcap Growth Investing
One group of stocks with market-beating performance over
the past decade has been midcap growth stocks. ETFs provide
a way to invest in a basket of stocks in this or other catego-
ries. Here’s a look at a handful of ETFs in this category to
consider.
L
by Leslie N. Masonson
ong-term and intermediate-term investors are
always looking for areas of the market that offer
consistent price performance with normal risk
parameters. Market experts always try to pick next
year’s winning category, but with limited success.
One group of stocks that has seen market-beating
performance over the past decade and intermediate periods
has been midcap growth stocks. Here is a look at a handful
of ETFs in that category to consider.
The midcap space
Investing in midcap stocks, as well as midcap equity ETFs
and mutual funds, is often overlooked not only by the aver-
age investor, but also sometimes by the mainstream financial
press. On the other hand, small-cap vehicles, and especially
large-caps, have attracted most of the attention of retail and
professional investors. Surprisingly, these “middle-of-the-
road” midcaps have been very good performers among the
24 • January 2021 • Technical Analysis of Stocks & Commodities
three major investment categories over the past decade.
Figure 1 shows the performance of the three capitalization
(“cap”) sizes against market averages. Clearly, midcap and
large-cap have run neck and neck, both way ahead of the
S&P 500 and Dow Jones Industrials. Meanwhile, small-caps
have underperformed.
Midcap ETF background
The midcap ETF arena contains stocks with a market cap of
between $2 billion to $10 billion, but can be further divided
into three types: basic or “plain-vanilla,” growth, and value.
Interestingly, midcaps deliver the best characteristics of the
capitalization sizes by offering higher growth rates than large-
caps, coupled with less volatility than small-caps.
SPDR S&P Midcap 400 (MDY) was the first midcap
ETF offered on May 5, 1995, followed by iShares Core S&P
Midcap’s birth on May 22, 2000. Next up were the triplets—
iShares Russell IWP, IRS, and IWS on July 17, 2001. Based
on their early start, these five ETFs have amassed the most
KENG MERRY DIGITAL CRAFT/SHUTTERSTOCK
AUM, in addition to Vanguard Midcap (VO) in second place
with a later starting date of January 26, 2004.
To gain a broad perspective on two midcap key data points,
refer to Figure 2, which provides a list of the largest midcap
ETFs based on assets under management (AUM). The top 10
midcap ETFs are listed in AUM order accompanied by their
multiyear performance, and type. A first glance at the table
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 WHY TRADE ETFS?

indicates a wide variance in performance Total Return Ticker ETF Name Y-T-D 1 Year 3 Years 5 Years 10 Years
among these ETFs. But a closer look over 10 years
iShares Morningstar Mid-Cap
the past one, five, and ten years shows that 308.30% JKH
Growth ETF
28.51% 37.33% 20.73% 17.10% 15.07%
the worst performers have consistently iShare Morningstar Small-Cap
been the value EFTs followed by the basic 255.90% JKK
Growth ETF
19.59% 27.90% 13.96% 14.05% 13.54%

ETFs. However, the three growth-focused 366.60% JKE

iShare Morningstar LargeCap
26.90% 37.75% 22.16% 17.76% 16.65%
ETFs (that is, IWP, VOT, and IJK) have Growth ETF
consistently excelled in price performance, 249.40% SPY SPDR S&P 500 ETF Trust 7.00% 14.74% 12.03% 12.59% 13.32%
even outpacing the S&P 500 and Dow Jones 498.60% QQQ Invesco QQQ Trust 32.62% 44.43% 25.03% 21.05% 19.56%
Industrials. 218.81% DIA
SPDR Dow Jones Industrial
-1.12% 5.07% 8.14% 12.00% 12.09%
ETF Report magazine lists 19 basic US Average ETF Trust
FIGURE 1: ALL-CAP GROWTH ETFS VS. MARKET AVERAGES. Midcap and large-cap performance have
ETFs, plus 9 growth and 7 value EFTs. Four exceeded that of small-caps, the S&P 500, and Dow Jones Industrial Average over multiple time periods.
of their growth ETFs are labeled as S&P YTD midcap has been the leader.
400 midcap growth (that is, RFG, IVOG,
MDYG, and IJK), but they had inferior Name Ticker 1 Year 5 years 10 years AUM Type
($bill)
performance to the others in that category
iShares Core S&P Mid-cap IJH -1.5% 7.5% 10.3% $44.3 Basic
over five years, so they were excluded
from my analysis in this article. Therefore, Vanguard Midcap VO 6.5% 9.3% 1.6% $35.3 Basic

I retained JKH, NUMG, VOT, IWP, and iShares Russell Midcap IWR 4.4% 8.9% 11.3% $20.7 Basic
FNY as the top growth performers. Figure SPDR S&P Midcap 400 Trust MDY -1.6% 7.3% 10.1% $14.9 Basic
3 contains the names and tickers of the six iShares Russell Midcap Growth IWP 22.8% 14.4% 14.1% $13.3 Growth
reviewed ETFs. Note that I added Invesco iShares Russell Midcap Value IWS -7.3% 5.2% 9.2% $9.8 Value
S&P Midcap Momentum ETF (XMMO), a Vanguard Midcap Value VOE -8.1% 5.2% 9.8% $9.3 Value
broad-based ETF, from the “basic” grouping Vanguard Midcap Growth VOT 21.9% 13.3% 13.3% $8.5 Growth
to the mix because of its strong performance
iShares S&P Mid-cap Growth IJK 8.4% 9.3% 11.4% $6.8 Growth
over three years.
In summary, this article focuses on growth iShares S&P Mid-cap Value IJJ -12.4% 4.7% 8.9% $4.4 Value

ETFs that are the “best” in their category S&P 500 ETF Trust SPY 9.5% 11.6% 12.9% $280.9 N.A.
over a decade. SPDR DJ Ind, Average ETF Trust DIA -0.25% 11.0% 11.6% $22.4 N.A.
FIGURE 2: TOP 10 MIDCAP ETFS BY AUM. The growth category has clobbered not only the value ETFs
Midcap growth ETFs and the plain-vanilla basic ETFs over multiple timeframes, but also the S&P 500 and Dow Jones Industrial
Average. IWP, VOT, and IJK had the best performance.
For additional
transparency pur- ETF Name Ticker
poses, I’ve provid- iShares Morningstar Mid-Cap
ed a performance Growth ETF
JKH
comparison of the Nuveen ESG Mid-Cap Growth ETF NUMG
Midcaps deliver the best
top three ETFs iShares Russell Mid-Cap Growth characteristics of the
in each midcap ETF
IWP
capitalization sizes by
category in Fig- Vanguard Mid-Cap Growth ETF VOT
ure 4. As you First Trust Mid Cap Growth Alpha-
offering higher growth rates
can observe, the DEX Fund
FNY
than large-caps, coupled
best growth ETFs Invesco S&P MidCap Momentum
ETF
XMMO with less volatility than
vastly outperform FIGURE 3: MIDCAP GROWTH ETFS. Six growth small-caps.
the others in the ETFs evaluated in this article are shown with their
group. Data for names and ticker symbols.
the analysis of the
ETFs in this col- Performance JKH NUMG IWP VOT FNY XMMO VO IWR IWS VOE NUMV
Period
umn was provided
Year-to-Date 28.51% 26.68% 18.78% 18.51% 16.49% 14.80% 4.10% 1.88% -9.14% -9.77% -13.03%
by ETFAction.
com, a platform 1 Year 37.33% 33.78% 26.43% 25.27% 22.56% 20.69% 10.00% 7.85% -4.12% -4.74% -8.36%
that I reviewed 3 Year 20.73% 18.83% 16.70% 15.67% 14.14% 20.90% 8.87% 7.86% 1.85% 1.97% 1.33%
in the May 2020 5 Year 17.10% 15.04% 13.87% 14.04% 18.63% 10.03% 9.62% 5.92% 5.96% N.A.
issue of this maga- 10 Year 15.07% 14.44% 13.67% 14.43% 12.00% 11.62% 9.54% 10.09% N.A.
zine. Previously, Type of ETF Growth Growth Growth Growth Growth Basic Basic Basic Value Value Value
I used data from FIGURE 4: MIDCAP PERFORMERS OF ALL TYPES. Here, the best performers among the basic, value, and growth ETFs are compared.
XTF.com for writ- Clearly, there is no contest that growth performance has been exceptional.

January 2021 • Technical Analysis of Stocks & Commodities • 25

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 Category VOT JKH NUMG IWP FNY XMMO 340,000 shares, but inexplicably
Efficiency Score - FactSet 96 94 91 96 83 91 has the worst net asset flows at a
negative $57 million for the past
Tradability Score - FactSet 98 91 84 98 94 95
year, the only ETF in the group
Fit Score - FactSet 85 86 86 87 71 70
with a negative number. Its one-
AUM ($MM) $8,884 $1,220 $206 $13,872 $436 $755 year and three-year performance
Expense Ratio 0.07% 0.30% 0.40% 0.24% 0.70% 0.34% of 26.4% and 16.7% place it third
Annual Yield 0.73% 0.51% 0.36% 0.85% 0.66% 0.49% in the group. And a low expense
Avg. Daily Share Volume 135,569 26,892 24,777 339,808 63,014 85,534 ratio of 0.24% places it second
Avg. Number of Holdings 157 161 58 342 225 77 behind VOT.
Inception Date 08/17/2006 06/28/2004 12/13/2016 07/17/2001 04/18/2011 03/03/2005 IWP also has the highest
FactSet scores on efficiency
Performance 1 Year 25.3% 37.3% 33.8% 26.4% 22.6% 20.7%
(96), tradability (98), and fit (87).
Performance 3 Years 15.7% 20.7% 18.8% 16.7% 14.1% 20.9%
These scores are explained on
Net Asset Flows ($MM) - 1 Year $461 $355 $102 $-57 $73 $72 the FactSet website, but briefly,
Net Asset Flows($MM) - 3 Years $980 $623 $112 $573 $231 $482 efficiency focuses on whether
Std. Deviation 30-day annualized 20.0% 19.5% 20.9% 20.5% 22.5% 21.5% the ETF delivers on its promises
FIGURE 5: COMPARISON OF MIDCAP GROWTH ETFS. JKH and XMMO are the preferred ETFs in this category, as without undue risk or cost, trad-
explained in the conclusion of this article. ability means ability to obtain a
fair market price, and fit assesses
ing this column, but they ceased operations in early September how the portfolio measure ups to its stated objective.
2020.
Figure 5 provides comparative data on the critical variables Vanguard Midcap Growth ETF (VOT)
for the six ETFs. Common characteristics of all these ETFs VOT came in second with $8.8 billion AUM with an August
include: open-ended investment company; 100% US equities; 2006 starting date, as well as with its 0.73% annual yield, and
passively managed; offer quarterly dividends; benchmarked to a decent 136,000 daily trading volume. VOT tracks a market-
S&P 500 Midcap, Russell 1000 Midcap Index or custom index; cap-weighted index of midcap growth companies selected by
listed on NYSE Arca (except for FNY listed on Nasdaq and the Center for Research in Security Prices (CRSP). Moreover,
NUMG listed on Cboe BZX US Equities Exchange); and not it came in first with its one- and three-year inflows of $461
part of the top 10 AUM grouping for all midcap ETFs (excep- million and $980 million, respectively. The low 0.07% expense
tion for IWP, which is the fifth largest in total category). ratio is the best of all. VOT also compiled almost identical
Blackrock is the issuer for IWP and JKH while Invesco FactSet scores as IWP, which is a big positive. However, its
Capital handles XMMO. TIAA offers NUMG, First Trust one-year performance of 25.3% was only fourth best, while
is the issuer for FNY. Lastly, Vanguard issued VOT. Each of its three-year performance of 15.7% was next to last.
these ETFs offers a slightly different focus.
iShares Morningstar MidCap Growth (JKH)
iShares Russell Midcap Growth (IWP) JKH is third in AUM at $1.2 billion with a June 2004 birthdate.
Let’s first review IWP, which was the first midcap growth It tracks a market-cap-weighted index of midcap companies
ETF available and the behemoth of the group with a solid selected by Morningstar based on their growth characteristics.
$13.8 billion in AUM gained over 19 years since its July 2001 Its 37% one-year performance places it first in this category,
inception. This ETF is clearly a powerful asset gatherer. IWP as does its three-year 21% annual return. The daily trading
tracks a market-cap-weighted index of growth companies from is low at 27,000 shares and its standard deviation of 19.5% is
a swath of the 800 smallest Russell 1000 companies using in line with its brethren.
two growth factors. JKH joins IWP and VOT as the biggest players in the arena
Moreover, it sports the highest annual yield of the group and account for 69% of the midcap growth assets. VOT and
at 0.85%, coupled with the highest daily trading volume of JKH have captured 81% of the one-year cash flows out of all
six ETFs discussed, while IWP actually went negative for one
year with outflows of $57 million.

All six of these ETFs had their Nuveen ESG Midcap Growth (NUMG)
NUMG has the lowest AUM in the category at $206 mil-
largest sector percentage lion, as it is not a pure midcap growth play. NUMG tracks
positions in information an index composed of midcap US companies with growth
technology. characteristics that meet specific “environmental, social, and
governance” (ESG) criteria (which is a set of standards used
as metrics in the socially conscious investing arena). Its 0.40%
26 • January 2021 • Technical Analysis of Stocks & Commodities
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expense ratio is second highest, while VOT JKH NUMG IWP FNY followed by industrials (12–17%).
XMMO
its 0.36% yield is the lowest along DLR ZM SNAP IDXX ENPH The fourth most invested sector was
GNRC
with its 25,000 daily trading volume, DXCM SQ TWLO DOCU DAR consumer discretionary (10–11%)
MPWR
none of which are very impressive LULU MELI SPLK LULU INSP with FNY at 14.6% and NUMG at
SEDG
numbers. Its limited 58 portfolio VEEV TWLO CPRT VEEV CHWY
5.6% as the two outliers in either
QDEL
DOCU LULU MTD ALGN GNRC SAM
holdings constitute a concentrated SBAC DOCU SNSS CSGP SAM
direction.
ENPH
portfolio compared to the 342 hold- CMG IDXX PAYC CMG FRPT MASIFor XMMO, the top 10 of its 77
ings of IWP and about 160 for VOT TWLO SNAP CBRE ORLY WMS holdings consisted of 29.5% of its
CRL
and JKH. Performance-wise it is in CNC VEEV XYL KLAC TXG portfolio. FNY had the lowest con-
CGNX
third place with the third-highest IDXX WDAY ZBRA TWLO SAIL centration in its top 10 at 8.4% with
MOH
cash inflows. iShares ESG Screened FIGURE 6: TOP 10 HOLDINGS FOR MIDCAP GROWTH ETFS. 225 holdings. NUMG had 27.8% of
S&P Midcap ETF (XJH) is the lat- Shown here are the top 10 symbols in each of the six ETFs
its 59 holdings in its top 10. IWP,
evaluated. In general, the largest sector holding is in information
est midcap launch on September VOT, and JKH had 12.3%, 14.3%,
technology, followed by healthcare, industrials, and then consumer
22, 2020 and will compete directly discretionary. and 18.2% of their portfolios in their
with NUMG. top-10 holdings. Figure 6 provides
the top 10 tickers in each of the six ETFs evaluated. Notice
First Trust Mid Cap Growth AlphaDEX (FNY) that Twilo, Inc. (TWTO) was represented in four portfolios,
FNY entered the category on April 18, 2011 gathering $436 while Lulelemon Athletica Inc. (LULU) and Veeva Systems
million in assets. It tracks a tiered, enhanced, equal-weighted Inc. (VEEV) were purchased in three.
index of midcap growth stocks selected from the Nasdaq US VOT invested about 1.4% in each of its top 10. IWP had
MidCap Growth Index. This index is reconstituted and rebal- about 1.2% in its top 10. JKH had 3% in Zoom Video Com-
anced quarterly. Eligible stocks are ranked on growth factors munications, Inc. (ZM), 2.3% in Square, Inc. (SQ), and about
including three-, six- and 12-month price appreciation, sales- 1.5% in each of the other eight positions. NUMH had 3.4% in
to-price and one-year sales growth, and additionally on value Twilio, Inc. (TWLO); 3% in Splunk, Inc. (SPLK); and 2.6%
factors including book value to price, cash flow to price and in Copart, Inc. (CPRT), Mettier-Toledo International Inc.
return on assets. All stocks are ranked on the sum of ranks (MTD), ANSYS, Inc. (ANSS), and Paycom Software, Inc.
for the growth factors and, separately, all stocks are ranked (PAYC); and 2.3% in Xylem Inc. (XYL) and Zebra Technolo-
on the sum of ranks for the value factors. A stock must have gies Corporation (ZBRA).
data for all growth and/or value factors to receive a rank for FNY had about 0.90% to 0.77% in its top 10 from high
that style. to low. Lastly, XMMO had 4% to 3% in its top four ETFs—
It has the second-lowest FactSet scores and the highest GNRC, MPWR, SEDG, and QDEL—and about 2.45% in the
expense ratio at 0.70%. Annual yield of 0.66% is third highest remaining six holdings.
and its 63,000 daily volume is low, but reasonable. Performance-
wise it came in dead last for three years at 14.1%, and next to Conclusion
last for one year at 22.6%. Its portfolio size of 225 places it Based on a review of the key characteristics of the six midcap
midrange. Its alpha is 5.00 and beta is 1.05. growth ETFs evaluated here, I’ve concluded that for investors,
JKH just edges out XMMO on the basis of higher FactSet
Invesco S&P Midcap Momentum ETF (XMMO) scores, better long-term performance (March 2, 2005 through
XMMO, born in March 2005, was included from the plain
vanilla category because of its top three-year performance Continued on page 39
record of 20.9%, beating all the others in the growth category.
Unfortunately, its more recent one-year performance of 20.7%
was the weakest of the six. Its FactSet efficiency and tradability
scores are strong at 91 and 95%, respectively, but its fit score The “efficiency” [rating]
was the lowest at 70. XMMO tracks an index of S&P 400 focuses on whether the ETF
midcap stocks based on momentum and weighted by market
cap and momentum.
delivers on its promises
Its expense ratio of 0.34% and 85,000 trading volume without undue risk or cost,
places it midrange while its annual yield of 0.49% places it “tradability” means ability
in the bottom quartile. The portfolio is fairly concentrated to obtain a fair market price,
with 77 issues.
and “fit” assesses how the
Sector breakdowns and holdings portfolio measures up to its
All six of these ETFs had their largest sector percentage posi- stated objective.
tions in information technology (most in the 25% area) with
JKH the outlier at 42%, followed by healthcare (20–24%), and
January 2021 • Technical Analysis of Stocks & Commodities • 27
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 Candlesticks And Cryptos
A Quick Look At Approaching
Cryptocurrencies
Are candlestick patterns and basic technical analysis prin-
ciples useful for trading cryptos? We take a look.
by Azeez Mustapha
T
wo of the most important success factors for a
trader are their ability to assess and recognize
risks, and their ability to evaluate and control
their impulses. Both require separate types
of skills, but there are some matches.
In the trading process, you will encounter
many opportunities to take risks. Of course,
most of them are not worth considering, but from time to
time you will find in the market something that you want to
become a part of.
If you are new to the world of cryptography, it is best to
start your portfolio with the purchase of bitcoin (BTC). This
is a common way to get your feet wet, as well as a great way
to understand how cryptocurrencies are moving. Almost
28 • January 2021 • Technical Analysis of Stocks & Commodities
always, when bitcoin rises, all the other coins do the same.
When bitcoin falls, the other coins also tend to fall.
The point of this article will not be to discuss specific tools
or strategies. Rather, it will seek only to introduce you to some
of the structures relating to cryptocurrencies—a still new and
developing field of investing.
Buy low, sell high
It sounds simple, but you will be surprised. Note that “buying
at a low price” doesn’t mean buying really bad coins. You
should only buy low prices in coins that have a proven history
of good results but that were perhaps hit by a falling market.
That way, you can know that not only is your coin falling but
most likely, all the coins and tokens are falling. When the
WIT OLSZEWSKI/SHUTTERSTOCK
market recovers, your coin will also recover (most likely).
Selling high is also a struggle. Most people tend to want to
wait “just a little longer” to see how far the top goes. Bad idea.
If you made a satisfactory return on your investment, pull it
out and convert it into fiat. Do not be too greedy.
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 CRYPTOCURRENCIES

Reading charts
Before we get into the technical
analysis of it, I would just like to first
make sure you understand how to read
basic candlestick charts. So this will
be just a brief reminder rather than
a full review.
Candlestick charts are made up of
multiple bands of green or red (or any
two different colors, but using green
and red is usually the default setting).
Green indicates that the price of a coin
has risen since the last period the bar
represents. The red bars represent the

TRADINGVIEW
price which has declined since the
last period.
In trading terms, the main body FIGURE 1: CUP WITH HANDLE. In this pattern, the candles drop significantly for a long time, only to start a quick
of the candle is called the real body. climb up immediately after the second ascent. This means a possible continued increase in value.
On green candles, the base of the real
body is sometimes called the open-
ing price (the price at the beginning
of the reference for this period) and
the top of the real body is called the
closing price (price at the end of the
period). For red candles, this process
is the opposite: The upper part is the
opening price, and the lower part is
the closing price. Any lines emerging
from real bodies are called shadows
or wicks. The upper part of the wick
represents the highest price that the
coin was bought during this period,
and the lower part of the real body rep-
resents the lowest price that the coin
FIGURE 2: MEASURED UPWARD MOVEMENT. Candles begin to rise, stop to rest (where they move sideways),
was bought during this period. Wicks and then continue to rise upward. The fact that the asset has been moving sideways for a considerable time makes
are rarely taken seriously, as they are it more optimistic than the average upward pattern.
often considered anomalies.
that interest you.
Technical analysis Market capitalization is the price of asset X, the number
There are many technical analysis tools to help you become a of existing assets. The greater the market capitalization, the
successful trader on your journey. Technical analysis allows more effort will be required for the asset to grow in value.
people to make informed forecasts regarding the future market This is a more important factor to check than just the price
based on its history. Many traders and investors argue that it is of a coin. For example, newcomers could think that Ripple
technical analysis that separates traders from standard players has many opportunities for growth as they looked at its price
because technical analysis allows people to make knowledge- on July 13, 2018 of just $0.40, but the market capitalization
based decisions rather than impulse-based decisions. is $17,291,808,853, which is huge. This means that price
Several different types of technical analysis can be used fluctuations in Ripple are slower than for coins and tokens
to facilitate your transactions, and although more advanced with lower market capitalization.
methods are not needed, some basic information should not Thanks to this characteristic, traders love to find coins with
be ignored. low market capitalization. A market cap shows the rarity of
People will think that technical analysis is about observing coins. This is why some developers prefer to regularly “burn”
patterns in charts. And that’s certainly a big part of it, since their coins to increase the price.
technical analysts were, after all, the original chartists. But
the term technical analysis also covers a lot more. One of the Bullish chart patterns
most basic things you can do that involves technical analysis It is well known that applying technical analysis patterns to
is to look at the market capitalization of the coins and tokens cryptocurrencies is extremely difficult and temperamental, but
January 2021 • Technical Analysis of Stocks & Commodities • 29
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 Bearish chart patterns
The following patterns, as a rule,
are the exact opposite of the bullish
patterns:

Inverted cup with handle: Candles

rise significantly, then begin to fall,
and in the end there’s an even steeper
fall.

Measured downward movement:

Candles begin to fall, pause, and push
sideways, then continue to fall. Trad-
ers see this as a terrible sign since a
pause and a side push make the fall
FIGURE 3: THREE POINTS OF RISING. Candles rise, then lower, rise again, lower, and finally rise for the last time
seem calculated and thorough (and
(this time higher than the previous times). During each lift, candles move higher than the previous lift. not accidental).

this does not mean that we should completely ignore patterns.
Although I found that these types of patterns are not execut-
able, this does not mean that they are unreliable.
Here are some bullish charts you will encounter. With most
exchanges you will be able to notice these patterns quickly,
given that their interface is simple and intuitive:
Cup with handle: This is the place where the candles on the
chart drop significantly for a long time, only to start a quick
climb up, immediately after the second ascent. This means a
possible continued increase in value.
Measured upward movement: Candles begin to rise, stop to
rest (where they move sideways), and then continue to rise. The
fact that the asset has been moving sideways for a consider-
able time makes it more optimistic than the average upward
pattern. If an asset grows without interruption, it could be a
sign of market manipulation or crowds. The fact that investors
stopped for a moment and continued to invest is a sign of a
high-quality coin or token.
Three points of rising: This is when candles rise, then lower,
rise again, lower, and finally rise for the last time (this time
higher than the previous times). During each lift, candles move
higher than the previous lift. Even though each accompanying
fall is usually regarded as bad behavior, subsequent ascents
continue to rise higher.
One of the most basic things you
can do is to look at the market
capitalization of the coins and
tokens that interest you.
Three downward points: In this pattern, candles rise, fall,
rise again, lower again, perform one last rise, and then fall
further than previously.
Finally
If you’ve come this far with building
your theoretical knowledge of the
markets, congratulate yourself. It’s
not easy, and it’s even more difficult to
follow and apply to live trading than it
is in textbooks.
My goal for this article has been to
simply point out a little of what’s in-
volved and to offer a few things you can apply to your trading in
cryptocurrencies. Also, developing the right thought processes
that go into trading is important to anyone’s dream of making
a career out of cryptocurrency trading. Trading can be a dif-
ficult process, but it becomes easier the more you do it.
Azeez Mustapha is an analyst at Instaforex Companies Group
and a blogger at Advfn.com, and as well as a freelance author
for trading magazines. He is a trading signals provider at some
websites. He can be reached via email at azeez. mustapha@
analytics.instaforex.com.
Further reading
Mustapha, Azeez [2020]. “A Nondirectional Trading Strategy
For Cryptocurrencies, Part 1,” Technical Analysis of Stocks
& Commodities, Volume 38: February.
[2020]. “A Nondirectional Trading Strategy For Cryp-
tocurrencies, Part 2,” Technical Analysis of Stocks &
Commodities, Volume 38: April.
[2019]. “Spotting Imbalances In Novel Markets,”
Technical Analysis of Stocks & Commodities, Volume
37: September.

30 • January 2021 • Technical Analysis of Stocks & Commodities

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 INTERVIEW

Portfolio Manager, Chartered Market Technician

Technical And Market Analysis

With Kyle Crystal
Kyle Crystal, CMT, CFTe, is a portfolio manager and technical/quantitative market
strategist with over 15 years of experience formulating and implementing invest-
ment policy in various styles including long-short, global macro and long-only
for single managed accounts as well as fund structures.
A contributor to the CMT Association 2019 curricula, he has expertise in defin-
ing price objectives, support/resistance, and cycles. His skillset includes multiple
timeframe analysis, market geometry, Elliott wave theory, momentum oscillators,
Gann analysis, cycles, and candlesticks.
His firm, Lakeshore Technical Analysis, LLC, provides technical and quantitative
forecasting to institutional clients including portfolio managers, risk managers
and wealth managers. Technical education is also offered to traders and analysts.
Crystal is a Bloomberg research contributor and holds Series 65 and Series 3
licenses. More information on these services can be found at his website, www.
lakeshoretechnicalanalysis.com.
In addition to offering forecasting services, his related companies, Crystal
Capital Advisors, LLC and Eastborough Capital, LLC, offer portfolio and money
management services for both equity and futures markets.
Stocks & Commodities Contributing Writer Karl Montevirgen interviewed Kyle
Crystal in October 2020 to discuss his approach to analyzing the markets.
After the 2009 bear
market in equities,
Kyle, tell us a bit about ket’s Compass, who described himself I decided I needed a
your background. When as an “Elliottician” and he encouraged skillset to not only avoid
did you first encounter the me to go through the Chartered Market
markets, and what set you Technician (CMT) program offered by disaster but to see it
on your current path as a the CMT Association (formerly known coming and profit from it.
technical analyst? as the Market Technicians Associa-
I grew up around markets. My dad tion). It was a great recommendation. I
was a successful portfolio manager and first developed a base skillset and then Capital Advisors, LLC, a Registered
I remember him bringing copies of his I read day and night for about seven Investment Advisory (RIA) firm. So,
Daily Graphs chartbooks on our annual years (much to my wife’s chagrin!), and Lakeshore was a natural extension of the
family vacation as a kid. I was lucky I studied with some brilliant people all skillset I developed managing money. My
because I came right out of grad school while applying theory to the reality of first client was a portfolio manager at a
and was able to work alongside him and managing capital. mutual fund who asked if I had a side
learn the business. I am still lucky enough service for analysis of commodity mar-
to be working with him today. And now you operate a firm whose kets. Since then, I have grown through
After going through the 2009 bear services are primarily focused on referral and cold calls, believe it or not.
market in equities I decided that I needed technical analysis. Not an easy task, I love introducing myself to firms and
a skillset to make sure that I could not considering that most research firms seeing where the conversation leads. I
only avoid another disaster, but see it are fundamentally oriented. And your also have a good sense of humor and
coming and profit from it. Initially, I firm specializes in Elliott wave analy- that is required for cold calls!
started down the CFA (Chartered Fi- sis, something that most mainstream
nancial Analyst) path but I decided the financial institutions would find unfa- I’m curious—what is it like advising
material was too removed from the day- miliar. How did you do it? various types of institutional invest-
to-day actions of the market. I called on It really came about after years of ment firms, many of whom are probably
someone who ended up becoming a real managing capital. Lakeshore Technical fundamentally based?
friend, Tim Brackett, now of The Mar- Analysis, LLC is a trade name of Crystal Out of all the businesses I am involved
32 • January 2021 • Technical Analysis of Stocks & Commodities
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in, advising Lakeshore clients feels the
least like work! I truly enjoy it. I think the
key is 100% transparency and honesty.
I work very early in the relationship to
make sure clients understand the basic
technical concepts that will be utilized
in real-time. From that point forward,
everything I bring into the analysis builds
on the basics. As they see consistency
and watch movements unfold, they gain
trust in the methods.
I’m bringing noncorrelated informa-
tion to the table that cannot be generated
from fundamental analysis. For instance,
specific price targets, support/resistance,
specific dates, and real-time action
signals. This information is then used
as a complement as well as a checks-
and-balance system against their own
fundamentally based view.
How do you view the relationship
between fundamental and technical
strategies?
Fundamental strategies tend to be dis-
cretionary or have a discretionary com-
ponent. Technical strategies may or may
not have discretionary components.
In my opinion, fundamentals provide
the answer to the question why. Funda-
mentals are responsible for the long-term
secular movement within markets and
therefore fundamental analysis excels
at helping one see through some of the
noise found in the near-term market
movements.
Unfortunately, fundamental analysis
offers little to no market timing or
risk-management methods. Therefore,
fundamentally based strategies can
improve their timing and risk manage-
ment through the addition of a technical
overlay to help answer the question of
when or even which (as in which market,
which stock, which commodity market,
etc.).
Let’s talk about Elliott wave. Years ago
I read the well-known Frost & Prechter
1978 book on Elliott wave analysis.
Yes, it’s considered the “bible” of
Elliott wave theory, serving as both an
introduction to the approach as well as
a documentation of how the technique
is applied.
I enjoyed it but found it
a little complicated when
it came to application. I studied with some brilliant
Given the complexities people, all while applying
and potential variations
involved in the theory,
theory to the reality of
might this form of analy- managing capital.
sis present be a bit risky
in the hands of less expe-
rienced technicians? think that’s what your question eludes
When I first learned about Elliott wave, to. When you get into those situations
I thought it was amazing and interest- where you are seeing more than two
ing. And then about six months later, I possible scenarios, it’s best to put it all
decided it was worthless. I probably went aside for the time being. Again, it is a
back and forth on that several times over subjective tool open to interpretation, so
a couple of years. I finally came around some situations will lack clarity.
to finding it useful. But I think when
trying to implement this approach, you So you find that Elliott wave analysis
really have to work with somebody who has its usefulness but it shouldn’t be
understands it. It’s hard to implement it treated as the holy grail, which less-
just by reading about it. experienced traders might uncritically
assume.
I can see how working with someone Right. Some people will think, “If I
would be helpful. Elliott wave analysis can just go back and understand market
is as subjective as an art but it’s as movements over the last 10 years, then I
complex as a science, which makes it should be able to predict market move-
difficult to work with. ment going forward.” But I think it’s
Yes, that’s why it helps to sit alongside dangerous to think that. If you start trying
someone and watch how they develop to predict large-degree market move-
their count. It is through this kind of ments, what this does to your thinking
osmosis that you can start to really is it glues your brain into expectations
understand how Elliott wave works. So that may not happen.
in my opinion, it’s a valid approach and The reality is, there is no holy grail.
can be very useful. But there’s no doubt You are going to make mistakes, and
that it’s the most subjective tool in the no tool is perfect. When it comes to ap-
toolbox. plying Elliott wave analysis, I find it’s
Because of that subjectiveness, it’s better not to start from the big picture,
the first tool I will put aside if there is as is the general custom when analyz-
any ambiguity within price structure. ing the markets, but rather, start small
However, here are two underlying ten- and work up. That way, the distance to
dencies to understand about the market whatever negates your count is as small
and why I think Elliott wave analysis as possible. This helps to minimize any
can be useful: Basically, it’s helpful misinterpretation.
to understand that market chop is es- So, to use Elliott wave effectively,
sentially corrective, and that aggressive I’d say that first, you have to go from
movement is essentially impulsive. And the small picture to the big picture.
the more you get into it and study it, the And second, since it’s a subjective tool,
more you can pick up on all those wave you must use confirming analyses. You
variations. Basically, you will know what should be thinking, how can I confirm
your preferred wave count is, and the my counts? What tools would be
second-highest probability will be the complementary to this analysis? There
alternative wave count. are some technicals that can help to
But there will be periods in the market confirm whether we’re in a third wave, a
where you will see conflicting scenarios, fifth wave, and so on. Using confirming
and you may think to yourself, well, it tools can raise the probabilities of getting
could be this, or it could be that. And I a good wave count.
January 2021 • Technical Analysis of Stocks & Commodities • 33
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 That’s interesting because people
would typically approach this theory
scaling the general down to the par-
ticular. But what you’re saying is to
go the other way around, to go from
the particular to the general. And also,
you’re saying that if you come across
too many variations that may conflict,
you have to know when to toss out the
count and put the analysis aside.
That’s right, and then you have to lean
on your other tools.
I’m thinking about the chaotic events
of this year and the markets. A lot has
been going on that affects the mar-
kets, from quantitative easing (QE),
to trade tensions with China, to the
pandemic. I can imagine someone
trying to plot a wave count amid the
uncertainty. How do you work with so
many unprecedented events? And does
that tend to throw off the basic Elliott
wave structure?
It’s a great question but compliance
restrictions prevent me from discussing
current markets with any specificity and
advising what I think. However, a lot of
what I do at Lakeshore is to consult with
people about current markets. I share
OPTUMA
FIGURE 1: EXAMPLE OF THREE CORRECTIVE STRUCTURES. This chart displays the three simple corrective structures found within Elliott wave theory: the zigzag,
flat, and triangle. The bar charts below each line chart above offer some real-life examples of the patterns.
34 • January 2021 • Technical Analysis of Stocks & Commodities
my thoughts, my read on the market,
and where technicals suggest we are
heading. I do that through conference
calls and screen sharing to graphically
demonstrate and annotate my interpreta-
tion of the market. That way, I can walk
the client through what I am seeing and
share my thoughts.
By the way, it’s easy to go off into the
weeds with wave counting. So I created
a simple Elliott wave course for people
who want to learn the technique. I offer
it through my firm, Lakeshore Techni-
cal Analysis. In the course I provide
examples using real market charts. I
provide the basic guidelines, I provide
the logic, I translate the line drawings
to real market charts (Figure 1), and
I provide a way to quiz yourself with
example charts (Figures 2 and 3).
Let’s talk about cycles. If you put a
bunch of cycles together, I can imagine
that a few of them might converge, or
not. They can agree or disagree. How
often do you come across conditions
wherein cycles don’t really agree or
are not compatible? And what do you
do when that happens?
To me, cycles are the least important
piece of the puzzle. The reason for that
is because they can invert, as you’ve
described. So in general, it’s the least
important piece of information that I tend
to care about. Generally, cycles produce
a window of time where something may
happen, meaning a change of trend. But
whenever you create or identify a win-
dow for a change in trend, the market
doesn’t have to turn there. So you need
other non-correlated tools to add to
your analysis to help indicate when the
market may turn.
So cycles can’t be used as an action
signal. They are really just an additional
layer of information to be aware of. There
are different types of cycles, but they all
function essentially the same way.
And an example of a natural cycle such
as seasonality would be, say, planting
and harvest seasons?
Yes, seasonality is the most common
natural cycle.
Something to be aware of is that sea-
sonality charts are essentially an overlay
of many years, including the outliers. If
there’s an extreme outlier in a given year,
it’s going to disproportionately influence
the seasonality chart. So you have to
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break it down by different intervals of
time, by plotting one year over another
year, and then again over another year.
Then we’ll look for correlation between
the different years to identify which
pieces of seasonality actually repeat. You
can think you see a seasonal pattern if
you look at a chart over a single period
of time. But you have to compare year
over year. If there’s variation at a point
during the year that repeats over many
years, it’s meaningful.
So there are pieces of seasonality that
are correlated and have high probability,
and there are pieces of seasonality that
are noncorrelated and have low prob-
ability.
So if I understand you, you’re saying
that you have to overlay many cycles
to see what’s really correlated versus
what’s not? To discern between more
reliable patterns versus randomness?
FIGURE 2: THE EXPANDED FLAT. This chart illustrates
an expanded flat. This is a common variation of the
flat pattern where the “B wave” and “C wave” expand
to new extremes before reversing.
FIGURE 3: THE CONTRACTING TRIANGLE. This
illustrates the most common variation of the triangle
pattern: a contracting triangle.
Yes, particularly for natu-
ral cycles. Each type of cycle
has its own quirks that you The higher timeframe is
have to work with. essentially the trend. The
Can you explain the differ- movements and the smaller
ent quantitative measures timeframe are the push and
you employ in your ap- the pull within the trend.
proach (and services)?
I use quantitative mea-
sures primarily within cy-
clical analysis. I work to identify three
independent types of cycles on each
market: fixed cycles (Hurst analysis),
natural cycles (seasonality, etc.) and
periodicity (sequencing). Fixed cycles
and natural cycles can and should be
verified through quantitative analysis
(spectrograms, composite diagrams,
correlation, etc.). I write about some of
these methods and tools in the CMT level
I and II curriculum that I authored.
Is there any software available to as-
sist traders with either Elliott wave
analysis or cycle analysis? Is it possible
for software to help with these types of
analyses? And if so, do you use such
software yourself, or do you perform
your analysis just by observation and
your own study?
Yes. I use Optuma software. It for-
merly was called Market Analyst, but
now it’s called Optuma. They have a
wonderful product and graphics.
The graphic display is very impor-
tant to me so that I can screen-share
with clients to show them more clearly
what I am seeing. You can customize
the charts to your liking. It also uses
an opensource coding language that
allows you to go in and work with data
in a custom way. The software can also
label Elliott waves, although in order to
interpret these labels, you still need an
understanding of Elliott wave theory.
Cycle-wise, it offers a spectrogram,
and it also has some Hurst tools. These
functions help you to look for cycles and
seasonality that may be taking place in
the market.
You mentioned Hurst cycles.
Yes, JM Hurst was the first to docu-
ment fixed cycles with the aid of a com-
puterized spectrogram and he created a
January 2021
full technical system for trading fixed
cycles. Sometimes people will refer
to fixed cycles as Hurst cycles. While
exceedingly rare, his correspondence
course is very cool and required reading
for serious market students.
Can you talk about multi-timeframe
analysis, which is one of the mainstays
of your approach?
As a broad statement, I use multiple
timeframe analysis to provide clients
with actionable information that is spe-
cific to the timeframe of their business.
For instance, if a client is interested in
buying soybean meal every two weeks to
feed their hogs, they need to focus on the
daily timeframe because buy/sell signals
tend to last 1 to 2 weeks. However, a client
who is interested in buying soybean meal
every three months will be interested
in technical signals originating from
the weekly timeframe, as these signals
tend to last 1.5 to 6 months. So the client
dictates the timeframe.
I generate the analysis from three
independent noncorrelated perspectives:
structure, momentum, and cycles. These
methods of analysis are always employed
in order of priority as mentioned above.
I am also a fan of using Commitment
Of Traders (COT) data when available.
While I use the exact same approach
on every market, I do tweak the tools
to match the volatility characteristics
of the market.
I think multiple timeframe analysis is
the most important piece of the puzzle.
You need multiple timeframes in order
to understand what’s happening in the
markets, because the reality is that price
is a fractal. Every movement is a piece
of a trend that’s one timeframe higher.
For Hurst cycles, for example, if you’re
dealing with a 20-day-cycle, it’s heavily
• Technical Analysis of Stocks & Commodities • 35
https://libta.org
 to keep it simple, although of this like Elliott wave—it’s fractal.
it could be more). It’s the Price structure is fractal. So we need
It’s helpful to understand push and the pull that tells tools that address fractals. Elliott wave
that market chop is us what to do with the near- analysis does that. Multiple timeframe
term movements. Do we analysis does that. Pitchforks do that.
essentially corrective, and want to ignore them? Or do Elliott wave was designed for equity
aggressive movement is we want to take advantage markets. After all, the developer of Elliott
essentially impulsive. of the situation and do the wave theory, R.N. Elliott, was sitting in
opposite of what the near a hospital bed studying stock charts, and
term is doing? what he discovered was essentially the
This is why I find multiple fractal nature of it. He started to docu-
affected by the 40-day-cycle. Meaning timeframe analysis so useful. ment the fractals he saw in the stock
that the higher timeframe is essentially charts, which became the waves.
the trend. And the movements and the You wrote part of the CMT (Chartered The pitchfork was designed for com-
smaller timeframe are the push and the Market Technicians) curricula? modity markets, in particular, the grain
pull within the trend. Yes, that’s right. markets. It has a fractal concept to it.
For an example, and keeping it simple, Let’s say the pitchfork is bullish—price
let’s consider a weekly chart and a daily Do you have anything available for is moving up within the pitchfork—
chart. When it comes to commodities, readers to read of yours who are not and then all of a sudden it breaks the
I generally refer to the weekly time- necessarily taking the CMT course? lower parallel and now price is out of
frame as the trend. That is what most If you truly want to learn then I would the pitchfork. That’s the same concept
people feel is the trend. When you get encourage you to reach out and drop of degree. So it essentially means that
a signal in a weekly timeframe, it tends me an email. I work with people of all upward movement is completed and we
to last between one-and-a-half months skill levels. could be in a new structure. So it could
to six months. Meanwhile, the daily As for published material, I’ve written mean the impulse up is done and we’re
timeframe is like the near-term push the cycle curriculum for Level I and II now in a correction.
and pull of the next one or two weeks. technicians within the CMT program. So pitchforks are a great noncor-
So you really need two timeframes There’s a total of four chapters that dis- related complementary tool to Elliott
to understand the bigger picture. As cuss cycles. The first two chapters discuss wave analysis.
an example, let’s say we’re in a bull the basics of cycle theory and principles
trend, meaning the weekly timeframe as per the work of the late J.M. Hurst as Anything else you’d like to mention?
is bullish, and the market is creating well as seasonality and detrending. The We know we are in the Wild West right
higher highs and higher lows. Let’s say second two chapters focus on tools used now from a macroeconomic standpoint.
it’s midway up in its range, it’s healthy, to phase cycles as well as application Technical and quantitative analysis
and there are no issues. And then we through case studies. is likely to become more and more
get a sell signal on the daily timeframe. As for other available writings, you important to “getting it right” as time
What does that mean? It suggests “buy can read two articles that I co-wrote on progresses. I would argue the current
the dip.” It suggests that in the near the Andrews pitchfork in issues 84 and environment requires technical input
term, the market is likely to go down, 85 (March 2018 and September 2018) and, from what I see, most firms agree
possibly for one or two weeks. But in of The Journal of The Society of Tech- with this view.
the higher timeframe, the trend is up. So nical Analysis, which is the publication I am involved in a lot of businesses:
in a case like this, we might be looking from The Society of Technical Analysis Lakeshore Technical Analysis (market
to buy the dip. (STA), the UK’s professional body for forecasting/risk management), Crystal
Now think about a different scenario technical analysts. Capital Advisors (active equity man-
where the weekly timeframe has been Pitchforks are an amazing tool. And agement), Round Rock Advisors (com-
going up. But now, say it has a sell sig- most people don’t really focus on them, prehensive financial planning/wealth
nal. Say your daily timeframe also has so I think they’re underappreciated. management), and Eastborough Capital
a sell signal. Well, that situation does There is no better tool for the diagonal (systematic commodity pool). All of
not suggest “buy the dip.” It suggests we axis. I would suggest that people read them, while different, have a common
may have a major high and so we need those articles and really try to think theme: They use technicals as an input
to react accordingly. about what the pitchfork formations are for decision-making.
So it’s all about the context. The near- actually showing. Working with markets is one of the
term signals are all about the context of most challenging jobs on earth, but if
the trend, what is happening within the Isn’t there a lot more complexity to you decide you want to drive the bus, I
trend, and the push and pull of at least pitchforks than it seems at first? would encourage you to study technicals
two timeframes (two timeframes in order It does involve degrees. You can think and specifically to go through the CMT
36 • January 2021 • Technical Analysis of Stocks & Commodities
https://libta.org
program offered by the CMT Associa-
tion. It offers good preparation.
And I would just encourage anybody
who wants to learn more about some of
these technical analysis tools, or who
feels they are overexposed to the vola-
tility in the markets and they need help
with this, to contact me.
Finally, and perhaps most important,
I’d like to mention a quick word of thanks
here to my wife for her years of support
and encouragement. What I do is not easy
and it’s quite time-consuming. She has a
level of patience that deserves acknowl-
edgement and gratitude. Thanks, Meg!
How can someone contact you?
Anyone can make an inquiry through
my website at http://www.lakeshoretech-
nicalanalysis.com.
Thanks for speaking with us and for
sharing examples of what you use to
analyze the markets. Good
to hear about them.
I’m bringing noncorrelated
Karl Montevirgen is a con-
tent writer specializing in
information to the table that
financial markets as well cannot be generated from
as the arts. His website fundamental analysis.
is www.kontenthammer.
com.
Further reading https://www.technicalanalysts.com.
Crystal, Kyle, and Brackett, Timothy Hurst, J.M. [1970]. The Profit Magic of
[2018]. “A Brief History Of The De- Stock Transaction Timing.
velopment Of Median Line Analysis,” Prechter, Robert, and A.J. Frost [1978].
The Journal Of The Society Of Tech- Elliott Wave Principle, Elliott Wave
nical Analysts, March 2018 issue 84, International.
The Society of Technical Analysts, ‡Optuma
https://www.technicalanalysts.com. ‡See Editorial Resource Index
[2018]. “Further Analytical Meth-
ods Using Median Line Analysis,”
The Journal Of The Society Of Tech-
nical Analysts, September 2018 issue
85, The Society of Technical Analysts,

METGHALCHI & BAIG/GOLD

Continued from page 19
We will apply the gold
GMS for the Euro Stoxx 50 has higher return and lower risk momentum strategy semi-
than investing in the Euro Stoxx 50. annually to several stock
The same conclusion can be made for all the other indexes market indexes in industrialized
tested except the MSCI Emerging Market Index. For example,
looking at the DJ World Index, with an average annual return
countries, to some well-known
of 7.09% in US currency, a trader could follow the semi-annual world indexes, and to the S&P
GMS and increase the return to 10.43% and at the same time 500 index.
lowering her risk from 14.95% to 10.22%. You can see from
Figure 2 that the semi-annual GMS works for all major world
indexes tested except the EM.
Massoud Metghalchi, PhD, is a professor of finance at the
S&P 500 index results University of Houston-Victoria. He may be reached at Met-
Looking at the S&P 500 index test results in Figure 2, we see ghalchim@uhv.edu.
a very significant improvement in the risk-return trade-off. Ahsan Baig is a student at University of Houston-Victoria
The semi-annual GMS applied to the S&P 500 index would pursuing an MBA degree.
enhance the S&P 500 return from 8.72% average annual return
to 14.47 % average annual return, while the risk is reduced Further reading
from 13.95% to 10.72%. Tang, Robert [2019]. “A Gold Momentum Strategy,” Techni-
cal Analysis of StockS & commoditieS, Volume 37:
SuMMarY December.
In summary, we applied the semi-annual gold momentum Metghalchi, Massoud [2020]. “Variations On The Gold
strategy to various individual industrialized countries and a Momentum Strategy,” Technical Analysis of StockS &
few well-known world indexes. Our results strongly support commoditieS, Volume 38: May.
applying the semi-annual GMS for all the individual industri-
alized countries tested and all the world indexes tested except
the MSCI Emerging Market Index.
January 2021 • Technical Analysis of Stocks & Commodities • 37
https://libta.org
 TARGET RICH TRADES
MetaStock Add-on
4548 Atherton Drive, Ste 200
Salt Lake City, UT 84123
Phone: 800 882-3040
Web: www.MetaStock.com/
saleschat
Requirements: MetaStock version
13 or higher, Windows XP or higher
Product: MetaStock add-on for a trad-
ing system by Anne-Marie Baiynd
Price: $499 one-time fee with 30-
day money-back guarantee
by Barbara Star, PhD
Target Rich Trades incorporates a trad-
ing system used by Anne-Marie Baiynd,
the originator and CEO of The Trading
Book.com. This MetaStock add-on com-
bines her use of trend, support/resistance,
and momentum within bullish and bear-
ish price cycles to produce real-time buy
and sell signals in all timeframes.
A “target-rich trade” is an area on the
chart that identifies the beginning of a
potential price move that leads to new
trading targets. Sometimes these are
areas where price might reverse and
sometimes they are areas where price
continuation moves could be expected.
The Target Rich Trades add-on issues
signals for long and short reversal trades
FIGURE 1: TARGET RICH TRADES FOR EASTMAN CHEMICAL. As seen on the daily chart of Eastman Chemical, Target Rich Trades automatically displays both
longer-term and current price trends, support and resistance levels, and buy and sell zones.
38 • January 2021 • Technical Analysis of Stocks & Commodities
as well as for long and short re-entry
trades. Whenever a buy or sell signal
triggers, an alert pops up on the screen
that labels the type and direction of the
signal. But more than merely signaling
those trades, the algorithm automati-
cally recognizes and labels support and
resistance levels as well as the buy and
sell zones.
Program components
The program opens with a price and
volume chart template that displays a
special moving average to represent the
overall general trend. The chart springs
to life when an expert advisor is added.
It populates the chart with signals and
text labels, along with colored price bars
that show buying and selling strength.
Target Rich Trades
incorporates a trading
system used by Anne-
Marie Baiynd.
A color ribbon under the chart identi-
fies the current shorter-term trend (see
Figure 1).
Diamond shapes mark support and
resistance levels. When the algorithm
detects a buy or sell zone that follows
a diamond shape and all the underlying
conditions for a trade have been met, a
text label, a directional arrow, and an ini-
tial stop-loss sign appear on the chart.
Trade re-entries also display the buy
or sell label and arrow but occur after a
failed entry, one that initially had been
stopped out, or after a failed pullback.
The support and resistance diamonds
provide the initial trading targets but
also could form part of an additional
trading strategy in which the diamonds
themselves serve as both entries and
exits. For example, traders looking for
long entries in an uptrending market
could use the green diamonds as entry
or re-entry signals and red diamonds as
places to take profit.
Commentaries
A commentary feature located within the
expert advisor provides the trader with
information about the current trend, the
price level of both the last support and
the last resistance areas, and whether a
new or open trade currently exits.
Once a trade is triggered, the com-
mentary conveys information about how
to proceed, with suggestions for exits or
profit-taking. Trade-management sug-
gestions are also given for open trades,
those that are currently in progress. An
initial stop-loss price, which adjusts
https://libta.org
automatically as the trade progresses,
is added to the commentary.
Trade preparation
Even though a buy or sell signal flashes,
traders are advised to avoid blindly en-
tering a trade. Trade preparation is so
important to Baiynd that she outlines
a procedure to follow prior to entering
a trade. Price slope, relation to moving
averages, and support/resistance location
are among the subjects she discusses to
assess the probability of a successful
trade outcome.
Scanning and backtesting
The program includes scans for long
entry signals, short entry signals, and
recent inflections. The scan lists those
symbols that have signaled either a buy
or re-entry buy and a sell or re-entry
sell, as well as price levels where stops,
confirmations, and closes occur.
The recent inflection scan is unique
because its function is not to filter for buy
or sell signals. Instead, it includes every
symbol on the chosen list and tells how
many bars have passed since posting the
last support or resistance diamond and
also the price when that happened.
The backtester can test one symbol
or multiple symbols. It can display a
bar graph to show winning and losing
trades as well as a report summarizing
performance activity for each symbol
A “target-rich trade”
is an area on the chart
that identifies the
beginning of a potential
price move that leads to
new trading targets.
which includes profit or loss, reward
to risk ratio, and the dates when orders
were considered, placed or canceled. It
can even plot an equity line on the price
chart of any symbol tested.
In tune with the basics
Too often, traders are tempted to
stray from the path of sound technical
chart analysis and rely on guesswork
or media attention for selecting and
entering a trade. Target Rich Trades
replaces guesswork with the key techni-
cal analysis components, scanning, and
trading signals necessary for a solid,
real-time trading method that works in
all timeframes for both beginning and
experienced traders.
Barbara Star, PhD, is a Contributing
Writer to Technical Analysis of Stocks
& Commodities magazine. She can be
reached at 818 224-4070 or by email at
star4070@aol.com.
Resources
Gibby, Jeff [2018]. “Anne-Marie’s
Target Rich Trades for MetaStock,”
video, https://www.youtube.com/
watch?v=vvXs9cumuWc
‡MetaStock ‡TheTradingBook.com
‡See Editorial Resource Index

MASONSON/WHY TRADE ETFS?

Continued from page 27
November 4, 2020) with a total return of 445% vs. 408%, 2020
current-year performance (through November 4) of 31% vs.
17%, 1.6 times the AUM, lower standard deviation, higher
cash inflows, and a more diversified portfolio with 161 posi-
tions. XMMO had a higher daily trading volume of 85,000
vs. 27,000 and more concentrated holdings with 77 positions,
though neither is a very significant factor.
Although Vanguard’s VOT had the lowest expense ratio,
highest cash inflows, significantly more AUM, and five times
VOT’s daily trading volume, it severely lagged on long-term
performance from August 2, 2006 to November 4, 2020 of
309% vs. 378% for VOT, and short-term 2020 YTD perfor-
mance of 20% vs. 31% for JKH.
iShares Russell Midcap Growth (IWP), the AUM leader of
the group, with a number of leading factors such as highest
annual yield and largest number of portfolio positions, also
had negative cash inflows of $57 million compared to VOT’s
massive inflows of $461 million. Moreover, on a long-term
basis from July 2, 2004 through November 4, 2020, IWP gained
457% compared to 526% for JKH, and since the beginning
of 2020 was underperforming JKH by 10 percentage points.
NUMG also underperformed JKH since December 15, 2016 by
17 percentage points and in 2020 by 1.5 percentage points.
For investors, JKH just edges
out XMMO.
Are you interested in learning more about using exchange
traded funds (ETFs) in your trading? Leslie N. Masonson,
an active ETF trader, is president of Cash Management
Resources, a financial consulting firm that focuses on ETF
relative strength and sector strategies. He is the author of
Buy—DON’T Hold: Investing with ETFs Using Relative
Strength To Increase Returns With Less Risk, and All About
Market Timing, as well as Day Trading on the Edge. His
website is buydonthold.com, where he writes a monthly blog.
To submit topics for future columns, reach him at lesmason-
son@yahoo.com.
resources
www.blackrock.com • vanguard.com • ftportfolios.com
• www.invesco.com • www.nuveen.com
January 2021 • Technical Analysis of Stocks & Commodities • 39
https://libta.org
 Explore Your Options
GOT A QUESTION ABOUT OPTIONS?
Jay Kaeppel has over three decades of experience in the options markets. He
was a head trader for a CTA firm, an options trading software developer, and is
a portfolio manager for an investment management firm. He also spent several
years writing a weekly column titled “Kaeppel’s Corner” and now publishes a
blog, “Jay On The Markets” (http://jayonthemarkets.com). He is the author of
several books, including The Four Biggest Mistakes In Option Trading; The Option
Trader’s Guide To Probability, Volatility, And Timing; and Seasonal Stock Market
Trends. Send your questions or topic suggestions to Jay Kaeppel at jaykaeppel@
gmail.com. Selected questions will appear in a future issue of S&C. Jay Kaeppel

SIDEWAYS STOCKS: AN OPPORTUNITY
TO USE CALENDAR SPREADS?
A number of stocks that I am following
seem to spend a lot of time going side-
ways and trading in a range. Is there a
low-risk way to profit from that scenario
using options?
A calendar spread can offer a trader
the opportunity to make money even
when a stock “goes nowhere.” Likewise,
if properly positioned, it can offer a
significant rate of return and a relatively
low dollar risk. As with most option
strategies, the key is to understand what
“makes it tick.”
A standard at or near-the-money put
calendar spread involves buying a put
option with a strike price near the current
price of the underlying stock in a further-
out expiration month and simultaneously
selling another put option at the same
strike price in a closer expiration month.
The basic premise of a calendar spread is
that the shorter-term option will experi-
ence time decay and lose time value at
a much faster rate than the longer-dated
option. But there are a few important
things to consider before entering an
at-the-money calendar spread:
are trading. Ideally, you will want to
focus on heavily traded, highly liquid
options with tight bid/ask spreads.
• Changes in implied volatility can
have a profound impact on a calendar
spread once the trade is entered. A
rise in volatility will typically help
a calendar spread and a decline in
volatility will typically hurt a calen-
dar spread. As a result, it is typically
preferable—though certainly not
A calendar spread
can offer a trader the
opportunity to make
money even when a
stock “goes nowhere.”
required—to enter a calendar spread
when implied volatility is on the low
end of the historical range.
Example trade
For our example trade we will use ticker
UBER. Figure 1 displays an UBER
price chart along with implied volatility
(black line). Note that the stock price has
support around $28.42 and resistance
around $38.50.
Figure 2 displays the history of implied
volatility (IV) for 90+ day options on
UBER. Current IV is not necessar-
ily “high” nor “low” compared to its
historical range. In recent years it has
been as low as low the 40s and spiked
to 140% during the COVID-19 selloff
in early 2020. It currently stands in the
mid 50s.
Our example trade involves:
• Buying 1 Jan15 2021 put @ $3.33
(with 112 days left until expiration)
• Selling 1 Nov06 2020 put @ $2.25
(with 42 days left until expiration)
The particulars appear in Figure 3 and
the risk curves in Figure 4.
Some key things to note:
• This trade costs $108 to enter on a
1-lot. This is the maximum risk on
the trade.

• The trade will make money if the un-

derlying stock price remains within
the breakeven prices through expi-
ration. If price moves significantly
outside of this range, then losses can
occur. So you should have some rea-
son to believe that price will remain
within a given range before entering
the trade.
PROFITSOURCE BY HUBB

• You are trading two options and you

may decide to exit the trade prior to
option expiration. As a result, it is
important to consider the width of FIGURE 1: UBER PRICE CHART. In this example price chart of UBER, you can see identifiable support &
bid/ask spreads on the options you resistance levels.

40 • January 2021 • Technical Analysis of Stocks & Commodities

https://libta.org
 Explore Your Options
• The approximate maximum profit
is $197.
• The breakeven points for this trade
are $28.38 on the downside and
$39.42 on the upside. Note that
these breakeven prices are beyond
the support and resistance levels we
identified earlier. The hope is that the
support and/or resistance levels will
serve as a “brake” to halt any advance
or decline before price moves beyond
our breakeven points.
• The theta for this trade is $1.94.
This implies that this trade will

OPTIONSANALYSIS.COM
gain $1.94 in value each day due
solely to the passage of time—that
is, each day, the shorter-term option
will lose roughly $3.60 in value and
the longer-term option will lose only FIGURE 2: IMPLIED VOLATILITY. Shown here is an example of implied volatility on 90+-day UBER op-
roughly $1.70 in value. Since we are tions.

short the former and long the latter,

we will gain $3.60 on the shorter-
term option and lose only $1.70 on
the longer-term option.
• The vega for this trade is $2.82. This
implies that if implied volatility rises
by 1 full percentage point, then the
position will gain $2.82 in value and
vice versa. If volatility rises, the call
we hold long will gain more time FIGURE 3: PUT CALENDAR SPREAD. This shows the particulars for the example put calendar spread on
value than the call we are short and UBER stock.
if volatility declines, the call we hold
long will lose more time value than
the call we are short.

Note that greek values are not static

and will change as time goes by and
price and volatility levels change. But
for now, these are the values we have to
work with in assessing the viability of
this particular position.

Position management
From a risk standpoint, the key consid-
eration is what to do if price exceeds the
breakeven points. There is no correct
answer. The choices are:
• Exit as soon as a breakeven price
is violated
• Exit as soon as a support or resistance
price is violated
• Establish a wider “uncle” point in or-
der to give price some opportunity to
work its way back into the profit range
if it only temporarily pierces support/
FIGURE 4: RISK CURVES. This graph shows the risk curves for the example put calendar spread on UBER
stock.
resistance or breakeven points
• One other technical—but impor-
tant—consideration is to remember
that if the short put is in-the-money
at expiration, you will be required to
buy 100 shares of stock at the strike
January 2021
price. You could simply exercise
your long call to offset, but more
typically a trader will want to exit
the position prior to getting involved
in exercise.
Continued on page 45
• Technical Analysis of Stocks & Commodities • 41
https://libta.org
 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the se-
nior 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 Creativity (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.DeCarleyTrad-
ing.com. Selected questions will appear in a future issue of S&C. Carley Garner

THE QUALITY OF FILLS
Does the commodity brokerage make
a difference in the quality of the fill?
Also, why aren’t orders always filled
as expected?
The biggest lesson new traders learn
is there are no free lunches. Moreso, the
commodity markets are not charities.
Orders will only be filled if there is a
willing and able market participant to
take the other side of the trade at the
desired price. The market does not owe
any of us anything, not even liquidity
or fair pricing.
Additionally, in the United States,
brokerage firms do not play a role in
making markets. Instead, they merely
connect retail traders to a centralized
exchange via trading platforms, a trading
desk, or an individual full-service broker.
Trades are sent for execution through the
proper chain directly to the exchange’s
trade-matching software (or open outcry
pit in rare cases). Accordingly, aside from
minimal differences in software and
connection speeds, there is no difference
in fill quality when entering an order
into a trading platform at one brokerage
versus another. In other words, a trader
who experienced slippage on a stop-loss
order, or who wasn’t filled on a limit order
they believed should have been, would
have had the same experience if they
were using any other brokerage. Thus,
switching shops isn’t going to make the
difference they are hoping for.
For futures traders, fill quality is less of
an issue. For instance, technically, a limit
order is one that buys or sells a futures
contract at a better price than the current
market price. An order is only owed a
fill if the futures price trades through it,
but on many occasions, the markets are
42 • January 2021 • Technical Analysis of Stocks & Commodities
amply liquid to enable a trader to get
filled if the market merely reaches the
noted price. For example, if a corn trader
works an order to sell a March contract
at $4.10 (a dime higher than the current
price of $4.00), the trader desires to go
short corn at $4.10 or higher if the market
rallies to the noted price. It is unlikely
she will receive a fill higher than a price
of $4.10 but she is only owed a fill if the
price prints one tick above $4.10. If the
futures market reaches precisely $4.10
Orders will only be filled
if there is a willing and
able market participant
to take the other side of
the trade at the desired
price.
and drops, the trader might or might not
receive a fill on the order. Whether or
not the order was filled would depend
on the number of orders from buyers at
that price and time. This makes sense,
since the exchange cannot force another
trader to accept the trade at the price you
desire; the transaction can only take place
if both traders are inclined to execute at
that price and time.
Something to be aware of regarding
stop orders (which is an order to buy or
sell a futures contract if the price gets
worse): The CME Group exchanges
have a system referred to as “protection
functionality for market and stop orders.”
This program defines protection points
representing prices the exchange deems
to be unacceptable slippage for a stop
order (or market order). If the market
is volatile, thinly traded, or both, it is
possible a working stop order cannot be
filled at a reasonable price (as determined
by the protection points). In this situa-
tion, stop orders go unfilled and become
limit orders. While this sounds like a
luxury because it can reduce slippage
on most occasions, it can also go the
opposite way. In late October, the S&P
500 gapped lower by 20.00 points from a
Friday close to the Sunday night reopen.
One of our brokerage clients had a sell
stop working at a price on the lower end
of the gap. Sadly, the CME exchange’s
protection functionality resulted in that
order not being filled; instead, it became
a limit order to sell at the previous stop
price, which was never filled at all. This
was particularly painful because the
S&P 500 futures proceeded to collapse
100 points ($5,000 per contract) in the
session. Luckily, this was a stop order
to enter a short trade, not one to protect
a long trade. It is a little easier to stom-
ach missing out on a big profit than it is
dealing with a failed stop-loss order and
sitting on a large loss.
For options traders, the issue of get-
ting orders filled at an agreeable price
is more of a challenge. This is because
options are not traded as fluidly as futures
contracts are. Thus, the lighter liquidity
means fewer parties to take the other
side of trades resulting in wider bid/ask
spreads and the necessity to accept price
slippage to get an order filled. In normal
market conditions and in a reasonably
liquid commodity market, the slippage
from the price needed to execute and one
that a trader might deem fair is minimal.
But on occasion, volatility arises, causing
Continued on page 45
https://libta.org
LAUNCH OF WEBSITE TO OFFER
COURSES, EDUCATION, DATA FOR
HEDGED TRADING
The new www.hedgedtrading.com
website from StockOdds (mystockodds.
com) offers courses on advanced hedged
trading and basket trading. HedgedTrad-
ing.com is a data and education service
for equities and CFD traders. It seeks to
offer insights for long and short basket
traders. Basket trading is an approach
that seeks to offer a way to cover rising
and falling industries without having to
be perfectly right on one stock selection.
The courses are designed to encourage
the development of a probability mindset
and a probability-based trading approach
through the use of statistical odds to
achieve relative performance yield.
The courses instruct on ways to com-
bine long and short positions as a way
to increase the chances of success over
the long sample. Hedges are used to help
insulate the trader from market moves
and adverse events. The courses offer
advanced strategies, money manage-
ment techniques, dealing with outliers,
balancing positions based on dollars,
beta, volatility, and more. Students can
learn to design baskets that may be
right for their skill set, account size,
and timeframe.
StockOdds Predictive Analytics &
Probability Data is offered as a service
to provide predictive analytics data as a
source of trading ideas for students and
hedge traders. Its indicators provide
signals as well as probabilities of what
may arise after the signals, based on the
strategies used and trade duration.
www.hedgedtrading.com
RISK AND DECISION-ANALYSIS
PLATFORM FOR ASSET ALLOCATION
Since extreme, black-swan events
are by definition unexpected, ironi-
cally, these types of events should be
expected to happen over the course of
decades, according to many advisors.
Probability simulations can be helpful
when preparing to address unexpected
market fluctuations, and asset allocation
is known to be a primary factor in long-
term portfolio outcomes.
To provide insights to help manage
long-term investment portfolios in ways
that conventional static models cannot
address, Palisade Company provides
a risk and decision-analysis software
platform. It offers a suite of analytics
tools including: @RISK for Monte
Carlo simulation; PrecisionTree for
decision trees; TopRank for “what-if”
sensitivity analysis; NeuralTools for
predictive neural networks; StatTools
for statistical analysis & forecasting;
Evolver for sophisticated optimization;
and RISKOptimizer for Monte Carlo
simulation & optimization.
@RISK Monte Carlo simulations ex-
amine a range of possible outcomes and
how likely each is to occur. The program
supports probabilistic, or stochastic, as-
set allocation models by incorporating
longer-time horizons and realistic prob-
ability distributions associated with asset
classes. @RISK provides a method to
forecast risk and prepare portfolios for
the unexpected, helping investors to turn
risks into opportunities.
The company is offering an on-demand
webinar (https://www.brighttalk.com/
webcast/18521/450696) titled “Asset
Allocation Modeling with Black Swans
Using Monte Carlo Simulation” that
demonstrates how @RISK can be used
to create financial models that give
investors a more realistic view of the
January 2021
risks in their portfolios by incorporat-
ing simulated distributions that more
closely resemble reality and allow for “fat
tails.” This is in contrast to a traditional
approach to asset allocation that uses
efficient frontier models to try to find
the optimal portfolio mix with the lowest
possible level of risk (standard deviation)
for its level of return (mean).
Headquartered in Ithaca, NY, Palisade
Company seeks to help companies op-
timize their decision-making in many
industries ranging from finance to oil
and mineral exploration, real estate to
heavy manufacturing, pharmaceuticals
to aerospace, as well as for business
schools around the world.
www.palisade.com, https://www.brighttalk.com/
webcast/18521/450696
IN-DEPTH GUIDES FROM IG MARKETS
IG is an online forex trading provider
and forex brokerage, offering a trading
platform and customizable apps, as well
educational and other services. In 2019
IG expanded into the US with its forex
services, offering access to over 80 cur-
rency pairs.
IG has compiled several in-depth
guides, available from www.ig.com/
uk, including the following topics: top
trading books; the future of trading;
psychology in trading; politics and the
markets; the impact on coronavirus on
the stock market; the economic impact
of coronavirus; and paychecks of world
leaders.
www.ig.com, www.ig.com/uk
• Technical Analysis of Stocks & Commodities • 43
https://libta.org

Buy Support, Sell Resistance
Here’s what to look for if you want to
trade within a price channel.
In
by Ken Calhoun
nontrending markets, it can
be frustrating to get stopped
out when trends do not con-
tinue in your favor.
The S&P 500 index has been in a
sideways consolidation from Septem-
ber through November 2020, as seen
in Figure 1 (SPY). In this situation,
you may find it more successful to buy
pivots off of support levels and sell into
resistance.
When price action cycles
up and down
Sideways markets are always difficult to
trade. From a technical analysis perspec-
FIGURE 1: BUYING SUPPORT, SELLING RESISTANCE (SPY). This shows an example of buying off of obvious support levels within the channel.
44 • January 2021 • Technical Analysis of Stocks & Commodities
TRADING ON MOMENTUM
Sideways Markets
tive, the most important factor to keep
in mind is the trading range: The larger
the range, the better. It is also important
to note that standard moving averages
won’t be nearly as useful in this type of
market as they are in trending markets,
since moving averages will appear in
This strategy gives
you clarity on exactly
where to enter and
where to exit, without
the guesswork.
the middle of the trading range, as seen
by the blue and red 50 and 100 SMA
(simple moving average) lines, illustrated
in Figure 1. Developing a trading plan
designed to capitalize on price action in
this situation requires the use of trailing
stops. We want to buy once price has
pivoted off the prior day’s low for at
least one day, and sell once price action
has pulled back off of resistance for at
least a day.
Step-by-step action plan
Here’s how you can start using this
strategy:
Step 1: After a sustained downtrend
of at least 10 days, look for a techni-
cal pivot signal, such as the hammer
seen on September 21 in Figure 1,
and enter your position.
Step 2: Set your exit target at just
beneath the prior high; which is $360
in this example.
eSIGNAL
https://libta.org
 Step 3: Either close the entire position
or scale out of it once price action has
gotten close to the prior high.
Step 4: Repeat this for as long as
price action cycles up and down in
a defined channel.
Insights: Why this
technique works
As with most trading strategies, support
& resistance levels are obvious and
traded by the majority of professional
traders. The most important thing to keep
in mind is exiting on time. In working
with many traders over two decades, I’ve
consistently found this to be the single
biggest error that traders make. They
don’t sell into resistance and instead
Explore Your Options
KAEPPEL
Continued from page 41
On the flip side, in terms of profit-
taking, a trader will likely need to exhibit
some patience since most of the profits
will accumulate as the short option nears
expiration.
One final wild card to consider: If IV
declines after the trade is entered, our
long option—because it has a higher
FUTURES FOR YOU
GARNER
Continued from page 42
wider spreads between the bid and ask
price of an option. As a result, another
trader might not be willing to take the
other side of a trader’s order at the ex-
pected fair price. This can be frustrating,
but it shouldn’t be; as mentioned before,
the markets are not a charity. In fact,
they are closer to the opposite. Markets
don’t volunteer to help those in need;
they forcefully accept donations of the
wait far too long to exit their trades to
book a profit.
Another reason why this strategy is
valuable is it gives you clarity on exactly
where to enter and where to exit, without
the guesswork that causes missed trade
opportunities.
Trade management tips
Because the duration of the trades is
relatively brief, it is important to manage
both your entries and exits with a bit more
precision compared to trading trending
instruments. From a size perspective, you
do not have the luxury of time to scale in
and build larger positions. So you need
to initiate your trade with full size from
the beginning once it has pivoted off of
support. If you do scale in and out, limit
If properly positioned,
it can offer a
significant rate of
return and a relatively
low dollar risk.
vega—would be more adversely affected
than our short option. The net effect
would be to narrow the range between
unsuspecting.
Let’s consider an example: A trader
wishing to execute a butterfly option
spread in silver might estimate a fair
price of the spread to be 26 cents. Yet,
the bid price of the spread might be 24
cents and the ask 28 cents. Unless the
trader is willing to buy the ask price (28
cents), he should not expect a fill, nor
get upset and feel victimized when one
doesn’t occur. This is because at least
one other trader is willing to take the
other side of the trade at 28 cents, but
there are currently no traders willing to
January 2021
You need to initiate
your trade with full size
from the beginning once
it has pivoted off of
support.
it to a single additional trade while price
action is still in the trading channel.
Ken Calhoun moderates a live trading
room for active traders. He is the founder
of TradeMastery.com, an interactive
webinar site for active traders, and is
a UCLA alumnus.
the two breakeven points. Conversely,
if IV increases, the net effect would
be to widen the range between the two
breakeven points as our long call would
gain more time premium than our short
call.
‡ProfitSource (HUBB);
‡Optionsanalysis.com
‡See Editorial Resource Index
do it at 26 cents. Just like the buyer of
this spread wouldn’t appreciate being
forced to pay 28 cents, the seller of the
spread cannot be required to accept a
lower price than they desire. Again, for
a transaction to occur, both parties must
be willing and able. A trader should never
assume they can buy or sell an instrument
at the price their software claims is fair;
market participation at any given price
is voluntary, not obligatory.
• Technical Analysis of Stocks & Commodities • 45
https://libta.org
 The focus of Traders’ • Traders.com → S&C Magazine → Traders’
Tips this month is Perry Tips
Kaufman’s article in this
At Traders.com you can also right-click on any
issue, “A Fresh Look At
chart to open it in a new tab or window and view
Short-Term Patterns.”
the chart at a much larger size.
Here, we present the
The Traders’ Tips section is provided to help read-
January 2021 Traders’
ers implement a selected technique from an article in
Tips code with possible
this issue or another recent issue. The entries here
implementations in vari-
are contributed by software developers or program-
ous software.
mers for software that is capable of customization.
The code for the following Traders’ Tips selections
is posted here:

bulltrendcases( 0 ),
beartrendcases( 0 ),
cday( 0 ),
F TRADESTATION: JANUARY 2021 TRADERS’ TIPS CODE comphigh( 0 ),
In his article in this issue, “A Fresh Look At Short-Term Pat- complow( 0 ),
outsidebull( false ),
terns,” author Perry Kaufman introduces some test methods outsidebear( false ),
to analyze various short-term price patterns to determine how ratio( 0 ),
they work with various stocks and ETFs. The analysis includes ndays( 0 ),
adate( " " ),
results with and without a trend filter. The trend filter used size( 0 ),
is an 80-period simple moving average and the article also back1( 0 ),
provided the criteria for the various patterns used to determine back2( 0 ),
back3( 0 ),
if an entry is triggered. back4( 0 );
Shown here is the indicator code based on the author’s
work. A simple Plot statement was added to indicate that arrays:
bullreturns[6]( 0 ),
the code was running, but the code is designed to export the bearreturns[6]( 0 ),
results to a text file. bulltrendreturns[6]( 0 ),
beartrendreturns[6]( 0 );
Indicator: TASC JAN 2021

// TASC JAN 2021

// PJK Short-Term patterns
// Look at reliability of short-term pat-
terns with
// and without a trend filter.
// Look at using noise as a qualifier
// Copyright 2020, P.J.Kaufman. All
rights reserved

inputs:
trendper( 0 ),
usekeyreversal( false ),
useislandreversal( false ),
usecompression( 0 ),
usegaps( 0 ),
useoutsideday( false ),
usewiderangingday( 0 ),
forecast( 5 ),
investment( 10000 );

variables:
trend( 0 ),
pattern( " " ),
bullcases( 0 ),
bearcases( 0 ),
compression( false ),
gap( false ),
outsideday( false ),
widerangingday( false ),
bullpattern( false ),
bearpattern( false ), FIGURE 1: TRADESTATION. Shown here is a TradeStation daily chart of SPY with the indicator applied. The plot is
bulltrend( false ),
used to indicate that the code is running and does not plot a significant number in terms of the article content. The code
beartrend( false ),
is designed to export information to a file.

46 • January 2021 • Technical Analysis of Stocks & Commodities

https://libta.org
// trend if trend < trend[1] then
if trendper > 0 then begin
begin beartrend = true;
trend = average( close, trendper ); beartrendcases = beartrendcases + 1;
end; end;
end
//============================================ // bullcases island reversal
// 3-day compression else if high < low[1] and close > open then
//============================================ begin
if usecompression = 3 then ndays = 1;
begin bullcases = bullcases + 1;
cday = truerange[3]; bullpattern = true;
size = investment / close;
compression = truerange < cday
and truerange[1] < cday if trend > trend[1] then
and truerange[2] < cday; begin
end; bulltrend = true;
bulltrendcases = bulltrendcases + 1;
//============================================== end;
// key reversals end;
//============================================== end;
if usekeyreversal and ndays = 0 then
begin //===============================================
pattern = "Key Reversal"; // compression
//==============================================
// key bearcases reversal if usecompression > 0 and ndays = 0 then
if high > high[1] begin
and low < low[1] pattern = "3-Day compression";
and close < low[1] then back4 = truerange[4];
begin back3 = truerange[3];
ndays = 1; back2 = truerange[2];
bearcases = bearcases + 1; back1 = truerange[1];
bearpattern = true; compression = back4 > back3 and back4 > back2
size = investment / close; and back4 > back1;

if trend < trend[1] then if compression then

begin begin
beartrend = true; comphigh = Highest( High[1], usecompression );
beartrendcases = beartrendcases + 1; complow = Lowest( Low[1], usecompression );
end;
end // bearcases compression
// key bullcases reversal if close < complow then
else if high > high[1] begin
and low < low[1] ndays = 1;
and close > high[1] then bearcases = bearcases + 1;
begin bearpattern = true;
ndays = 1; size = investment / close;
bullcases = bullcases + 1;
bullpattern = true; if trend < trend[1] then
size = investment / close; begin
beartrend = true;
if trend > trend[1] then beartrendcases = beartrendcases + 1;
begin end;
bulltrend = true; end
bulltrendcases = bulltrendcases + 1; // bullcases compression
end; else if close > comphigh then
end; begin
end; ndays = 1;
bullcases = bullcases + 1;
//=============================================== bullpattern = true;
// island reversals size = investment / close;
//===============================================
if useislandreversal and ndays = 0 then if trend > trend[1] then
begin begin
pattern = "Island Reversal"; bulltrend = true;
bulltrendcases = bulltrendcases + 1;
// bearcases island reversal end;
if low > high[1] and close < open then end;
begin end;
ndays = 1; end;
bearcases = bearcases + 1;
bearpattern = true; //================================================
size = investment / close; // Outside day (or wide ranging day) with close in
// upper/lower 25%

January 2021 • Technical Analysis of Stocks & Commodities • 47

https://libta.org
 //================================================ beartrend = true;
if (useoutsideday or usewiderangingday <> 0) beartrendcases = beartrendcases + 1;
and ndays = 0 then end;
begin end
if useoutsideday then else if ratio >= usegaps then
pattern = "Outside Day" begin
else // bullcases gap
pattern = "Wide Ranging Day"; ndays = 1;
bullcases = bullcases + 1;
outsidebull = high > high[1] and low < low[1] bullpattern = true;
and close > 0.75 * ( high - low ) + low; size = investment / close;

outsidebear = high > high[1] and low < low[1] if trend > trend[1] then
and close < 0.25 * (high - low ) + low; begin
bulltrend = true;
ratio = 0; bulltrendcases = bulltrendcases + 1;
end;
if usewiderangingday <> 0 then end;
begin end;
ratio = truerange / avgtruerange( 20 );
end; //================================================
// accumulated profits over next 5 days
// bearcases outside day //================================================
if outsidebear and if ndays > 1 then
( ratio = 0 begin
or ratio > usewiderangingday ) then if bullpattern then
begin begin
ndays = 1; bullreturns[ndays] = bullreturns[ndays] +
bearcases = bearcases + 1; size * ( close - close[ndays-1] );
bearpattern = true; end;
size = investment / close;
if bearpattern then
if trend < trend[1] then begin
begin bearreturns[ndays] = bearreturns[ndays] +
beartrend = true; size * ( close[ndays-1] - close );
beartrendcases = beartrendcases + 1; end;
end;
end if bulltrend then
// bullcases outside day begin
else if outsidebull bulltrendreturns[ndays] =
and (ratio = 0 bulltrendreturns[ndays] +
or ratio > usewiderangingday) then size * ( close - close[ndays-1] );
begin end;
ndays = 1;
bullcases = bullcases + 1; if beartrend then
bullpattern = true; begin
size = investment / close; beartrendreturns[ndays] =
beartrendreturns[ndays] +
if trend > trend[1] then size * ( close[ndays-1] - close );
begin end;
bulltrend = true; end;
bulltrendcases = bulltrendcases + 1;
end; if ndays > 0 then
end; begin
end; ndays = ndays + 1;
end;
//================================================
// Gap opening with profits in direction of the gap //================================================
//================================================ // summary
if usegaps > 0 and ndays = 0 then //================================================
begin if lastbaronchartex then
pattern = "Gap Opening"; begin
ratio = ( open - close[1] )/avgtruerange( 20 )[1]; adate = ELdatetostring( Date );

// downward gap // print headers to file

if ratio < 0 and -ratio >= usegaps then print(
begin file( "c:\tradestation\Short-Term Patterns.csv"),
ndays = 1; "Date,Pattern,Cases,Bull Cases,BullPL1,BullPL2,"
bearcases = bearcases + 1; + "BullPL3,BullPL4,BullPL5,Bear Cases,",
bearpattern = true; "BearPL1,BearPL2,BearPL3,BearPL4,BearPL5,,"
size = investment / close; + "TrendCases,",
"Bull Trend Cases,BullTrPL1,BullTrPL2,BullTrPL3"
if trend < trend[1] then + ",BullTrPL4,BullTrPL5,",
begin "Bear Trend Cases,BearTrPL1,BearTrPL2,BearTrPL3,"

48 • January 2021 • Technical Analysis of Stocks & Commodities

https://libta.org
 +
"BearTrPL4,BearTrPL5" );

// print the data to file

print(
file( "c:\tradestation\
Short-Term Patterns.
csv"),
adate, ",",
pattern, ",",

bullcases+bearcases:8:0,
",",
bullcases:8:0, ",",
Bullreturns[2]:8:0, ",",
Bullreturns[3]:8:0, ",",
Bullreturns[4]:8:0, ",",
Bullreturns[5]:8:0, ",",
Bullreturns[6]:8:0, ",",
bearcases:5:0, ",",
Bearreturns[2]:8:0, ",",
Bearreturns[3]:8:0, ",",
Bearreturns[4]:8:0, ",",
Bearreturns[5]:8:0, ",",
Bearreturns[6]:8:0, ",,",
FIGURE 2: THINKORSWIM. Here is an example of the study. The returns calculation from 1 to 5 days for bullish key reversals is shown
bulltrendcases+beartr
endcases:5:0, ",", in the upper pane with bearish key reversal returns in the lower pane. Log scale is enabled for the price pane to view the price moves
bulltrendcases:5:0, ",", more distinctly.
Bulltrendreturns[2]:8:0,
",",
Bulltrendreturns[3]:8:0, ",",
Bulltrendreturns[4]:8:0, ",",
Bulltrendreturns[5]:8:0, ",",
Bulltrendreturns[6]:8:0, ",",
beartrendcases:5:0, ",", F THINKORSWIM: JANUARY 2021 TRADERS’ TIPS CODE
Beartrendreturns[2]:8:0, ",",
Beartrendreturns[3]:8:0, ",",
We have put together a study based on the article in this issue
Beartrendreturns[4]:8:0, ",", “A Fresh Look At Short-Term Patterns (With And Without A
Beartrendreturns[5]:8:0, ",", Trend Filter)” by Perry Kaufman.
Beartrendreturns[6]:8:0 );
end;
We built the study referenced by using our proprietary
scripting language, thinkscript. To ease the loading process,
//================================================ simply click on http://tos.mx/pnEzI0G or enter it into the ad-
// end of trade
//================================================
dress into setup → open shared item from within thinkor-
if ndays > 6 then swim, then choose view thinkScript study and name it “Re-
begin turnsCalculationForPricePatterns” or whatever you like so
bullpattern = false;
bearpattern = false;
you can identify it. You can then add the study to your charts
bulltrend = false; from the edit studies menu from within the charts tab.
beartrend = false; The example chart shown in Figure 2 is the returns cal-
ndays = 0;
end;
culation from 1 to 5 days for bullish key reversals (upper
pane) and bearish key reversals (lower pane). Also, log scale
Plot1( Close ); // dummy plot to show code is running is enabled for the price pane to see the price moves more
distinctly. The price pattern to be used, its direction, whether
To download the EasyLanguage code for TradeStation or not to apply the trend filter, and investment size are all
10, please visit our TradeStation and EasyLanguage support configurable via inputs. Please see Perry Kaufman’s article
forum. The files for this article can be found here: https:// for more information on how to read the study.
community.tradestation.com/discussions/Topic.aspx?Topic_ —thinkorswim
ID=190289. A division of TD Ameritrade, Inc.
A sample chart is shown in Figure 1. www.thinkorswim.com
This article is for informational purposes. No type of
trading or investment recommendation, advice, or strategy
is being made, given, or in any manner provided by TradeS-
tation Securities or its affiliates.
—Chris Imhof
TradeStation Securities, Inc.
F WEALTH-LAB: JANUARY 2021 TRADERS’ TIPS CODE
www.TradeStation.com The Wealth-Lab strategy code for the short-term pattern
scanner described by Perry Kaufman in his article in this

January 2021 • Technical Analysis of Stocks & Commodities • 49

https://libta.org
 issue, “A Fresh Look At
Short-Term Patterns,” is
presented here.
With parameter slid-
ers at the bottom left
of your Wealth-Lab
workspace, the included
strategy demonstrates
how to switch between
the patterns interac-
tively when viewing a
chart. Dragging the pat-
tern slider to the left or
to the right will change
between the six choices
and make the chart up-
date with backtested
trades.
For example, Figure FIGURE 3: WEALTH-LAB. Sample entries are shown on a daily chart of QLD. Data provided by Yahoo! Finance.
3 illustrates one bearish
and two bullish key re- /* key reversal */
versal trades created on the next open following the pattern bool keyRevBear = High[bar] > High[bar - 1] &&
and exiting 3 days after. Through another parameter slider, Low[bar] < Low[bar - 1] && Close[bar] < Low[bar - 1];
bool keyRevBull = High[bar] > High[bar - 1] &&
you can control exits after N bars in a trade. Low[bar] < Low[bar - 1] && Close[bar] > High[bar - 1];
To avoid copy/paste, hitting Ctrl-O and choosing down-
load in Wealth-Lab gets you the downloadable strategy un- /* island reversal */
bool islRevBear = Low[bar] > High[bar - 1] &&
der the “Chart patterns” folder. Close[bar] < Open[bar];
bool islRevBull = High[bar] < Low[bar - 1] &&
WEALTH-LAB CODE Close[bar] > Open[bar];
using System; /* outside day */
using System.Collections.Generic; bool outsideBull = this.isOutsideBar(bar) &&
using System.Text; Close[bar] > Low[bar] + ( 0.75 * (High[bar] - Low[bar]));
using System.Drawing; bool outsideBear = this.isOutsideBar(bar) &&
using WealthLab; Close[bar] < Low[bar] + ( 0.25 * (High[bar] - Low[bar]));
using WealthLab.Indicators;
/* Requires Community Components installed */ /* wide range day */
using Community.Components; var ratio = TrueRange.Series(Bars)[bar] / atr[bar];
bool isWRBBull = outsideBull && (ratio > 1.5);
namespace WealthLab.Strategies bool isWRBBear = outsideBear && (ratio > 1.5);
{
public class TASCJan2021 : WealthScript /* 3-day compression */
{ bool compression = CumDown.Series(TrueRange.
private StrategyParameter paramPattern; Series(Bars), 1)[bar] >= 3;
private StrategyParameter paramExitDays;
/* gap open */
public TASCJan2021() bool isGapUp = (this.isGap(bar) == CommonSignalsEx.
{ GapType.FullUp) && (Open[bar] > Close[bar] + 0.5 * atr[bar]);
paramPattern = CreateParameter("Pattern", 1, 1, 6, 1); bool isGapDown = (this.isGap(bar) == CommonSig-
paramExitDays = CreateParameter("Exit after", 3, 1, 10, nalsEx.GapType.FullDown) && (Open[bar] < Close[bar] + 0.5 *
1); atr[bar]);
}
/* trend filter */
protected override void Execute() bool isBullish = Close[bar] > trendFilter[bar];
{ bool isBearish = Close[bar] < trendFilter[bar];
var _pattern = paramPattern.ValueInt;
var _exitAfter = paramExitDays.ValueInt; if (IsLastPositionActive)
int atrPeriod = 20, maPeriod = 80; {
double tick = Bars.SymbolInfo.Tick; /* Exit after N days */
var atr = ATR.Series(Bars, atrPeriod); Position p = LastPosition;
var trendFilter = SMA.Series(Close, maPeriod); if (bar + 1 - p.EntryBar >= _exitAfter)
ExitAtMarket( bar + 1, p, string.Format("After
for(int bar = GetTradingLoopStartBar( Math. {0}", _exitAfter));
Max(atrPeriod,maPeriod)); bar < Bars.Count; bar++) }
{ else

50 • January 2021 • Technical Analysis of Stocks & Commodities

https://libta.org
 {
switch (_pat-
tern)
{
case 1:
if( key-
RevBear && isBearish)
ShortAtMarket( bar + 1,
"KeyRevBear");
if(
keyRevBull && isBullish)
BuyAtMarket( bar + 1,
"KeyRevBull");
break;
case 2:
if
(islRevBear && isBearish)
ShortAtMarket( bar + 1,
"IslRevBear");
if
(islRevBull && isBullish)
BuyAtMarket( bar + 1,
"IslRevBull");
break;
FIGURE 4: NINJATRADER. The PJKShortTermPatterns indicator is displayed on a daily MSFT chart from November 2019 to Novem-
case 3:
if (out- ber 2020 with TrendPer = 2 and Use Key Reversal = true.
sideBear && isBearish)
ShortAtMarket( bar + 1, Patterns,” is available for download at the following links for
"OutsideBear");
if (outsideBull && isBullish) BuyAtMarket( bar NinjaTrader 8 and for NinjaTrader 7:
+ 1, "OutsideBull");
break; NinjaTrader 8: www.ninjatrader.com/SC/January2021SCNT8.zip
case 4: NinjaTrader 7: www.ninjatrader.com/SC/January2021SCNT7.zip
if (isWRBBear && isBearish) ShortAtMarket(
bar + 1, "WRBBear"); Once the file is downloaded, you can import the indicator
if (isWRBBull && isBullish) BuyAtMarket( bar into NinjaTader 8 from within the control center by selecting
+ 1, "WRBBull");
break; Tools → Import → NinjaScript Add-On and then selecting
case 5: the downloaded file for NinjaTrader 8. To import in Ninja-
if (compression) Trader 7 from within the control center window, select the
{
if(BuyAtStop(bar+1, Highest.Series(High,3) menu File → Utilities → Import NinjaScript and select the
[bar], "CompressionBull") ==null) downloaded file.
ShortAtStop( bar + 1, Lowest. You can review the indicator’s source code in NinjaTrader
Series(Low, 3)[bar], "CompressionBear");
} 8 by selecting the menu New → NinjaScript Editor → Indica-
break; tors from within the control center window and selecting the
case 6: PJKShortTermPatterns file. You can review the indicator’s
if (isGapUp && isBullish) BuyAtClose( bar,
"GapUp"); source code in NinjaTrader 7 by selecting the menu Tools →
if (isGapDown && isBearish) ShortAtClose( Edit NinjaScript → Indicator from within the control center
bar, "GapDown"); window and selecting the PJKShortTermPatterns file.
break;
default: break; NinjaScript uses compiled DLLs that run native, not in-
} terpreted, which provides you with the highest performance
} possible.
}
} A sample chart displaying the indicator is shown in Figure
} 4.
} —Chris Lauber
NinjaTrader, LLC
—Gene Geren (Eugene) www.ninjatrader.com
Wealth-Lab team
www.wealth-lab.com

F NEUROSHELL TRADER: JANUARY 2021

F NINJATRADER: JANUARY 2021 TRADERS’ TIPS CODE
The PJKShortTermPatterns indicator, as presented in the article
by Perry Kaufman in this issue, “A Fresh Look at Short-Term
TRADERS’ TIPS CODE
A short-term pattern trading system such as the one
discussed by Perry Kaufman in his article in this issue can be
easily implemented in NeuroShell Trader by combining a few
of NeuroShell Trader’s 800+ indicators.

January 2021 • Technical Analysis of Stocks & Commodities • 51

https://libta.org
 For this example,
we’ve used the island
reversal pattern, but you
can choose from any
of the 90 candlestick
and traditional trading
patterns included in
NeuroShell Trader. To
create the trading sys-
tem, simply select new
trading strategy from
the insert menu and en-
ter the following in the
appropriate locations
of the trading strategy
wizard:
BUY LONG CONDI-
TIONS: [All of which
must be true]
Key Reversal: Bullish
Flag(High,Low,Close)
A>B(Momentum(Avg(
Close,80),1),0)
FIGURE 5: NEUROSHELL TRADER. This NeuroShell Trader chart shows the key reversal pattern applied to Walmart.
SELL LONG CONDI-
TIONS: [All of which
must be true]
BarsSinceFill>=X(Trading Strategy,3) the article “A Fresh Look At Short-Term Patterns” in this is-
sue, Perry Kaufman tests several new patterns with major US
SELL SHORT CONDITIONS: [All of which must be true] stocks and indexes, and with an additional trend filter.
Key Reversal: Bearish Flag(High,Low,Close)
A<B(Momentum(Avg(Close,80),1),0) The 6 patterns tested were key reversal, island reversal,
outside days, wide-ranging days, 3-day compression, and
COVER SHORT CONDITIONS: [All of which must be true] gap opening. All are calculated from the previous 3 or 4
BarsSinceFill>=X(Trading Strategy,3)
candles and give a buy or sell signal. Here’s how they look
POSITION SIZING METHOD: coded as indicators in C:
Fixed Dollar
10,000.00 Dollars var cdlKeyReversal()
{
After entering the system conditions, you can also choose if(priceHigh(0) > priceHigh(1) && priceLow(0) < priceLow(1))
{
whether the parameters should be genetically optimized. Af- if(priceClose(0) < priceLow(1)) return -100; // sell
ter backtesting the trading strategy, use the detailed analysis if(priceClose(0) > priceHigh(1)) return 100; // buy
button to view the backtest and trade-by-trade statistics for }
return 0;
the system. }
NeuroShell Trader users can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical
var cdl3DayCompression()
support website to download a copy of this or any previous {
Traders’ Tips. vars TRs = series(TrueRange(),4);
—Marge Sherald, Ward Systems Group, Inc. if(TRs[0] < TRs[3] && TRs[1] < TRs[3] && TRs[2] < TRs[3])
301 662-7950, sales@wardsystems.com return 100;
else
www.neuroshell.com return 0;
}

var cdlIslandReversal()
F THE ZORRO PROJECT: JANUARY 2021 {
if(priceLow(0) > priceHigh(1) && priceClose(0) < priceOpen(0))
TRADERS’ TIPS CODE return -100; // sell
Japanese traders developed candlestick charts and if(priceLow(1) < priceHigh(0) && priceClose(0) > priceOpen(0))
candlestick patterns in the 17th century. Some traders believe return 100; // buy
else return 0;
that those patterns are still valid today. But since the 21st- }
century financial markets are quite different from the Kyoto
rice market of 300 years ago, new patterns were invented. In var cdlOutsideDay()

52 • January 2021 • Technical Analysis of Stocks & Commodities

https://libta.org
{ Symbol cases Day 1 Day 2 Day 3 Day 4 Day 5
if(priceHigh(0) > priceHigh(1) && priceLow(0) < SPY 265/82 1071/-604 3290/50 5615/-2910 5675/-3681 6978/-5998
priceLow(1))
{ QQQ 235/68 -695/-2639 -293/-5285 1977/-9691 5434/-11494 6820/-13151
if(priceClose(0) < 0.75*priceLow(0) + IWM 149/82 956/-121 1113/1497 2096/179 2909/2132 4466/1356
0.25*priceHigh(0)) AAPL 198/60 3994/-1240 3198/-2862 4214/-5816 8094/-5577 11433/-6916
return -100; // sell AMZN 158/34 -367/-2245 1686/-5913 1232/-6319 4469/-7560 8272/-6198
if(priceClose(0) > 0.25*priceLow(0) + GE 129/89 -283/655 -2680/4809 -3070/4147 -2321/6090 -1472/2813
0.75*priceHigh(0)) WMT 82/80 -678/-1166 -111/-508 -82/-1009 -1140/-713 464/-1995
return 100; // buy
} TSLA 126/62 5200/-5307 13983/-5237 21086/-4802 33549/-2898 43231/-2216
return 0; FIGURE 6: ZORRO. Example result for the gap opening pattern with trend.
}

var cdlWideRangeDays() rt);

{ printf(" %s: %.0f/%.0f ",Algo,
if(TrueRange() > 1.5*ATR(20)) WinLong-LossLong,WinShort-LossShort);
return cdlOutsideDay(); }
else }} // asset/algo loops
return 0; }
}
Here are some explanations for the code: At the start of
var cdlGapOpening()
{ the run() function, the pattern and the trend mode are set up.
var Ratio = (priceOpen(0) - priceClose(1))/ATR(20); For convenience we’re using a function pointer that is set to
if(Ratio >= 0.5) return 100; the pattern function to be tested. The test uses two nested
if(Ratio <= -0.5) return -100;
return 0; loops, first for selecting the stocks, and second for selecting
} the trade lifetime to get the results from a 1-day trade up to
a 5-day trade. The predefined Itor2 variable is the iterator
Following the convention of the classic candle patterns of the second loop and runs from 0 to 4, so we just use it
from the TA indicator library, the pattern functions return to set the LifeTime variable for the subsequent trade. The
100 for a bullish pattern, -100 for a bearish pattern, and 0 number of stocks purchased is calculated in the same way as
for no pattern. in Kaufman’s article and code. The results are printed in the
We will test the patterns with IWM, AAPL, AMZN, GE, EXITRUN at the last day of the simulation.
WMT, and TSLA stocks, as well as SPY and QQQ index The table in Figure 6 shows an example result for the gap
ETFs. There are two differences from the test in Kaufman’s opening pattern with trend.
article. First, we will use not merely price differences, but The numbers are the returns of long/short trades in US
will simulate real trades with spread and commission. So dollars.
the returns will be a bit worse but more realistic. Second, The pattern functions and the test script can be down-
we test from 2010 to 2020 to help ensure that the results of loaded from the 2020 script repository on https://financial-
all assets are comparable. Some of them, like TSLA, didn’t hacker.com.
exist before 2010. The Zorro platform can be downloaded from https://zor-
Here is the test script: ro-project.com.
var pattern(); // function pointer —Petra Volkova
The Zorro Project by oP group Germany
void run() www.zorro-project.com
{
pattern = cdlGapOpening; // place pattern function here
bool WithTrend = true; // false without trend
BarPeriod = 1440; // 1 day
StartDate = 2010; // TSLA went public in 2010 ®
var Investment = 10000;

while(asset(loop("SPY","QQQ","IWM","AAPL","AMZN","GE","W F OPTUMA: JANUARY 2021 TRADERS’ TIPS CODE

MT","TSLA"))) {
vars Trend = series(SMA(seriesC(),80));
while(algo(loop("Day1","Day2","Day3","Day4","Day5"))) {
Lots = Investment/priceClose();
LifeTime = Itor2+1; // life time in days
if(pattern() > 0 && (!WithTrend || rising(Trend)))
enterLong();
else if(pattern() < 0 && (!WithTrend || falling(Trend)))
enterShort();
if(is(EXITRUN)) { // print statistics in the last run
if(Itor2 == 0) // first loop run
printf("\n%s Cases %i/%i -",Asset,
NumWinLong+NumLossLong,NumWinShort+NumLossSho
Here is a list of formulas for use with Optuma based on the
article in this issue by Perry Kaufman, “A Fresh Look At
Short-Term Patterns.”
To include the 80-trend filter, users just need to add ‘and
MA(BARS=80) IsUp’ for bullish trend, or ‘MA(BARS=80)
IsDown’ for bearish.
Key Revesal - Bullish
BARTYPES().Outside and CLOSE()>HIGH()[1]
Key Reversal - Bearish
BARTYPES().Outside and CLOSE()<LOW()[1]

January 2021 • Technical Analysis of Stocks & Commodities • 53

https://libta.org
 Island Reversal - Bullish
HIGH()<LOW()[1] and CLOSE()>OPEN()

Island Reversal - Bearish

LOW()>HIGH()[1] and CLOSE()<OPEN()

Compression - Bullish
TR1 = TRUERANGE();
Compression = (TR1[4] > TR1[3]) and (TR1[4]
> TR1[2]) and (TR1[4] > TR1[1]);
CompHigh = HIGHESTHIGH(BARS=4);
Compression and CLOSE() CrossesAbove
CompHigh

Compression - Bearish
TR1 = TRUERANGE();
Compression = (TR1[4] > TR1[3]) and (TR1[4]
> TR1[2]) and (TR1[4] > TR1[1]);
CompLow = LOWESTLOW(BARS=4);
Compression and CLOSE() CrossesBelow
CompLow

Outside Days - Bullish

BARTYPES().Outside and
CLOSE() > 0.75*(HIGH() - LOW()) +LOW()

Outside Days - Bearish

BARTYPES().Outside and FIGURE 7: OPTUMA. This chart displays sample test results for the bullish opening gap pattern. In this test,
CLOSE() < 0.25*(HIGH() - LOW()) +LOW() there were 1,502 total signals showing performance 5 days before and 10 days after each signal.
Wide Ranging Days - Bullish
ATR1 = ATR(BARS=1);
ATR20 = ATR(BARS=20, MULT=1.50);
(ATR1>ATR20) and
CLOSE() > 0.75*(HIGH() - LOW()) +LOW()

Wide Ranging Days - Bearish

ATR1 = ATR(BARS=1);
ATR20 = ATR(BARS=20, MULT=1.50);
(ATR1>ATR20) and
CLOSE() < 0.25*(HIGH() - LOW()) +LOW()

Opening Gaps - Bullish

FIGURE 8: OPTUMA. For the instruments tested you can view the trade statistics and metrics, including
ATR20=ATR(BARS=20, MULT=0.50);
OPEN()>(CLOSE()[1]+ATR20) and number of signals found, probability of gain or loss, standard deviation, and mean.
CLOSE()>OPEN()

Opening Gaps - Bearish

ATR20=ATR(BARS=20, MULT=0.50);
OPEN()<(CLOSE()[1]-ATR20) and
CLOSE()<OPEN()

Testing
Optuma has a Signal Testing module that can
run these formulas over any timeframe and
universe of stocks with a couple of clicks,
giving the results in seconds. The results
show the average percentage returns, and
other statistics (including 20th/80th per-
centiles, standard deviation, and a Monte
Carlo simulation).
Here are two example tests since Janu-
ary 2000 on the three ETFs and five stocks
used in the article.

Opening gap—Bullish
Figure 7 shows 1,502 total signals showing
performance 5 days before and 10 days after FIGURE 9: OPTUMA. This chart displays sample test results for the bearish compression pattern with a trend
filter.

54 • January 2021 • Technical Analysis of Stocks & Commodities

https://libta.org
each signal.
After 10 days, there was a probability
of gain of 58%, for an average return of
0.51%. The individual instrument break-
down is as follows: 289 signals for SPY
with probability of gain after 10 days of
60.5%, with a mean gain of 0.06%. TSLA
had a higher mean return (4.3%) but a
lower probability of gain (56%) and a
higher standard deviation (15.5%) in the FIGURE 10: OPTUMA. For the instruments tested you can view the trade statistics and metrics.
82 events. (See Figure 8.)

Compression—Bearish with trend filter

For this test, we had 433 results showing
an average gain after 10 days of 0.3% (see
Figure 9). The individual components are
shown in Figure 10.
—support@optuma.com

F TRADERSSTUDIO:
JANUARY 2021
TRADERS’ TIPS CODE
The importable TradersStudio files based
on Perry Kaufman’s article in this issue,
“A Fresh Look At Short-Term Patterns
(With And Without A Trend Filter),” can
be obtained on request via email to info@
TradersEdgeSystems.com. The code is also
available on this magazine’s website at Trad-
ers.com in the Traders’ Tips section.
Code for the short-term patterns in the FIGURE 11: TRADERSSTUDIO. Equity curve for BullGap and BearGap trading 100 shares per trade of the
article is included in the system file ST_ NASDAQ 100 without the trend filter.
Patterns_Sys both with and without the
trend filter depending on the input param-
eters. All of the patterns are coded on one
file so if all of the buy and sell rules for the
patterns are uncommented then the back-
test will run all the patterns in one run. To
test each pattern individually, simply com-
ment out all the other patterns not of cur-
rent interest. The way I have supplied the
code is with all but the BullGap and Bear-
Gap patterns commented out. Hence, the
only one that will run on a backtest is the
gap patterns. Figure 11 shows the equity
curve of the BullGap and BearGap trading
100 shares per trade of the NASDAQ 100
list of stocks from 2000 to 2014 with the
trend filter turned off. Figure 12 shows the
equity curve for the same set except that
the trend filter was turned on. The trend
filter did not improve the returns.
—Richard Denning
info@TradersEdgeSystems.com FIGURE 12: TRADERSSTUDIO. Equity curve for BullGap and BearGap trading 100 shares per trade of the
for TradersStudio NASDAQ 100 with the trend filter.

January 2021 • Technical Analysis of Stocks & Commodities • 55

https://libta.org
 FIGURE 13: AIQ. Equity curve (blue) for Bull Outside Day pattern compared to the
NASDAQ 100 index (red) from 1999 to 2020, all trades closed on 4th bar’s open
after entry.

F AIQ: JANUARY 2021 TRADERS’ TIPS CODE

The importable AIQ EDS file based on Perry Kauf-
man’s article in this issue, “A Fresh Look At Short-
Term Patterns (With And Without A Trend Filter),” can be
FIGURE 14: AIQ. Account Statistics Analysis report for the portfolio simulation.
obtained on request via email to info@TradersEdgeSystems.
com. The code is also available on this magazine’s website at
Traders.com in the Traders’ Tips section. in Figure 13 and the ASA report for the test is shown in
Code for short-term patterns in the article is included in Figure 14.
—Richard Denning
the EDS file both with and without the trend filter. I ran a info@TradersEdgeSystems.com
portfolio simulation trading NASDAQ 100 stocks with the for AIQ Systems
Bull Outside Day pattern from 1999 to 2020. The equity
curve (blue) compared to the NASDAQ index (red) is shown

OSOBA/FEAR
Continued from page 22
We can choose to think the
riods of stress or fear. We can reactivate our prefrontal cortex
thoughts that will maximize
by staying present and reminding ourselves that the fear we our potential for right action
feel is simply a chemical process happening deep inside our when we trade.
brain. And we can control that chemical process through the
thoughts that we allow ourselves to think.

Stella Osoba is a financial writer and trader. She has earned FURTHER READING
the Charted Market Technician designation and has writ- Watts, Dickson G. [1880]. Speculation As A Fine Art And
ten for several financial websites and publications. She is Thoughts On Life.
a frequent contributor to this magazine and to the Traders. Livermore, Jesse [1940]. How To Trade In Stocks.
com Advantage online publication. She may be reached via
email at stellaosoba@gmail.com.
56 • January 2021 • Technical Analysis of Stocks & Commodities
https://libta.org
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accuracy, last-minute changes may result in omissions or errors.

January 2021 • Technical Analysis of Stocks & Commodities • 57

https://libta.org
 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Dec ’20) CME 7.4 19.1 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>
Ultra T-Bond (Dec ’20) CBOT 5 4.7 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>
10-Year T-Note (Dec ’20) CBOT 1.2 8.1 11 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Dec ’20) CBOT 0.6 5.2 17 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Dec ’20) CBOT 3 13.8 6 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Dec ’20) CME 4 8.6 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Jan ’21) NYMEX 12.3 6.3 3 ••••••••••••••••••••••••••••••••••••••••••••••••
Ultra 10-Year T-Note (Dec ’20) CBOT 1.7 8.1 7 ••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Dec ’20) CME 7.9 15.4 2 ••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Dec ’20) CBOT 0.2 3.4 22 •••••••••••••••••••••••••••••
Gold (Dec ’20) COMEX 6.8 17.8 3 •••••••••••••••••••
Soybean (Jan ’21) CBOT 1.7 4.9 6 ••••••••••••••••
Euro FX (Dec ’20) CME 1.9 18.8 15 •••••••••••
Eurodollar (Dec ’20) CME 0.1 3.8 36 ••••••••
S&P 500 VIX (Dec ’20) CFE 56.2 24.4 4 ••••••••
Corn (Mar ’21) CBOT 4.4 14.6 36 •••••••
Natural Gas (Jan ’21) NYMEX 12.5 16.1 11 •••••••
Soybean Meal (Jan ’21) CBOT 0.7 2.3 3 •••••••
Dow Futures Mini (Dec ’20) CBOT 7.2 18.8 4 ••••••
Gasoline RBOB (Jan ’21) NYMEX 10 10.6 5 •••••
ULSD NY Harbor (Jan ’21) NYMEX 8.1 9 5 •••••
Silver (Dec ’20) COMEX 13.6 26.4 4 ••••
S&P Midcap E-Mini (Dec ’20) CME 6.9 15.1 2 •••
Sugar #11 (Mar ’21) ICE/US 6.1 15.2 34 •••
Australian Dollar (Dec ’20) CME 2.7 11.1 13 ••
British Pound (Dec ’20) CME 4 28.4 20 ••
High Grade Copper (Dec ’20) COMEX 5.6 14.4 7 ••
Japanese Yen (Dec ’20) CME 3.3 35.3 21 ••
Wheat (Mar ’21) CBOT 5 14.2 22 ••
30-Day Fed Funds (Jan ’21) CBOT 0.1 2.8 24 •
Canadian Dollar (Dec ’20) CME 2.1 19.3 28 •
Cocoa (Mar ’21) ICE/US 13.1 39.3 26 • CBOT Chicago Board of Trade, Division of CME
Coffee (Mar ’21) ICE/US 10.1 36.8 19 • CFE CBOE Futures Exchange
Cotton #2 (Mar ’21) ICE/US 8 23.7 19 • CME Chicago Mercantile Exchange
Hard Red Wheat (Mar ’21) KCBT 5.3 15 24 • COMEX Commodity Exchange, Inc. CME Group
Lean Hogs (Feb ’21) CME 12 27.6 21 • ICE-EU Intercontinental Exchange-Futures - Europe
Live Cattle (Feb ’21) CME 4.5 17 20 • ICE-US Intercontinental Exchange-Futures - US
Mexican Peso (Dec ’20) CME 8 34.3 40 • KCBT Kansas City Board of Trade
New Zealand Dollar (Dec ’20) CME 2.7 12.6 16 • MGEX Minneapolis Grain Exchange
Platinum (Jan ’21) NYMEX 8.1 19.5 12 • NYMEX New York Mercantile Exchange

Bitcoin CME Futures (Nov ’20) CME 35.2 42.3 3
2101
Brazilian Real (Dec ’20) CME 8.9 12.2 17
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • January 2021 • Technical Analysis of Stocks & Commodities

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services such as brokerages, data services, courses and seminars, click on the Traders’ Resource link. Then follow the category
software, and more. We hope this will help you learn about prod- link, or use the search feature to find products or services with
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plied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever
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January 2021 • Technical Analysis of Stocks & Commodities • 59

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 Trading Perspectives
SOME PERSPECTIVES ON THE EQUITIES WORLD
Rob Friesen is a professional trader and president & COO of Bright Trading (www.
stocktrading.com), a proprietary trading firm hosting independent trader/members, an
online trading school, and utilizing the StockOdds database (www.mystockodds.com).
Courses on advanced hedged trading and basket trading are offered at www.hedgedtrad-
ing.com. This column shares his thoughts and outlooks on trading, locating opportunity,
probabilistic outcome, and maintaining perspective throughout industry changes. He
can be reached at robfriesen@brighttrading.pro or via www.stocktrading.com.
Rob Friesen

BASKET TRADING: A LOW-VARIANCE
APPROACH TO SCALING UP YOUR
TRADING BUSINESS
Markets won’t always go up.
Besides the directional outcomes, there
are also many inside days and choppy
sessions to endure or to participate in,
if you have the knowhow and the tools.
In my work, my goal is not only to assist
traders with naked single-stock trading,
but also encourage traders to explore
any additional strategies, methods, and
techniques, so that they can broaden
their toolchest.
As I’ve discussed before in this col-
umn, basket trading is one of the methods
traders can employ to go beyond naked
stock trading. Both basket trading and
hedged trading in general offer many
benefits for career-minded traders. Most
don’t go back to naked trading once
they’ve learned to incorporate hedges.
Basket trading is essentially trading
a group of stocks simultaneously to
potentially reduce the risk and lower
the variance of the total capital that is
utilized, whether that capital is your own
or whether you are using leverage. If you
are leveraged, it’s even more important
to lower the risk per idea, as well as your
total exposure to the market.
Baskets can be deployed and hedged
with ETFs or they can be traded against
other baskets to further reduce risk.
Spreading capital over many instruments
along with a variety of strategies em-
ployed can increase your staying power
by reducing noise, buying you more time,
and ultimately, these factors can increase
the probability of success.
I’ll reflect for a moment on probability.
I’m not talking about hedging trades as
an afterthought or done simply because
you read that hedging is a good idea, but
rather because you are acting intention-
ally and with analytics to support any
60 • January 2021 • Technical Analysis of Stocks & Commodities
long or short, or inverse, positions.
The objective of basket trading is to
get the greatest return on capital (ROC)
during your designated timeframes,
but it must be on a risk-adjusted basis
as well.
A basket can be as simple as three
stocks, or it can be a large group of
hundreds of symbols. As with any di-
versification, the number of instruments
deployed may have a diminishing effect
on the benefit of diversification at some
point. It’s been debated as to what the
optimal number of instruments should
be, but historically, an amount on the
order of 20 to 30 different instruments
has been regarded as an approximate
level of diversification for a portfolio.
Baskets can be
deployed and hedged
with ETFs or they can
be traded against other
baskets to further
reduce risk.
The Dow Jones Industrial Average
(DJIA) is comprised of 30 stocks which
do change from time to time as we saw
with the changes this past August. It is
weighted by stock price, so when AAPL
had a 4:1 split, the index was rebalanced
with other symbols. Apple dropped from
the most heavily weighted stock of the
30 stocks in the DJIA to 17th place. Index
managers replaced XOM, PFE, and RTX
with CRM, AMGN, and HON.
You can see from this how meaning-
ful it is to have knowledge about what
symbols push and pull at the index and
at its tracking ETFs. (ETFs that track
indexes include the DIA and SPY). If
you are going to trade ETFs, you should
understand their composition and what
makes them “tick.”
Index arbitrage is one form of basket
trading, by using stocks against futures,
but there are many ways to harvest
anomalies staying within equity instru-
ments only.
When comparing the DJIA with the
S&P 500 (SPX), the DJIA closely tracks
the SPX over the long sample, showing
that the benefits of 30 symbols rivals that
of 500. I am not suggesting that you have
to construct baskets of hundreds of differ-
ent stocks (although some traders do), but
just that grouping stocks “normalizes”
outcomes, and provides that balance
in contrast to the selection of a single
stock. ETFs are statistically muted, as
they are comprised of several symbols,
but again, take some time to research
and understand the composition.
Most investors are already familiar
with having a basket of stocks, which
they regard as their portfolio. This goal
of having a portfolio is usually to select
a group of noncorrelated stocks from
multiple industries and sectors. The
purpose is to smooth out the returns and
benefit from the overall performance of
the group. Stock-specific news, earnings,
and events will not make or break the
entire portfolio. We do find though that
in significant market moves, the cor-
relations increase as the market begins
to act as one. During the market crash
in March 2020, most equity portfolios
were seriously declining.
The trading of baskets is similar, but
with shortened timeframes. In addition,
most investors don’t have hedges on, nor
are short, but rather they are striving
to diversify and reduce correlations. A
basket trader could have exploited the
market correction rather than be a pas-
sive victim of it.
A basket within the same sector or
same industry can allow a trader to
https://libta.org
 Trading Perspectives
take advantage of macro fine. Other reports offered
influences, technical, and include streaks, RSI-2
relative strength observa- period, price performance,
tions, while reducing the and a seasonality almanac
impact of adversity from (a sample report is shown
a single stock or its lack in Figure 2). With this,
of performance. It is fairly the user can dial in the
hard to pick one stock out seasonal signals as well
of 500 to earn a living on, as price, volume, events,
versus having a probabi- stocks, or ETFs.
listic approach to picking Additional diversifica-
25 longs and 25 shorts tion can come from trad-
and earning your keep on ing various strategies, and
the relative performance trading over a variety of
between long and short timeframes.
dollars. Many market partici-
If you want to reduce pants can gain a false
FIGURE 1: SAMPLE REPORT FROM WWW.HEDGEDTRADING.COM
market and macro influ- sense of security through
ences simultaneously, then outsized returns in a
going long a few symbols momentum market. The
in a peer group and short goal of career traders is to
a few symbols in the same look at the long sample of
group is one approach. The what works in all markets
idea is to have favorable and most of the time,
odds for each long selec- while protecting their
tion (meaning, likely to capital and reducing risk
move up), and favorable of ruin.
odds for each short selec- There are a variety of
tion (meaning likely to methods to position-size
move down). And if this your baskets, and traders
could be made compound- usually start with capital-
able day after day, then balancing long dollars
this is not only a good against short dollars. This
starting point but also doesn’t account for the
one stepping-stone on a instruments’ volatility, so
path to a scalable potential FIGURE 2: SEASONALITY ALMANAC traders can use ATR (av-
trading career. erage true range) or ATR
I’ll illustrate how we approach this. could try to select some long ideas and as a percentage of price, or a blend of
Figure 1 shows an example report from some short ideas that all have favor- beta and historical volatility. Regardless
our dashboard, which is a free resource able odds of moving up or down. If the of your chosen method, the key is to
we offer at www.hedgedtrading.com. SYMBOL/SPY relationship moves up, use a systematic approach so that you
With this information, we are seeking that means the symbol would outperform don’t have the problem of a loss on one
to gain insights into the performance the SPY on a relative basis. Since the symbol that wipes out the gains from
of each symbol in the S&P 500 index common symbol is the SPY that every ten symbols.
against the tracking ETF itself. other symbol is also ratioed with, and On the subject of executing the bas-
The dashboard works by analyzing that relationship has had the event (of kets, various platforms have the ability
signals generated and reporting the the percent penetration of the Bollinger to perform a wave, or you could buy at
subsequent average performance. In this Bands), then you could drop the SPY the open using market or limit orders
example, the widely used %B indicator from the equation and go long some (we prefer limit orders, but that might
is shown and reports the subsequent symbols against short some symbols. mean you miss some trades). If you
average performance for the 10 days The SPY could be utilized for any buy during the day, you must account
after the signal was generated for all the capital-balancing offset or for protection for slippage. You also need to account
same events or signals in the lookback against drift, and to use only when valid for hedging all at once versus hedging
period. Other reports on the website show and with defined parameters. in increments. More on this subject in
three-day performance. Some traders will simply trade a sym- a future issue!
Using this type of information, you bol against the SPY, which is perfectly
January 2021 • Technical Analysis of Stocks & Commodities • 61
https://libta.org
 The following selection of book descriptions represents a sampling of recent
book releases in the investing field. Books described here may be from some of
the major book publishers as well as some independent book publishers. These
are not critical reviews or editorial evaluations, but rather a brief look at the book
marketplace to help keep readers up to date on new or recent book offerings.
Unknown Market How I Invest My
Wizards: The Best Money: Finance Ex-
Traders You've perts Reveal How
Never Heard Of They Save, Spend,
(376 pages, £30 And Invest (192
for hardback, £15 pages, £18.99 for
for eBook, Novem- paperback, £14.49
ber 2020, ISBN for eBook, Novem-
9780857198693– ber 2020, ISBN
9780857198709) 9780857198082 –
by Jack D. Schwa- 978 0 8 5719 8 0 9 9)
ger, published by Harriman-House. Unknown by Joshua Brown and Brian Portnoy,
Market Wizards continues in the three- published by Harriman-House. The world
decade tradition of the hugely popular Market of investing normally sees experts telling
Wizards series, interviewing exceptionally us the ‘right’ way to manage our money.
successful traders to learn how they achieved But how often do these experts pull back
their extraordinary performance results. the curtain and tell us how they invest their
The twist in Unknown Market Wizards own money? How I Invest My Money seeks
is that the featured traders are individu- to do just that.
als trading their own accounts. They are In this collection, 25 financial experts
unknown to the investment world. Despite share how they navigate markets with their
their anonymity, these traders have achieved own capital. In this honest rendering of how
performance records that rival, if not surpass, they invest, save, spend, give, and borrow,
the best professional managers. this group of portfolio managers, financial
Some of the stories include a trader who advisors, venture capitalists and other ex-
turned an initial account of $2,500 into $50 perts detail the ‘how’ and the ‘why’ of their
million; a trader who achieved an average investments. They share stories about their
annual return of 337% over a 13-year period; childhood, their families, the struggles they
a trader who made tens of millions using face and the aspirations they hold. Some-
a unique approach that employed neither times raw, always revealing, these stories
fundamental nor technical analysis, and detail the indelible relationship between our
a promising junior tennis player in the UK money and our values.
who abandoned his quest for a professional Harriman-house.com
sporting career for trading and generated
a nine-year track record with an average Investing For
annual return just under 300%. Growth: How To
World-renowned author and trading expert Make Money By
Jack D. Schwager is the guide. His trade- Only Buying The
mark knowledgeable and sensitive interview Best Companies
style encourages the Wizards to reveal the In The World—An
fascinating details of their training, experi- Anthology Of In-
ence, tactics, strategies, and their best and vestment Writing,
worst trades. There are dashes of humour 2010–20 (320 pages,
and revelations about the human side of £24.99 for hardback,
trading throughout. £18.99 for eBook, October 2020, ISBN
The result is an engrossing new col- 9780857199010–9780857199027) by Terry
lection of trading wisdom, brimming with Smith, published by Harriman-House. Some
insights that can help all traders improve people love to make successful investing
their outcomes. seem more complicated than it really is. In this
Harriman-house.com anthology of essays and letters written be-
62 • January 2021 • Technical Analysis of Stocks & Commodities
tween 2010 and 2020, leading fund manager
Terry Smith delights in debunking the many
myths of investing—and making the case for
simply buying the best companies.
Smith not only reveals what these high-
quality companies really look like and where
to find them, but also why you should avoid
companies that abuse the English language;
how most share buybacks actually destroy
value; what investors can learn from the Tour
de France; why ETFs are much riskier than
most realize; how ESG investors often end
up with investments that are far from green
or ethical; his ten golden rules for investment,
and much, much more.
The result is an enjoyable and eye-opening
tour through some of the most important
topics in the world of investing—as well as
a collection of practical insights on how to
make your money work for you.
Harriman-house.com
The VIX Trader’s
Handbook: The
History, Patterns,
And Strategies
Eve ry Vo l a t i l -
ity Trader Needs
To Know (206
pages, £50 for
hardback, £37.50
for eBook, Octo-
ber 2020, ISBN
9780857197115–9780857197122) by Rus-
sell Rhoads, published by Harriman-House.
Russell Rhoads is an expert on VIX, the Cboe
Volatility Index. He takes a deep dive into
all things associated with volatility indexes
and related trading vehicles, beginning
with an explanation of what VIX is, how it
is calculated, and why it behaves the way
it does in various market environments. It
also explains the various methods of getting
exposure to volatility through listed markets.
The focus then moves on to demonstrate how
traders take advantage of various scenarios
using futures, options, or exchange-traded
products (ETPs) linked to the performance
of VIX.
Finally, a review is presented of volatility
events that shook the markets, including the
1987 crash, Great Financial Crisis, 2010 flash
crash, and the 2020 pandemic.
Harriman-house.com
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 Traders take many paths to reach their destination.
Can your platform get you there?

Search apps and services to personalize the

NinjaTrader platform to meet your requirements.
Indicators, automated strategies, free tools & more.

Explore now at ninjatraderecosystem.com

Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
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