E 08 Web

Interview: Mark Jurik – Innovative Concepts of a Trading Maverick
H E T R UTH
T
ABOUT I Your Personal Trading Coach
ACC
FIBON
Issue 06, August 2010 | www.tradersonline-mag.com
Important
Price Levels
Identifying Potential
Trading Opportunities
Pair Trading
How to Achieve Consistent Success
by Using the Spread
Wish and
Reality
This Is Why Trading Success Is a Mind Game
TRADERSÉDITORIAL
What‘s Really Priced in?

The nice thing about the stock market is that there is always more than one way of seeing things. Basically, it does not matter
what the latest news is and whether it turns out to be good or bad. It is much more important to assess what expectations
are like and to what extent the market is “blind in one eye”.
Let me explain this briefly. For a start, there are all those expectations. Many active traders know that sometimes the stock
market defies logic – good numbers but stocks are down; bad numbers but stocks are up. Those are the situations where
novice traders don’t believe their eyes and suspect that the price must be false or that they must have overlooked an
important news detail. However, more often than not there are two simpler explanations: Either the whispered estimates,
which incidentally sometimes differ significantly from the official ones, were off-target, or the numbers were in fact better
than expected, but there are too many large institutional investors wanting to seize the opportunity and selling right on the
anticipated high-volume price strength in order to achieve a better exit price (“sell on good news”).
Usually it is simply the expectations that monkeywrench
Good numbers but stocks are down; bad numbers and stocks up. a sober assessment. By the way, that is the reason why
you can well and truly rely on Technical Analysis which at
least provides you promptly with appropriate entry and exit signals – after all, fundamental data need to be interpreted first
(correctly), which is anything but simple and time-consuming as well. But that is a different topic.
The second point I had mentioned early on is that the market is sometimes blind in one eye. Obviously that is something that
none of the adherents of the efficient-markets theory like to hear because on the basis of that assumption prices are always
updated objectively and completely accurately. Reality, however, paints a different picture. Once the momentum is in full
swing, some inopportune news or other information may well be swept under the carpet. I do not mean to imply that this is
done deliberately – after all, such things are indeed made public but they are just ignored by the strongly bullish or bearish
mood. That leads us to sentiment, which again is a separate topic.
So what is left besides the insight that technical analysis and chart analysis clearly are of practical use? Roughly, this can be
summarised as follows: When in doubt, do not rely on any fundamental data or expert opinions but on your own analyses
and trading setups: And on those occasions when speed is of the essence, just look at the simple trading signals on the chart
– then you won’t have to worry about whatever has been priced in. It doesn‘t matter. After all, it’ll be decision-making time
for you.
Good Trading,
Lothar Albert
On a different note: TRADERS´ comes to you free of charge. This is possible because of the
support of our sponsors and advertisers. So please take a good look at their messages and
help them develop their business.
Moreover, we are looking forward to your feedback. This is the only way to improve our
magazine constantly. Please write to feedback@tradersonline-mag.com.
2 August 2010 | www.tradersonline-mag.com

Do You
Want to Make
Better
Trades?
You can make better trades
— with eSignal.
Get reliable data, predictive analytics and
advanced charting — know exactly when to get
in and out of your trades. Maximise your profits
and limit your losses.
eSignal makes it possible with customised
packages to fit your specific trading style. We
Tens of thousands of active traders prefer to use the offer software solutions for all levels of traders
professional, feature-rich benefits found only in eSignal. from beginner to pro.
eSignal's tools for market success:
Seamless integration to trade within
eSignal the charts, using your choice of broker**
Trade2Win Members' Choice
5 Years in a Row! Real-time stock, futures, options and
Best Real-Time Data Feed Forex quotes plus market-moving news
eSignal Advanced charting with EFS, a unique
Voted Best for More Than 15 Years!
Stocks & Commodities Readers' Choice Award
formula engine for creating strategies
Best Real-Time/Delayed Data Back testing to verify your strategies
eSignal before putting your money on the line
Voted Best
Real-Time Data Feed To assist traders with back testing, we
World Finance are constantly adding historical data to the
individual exchanges/services we offer
Call now for a customised demo and ask how
eSignal is a division of Interactive Data Corporation (NYSE: IDC).
you can get a risk-free trial of eSignal.
eSignal is represented in Europe by eSignal (Europe) Limited, a
company regulated in the UK by the Financial Services Authority.
*All fees will be refunded to you, minus any taxes and applicable
add-on service/exchange fees, if you cancel within the first 30
Start a 30-day trial* today:
days of service. Call for details.
**For a list of brokers that are integrated with eSignal, +44 (0)20 7825 7911
go to: http://www.esignal.com/brokers/
x14236 www.eSignal.com/offer/tuk
TRADERS´ CONTENT
CONTENT
August 2010
PEOPLE
56 Mark Jurik – Innovative Concepts of a Trading Maverick

Mark Jurik is a creative head who is constantly searching for new challenges, who is intensively
applying research, and who is developing new formulas or indicators. And that is not just for
financial marekts but also in biology, chemistry, medicine, and so on. In 1988, Jurik founded his
company Jurik Research (www.jurikres.com) that develops algorithms identifying and classifying
complex data. In the TRADERS´ interview, Jurik explains his most important indicators and shows
which advantages they have opposite to classic indicators. He illuminates, as well, his trading
approach and provides valuable trading tips for novices and pros.
Coverstory
COVERSTORY
6 Wish and Reality

Wieland Arlt shows how the inner attitude influences the trading. In
doing so, he explains the phenomenon of selective perception. With
its help, you can differentiate between important and unimportant
information and can make decisions based on information fragments.
Thus, selective perception functions to reduce complexity and runs a
major part of decision processes subconsciously. In his article, the
author shows how you can integrate it in your trading by the means
of some practical examples.
Insights
INSIGHTS
14 Fibonacci Numbers
When you enter the trading arena, you find yourself looking
for a constant. A constant is a rule, something that always
works. Many traders seem to have found such a constant in
Fibonacci Numbers. Tom Hougaard writes about his take on
the subject.
18 Economic News
Chris Manson presents the most important economic news for traders and shows how they move
the markets.

TRADERS´ CONTENT
MASTHEAD
Address |
Tools
TOOLS
TRADERS´ media GmbH
Barbarastraße 31, D-97074 Wuerzburg
22 Bookmark
Behavioural Technical Analysis– by Paul Azzopardi Phone +49 (0) 9 31 4 52 26-0
Fax +49 (0) 9 31 4 52 26-13
24 Softwaretest E-Mail info@traders-mag.com
Madscan
Publisher | Lothar Albert
28 Webreview
www.poweropt.com – Find Your Best Strategy Subscription Service |
www.traders-mag.com; www.tradersonline-mag.com
30 New Products abo@traders-mag.com
The Latest and Greatest from the Industry Tel. 0931 45226-15, Fax 0931 45226-13
Address of Editorial and Advertising Department |

Strategies
STRATEGIES
Barbarastraße 31, 97074 Wuerzburg
32 Developing Swing Trading Strategies – Part 6 Editor-in-Chief | Lothar Albert

In part 6 of his series about swing trading, Faik Giese completes
the study of exit techniques. He shows how fix profit targets affect Editors | Prof. Dr. Guenther Dahlmann-Resing, Karsten
performance and portfolio numbers. Gore, Marko Graenitz, Theresa Hußenoeder, Sandra
Kahle, Nadine von Malek, Rodman Moore, Stefan Rauch,
38 Trade Like an Insurance Company Tina Wagemann, Sarina Wiederer
Major insurance companies use things like actuary tables and background checks to make sure they
do not take too much risk. Traders use tools like support levels, delta, and news to do the same. Articles | Wieland Arlt, Chuck Fulkerson, Faik Giese, Tom
Chuck Fulkerson shows how you can act like an insurance company with Naked Puts. Hougaard, Chris Manson, Manfred Schmid, Peter Soodt,
Eric Waddell
40 Cluster Trading – Draw on Unlimited Resources Pictures| www.photocase.de, www.fotolia.de
Cluster Trading means identifying several signals occuring coincidentally
in order to find the right entry and exit in the market. For this purpose, Price data |
different indicators and processes of technical analysis are suitable. • www.bis.de
• www.bsb-software.de
44 Pair Trading • www.captimizer.de
Since 1980 pair trading has been a household word on stock markets. Institutional investors have • www.esignal.com
been using this strategy ever since in order to produce steady earnings without any major fluctuations. • www.metaquotes.net
Manfred Schmid explains how private traders can use this technique as well. • www.tradesignal.com
48 Using Important Psychological Price ISSN | 1612-9415

Levels for Trading
There are certain price levels in trading that provide Disclosure |
potential trading opportunities around themselves. Eric The information in TRADERS´ is intended for educa-
Waddell explains how to recognize them and how to tional purposes only. It is not meant to recommend,
implement these levels in your trading. promote or in any way imply the effectiveness of
any trading system, strategy or approach. Traders
are advised to do their own research and testing to
determine the validity of a trading idea. Trading and
investing carry a high level of risk. Past performance
does not guarantee future results.
Basics
BASICS
52 Of Lines, Candlesticks, and Bars

Since the price development of a commercial paper may well provide quite a bit of
information for analysts, they draw on a variety of price charts to get a more accurate picture.
54 Traders Camp
Volume in Technical Analysis – A Real Trend Setter.
August 2010 | www.tradersonline-mag.com 5

TRADERSĆOVERSTORY
Wish and Reality

This Is Why Trading Success Is a Mind Game
It is a well-known fact that successful trading is not just a matter of the right tactics and
techniques. There is also a general consensus that a trader’s individual attitude towards
trading is key to his being successful. This article will elaborate on what concrete impact a
trader’s individual attitude has on his trading. It will include an introduction to a phenomenon
which not only looms large in trading but which we encounter at any time in any number of everyday
situations: the selective perception.
o Everybody Creates Their Own World View creates their own reality. Looked at this way, it is no longer
As early as more than 2400 years ago the Greek philosopher certain that the grass is indeed green. The entire debate
Socrates postulated that man had no absolutely certain was epitomised in 1976 by the communication expert and
access to the absolute truth. However, he did qualify that psychotherapist Paul Watzlawick, who died in 2007, when he
statement by adding that such access was actually possible asked the simple question, “How real is real?”
in the case of directly observable facts such as, for example,
the fact that the grass was green. What Is Our Perception Based on?
And even this qualification is being challenged by the What does it mean when we talk about perception? You
school of Constructivism, which goes so far as saying that probably know W. E. Hill’s classic 1915 picture in which the
everything we take to be reality is in fact considered to be portrait of either a young woman or a old woman can be seen
a product of our own perception. In that sense everybody (Figure 1). Typically, these types of pictures have two people

TRADERSĆOVERSTORY
5 Interviews at How Do I Know If The Market Has Changed Its Direction Or
www.ablesys.com If It’s Just A Temporary Pullback? AbleTrend T2 Stops Can Help
1. Small blue dots are T2 stops for buy positions 2. Small red dots are T2 stops for sell positions
showing the market support levels showing market resistance levels Award
Winning
Trading
Software
1997 - 2009
3. T2 stops helps to define the retracements 4. T2 stops helps to define the reversal
For Stocks,
Futures
FOREX &
Options
AbleTrend T2 offers
the following advantages:
1. T2 stops are defined by the market’s own support and
With T2 stops, you now can:
1. Add more positions after the market tests but does not
penetrate the T2 stops, and then resumes the original trend.
30 D
Start Tay Trial
$20 D o
isco day!
ETM1unt Code:
003
AbleTrend 7.0
resistance levels and are therefore 100% objective. 2. Exit the market when prices penetrate the T2 stops and close
beyond that level, suggesting a reversal of the trend.
2. The scientific calculations behind T2 stops are universal,
not curve-fitted. 3. Boost your confidence, because “you have seen it happen
hundreds of times” in both historical and real time. Without
3. T2 stops can be back-tested to reveal the characteristics of confidence, no matter how great your systems are, they are
individual markets. of no practical use.
4. T2 stops are updated with each new tick so there are no 4. Take advantage of “sweet spot entries” by entering the
delays. market right after prices have tested the support and
5. T2 stops are proprietary, not shareware, and are for the resistance level (T2 stops) and resumed the original trend.
exclusive use of software owners. These entry points are often close to T2 stops.
®
6. Successful AbleTrend users around the world have relied The market is always changing, but the way T2 works remains
on T2. Their common conclusion: “Never fight T2 stops.” unchanged. Once you see it work time and time again, you will
know that you can rely on it and utilize it. That’s the value of the T RA DE RS '
RE S OURC E
legendary T2 stops. The method is timeless. AbleTrend T2 stops
can help you thrive in todays volatile markets.
LINK S
Get Started Today! www.ablesys.com/567 Reader’s Choice Awards

1997-2009 in Stock Trading
System; Futures Trading System
& Option Trading System
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE
RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED
FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY
ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. THE
TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. CTA Firm

TRADERSĆOVERSTORY
F1) Picture by W. E. Hill, 1915 extra stimulation to all the neurons. As a result, we are in a
position to form a picture on the basis of a fraction of the bits
of information. On the other hand, when looking at a picture
such as Hill’s there is a so-called digital selection at work. This
means that the visual system in our cerebrum automatically
selects one of the possible perspectives. A picture such
as Hill’s activates different groups of neurons, generating
different perspectives. To neurobiologists there is a random
selection of the perspective in question.
The Psychological Factor in Perception

Is it really pure coincidence or aren’t there some other selection
criteria that play a role here? This is where the psychological
factor – our individual attitude – comes into play.
When looking at reality we absorb pieces of information
and then have to process these. Since we don’t have enough
time at our disposal to evaluate each and every aspect of
any piece of information accurately and consciously, the
bits of information absorbed will be evaluated and filtered
subconsciously, i.e. they run through a perception filter
(Figure 2). Depending on whether this particular piece of
information taken from reality is evaluated as something
positive or negative, we create our own subjective reality
that we see either as a chance or as a risk. The hidden danger
here is that we ultimately perceive a distorted version of
reality, causing us to jump to premature and possibly wrong
conclusions on the basis of fragmentary bits of information.
What do you see by looking at this picture? The portrait of a young or of an old lady?
Source: hhtp://positron.physik.uni-halle.de Criteria for Evaluating Information
Obviously the question now is according to which criteria we
evaluate and process the pieces of information making up
looking at one and the same picture and possibly arrive at reality. Three major fields can be cited here:
two different interpretations. Why is this? What happens in
our brain to cause us to look at the same reality, the same 1. Our socialisation, i.e. experiences we’ve had; our
picture , and yet arrive at an interpretation and perception assumptions and attitudes or our goals and values.
totally different from any other person? 2. Our feelings, which obviously include fear, greed, and
In neurobiological terms, there are two phenomena at insecurity.
work here. On the one hand, there is a so-called analogous 3. Our perception which is dependent on the situation we
reinforcement here which causes the activity of one are currently in. For example, are we actively involved in
individual group of neurons to be increased, providing the market or are we just standing on the sidelines?
Accordingly, we will evaluate and process a piece of

F2) Perception Filter information on the basis of whether we have had a similar
experience or pursue a certain goal that is matched by this
Perception Filter information, all of which happens unconsciously and very
Reality rapidly. What may regularly happen here, though, is that those
Chance pieces of information are simply filtered out that do not match
our experiences, objectives, or values. In such cases a portion
Information of objective reality never enters our own subjective reality.
Reality Whatever We Concentrate on Intensively

Information Determines Our Own Reality
In 1999 the American psychologist Daniel J. Simons carried
Risk out an experiment that attracted a great deal of attention
Reality and involved two teams being observed playing with one ball
each. Based on a team in white and on a team in black, the
The difference between objective and subjective reality is determined by our perception filter. observers’ task was to count how many times the members
Source: Author of the white team throw the ball to their teammates.

TRADERSĆOVERSTORY
What happened was that approximately 50 per cent F3) American Express in a Downward Trend
of the participants concentrated so much on the white
team that they failed to notice the student disguised as a
gorilla suddenly walking among the teams. The gorilla has
remained outside their own subjective reality. It follows from
this that we filter information not only according to our own
criteria but also following directions given by third parties.
So our perception may also be governed by third parties!
Just remember that next time you read a market analysis or
trading recommendation in a magazine or on the Internet. So
much for the concept of selective perception. What concrete
relevance does this now have to your practical trading?
Selective Perception in Practical Trading

Let’s look again at the chart in Figure 3, and I am asking
you to do this regardless of your own trading strategy. This
is solely designed to serve as an example of perception
being described: Now before you read on, ask yourself
this: What would suit an active trader here? This is what we American Express bounces off in the monthly chart, breaks through the upward trendline and falls through several
can see: American Express bounces off a resistance, breaks supports. Following a test of the former supports from below, a shooting star candle is formed.
through the upward trendline, falls through a support Source: www.tradesignalonline.com
and subsequently breaks the next one, tests both former

supports from below and right after that forms a shooting- first make sure that you protect your capital in a first step and
star candle. A short trade seems to be suitable. then in a second move increase it. This means that the author
Suppose you are positioned short upon completion of dares to claim that your first priority will be to determine at
the red candle. What are you going to pay increased attention which point you have to exit in order to reduce losses and
to from now on? Of course, as a professional trader you will secure profits.
10 ways ShareScope users

stay ahead of the market
Trading hotlists generated for you each day
The more time you waste looking for trading opportunities the less time
you have to choose the most attractive ones. ShareScope can generate
daily hotlists of all charts that exhibit your favourite trading signals.
Which means you can spend ALL your time choosing the ones with the
strongest signals. You can create multiple filters for different setups and
for long and short trades.
You can even create your own custom analytics and indicators and add
Voted ‘Best Software’ by
them to your filters. traders and investors for
EIGHT years running 7)..%2
You’ll be amazed
with the power at TRADERS SPECIAL OFFER
your fingertips.
Claim your no-obligation free trial:
This example filter searches for www.sharescope.co.uk/freetrial
charts on which four different
bullish events have occurred in
the last ten days.
0800 052 1515
Click here to discover more reasons why traders profit with ShareScope.

TRADERSĆOVERSTORY
F4) American Express with Reversal Signal green candle suggest – especially in view of the fact that
American Express is heavily oversold and ready for a rally
that is at least corrective?
What happens as often as not is that we concentrate so
much on an existing trade to make sure that it is managed in
accordance with the rules that we only see exit signals and
completely ignore entry signals for a trade in the opposite
direction. Such trades just do not enter our subjective reality
because we are not prepared for them. And that is exactly
the moment at which we miss a good opportunity.
Figure 5 illustrates how American Express has developed:
Let’s look at a second current example in the daily chart
(Figure 6). Since mid-May the DAX has been in a short-term
upward trend. During the yearly high it bounces off and falls
back. What do you think will many traders expect when the
DAX forms a green reversal candle at the Simple Moving
Average of 20?
Before you read on, ask yourself these questions: How
In the monthly chart American Express forms a first reversal signal after the sell-off. would I react to this situation? Enter long in the direction of
Source: www.tradesignalonline.com the trend with the minimum target of the yearly high? Enter
short? Not at all? Let’s assume here that you had entered
long.
Let’s now look at the chart in Figure 4: As expected, the Let’s look at what is going to happen to the DAX next
short trade runs into the profit zone and American Express (Figure 7). On the following day the DAX opens with a down
falls over several months. The stock has plummeted, from 50 gap and drops significantly during the trading session.
to just under ten dollars, forming a first timid green candle Again, you will have to face this question: What are you
there. No doubt this is a lucrative trade. What are you going going to do? Cancel the position and wait for the next entry
to do as an active professional trader? Of course, you will take signal for a long trade? Or you may have seen a signal for a
the profit if you haven’t done so already. short trade?
And now, cross your heart, chances are that you will still Obviously, it is easy to say in hindsight, “Yes, that I
be in a bearish mood for Amex, aren’t you? would definitely have seen …” After all, the first example
If you are a trend follower, you may even be looking out is a monthly chart and even the daily chart in the second
for a new entry for your short position. Or you may still be in example gives you enough time to consider your next
the market with your short position and count on the stock move. But what is it all like in real time, in reality, in the
continuing to fall. Change of perspective – change of trend? heat of the moment? Imagine trading intra-day on the five-
Let’s take another close look at the chart. What does the first minute chart or below.
Be honest with yourself: Would you have recognised a
new trading opportunity in each of these cases and built up
F5) American Express with Rally a new position in the opposite direction?
If countertrend trades as cited in the first example
do not happen to be part of your trading strategy and if
you had not executed the trade for that very reason, then
there is obviously nothing wrong with this. After all, it is
perfectly legitimate to deliberately not make a trade. And
that is exactly the point that had to be made here. There
is a difference between being unconsciously incapable
of perceiving something, thereby missing a chance , and
being able to perceive something consciously and then
decide consciously against it.
Why Selective Perception?

Have you ever wondered how many different pieces of
information you are bombarded with in any given moment?
Just have a look around your workplace: How many
monitors do you have in operation there? What are their
settings like? The writer is just guessing there are several
American Express in the monthly chart after the sell-off and subsequent rally to the near-starting point of Figure 3. charts of several stocks in different time frames. Also news,
Source: www.tradesignalonline.com ticker, alarms, tables , Internet forums …

TRADERSĆOVERSTORY
Studies have suggested that humans are only capable F6) DAX Bounces off the Yearly High
of absorbing and processing information to a very limited
extent. Imagine absorbing and perceiving everything that
you are bombarded with. You would be quite incapable
of processing and evaluating this plethora of information
without becoming incapacitated and/or going insane.
And not only that. It is especially true in trading that
we are constantly supplied with bits of information that
run counter to one another. There are a multitude of
indicators some of which generate contradictory signals
simultaneously. Or think of the fundamental-data news that
just won’t fit the current chart picture. As described above,
we have already come to know the factors influencing our
perception.
Let’s delve a little deeper into the subject. What exactly
are the criteria according to which we unconsciously filter
and weight information? To come straight to the point:
Selective perception helps us to distinguish between things
important and things unimportant. First and foremost, we DAX in the daily chart. Bounce off the yearly high. Since mid-May there have formed higher highs and higher lows.
perceive those pieces of information that serve to meet our The DAX is in a short-term upward trend. At the Simple Moving Average of 20 the market stops and a reversal
current goals. candle is formed.
In the American Express example we first perceived the Source: www.tradesignalonline.com
signals that met our goal of profit realisation. In the final

analysis, selective perception serves to reduce complexity.
No matter how many monitors you have near you, you important from things unimportant and to make decisions
will always see only what you are prepared for and what even on the basis of fragments of information. Pieces
you actually want to see. That may, for example, be your of information run through our perception filter which
favourite entry setup or even an exit level. In extreme cases sorts them according to different criteria. It is especially
this may go so far as to cause you to interpret and perceive our goals, wishes , and values that are key here. Selective
signals where there aren’t any – simply because you want perception helps us to highlight all the information that we
to see them. focus on intensively.
What does this insight mean to a trader who is at odds
Selective Perception: an Example from Daily Life with himself; who has had a “bad hair day”? What does it
Let’s illustrate this once more by using another example from mean to a trader who is not completely convinced that his
daily life. Suppose you are driving along a country road with profits are “deserved”?
a near-empty tank. It is a wonderful summer’s day, the sun What do you think – given a negative attitude towards
is shining and everything is in full bloom. When you headed trading, what pieces of information are weighted more
out with a full tank, you enjoyed the beautiful scenery and heavily in the perception filter and actually enter the trader’s
did not even come close to watching the fuel gauge. But subjective reality?
what is it like now that you know you will have to fill up? Unconsciously, a trader who has got the blues, i.e. who
Although the scenery has not changed, it just passes you is in a bad mood, will focus more on the signals confirming
by. You no longer pay any attention to the scenery but only his current mood and perceive less those signals that lead
watch out for the nearest filling station. In prioritising, our to success.
brain filters out all things non-essential , focussing instead This means that the trader’s bad mood is going to be a
on all things essential. However, once you have have filled up self-fulfilling prophecy.
your tank again, there may well be totally different priorities.
The obvious danger in this is that in extreme cases we focus Conscious Use of the Perception Filter
so much on one thing that we block out everything else How can we integrate the insights gained about selective
around us. This may even go as far as you being a danger perception into our daily trading and work with them as
to other road users while you’re looking for a petrol station, well? Now that we know we have a perception filter at our
simply because you fail to perceive them. disposal, we can obviously use it consciously as well.
Or you fail to enter a trade because the opportunity to do
so did not enter your subjective reality. 1) Raising consciousness and questioning
Our Frame of Mind Influences The mere fact that we are aware of the way our perception
the Information Filtered filter and selective perception work, allows us to regularly
To recap: Selective perception is something very useful question the pieces of information forming the basis of our
and even vital to us since it allows us to separate things trading decisions.

TRADERSĆOVERSTORY
F7) DAX Keeps on Falling • … I were not invested already? Would I enter the trade
once again?
Also, just try and look at the big picture for a change:
Do not ask yourself, “What is the significance of this price/
point for me and my position?”, but ask yourself, “What
significance does this price/point have for the market?”
4) Make your own trading plan
… and trade accordingly. The less you have to interpret,

the less scope there is for wrong evaluations and wrong
decisions. Besides, this also makes you independent of the
opinion and analysis of third parties.
Fill your perception filter with your criteria in accordance
with your plan. Because if we know that others can influence
our perception filter, we can obviously do so too.
The DAX builds a down gap and falls below the reversal candle. Simultaneous break through the short-term 5) Keep training and practising
upward trendline and sell-off down to the region of the previous low.
Source: www.tradesignalonline.com The more you use your setups and rules and enjoy
success with them, the more those are embedded in your
subconscious. They store experiences that over time can
2) Take a step back be retrieved automatically. In your perception filter those
pieces of information that match these experiences are
This is particularly important whenever you have automatically weighted more heavily and enter your
contradictory information. What do things look like from a subjective reality. You will become ever more adept at
higher perspective? Be sure to take a conscious step back. recognising your setups. At the same time those pieces of
Stand up. Switch to a time frame one unit higher. information not included in your criteria will be ignored.
From the hourly chart to the daily chart. From the This will enable you to work more successfully and continue
daily chart to the weekly chart. From the weekly chart to to embed positive experiences. A demonstration account is
the monthly chart. Should that still leave you uncertain, also helpful for training and practising purposes.
remember that nobody forces you to do anything. Stay on
the sidelines and watch the way things are developing. 6) Mind your frame of mind
3) Change of perspective Those who have the blues and are not completely
convinced they are in the market to win are in danger of
Ask yourself a hypothetical question: sabotaging themselves in trading. Instead of good signals
it’s potential losers that get weighted more heavily. If and
What if … when this happens, I can only recommend one thing: Take a
break from trading and turn your mind to other things.
• … this setup were not an exit but also an entry?
• … I had done this analysis myself? Would I have arrived Conclusion
at the same result? We have come to know the effect and mechanisms of
selective perception and of the perception filter. In the
process we have found that we weigh and filter information
at all times, be it in our daily lives or our practical trading.
Selective perception has the important function of reducing
complexity and causing the majority of the decision-
making processes to take place unconsciously. However, it
may be possible for us to filter out important information
Wieland Arlt which then fails to arrive in our subjective reality or does
so belatedly.
Mr Wieland Arlt has been actively trading in short-term time One way of dealing with selective perception is to
frames for several years. After graduating with a degree in first make oneself aware of this selection and question
economics he worked in sales for several years. He lives in it appropriately. This way, the perception filter can be
Hamburg and can be reached at info@wielandarlt.de. consciously programmed onto a certain setup, for example,
and so become an important ally in everyday trading. n

www.tradersonline-mag.com
TRADERSÍNSIGHTS
Do You Really Need It?
Fibonacci Numbers
I have not written this article to prove or disprove the use of Fibonacci. It rather points out some of the curious aspects of this approach to market
analysis. I really wanted to call this article “Stuff Fibonacci – You don’t need it“, but I suspect the editor would have suggested a title less sacrilegious
and indeed less provocative. And the truth is that I do need it a little bit, but we will get to that soon enough.
o The Need of Feeling Safe and Secure However, you were never in doubt what each function stood
When you enter the trading arena, you find yourself looking for. There never was a question of the break turning into an
for a constant. A constant is a rule, something that always accelerator. Nor would the clutch act as a break. There was
works. It never lets you down. Your action facilitates a known certainty. The astute reader will at this point add that another
reaction. For example, when you learn to drive a car (sorry function is crucial to successful driving, namely the steering
America – but in Europe we actually have to learn to operate wheel. If so, you share my vicarious appetite for cynicism and
a manual gear shift before they let us loose on the public you should find this article appealing.
roads on our own), you quickly understand that successful
driving requires a carefully blended mix of accelerator, clutch The Secret behind Everything?
and breaks. As you acquire the skills of these three functions, Now we enter the trading arena, and we begin to look for the
you appreciate it as a function of administrating the three same kind of certainties that we look for in our every day lives.
factors in the proper sequence and in the right proportion. On our path to trading wisdom and the search for certainty

TRADERSÍNSIGHTS
it is very difficult to avoid Fibonacci. Fibonacci stands for a F1) The Vitruvian Man
slightly mystical segmentation of the markets. It is a method
which slices and dices the market into known quantities. It
is said to foretell the end of bull markets and bear markets.
It is hailed as the greatest forecaster. I am told that our very
existence, our very sphere, our life, our solar system, follows
the laws of Fibonacci. Pay close attention here. It is not even
a rule. It is a law! This thing is so big that it is not labelled a
mere rule. It is a law, on par with gravity and taxes, i.e. simply
beyond question.
Finally we have a constant. A beacon of light in the
dark landscape of indicators, oscillators, incubators, neural
networks, volume, time of day, day of the week, seasonality and
the millions of tools designed to further our understanding of
the markets and enrich our bank accounts. You could pick up
a book on Fibonacci and you will see one convincing example
after the next that this really is a law. It is hard to dismiss, and
you might want to begin to experiment.
Love and Doubt

So did I. I used Fibonacci extensively in my trading. I loved
it. It was so great to know exactly where the market would
stop. Or should I say, where it was supposed to stop. It did
not always stop where I wanted to, but like any new love
relationship you focus only on the positive, and turn a blind
eye to all the quirky sides. My love affair did not last long. I The famous Vitruvian Man shows Fibonacci Ratios of the human body as proved by Leonardo Da Vinci. They are
began to doubt my love. It was not quite what it was hyped claimed to be everywhere in nature, including the finance markets.
up to be. Truthfully I used to swear by it. It was my constant in
an uncertain world. I would put up with the frequent hit-and-
miss. I would tell myself that it was my lack of understanding
of the laws of Fibonacci that caused my poor results. I would description on a website while researching for this article. It
study more, study harder. There came a point where I is a typical description of the Fib numbers, as we now call
thought it was pointless. It gave me as many bad signals as it them. I have put my own comments in brackets: „These ratios,
gave me good signals. Did I not see what everyone including and several others derived from them, (apparently) appear in
Fibonacci could see? nature, and in the financial markets they often indicate levels
at which strong resistance and support (apparently) will be
The Origin of Fibonacci Maths found. They are (apparently) easily seen in nature (seashell
Of course, Mr. Fibonacci was not a trader in our sense of the spirals, flower petals, structure of tree branches, etc.), art,
word. He was a mathematician. I suspect that Mr. Fibonacci geometry, architecture and music. Why are they (reportedly)
himself, the medieval mathematician as he was, would be so important to the financial markets? Because (apparently)
quite astounded at the impact his discovery had on the the markets tend to reverse right at levels that coincide with
financial markets, or at least traders, searching for something the Fibonacci ratios. Whether you see this as cosmic order
to believe in and hold on to. Discussing Fibonacci theory is or coincidence makes little difference. It happens and tens
like discussing the bible with a born-again Christian. There is of thousands of traders make decisions based on Fibonacci
nothing that works but their chosen belief. ratios, thus amplifying the results.“
His mathematical series was constructed from observations And here I was, trading away, thinking that the majority
on the incestuous copulation patterns of rabbits. You start of people trading lost money. I am a special breed because
off with a Mr. Rabbit and Ms. Rabbit, and then you let nature I am still here. I have succeeded (at least for now) where
do what it is supposed to do. The Fibonacci number series thousands have perished. Now I am being told that tens of
mathematically calculates at what rate Mr. and Ms. Bunny thousands of traders make decisions based on Fibonacci
Rabbit and their off spring pro-create. Incest police, close your ratios, thus amplifying the results. So I will ask this question,
eyes please. to you, as I asked myself: If thousands are using Fib, and most
people fail in trading, then does Fibonacci work? Or is the
The (Apparent) Link to Finance Markets problem with the trader?
In the financial markets the ratios of the Fibonacci numbers
are supposed to tell traders where there might be important Is It the Numbers or Is It You?
support and resistance in the market. I won’t bore you Example: I have identified a great area of support in the S&P
with the ratios. You know them as well as I do. I found this 500 futures at price level X. It is a 38 percent retracement of

TRADERSÍNSIGHTS
F2) Fibonacci Ratios in the S&P 500 know that the great Leonardo da Vinci in his sculpture of
man irrefutably proved that the law of Fibonacci works
everywhere, in man, as in nature and in the markets?
No Ultimate Answer
Of course the student is right. Where do I place my buy
order? Where is my stop?
If I buy at 38, and it fails, do I buy at 61.8? I think it is
utter rubbish, if you are day-trading. I even think it is utter
rubbish if you are swing trading the market over several
days. You might as well put some arbitrary lines up, based
on a throw of a dice and watch them. Every night I do my
homework. It involves going through the trading day with
the benefit of hindsight.
It Does Not Quite Add up, Does It?

I will make a statement, which is difficult to prove, but I
I put in the most important Fib numbers in the S&P 500 chart as anyone could do. think I will take on the bet, if you want to challenge me. For
Source: www.esignal.com every one of your perfectly chosen examples, where the
market retraces perfectly into a Fib ratio, I can show you
two examples on the same chart, where it did not work. I
the recent range. The market is in an uptrend on the larger can go through chart after chart after chart and for every
time frame, and I am looking to buy into the uptrend. I hope single example you give me of a Fib set-up, I can show
that the 38 percent retracement will provide me with a you an example where it did not work. Think about if for
low-risk entry. I should make a statement in the interest of a second: if a market retraces somewhere between 35 and
honesty. I teach people on a regular basis the „art“ of trading. 41 percent, traders will say it is a 38.2 percent retracement
I love teaching, because I learn so much myself about the or near as possible. If it retraces somewhere between 47
market through the teaching and more importantly through and 53 percent, then it is called a 50 percent retracement,
the eyes of the innocent and uncorrupted eye. They have even though that is not even a Fib number. If we retrace
no RSI luggage, no bad stochastic experience, no Moving somewhere between 59 and 65 percent, it is called a 61.8
Average conceptions. They just watch and stare while I percent retracement.
pollute their minds with pre-fabricated rubbish. In short order we are giving the Fibonacci army an
extraordinarily amount of leeway. Some will use slightly
Learning by Questioning more sophisticated ratios such as 0.786, and even 0.886.
The best part of teaching is when the pupils get to ask Some extremists will find comfort and meaning in the
questions. I love the Q & A sessions, because it is in those 0.994 or even the 0.236. If they make money with it, good
moments that the adults turn into children and ask the luck to them. I just suspect it is not the result of any laws,
obvious innocent questions such as: What if the market Fibonacci or otherwise. I have a friend who charged 5000
does not stop at 38? Do I buy then at the 61.8? Where is my British Pounds for a seminar on Fibonacci. It is hailed so
stop? Do I need a stop, if this is supposed to be a law? What secretive that disclaimers had to be signed. I have yet to see
about 78.6 percent retracements – are they any good? How him make any money out of it.
the hell would I know?
I am just the teacher who over the last two hours has Religious Functionalities
provided you with 50 slides where all the charts worked Do I want to dismiss Fibonacci altogether? Not really. I
perfectly. How dare you question Fibonacci? Did you not have found our relationship is a love hate sort of an affair, a
little bit like reading HELLO magazine at a friends house. I
would not dream of buying the rubbish, but I like the glossy
pictures when no one is looking. I love to hate to Fibonacci,
and I will always keep an eye on what he is saying about
support and resistance in the market. I do not pay close
attention, but I love to laugh when he gets it wrong and the
market plunges to the next level.
Of course, it is like the bible. It is never wrong. If it does
not stop at 38, then it will go to the next level. A little bit
Tom Hougaard like when the bible says „an eye for an eye“ versus „turn the
other cheek“. You are fully covered. You cannot go wrong.
http://www.whichwaytoday.com Fibonacci traders are the born-again christians of the
finance markets. n

TRADERSÍNSIGHTS
What Moves the Markets?
Economic News
Day traders especially live for big news events: news that will move markets. Home sales could be lower than expected and the market will sell off, or the
Consumer price index (CPI) data indicates that inflation is threatening the economy, and the biggest one of all that traders fear is that the Fed will come
in and raise interest rates and stocks tank into the abyss. Likewise, if good news is reported, the markets like the numbers and they will march forward.
Traders need to understand how to use news to make money. News is so important to the markets that I personally plan my week around the major
reports that will be released. I want to be ready, so I can maximize any money making opportunities that are presented.
o Work the Reports into Your Trading Plan to know when important news in being broadcast. You can
Many government and institutional economic reports are get the news from many different websites or by watching
published each month. These reports cover all aspects of our CNBC or Bloomberg in the morning for example. To begin
economy. Some reports gauge manufacturing, some reports working this into our trading plan, learning the day and
are based on new home sales, housing starts, and existing time when the information will be released is crucial. I use a
home sales, while others may track consumer habits like calendar on my desk to organize myself through the trading
spending or confidence. Many of these reports are released week, so I am aware of news before taking a trade in front of
at the same time each month, giving traders the opportunity a major report. Here are some examples of different reports,
and why traders pay close attention to these to gauge the
market’s health.
T1) Consumer Confidence Index
Consumer Confidence Index
Prior Consensus Consensus Range Actual This is a compilation of data taken from a survey of 5000
Consumer sentiment level 73.6  74.0  72.5  to 75.0  75.5  consumers across the United States (Table 1). The data reflects
The CCI Reports changes in consumers standard of living expenses. the attitudes and spending of consumers. When consumers
believe the economy is not doing well they have a tendency

TRADERSÍNSIGHTS
to tighten their belts and spend less. When they believe the T2) Consumer Price Index
economy is doing well, they are more likely to spend a little
more freely. Consumers who are more optimistic about the Prior Consensus Consensus Range Actual
future of the economy will be more willing to buy items that CPI – M/M change -0.2 % -0.1 % -0.2 % to 0.0 % -0.1 %
they need and want. Because consumer spending accounts CPI – Y/Y change 1.1 %
for more than two-thirds of the overall economy the market
CPI less food & energy – M/M 0.1 % 0.1 % 0.0 % to 0.1 % 0.2 %
keeps a close eye on this particular report.
CPI less food & energy – Y/Y 1.0 %
Consumer Price Index The CPI is the benchmark Inflation guide for the U.S economy.
The index is a measure of the average price level of a fixed
basket of goods and services purchased by consumers each
month (Table 2).
Goods and services remain fairly constant month after T3) Durable Goods
month so price changes can be tracked and monitored. This
report is the most widely followed indicator of inflation. Prior Consensus Consensus Range Actual
When inflation is up, consumers spend more money on basic Durable goods – M/M change 2.9 % -0.5 % -2.5 % to 1.5 % -1.1 %
living expenses and cash is being sucked out of the economy Durable goods – Y/Y change 18.9 % 14.9 %
CPI has the power to be a real market moving report, and is
Ex-transportation – M/M -1.0 % 0.9 %
watched very closely by traders and institutions – one not to
Ex-transportation – Y/Y 18.0 % 17.6 %
miss for a trading opportunity.
Durable Goods provides more insight on how busy factories will be in the future.
Durable Goods
The report reflects new orders placed with manufacturers
for immediate delivery of hard goods like automobiles,
appliances, and electronics (Table 3). The data is compiled and follow up reports and sometimes revisions. This number
by the department of commerce and reflects both consumer is watched closely by financial markets for indications of
demand and business spending. There are advanced reports whether the economy is growing too fast which could result

TRADERSÍNSIGHTS
T4) Existing Home Sales Housing Starts

Housing Starts measure the number of new building permits
Prior Consensus Consensus Range for new construction each month (Table 5). This report is very
Existing Home Sales 5.66 M 5.260 M 4.800 M to 6.200 M important for a number of reasons, including the demand
for building products, construction labor, appliances, and
Existing Home Sales Reports demand in the real estate sector. furniture, so needless to say if this number is positive or
negative it will affect a lot of industry groups.
T5) Housing Starts New Home Sales

This report measures the number of newly constructed
Prior Consensus Consensus Range Actual homes that have sold during the month (Table 6). Like
Housing starts 0.672 M 0.650 M 0.575 M to 0.662 M 0.593 M Housing Starts this data will also result in a ripple effect in the
economy. If consumers have a positive outlook in the future
Housing Starts is Wall Street‘s residential construction report. they are more likely to buy a new home, and the downside
is when fear of the economy slowing down or bad times are
ahead, they will most likely postpone a purchase of a new
T6) New Home Sales home.
This report tells us a lot about the confidence level of
Prior Consensus Consensus Range Actual consumers, so housing news is a potential market mover and
New Home Sales 504 K 400 K 370 K to 480 K 300 K is watched closely by traders.
New Home Sales is a measurement of newly built homes. Producer Price Index
The index is released monthly by the department of labor
(Table 7). This reports measured price changes for products
T7) Producer Price Index that are produced. There are many PPI reports generated
each month. The department of labor compiles over 10
Prior Consensus Consensus Range Actual 000 of them and the data is then analyzed and merged into
PPI – M/M change -0.3 % -0.1 % -0.5 % to 0.2 % -0.5 % one report. This report reflects the cost to produce such
PPI less food & energy 0.2 % 0.1 % 0.1 % to 0.2 % 0.1 % goods from manufacturing, it over shadows the prices for
– M/M change consumers and the general economy. Inflation signals may
The PPI is a weighted index of prices measured at producer levels. be revealed before they hit the retail sector; for this reason
the PPI is important to governmental and business type
entities.
in inflation. Durable Goods orders tell the investor what to PPI is considered a precursor of both consumer
expect from the manufacturing sector. If fewer durable price inflation and producer profits. If the prices paid to
goods are being ordered, factories will be slowing down manufacturers increase, individual businesses are faced with
production, which would cause the economy to shrink, and either charging higher prices or cutting profits, and we all
recession could be on the horizon. know which one is not going to happen.
Existing Home Sales Conclusion

This data is gathered by the National Association of Realtors and Both CPI and PPI are very important inflation gauges and
reflects the number of constructed homes in which a sale closed are extremely significant to traders and investors. There are
during that month (Table 4). The group also tracks the average other reports that come out monthly, but I wanted to touch
prices for homes. Existing home sales account for a larger share on some of the major reports, so do your homework and be
of the market than new home sales and show market trend. prepared.
If you are going to trade on news and use these market
moving reports effectively, it is imperative to know the times
and dates when these reports will be released.
I never try to predict the news, and I never try to out
guess the market’s response to news. Any experienced
Chris Manson trader knows that there are times when good news is aired,
but the markets expect something better and they sell it
Chris has actively been trading Stocks, Options, and off, or bad news breaks and investors were anticipating
Futures in his own accounts for eleven years, and has six being even worse, so after the dust has settled the market
years of experience in trading managed accounts. Chris bounces back and rallies. Having observed this scenario a
is an instructor for Online Trading Academy where he few hundred times, I learned to wait for the news; and let the
helps students reach the next level. market figure out the numbers and let it show you the way to
be on the right side to a profitable trade. n

TRADERS´TOOLS
Behavioural Technical Analysis
o At its core, trading is a decision-making process based on He shows how the concepts of behavioural finance can be
the analysis of data and a judgement of risk and uncertainty. applied to technical analysis techniques to create a profitable
Our human nature – be it our emotional side, our brain, trading strategy.
or even our physiology – plays an important part in this Azzopardi, an experienced accountant and private fund
decision-making process and so to better understand manager, introduces his main areas of behavioural finance
the financial markets we need to better understand the early in the book: dealing with complexity, how humans
behaviour of individual investors within the markets. perceive what is around them, sense of self, aversion to risk,
the impact of society and crowds, and gender.
Behavioural Finance
Behavioural finance – the study of how human sentiment Content
and emotion affects financial decision-making – is a means A detailed overview of each area follows with information
for achieving this better understanding and it is already about how each can affect the work of technical analysis.
revolutionising investment and trading. The way financial For example, one category focussed upon is the self – how
decisions are analysed today is very different from how they what we see and what we do depends on who we are. If an
were analysed in the past. Classical economists assumed individual is overconfident, the way they see the market
that human beings were entirely rational in their trading and the way they act within the market will show this.
behaviour and that they always acted within an environment Azzopardi says “This is one reason why many investors claim
of perfect information. However, it has become increasingly that their luck turns bad when they stop paper trading and
accepted that human emotions, such as fear and greed, start the real thing. When paper trading and using notional
creep surreptitiously into our decision-making and nudge us money investors have less emotional involvement… once
off the logical path. they start using real money, they become hesitant and
Paul V. Azzopardi’s new book ‘Behavioural Technical emotional rather than logical, and their trading suffers.” The
Analysis’ gives an introduction to behavioural finance key to successful trading, according to Azzopardi, is to gain
– describing how people make financial decisions, and the poise, act dispassionately and avoid getting emotionally
influence human nature has on the decisions of traders. involved. The book then builds on these early chapters as

www.traders-mag.com
TRADERS´TOOLS
Behavioural Technical Analysis
Subtitle: An Introduction to Behavioural Finance and Its Role In Technical Analysis

Author: Paul Azzopardi
ISBN: 9781905641413
Price: £34.99
Publisher: Harriman House
Azzopardi applies the concepts of behavioural finance to analysis and advances a new and exciting way to think
three key technical analysis techniques: study of extremes, about trading. As a result, ‘Behavioural Technical Analysis’ is
study of trends, and support and resistance. He shows how an informative and practical read for all those who want to
behavioural finance can illuminate technical price patterns understand exactly what happens when human nature and
and thus serve as a foundation for profitable investment and financial markets collide – and, most importantly, how they
trading strategies. can profit from it.
Let’s take the study of trends, one of the key concepts in
technical analysis, as an example. Human beings will always About the Author
attempt to simplify the complex world around them and one Paul V. Azzopardi trained and worked as a certified public
way of doing this is to use heuristics, or rules of thumb. The accountant and then obtained an MBA from the University of
trend heuristic is one of the most powerful; people observe British Columbia, now Sauder School of Business, concentrating
what is happening and decide that what is happening now in finance and investments.
will continue to happen. This is compounded by the tendency Paul worked in the securities industry for the last twenty
of humans to remember recent events more clearly and for years in various roles but principally as a manager of private
trend followers to suffer from selective perception, with client accounts. In this role he invested in securities around the
information which supports their beliefs is given importance world on behalf of his private clients.
while conflicting information is ignored. Putting all of this He now concentrates on managing a private fund and on
together, therefore, it becomes clear that when observing his lifelong passion of writing about investments and finance.
trends an investor’s vision is somewhat compromised. His blog can be found at www.etfinvestmentsnewsletter.com.
Paul‘s first book, „Investment and Finance: A Common Sense
Conclusion Approach“, an investment primer, was published in 2004 by
Azzopardi’s book does not presuppose any knowledge of Progress Press. Paul lives near Toronto, in Ontario, Canada, with
behavioural finance or psychology, skills in mathematics his wife and two children. In this way he combines his twin loves
or detailed trading techniques. It provides an excellent of cities and great open natural spaces. Paul can be contacted at
introduction to the key features of behavioural technical email@paulvazzopardi.com. n

TRADERS´TOOLS
Stock Selection à la Scan
MadScan
Every day the ambitious trader can choose from among nearly 10 000 different shares on the American stock market. But how to find the right stocks at
the right time? Large proprietary trading companies have developed special tools for their trading in order to have a decisive edge over their competitors
and substantially improve their chances vis-à-vis other market participants. By now, there are many different retailers specialising in stock scans, and
MadScan is one of them.
o MadScan – Unlock the Madness tool, though, but nor to the scanner, which continues to
MadScan offers two versions of its scanning tool which operate independently.
is available in Version 5.9.0, effective immediately: the For the benefit of algorithmic traders MadScan offers the
standard version containing only the signal scans including autotrader. This can be used both as a grey and as a black
the general filters and its own list scans, and the elite version box system and integrates directly into a front-end system.
whose only difference is that MadScan has implemented a However, the autotrader is currently available only as a beta
streaming news feed filter. This filter allows the user to scan version.
for market-moving news in real time – regardless of whether
that means upgrades or downgrades or whether it’s all about System Requirements
an FDA report. The following are the minimum requirements for using
In addition, it is possible in the elite version to connect MadScan 5.9.0 on a personal computer:
the scanner to an eSignal charting tool, which can only be
booked along with the MadScan elite package. However, Pentium 4
a disadvantage of this charting tool is that it is based on • 2.4 GHz processor.
Java and eSignal has released no more than 200 symbols. • 1 GB RAM.
After calling up the 200th symbol the charts turn white and • Minimum 1 GB available on the hard disk.
MadScan must be restarted. This only applies to the charting • Windows XP or Vista.
The recommended requirements are:

F1) News Scanner • Intel Core 2 Duo 3 GHz processor.
• 2 GB RAM.
To allow the user to work comfortably and hassle-free,

it is better to use an Intel Core 2 Quad processor with six
Gigabyte RAM, 200 Gigabyte hard disk. MadScan runs on
the Windows XP, Vista and Windows 7 operating systems.
In addition, the latest Java version must be installed on the
computer.
Installation
MadScan is installed via a Setup.exe downloadable at www.
MadScan.com following prior registration. The access data
can be selected during registration. Following a successful
registration you will receive a welcome e-mail confirming
the data indicated.
The (approximately) six-Megabyte file is installed
Here you can see the settings for the news scanner. There are various providers of news listed who are important by MadScan quickly and without encountering any
for the patented news scanner. You can also subdivide the news scanner separately. This means that you can only complications on the chosen disk drive of the computer and
scan for upgrades or downgrades or for FDA news. The advantage is that the news scanner is not overloaded (you is ready to be used right after entering the access data. For
would very quickly be lost in a wealth of information if the scanner were to filter all the news for approximately charting purposes the latest Java version must be installed
10,000 shares). on the computer, otherwise it wouldn’t work. The program
Source: www.madscan.com is available in English, Chinese, and Hungarian. Furthermore,

TRADERS´TOOLS
the forms for NASDAQ, NYSE and AMEX stocks must be F2) Scandesk
completed in order for the data feed to be provided.
Updates: Unlike what one is used to in the case of other
programs, MadScan will give you a hint of updates which
cannot be installed automatically, though. When using the
program a context window will open indicating that new
updates are available on MadScan’s web site. That is where
you first log in with your access data in order to install the
latest updates, without which the program can no longer be
used.
Testing Possibilities
The MadScan products (standard and elite versions) may
be tested free of charge for seven days. The only costs
incurred are the exchange fees. That means that if you take
the NASDAQ, NSYE and AMEX stocks on trial, you’ll pay a fee
of $3 debited by credit card. In this seven-day trial MadScan Figure 2 shows a scandesk including quote board (above right) and charting tool (above left). On the left-hand
Realtime will be made available to you. side below you can see the news window. Using a double-click, you can call up the news for a certain stock. That
news appears in a context window. In the window below on the right-hand side you can see a normal scanning
Cost process. Here it is important to recognise what the scanner tells you. For example, the time of day that the signal
There are monthly fees of $64.99 for the standard version. was generated = Trade Time, Symbol = stock code, Count = indicates how often this signal was generated within
In addition, the individual market data feeds must also be a specified time. Besides, you can see the ADV Multiple indicating the average daily volume compared to the 21-
booked for one dollar each. This one dollar per exchange only day average (a very important piece of information).
applies to non-professional traders and not to professional Source: www.madscan.com
ones.
The elite version can be paid for in incremental amounts.
It starts at $99.99. Beyond that, eSignal’s Chart add on can be allowed to be?”, Minimum bid or ask size”, Minimum up
be booked for a monthly payment of $29.99 and individual from closing price” and so on.
news services like 10K for $10 and Fly on the Wall for $25. A Should there still be problems or should there be
package containing the MadScan elite version plus briefing something that is not clear, MadScan has installed a live
is available for $124.99. Here, too, prices of one dollar each for chat support. Here you can find professional people to talk
the data feeds apply. The autotrader costs $299 a month but to during the principal American trading hours. However, so
is currently available to Beta testers only. far there is nobody there to offer any support in German. If
you need any help, the online chat is very fast and always
From the Installation to the First Scan
Following installation and a successful log-in the main menu
opens first. This is where you get to see the many possibilities F3) Scanner in Its Raw Version
offered by the program. At first glance, the program appears
to the first user to be rather extensive, which is why you ought
to take the time to familiarise yourself with this program
and understand it. Once you have grasped the scanner’s
structure and mode of operation, creating new scanners
will be made considerably easier. Default scanners, too, can
continue to be optimised on the basis of one’s experience
with the program.
The most important thing for first users is the various
scans that can be found at the “Sample Scans” tab. That’s
where the most important default scans are listed such as,
for example, Gap Scanning, Momentum Scanning, or the
Scanning for Candlestick Patterns. These are all provided in
the basic setting. You can modify the default scans as you
see fit by clicking the right mouse button to reach the Alert
window and then going to “Scan Settings”. There a context In Figure 3 you can see a scanner in its raw version (above left). Above on the right-hand side you can see the main
window will open offering various setting options. The most window. Below left you can find the scan possibilities with the rough settings such as, for example, “New High”
important tool for refining one‘s own settings is the “General or “New Low”. Next to it on the right the important general filters can be seen. This leads to the fine-tuning of the
Filters” tab. Here you can choose all the settings required for scanner, using the example ”Min Count” or ”Max Count”. That is to say how long does the signal have to remain at
what the scanner is supposed to be looking for. For example, its stage of being generated for it to be released by the scanner?
“Scan for new highs or new lows”, ”How big should the spread Source: www.madscan.com

TRADERS´TOOLS
F4) Installing Alerts case, four charts of the same stock are indicated in different
time frames (from the tick chart up to the monthly chart).
This saves you valuable time and provides you with a direct
overview. A number of different indicators can be integrated
into the charting tool itself, starting with the average true
range to the William’s percentage. Furthermore, Fibonacci
retracements, Gann Fans and many more items have been
implemented.
Another interesting highlight offered by MadScan is the
so-called Quote Board set in the default setting with Sample
1, Sample 2 and 52-week plays. By adding tabs of your own
it can be perfectly converted into a watch list. There you
can insert those of your shares you have picked out in the
end-of-day basis prior to the opening of trading. Here, too,
Here you can see how alerts for certain stocks can be installed in the quote board. You click on the stock selected the double-click link applies, enabling you to retrieve the
and then on Add Alerts. Now a context window will open in which you can find various defaults how to find alerts chart immediately. Another benefit derived from working
for real trading. with the quote board is that you can create so-called price
Source: www.madscan.com alerts for yourself which can be e-mailed by the program
after entering an e-mail address. For example, MadScan
is supposed to send an alert if and when the AAPL stock
friendly. Private sessions may also be arranged with the is quoted at $247.50. So you use the right mouse button
help desk. That means that you are chatting with MadScan to go to the code in the quote board, then to “Alerts” and
professionals, and they’ll explain to you, using the “learning from there to “Alerts Notification Properties”. Then you only
by doing” principle, how the program is to be handled, and have to enter the mail server’s address and your own e-mail
can also continue to refine the settings. Alternatively, in address. This is very helpful whenever you are in a meeting
order to get to know the program in more detail you can go or briefing. This way you’ll always be well-informed and can
to MadScan’s web site which makes video tutorials available place specific stock orders by mobile phone or laptop.
for you to watch. Another good service provided by MadScan is that you
can have your own scans created. These scans are for the
Connecting the Alerts to the Charting Tool paying customer only and are not circulated otherwise.
A very important add-on is eSignal’s Charting Tool. By
clicking on the green eSignal button you can connect the Quality of Data
scanner to the eSignal add-on. Especially when things are Data quality is of a very high standard; there are hardly any
hectic it is possible to directly open a chart picture from the noticeable delays. On the contrary: The data arrive at the scan
current scan by the connection in the “Tools” “Double-click desk cleanly tick by tick and are then converted correctly
Settings” (This is, however, only possible with the MadScan by the program. Compared to other scanning software
Elite version). Here you have two options of having the charts programs its speed ranks among the top programs.
indicated: as a single chart or as a multiple chart. In the latter
Conclusion
As far as its settings are concerned, the program makes
F5) Alerts en Route a clean, compact and very well programmed impression.
Owing to the default settings in the scan, even inexperienced
traders can handle the program relatively quickly. The
structure of the program is such that you soon feel
comfortable with it and it is really fun to work with. In many
other programs the scans run across the screen in a way that
lacks order and is not really thought through. This is not the
case here. The only drawback is that the charting is limited
to only 200 symbols. Over time the constant restarting may
well get on your nerves. But the scanner itself is absolutely
brilliant. Properly configured, it is an absolute weapon
for stock trading. What should perhaps be introduced to
MadScan are co-operations with established charting tools
such as, for example, eSignal or Visual Chart in which you can
Figure 5 shows how to set alerts for yourself when you’re on the road. As a rule, a message box will open when connect the scanner to other products. The situation at the
you’re on the scan deck. However, you can also change it by clicking on “send e-mail” and there indicating the Mail moment is that while eSignal does make charting available,
Server’s address and your own e-mail address. And, presto, the alert will be sent to the address intended. it has a limited number of symbols causing it to be less
Source: www.madscan.com effective than it could be. n

INSTANT TRADING ALERTS IN LIVE TRADING ROOM
GREAT TRACK RECORD – GREAT VALUE
5-day FREE trial for everyone
L ast year the WhichWayToday LIVE trading made

8000 pips. Each day between 0630 and 1100 GMT
two experienced financial traders operate the live
concluded that the WhichWayToday live room is like
going on a course in trading in each day that someone
else (the markets) pay for.
trading room which specialises in making money from
short term trades in stock indices and Forex. I n the last week of each month WhichWayToday run
a two day workshop. Here the emphasis is on quickly
T he room is run by Tom Hougaard and David Paul. explaining the various setups and applying them to
real markets WHEN the market is open.
The room has a one year, transparent profit history, which

is clearly displayed on the www.whichwaytoday.com
T he setups are simple, but unique. They are taught
in an open and friendly environment by two
excellent speakers who trade each day themselves.
website. Each trade is relayed to each room member Although many setups are taught the aspiring trader
instantaneously and is complete with stop loss level just needs one to be successful. Each seminar student
and profit target. is allowed to repeat the seminar at a nominal cost if it
I n the room the trades are classified into two main

categories. These are intraday and swing trades.
When a new customer signs up for the service, they
is required.
I n summary the WhichWayToday seminar teaches the

setups and techniques necessary for success in short
are immediately sent a document which details the term trading. The WhichWayToday live trading room
money management principles upon which all winning shows how to apply these techniques each and every
traders agree, that success is built. During the trading morning as the market is moving. It is an unequalled
sessions, this concept is reinforced and many have learning experienced.
TRADERS´TOOLS
What Can You Expect From Your Option?
PowerOptions – Find Your Best Strategy

The biggest advantage of options trading is that you can use a variety of strategies. At the same time, however, that is a disadvantage since the more
strategies are available to you, the more you have to learn about the subject. Suppose that you had access to more than 3300 optionable stocks, ETFs and
indices with several strategies each: How would you find the best strategies for yourself? In order to simplify this selection procedure, Power Financial has
put an online tool on the market that allows you to filter all the options according to your personal criteria: PowerOptions (www.poweropt.com). This way
PowerOptions can comb through all your options and find the best strategies for you.
F1) Start Page o Mode of Operation

PowerOptions costs $59.95 a month for 20-minute delayed
data, $79.90 for real-time data and $99.99 for historical data
and backtesting. However, prior to taking out a subscription,
the user may register for a 14-day trial subscription and first
test the platform thoroughly. Since PowerOptions is web-
based, there is no need to download any program, which
means that you can get started right after registration.
On the start page (Figure 1) the user is given a detailed
introduction to the use of PowerOptions. This is done in
four steps: first, there is the free user guide, secondly, there
is a tutorial, thirdly a free live webinar and fourthly a free,
personal training session. Beyond that, you can see that three
different services are being offered: PowerOptions, Training
(educational kit), and Advising (advisory site). However, in this
article we have only focussed on the PowerOptions product.
Strategies
There is link under “Power Options” to the so-called Learning
On the start page you can see, firstly, the four steps PowerOptions uses to introduce you to the use of the platform. Centre where the user receives initial assistance to help him
Secondly, you’ll get to the three major services: PowerOptions, training, and advising. In the upper tab bar you can use the platform. At the very top you will see a tab bar which
see the most important options strategies. includes the most important options strategies such as,
Source: www.poweropt.com for example, covered call, bull put credit, long call, naked

TRADERS´TOOLS
put, bear call credit, calendar call and so forth. Altogether F2) Strategies
PowerOptions makes 23 options strategies available which
you assemble individually under “other strategies” and can
have indicated on your monitor.
For example, if you click on “calendar call”, you’ll be given
all manner of “optionable” stocks, ETFs and indices for this
strategy, in this case 484 of them (Figure 2). This list includes
the latest price change, the buy and sell option, the date of
expiry, historical volatility and much more. In order to tailor
the results to individual needs, the search can be narrowed
down by using a filter to meet one’s own criteria.
This means that, for example, the share price, the volume
of options or implicit volatility can be defined or neglected , When you click on a strategy, such as, for example, Calendar Call, a list will appear of all the results for this
and yet in the end you’ll be given only those results that are strategy, here 484 of them. You can find all the important information in this list such as, for example, name,
indeed suitable for you. The patented technology behind symbol, bid, ask etc.
this search is called SmartSearchXL. Source: www.poweropt.com
Valuable Information
Using the arrow that is located in front of each result and that F3) Options Data
causes a new window to open, the user can retrieve further
information about the respective stock or the respective
ETF/Index: charts, information about the company, options
chains, a handy calculator as well as profit/loss charts. The
research tool that is also located in the new window, is based
both on fundamental data and options data. Especially the
latter are dealt with in detail and buy and sell options are
presented independently of one another (Figure 3). Here
you can find all the important variables such as, for example,
probability ratios, volatility data, Black-Scholes values as
well as a chart showing the ratio of one variable to another.
The variables can be selected from a dropdown menu. For
example, the chart in Figure 3 shows the most recent options For each option you will be given detailed information showing you whether you can expect a price change. Here
price and implicit volatility. You can get directly from the you can see the history of the option price and the implicit volatility.
research site to the Black-Scholes options calculator in order Source: www.poweropt.com
to determine which price your option might theoretically

have prior to expiry. In addition, you can use the calendar call
calculator in order to look at your anticipated profits after change can be expected. Moreover, you can look at trades
you have entered your bid and ask prices and commissions. that might be worth considering in the following month.
Once you have completed your research and are ready to
place your order, you can, again in the new window, get Conclusion
in touch directly with your broker (provided your broker is PowerOptions specialises in options trading and offers
OptionsExpress) and enter your trade. If you have a different numerous features. While the research still requires a
broker, you’ll have to make him accessible by simply opening lot of work, this is made considerably easier thanks to
another window in your browser. Once you have placed PowerOptions. The platform supports its users wherever
your trade, you can watch your open positions under “My it can: with free training sessions, a Learning Centre, a user
Portfolio”. Depending on which service you have subscribed forum, the PowerOptions blog and much else. Every day
to, you’ll receive real-time or 20-minute delayed data. Using members receive an update of their results by e-mail. Without
PowerOptions you can analyse those positions that are a doubt, PowerOptions offers all the features an options trader
shortly due to expire in order to determine whether a price needs to carefully analyse potential positions. n

TRADERS´PRODUCTS
NEW PRODUCTS
OmniTrader Xpress calculating margins. ICSC will offer margin benefits for products from the
same product series and for products from other product series. ICSC will be
implemented within the existing and SPAN margin model, optimizing the
daily margin call for clearing members. Additional details can be found at
www.nordpool.com or www.nasdaqomx.com.
eSignal has redesigned FutureSource.com and added features to the

free website so futures, energy, and foreign exchange traders have easier
access to financial information. The website has an enhanced layout and
navigation incorporating the latest web capabilities, which gives the
trading community a broader swath of market data and free decision
support systems and services. Site visitors will find adjustable workspaces
that enable them to save charts, quote tables, and news articles. The saved
content can be found in the workspaces. The site provides free futures
commodity quotes, charts, news, and other relevant information in an
online format. For more information, please visit www.futuresource.com
or www.esignal.com.
RTS Realtime Systems Group, a global trading solutions provider,

o OmniTrader Xpress trading software has all the key features that launched RTD Tango Trader (RTD TT), a comprehensive trading
has made it so prominent – it generates daily buy & sell signals and solution that combines the advantages of “point and click” and high-
includes automatic chart patterns and automatic indicator setups to help speed algorithmic trading. RTD TT is created to leverage firms’ current
you home in on your trade candidates, trade management features (the infra-structure and enable more traders, brokers, and clients to profit
software allows you to trade right in the charts), and a trading simulator from customized algorithms. RTD TT is fully integrated into the high-
so you can practice before you trade. The developer, Nirvana Systems,
has a special introductory offer for the first month of data free (although FutureSource
exchange fees apply to real-time data). For further information, please
visit www.nirvanasystems.com.
NASDAQ OMX Commodities has introduced Inter Commodity Spread

Credit (ICSC). ICSC, which has been introduced to meet member needs for
margining efficiencies, enables collateral benefits to members by giving
credit to offset positions in products with sustained price correlation when
Nordpool

TRADERS´PRODUCTS
NASDAQ OMX thinkOnDemand, the technology offers users with tick-by-tick intraday
prices that can be replayed at any time – even days and weeks after
occurrence – without leaving the live trading platform. It is like a digital
video recorder (DVR) for traders. Users of thinkorswim from TD Ameritrade
trading platform can use it to paper trade stocks, futures, forex, and
options. Because thinkOnDemand is integrated into the live trading
platform, traders can sway between thinkOnDemand paper trading
and live trading with a single click. Additional details can be found at
www.tdameritrade.com.
Oracle Trader has changed its name to StockVision. StockVision is

a trading tool that scans more than 2000 stocks in real time for gaps,
intraday spikes, and many other indicators that can be customized.
There is a one-time fee, so no ongoing subscription is required. The
live datafeed means that there are no more feeds needed, and the live
performance RTS infrastructure. Traders can use the new off-the-

shelf RTD TT platform to develop their own proprietary, customizable TD AMERITRADE
algorithms and deploy them either in an RTS-hosted environment
or their own environment. Brokers can develop their own execution
algorithms, such as spreads, VWAP1, TWAP2 or smart-order routing, and
make them available to their clients via the Java-based RTD TT. Brokers
can take advantage of the RTS integrated low-latency risk-management
solution with extended risk limits to ensure the firm and client are both
protected. Trading firms can leverage their infrastructure by connecting
multiple traders on RTD TT to a single back-end, and maximize their
development resources by publishing and managing access rights to
custom-made algorithmic strategies. For more details, please visit
www.rtsgroup.net.
CQG, Inc., has expanded its order execution, market data, and analytics
platform to provide more functions for fixed-income traders. New features
include spread across multiple accounts; aggregation; and yield pricing.
CQG has improved its analytics offering with its instrument and portfolio
monitors. Traders have access to data sources including ICAP/ BrokerTec,
BGCantor Market Data, ELX Futures, and more. For further information,
please visit www.cqg.com. forum, where users post their trades, helps to demonstrate how success
is achieved. StockVision provides a free trial version, where users do
TD Ameritrade has launched a way for retail traders and investors to not need to supply anything other than their email address to obtain
paper trade, or trading, based on simulated cash and positions. Called complete access to the program. For more information, please visit
www.garsworld.com.
StockVision MTPredictor Ltd. has launched new real-time (RT) analysis software
for the NinjaTrader7 charting platform. The software helps a trader
through a Four-Stage Process, from finding a low-risk trade and
assessing its risk/reward outlook, to determining the position size
and managing the trade. Futures, stocks and forex can all be analyzed
completely. The MTPredictor RT add-on for NinjaTrader7 also features
new tools, including the highly regarded Elliott Wave tools (enabling
the trader to find clear, simple Elliott Wave patterns) and the Volume
Spike Indicator (warning the trader to trapped buyers and sellers). In
addition to an enhanced risk/reward analysis tool, the RT add-on also
puts the trader in a position to check past signals, as historical signals
are now retained on the chart being analyzed. NinjaTrader7 can accept
numerous data feeds, including Zen-Fire, eSignal, DTNiQ, PFGBEST, IB,
and more. The firm also confirmed the RT add-on can be used on iMacs,
with Windows-emulation software. For further details, please visit
www.mtpredictor.com. n

TRADERS´STRATEGIES
Implementation of Profit Targets and Consideration of the Second Half of 2008 – Part 6
Developing Swing Trading Strategies

with a Discretionary Component
This sixth part of the series of articles on developing professional swing trading strategies is designed to conclude the examination of exit techniques.
Drawing on the two previous articles (TRADERS´ 5/2010 and 4/2010) and the exit rules examined there, the following article will be examining the impact
of fixed profit targets on performance and portfolio indices, finally including the second half of the market year of 2008. Again, the criteria derived from
articles one to three (see TRADERS´ 1/2010, 2/2010, and 3/2010) will serve as a starting point for the underlying portfolio and the entry signals. With
holding periods of between one to nine days these entry criteria led to a marked statistical advantage over the comparison index.
o Examination of Exit Techniques (Continued) will be carried out here by way of the example of an exit
In the previous article (TRADERS´ 5/2010) eight different exit method from article five; this procedure should be followed
procedures from long and short positions were analysed accordingly with regard to the other exit methods.
for three different stop losses. By using three additional
portfolio indices – the profit factor, the Sharpe Ratio, and Implementation of Profit Targets
the Ulcer Index – it was possible for the choice of suitable The exit method to be used will be that of the variant
methods to be limited to four variants. presented in article 5 which best combines annualised
The following analyses are designed to examine the performance, maximum drawdown, profit factor, Sharpe
impact of fixed profit targets and determine whether their Ratio, and Ulcer Index.
implementation will lead to an improvement of portfolio Long positions will be smoothed on the next day at
test results. market opening time if the closing price is above the closing
Fixed profit targets are points at which a position is price of the previous day (Close > Close [1]).
cancelled for the purpose of profit-taking. For example, Short positions will be smoothed on the next day at
based on a profit target of 20 per cent a stock would be market opening time if the closing price is below the previous
sold at $48 after a long entry at $40. Among professional, day’s closing price (Close < Close [1]). The examinations are
systematically proceeding swing traders, profit targets are carried out for three different stop losses of ten per cent, 15
highly controversial since they contradict the principle every per cent, and 20 per cent respectively (see also TRADERS´
novice trader is recommended to follow, which is letting 4/2010).
profits run. Nevertheless, it is possible for profit targets to
make sense against the backdrop of the strategy presented Entry Rules
here and of the attendant short holding period and high In articles one to three entry rules were chosen from among a
trading frequency. For pragmatic reasons, the examination large number of possible choices. They are for the buy side:

TRADERS´STRATEGIES
T1) Results for Various Exit Techniques with Profit Targets

period: 30.6.2002 until 30.6.2008 period: 30.6.2002 until 31.12.2008
Fix profit target without 6.00% 8.00% 10.00% without 6.00% 8.00% 10.00%
10% stop loss; long + short
Net Profit % 1876.32% 2471.97% 2268.85% 2256.99% 3962.67% 5399.84% 4239.98% 4609.28%
Annualized Gain % 64.50% 71.89% 69.55% 69.41% 76.62% 85.03% 78.42% 80.67%
Exposure 22.01% 19.84% 21.14% 21.91% 25.58% 22.38% 24.03% 25.13%
Number of Trades 1498 1562 1530 1518 1721 1816 1775 1748
Avg Profit/Loss % 2.01% 2.10% 2.09% 2.11% 2.20% 2.24% 2.17% 2.26%
Avg Bars Held 2.39 2.08 2.26 2.35 2.35 1.97 2.16 2.27
Winning Trades % 69.16% 71.90% 70.13% 69.76% 69.96% 72.91% 70.59% 70.37%
Avg Profit % 5.27% 5.07% 5.26% 5.33% 5.59% 5.26% 5.50% 5.61%
Avg Loss % -5.31% -5.51% -5.36% -5.33% -5.71% -5.88% -5.82% -5.71%
Max Drawdown % -14.53% -10.97% -10.36% -11.85% -18.27% -13.86% -16.84% -18.27%
Profit Factor 2.07 2.13 2.14 2.16 2.17 2.27 2.15 2.24
Sharpe Ratio 2.79 2.50 2.45 2.63 2.87 2.58 2.46 2.63
Ulcer Index 1.67 0.94 1.14 1.32 1.59 1.08 1.32 1.30

Net Profit % 2441.27% 3251.21% 3025.73% 2889.98% 5310.79% 7024.16% 5831.76% 5891.71%
Annualized Gain % 71.55% 79.65% 77.58% 76.27% 84.57% 92.53% 87.19% 87.48%
Exposure 22.41% 21.00% 22.15% 22.27% 26.46% 23.69% 25.27% 25.89%
Number of Trades 1465 1528 1497 1484 1672 1764 1718 1696
Avg Profit/Loss % 2.23% 2.32% 2.33% 2.32% 2.45% 2.47% 2.44% 2.48%
Avg Bars Held 2.53 2.28 2.44 2.49 2.49 2.17 2.36 2.42
Winning Trades % 70.31% 73.63% 71.74% 71.02% 71.77% 74.94% 72.82% 72.29%
Avg Profit % 5.25% 5.06% 5.27% 5.30% 5.57% 5.24% 5.45% 5.55%
Avg Loss % -4.93% -5.32% -5.13% -4.98% -5.49% -5.84% -5.65% -5.54%
Max Drawdown % -15.43% -11.64% -14.22% -14.37% -22.96% -15.49% -19.72% -21.32%
Profit Factor 2.43 2.42 2.50 2.57 2.33 2.47 2.38 2.42
Sharpe Ratio 2.92 2.57 2.53 2.77 2.94 2.63 2.46 2.68
Ulcer Index 1.33 0.97 1.14 1.11 1.69 1.23 1.44 1.48

Net Profit % 2891.35% 3472.66% 3280.23% 3154.01% 6310.62% 7993.85% 7114.80% 6836.15%
Annualized Gain % 76.28% 81.58% 79.91% 78.77% 89.43% 96.34% 92.90% 91.74%
Exposure 22.63% 22.16% 23.04% 22.75% 26.83% 24.53% 26.01% 26.55%
Number of Trades 1455 1508 1484 1477 1651 1727 1694 1678
Avg Profit/Loss % 2.36% 2.39% 2.41% 2.39% 2.57% 2.58% 2.58% 2.58%
Avg Bars Held 2.59 2.46 2.58 2.58 2.56 2.37 2.54 2.57
Winning Trades % 70.65% 74.20% 72.30% 71.56% 71.96% 75.62% 73.61% 72.77%
Avg Profit % 5.25% 5.05% 5.28% 5.32% 5.52% 5.17% 5.42% 5.54%
Avg Loss % -4.61% -5.26% -5.09% -4.99% -4.99% -5.44% -5.36% -5.31%
Max Drawdown % -13.97% -8.92% -13.31% -12.21% -21.25% -13.05% -17.36% -19.63%
Profit Factor 2.64 2.58 2.59 2.66 2.57 2.94 2.72 2.66
Sharpe Ratio 3.04 2.68 2.60 2.85 3.01 2.69 2.54 2.73
Ulcer Index 1.25 1.11 1.28 1.17 1.51 1.35 1.46 1.49
Assumptions for all test runs: Weighting per position: 9.8%, slippage: 0.1%, commissions: one cent per share per page; criteria for buys: RSI(3) < 20, ROC(200) > 0,7% buy limit; for short sales: RSI(3) > 95,
ROC(200) < 0,5% short-sale limit; exit method: long exit: Close > Close [1]; short exit: Close < Close [1].

TRADERS´STRATEGIES
T2) Results for Various Exit Techniques with Different Time Periods
In-The-Sample Test (TRADERS´ articles 1-5) In- and Out-Of-The-Sample Test
period: 30.6.2002 until 30.6.2008 period: 30.6.2002 until 31.12.2008
Long Exit Signal Close > SMA(3) Close > Close[1] Low - $0.02 Close-0.5*ATR(10) Close > SMA(3) Close > Close[1] Low - $0.02 Close-0.5*ATR(10)
Short Exit Signal Close < SMA(3) Close < Close[1] High - $0.02 Close+0.5*ATR(10) Close < SMA(3) Close < Close[1] High - $0.02 Close+0.5*ATR(10)
Net Profit % 1679.01% 1876.32% 1152.00% 936.20% 2419.04% 3962.67% 1123.55% 1297.86%
Annualized Gain % 61.64% 64.50% 52.44% 47.70% 64.12% 76.62% 46.90% 49.93%
Exposure 28.13% 22.01% 27.25% 23.58% 31.06% 25.58% 31.11% 27.42%
Number of Trades 1457 1498 1629 1657 1662 1721 1917 1941
Avg Profit/Loss % 2.01% 2.01% 1.59% 1.42% 2.01% 2.20% 1.36% 1.39%
Avg Bars Held 3.16 2.39 2.57 2.25 3.07 2.35 2.48 2.18
Winning Trades % 68.84% 69.16% 50.28% 57.51% 68.35% 69.96% 48.83% 57.39%
Avg Profit % 5.68% 5.27% 6.17% 5.23% 6.02% 5.59% 6.17% 5.27%
Avg Loss % -6.11% -5.31% -3.05% -3.74% -6.65% -5.71% -3.24% -3.84%
Max Drawdown % -17.95% -14.53% -8.82% -10.42% -30.64% -18.27% -36.26% -26.49%
Profit Factor 1.84 2.07 1.99 1.87 1.71 2.17 1.61 1.78
Sharpe Ratio 2.29 2.79 1.69 1.93 2.31 2.87 1.58 1.94
Ulcer Index 2.34 1.67 1.50 1.37 3.01 1.59 5.25 2.62

Net Profit % 2245.37% 2441.27% 1229.86% 979.89% 3471.36% 5310.79% 1345.18% 1566.46%
Annualized Gain % 69.27% 71.55% 53.98% 48.73% 73.16% 84.57% 50.70% 54.03%
Exposure 29.01% 22.41% 27.63% 23.93% 32.42% 26.46% 31.73% 27.98%
Number of Trades 1411 1465 1627 1654 1605 1672 1913 1934
Avg Profit/Loss % 2.27% 2.23% 1.62% 1.44% 2.31% 2.45% 1.45% 1.48%
Avg Bars Held 3.42 2.53 2.60 2.28 3.34 2.49 2.52 2.22
Winning Trades % 71.16% 70.31% 50.71% 57.98% 71.28% 71.77% 49.45% 58.12%
Avg Profit % 5.58% 5.25% 6.16% 5.17% 5.95% 5.57% 6.21% 5.27%
Avg Loss % -5.91% -4.93% -3.04% -3.70% -6.73% -5.49% -3.21% -3.77%
Max Drawdown % -13.59% -15.43% -9.31% -10.89% -30.11% -22.96% -34.52% -24.94%
Profit Factor 2.14 2.43 2.05 1.93 1.87 2.33 1.69 1.90
Sharpe Ratio 2.39 2.92 1.73 2.03 2.47 2.94 1.67 2.05
Ulcer Index 1.86 1.33 1.53 1.47 2.79 1.69 4.63 2.45

Net Profit % 2667.30% 2891.35% 1335.26% 1022.35% 4216.43% 6310.62% 1469.23% 1624.69%
Annualized Gain % 74.01% 76.28% 55.95% 49.68% 78.27% 89.43% 52.62% 54.85%
Exposure 29.35% 22.63% 27.62% 23.98% 32.95% 26.83% 31.76% 28.05%
Number of Trades 1400 1455 1622 1654 1575 1651 1909 1934
Avg Profit/Loss % 2.40% 2.36% 1.67% 1.47% 2.46% 2.57% 1.49% 1.50%
Avg Bars Held 3.52 2.59 2.62 2.29 3.46 2.56 2.54 2.23
Winning Trades % 71.43% 70.65% 50.99% 58.16% 71.68% 71.96% 49.66% 58.27%
Avg Profit % 5.60% 5.25% 6.17% 5.18% 5.88% 5.52% 6.23% 5.27%
Avg Loss % -5.60% -4.61% -3.00% -3.70% -6.18% -4.99% -3.18% -3.77%
Max Drawdown % -13.39% -13.97% -8.83% -11.37% -31.77% -21.25% -34.71% -25.23%
Profit Factor 2.30 2.64 2.10 1.94 2.00 2.57 1.71 1.90
Sharpe Ratio 2.48 3.04 1.77 2.01 2.51 3.01 1.68 2.05
Ulcer Index 1.75 1.25 1.60 1.55 2.88 1.51 4.67 2.51
Assumptions for all test runs: weighting per position: 9.8%; slippage: 0.1%, commissions: one cent per share per page; criteria for buys: RSI(3) < 20, ROC(200) > 0,7% buy limit; for short sales: RSI(3) > 95,
ROC(200) < 0,5% short-sale limit.

TRADERS´STRATEGIES
1) The current closing share price is above $2: C > 2. F1) Maximum Favourable Excursion (MFE)
2) The rate of change over a period of 200 days is higher
than zero: ROC (200) > 0.
3) The RSI indicator over a period of three days is lower than
20: RSI (3) < 20.
4) When conditions 1 to 3 are met, buy the next day if the
price is at least seven per cent below today’s closing price
(seven per cent buy limit).
For the short-selling side the entry rules are as follows:
1) C > 2.
2) ROC (200) < 0.
3) RSI (3) > 95.
4) When conditions 1 to 3 are met, make a short sale on the
next day if the price is at least five per cent above today’s Maximum positive movements of the trades included in Table 1, Column 1 after an entry using a 20 per cent stop
closing price (five per cent short-sale limit). loss; the distribution of MFEs is shown both for all trades and solely for losing trades. Conversely, the distribution
of MFEs for the winners’ side can be calculated on that basis. The scale is to be read from left to right; for example,
Multiple entries into a stock leading to overlapping it can be seen that 180 losing trades have an MFE of between 2.5 and 5.0 per cent.
positions will be allowed for both sides. Again, for test-run Source: www.wealth-lab.com
purposes a marginable $100 000 share account will be drawn

on allowing 100 per cent mortgaging of the stocks included
in the portfolio and thus a leverage of up to 2:1. trades, i.e. 270 winning trades) stood at between five and
In addition, position size will be set at 9.8 per cent and 7.5 per cent.
slippage at 0.1 per cent and commissions at one cent per
share per page. The Russell 1000 Index as of 27th June 2008 Determining the Profit Target Range
prior to the rebalancing of that day will serve as a stock pool. It is known from the previous article five, Table 1 that the
The testing will be done over a period of six years, i.e. from average winner of the underlying exit strategy for a 20 per
1st July 2002 to 27th June 2008. cent stop loss stands at 5.25 per cent and the average loser
at -4.61 per cent. If at all possible, the profit target should
Maximum Favourable Excursion (MFE) now be chosen in such a way that the winners can only be
How big should a potential profit target be chosen? The curtailed to a small extent but at least some losers that had
procedure used in determining a sensible size is the same meanwhile been clearly in positive territory in their lives,
as that used for determining the size of the stop losses can be turned into winners. Against this background profit
as outlined in the fourth article of this series when the targets of six, eight, and ten per cent are chosen.
so-called maximum adverse excursion (MAE) was drawn
upon. The MAE indicates the maximum percentage by Profit-Target Results
which a position was in negative territory in the course of In the left half of Table 1, time period 30th June 2002 to 30th
its life prior to its being cancelled. June 2008, there are the test runs for the chosen method of
The MAE’s counterpart is the so-called MFE (maximum entry (Close > Close [1] for the long side and Close < Close
favourable excursion). Like the MAE, the MFE was
introduced in the mid-nineties by John Sweeney in his book
“Campaign Trading”. The MFE indicates by what maximum F2) Russell 1000 Index© Chart
percentage a position was in positive territory prior to its
being smoothed. Like the MAE, the MFE can be used both
for winning and losing trades. This makes it a tool by means
of which the suitable range for profit-taking targets can be
determined.
Figure 1 shows the distribution of maximum favourable
excursion (MFE) for the test run under the previously cited
entry and exit rules, taking account in this case of a 20 per
cent stop loss. It can be seen from the Figure then that 25
losing trades had meanwhile been in positive territory by
between 7.5 per cent and ten per cent before they were
cancelled. Twelve additional losing trades were in positive
territory by between ten per cent and 12.5 per cent during This shows the chart’s development in 2008 on a daily basis. In the upper range the 10-day average true range in
the trading session before they closed in negative territory. percentage terms of the Russell 1000 Index can be seen as a measure of daily volatility.
At the same time, the MFE (for 341 trades minus 71 losing Source: www.wealth-lab.com

TRADERS´STRATEGIES
F3) Portfolio Development (July 2002 until December 2008) This also means in particular that the insight that a fixed six
per cent profit target can be implemented advantageously,
only applies to the particular exit considered here. The
ambitious swing trader is recommended to carry out these
examinations for all the exit methods presented in the
previous article. As has been mentioned more than once
in the previous articles of this series, this is not exclusively
about presenting a lucrative strategy but especially about
passing on ideas and showing ways that professional swing
traders go when developing and examining strategies of
their own.
Extension of the Time Period Considered

This series of articles about the development of swing
trading strategies was started in early July 2008. At that time
the author still had no idea that in the following months the
stock markets would accelerate their downward movement
This shows the overall performance of a $100,000 portfolio as well as the separate performance for the long and and the leading share indices would be halved at the height
short sides using a ten per cent stop loss and under the conditions cited in Table 1, Column 6 (fixed profit target of the slump when compared to what they were at the
of six per cent; if this is not achieved, exit from the position at market opening time on the next day when closing beginning of the year. Volatilities (shown in the upper part
price is higher than the previous day’s closing price (for the buy side) or closing price is below the previous day’s of figure 2 as average true range in percentage terms over
closing price (short side) a period of ten days) substantially increased in the second
Source: www.wealth-lab.com half of 2008, which made it difficult for many swing traders
to reduce major drawdowns.
The intriguing question now is how the swing trading
[1] for the short side respectively) in combination with profit targets of six, strategy developed here has performed with its various exit
eight, and ten per cent as well as stop losses of ten per cent, 15 per cent, options over the period of 1st July 2002 to 31st December
and 20 per cent respectively. For comparison purposes, the first column 2008, i.e. including this turbulent second half of 2008. The
(profit target = “without”) indicates the result achieved when doing without answer to this should shed light on how robust the strategy
a profit target and merely drawing on the exit strategy. It is shown there actually is. Should the approach presented here have
that especially the maximum drawdown during the period of July 2002 to been successful in this market phase as well, the strategy
June 2008 can be reduced considerably without significantly worsening the would without a doubt have proved its mettle because, as
other indices (profit factor, Sharpe ratio, Ulcer Index). elaborated on in the first three parts of the series, this is a
The biggest improvement for this exit method results from using a six strategy that generates 80 per cent of its trades on the long
per cent buy target in combination with 20 per cent stop losses. Thus the side.
maximum drawdown drops to less than nine per cent with a profit target of
six per cent and a stop loss of 20 per cent. At the same time, the Ulcer Index, Results for June 2002 to December 2008
a measure of the overall volatility of the development of performance, without Profit Targets
improves from 1.28 to 1.11 (for the Ulcer Index the rule is: the smaller, the First the test results for various exit options without any
better). The profit-target analysis presented has only been conducted profit targets will be presented. In Table 2 the results for
here for one of the four exit methods deemed beneficial in article five. two time periods are indicated: for the period of 1st July
2002 to 30th June 2008 (left half), and the period of 1st July
2002 to 31st December 2008 (right half). As in all previous
F4) Portfolio-Development Drawdown Chart articles, the stock pool for the first period is the Russell 1000
Index as of 27th June 2008 prior to the rebalancing that
took place on that day.
By contrast, the results of the right half of Table 2 – and
so of the extended time period – are based on the stock
pool of the current Russell 1000 Index as of 31st December
2008. This is designed to reflect the fact that the rebalancing
in this index is carried out at the end of June once a year
(stocks that are delisted no longer appear in the index and
are not replaced). For both periods under consideration
those four exit variants are taken into account that in the
previous article five were found to be the most suitable
The chart shows the drawdowns of the portfolio development taken from Figure 3 calculated on a daily basis and methods.
indicated in percentage terms. The biggest drawdown of just under 14 per cent was suffered in October 2008. As was only to be expected of a strategy that is clearly
Source: www.wealth-lab.com more active on the buy side than on the short-selling side,

TRADERS´STRATEGIES
the maximum drawdown in the portfolio (max drawdown

%) has markedly increased after including the period of July
to December 2008. The method used here within the scope
of the profit-target examination has proved to be the best
exit option by far. This is the method (see 3rd column from
the right), in which long positions are cancelled when the
closing price is above the previous day’s closing price and Faik Giese
short positions are smoothed when the closing price is
below the previous day’s closing price. Faik Giese is managing partner of the Swiss based asset manage-
This result confirms the procedure chosen in the previous ment firm effinX AG, a trading coach and personal consultant.
article five when for the purpose of assessing exit methods Contact: giese@thewayoftrading.com
the Sharpe Ratio, the profit factor and the Ulcer Index were
introduced in addition to the maximum drawdown, and
on the basis of these indices the exit strategy was already
identified as the seemingly most suitable variant. Using the Outlook
exit strategy that had evidently been the best one as early In the course of what are by now six articles, swing trading
as July 2008, it would have been possible to experience the strategies “with a discretionary component” were discussed
drawdown on the stock markets with a drawdown of less here without elaborating on the word “discretionary”. This
than -19 per cent by means of using a stop loss of ten per subject then will be dealt with in detail in the next article,
cent. which will also include some practical advice and additional
With a concurrent annualised performance of slightly hints, bringing this series of articles to a conclusion. n
above 76 per cent, a Sharpe Ratio and a profit factor of more
than two and an Ulcer Index of below two, this constitutes
an excellent performance, showing that the strategy
presented here can be rated as being very effective and
extraordinarily good even without profit targets being
included.
Trade With
Results for theCONFIDENCE
June 2002 to December 2008 Trade
Trade With ConfidenCe
CONFIDENCE
And
In theWin More
period with Profit Targets
first part of Often
this article sensible profit target levels were
And
And Win
Win More Often
More often
deduced, by way of example, from the exit variant that best Winning Signals Day After Day
Winning Signals Day After Day
Trade reflWith CONFIDENCE
ects the portfolio
Futures/Forex/Stocks:
indices. Coincidentally, the exit method
chosen by the author inAlltheTime Frames
first paragraph (and deliberately
Trade With
Winning CONFIDENCE
Signals
Futures/Forex/Stocks: Day After Day
All Time Frames
Futures/Forex/Stocks: All Time Frames
And Win
so SIMplE
ONE More
for pragmatic Often
reasons)WE
SECrET corresponds
TEACh exactly to the best
And
ONE SIMplE SECrET Often
Win More WE TEACh
variant according to Table 2.
WIll ChANgE
Winning YOur
Signals TrADINg
Day lIFE!!!
After Day WIll
WinningChANgESignalsYOur TrADINg
Day After lIFE!!!
Day
In the right-hand half of Table 1, the results for the most one SiMPLe SeCReT We TeACH
Futures/Forex/Stocks:
• See why After 14 Years
successful exit Our All inTime
Students
method Frames
Continue
combination with profit targets Futures/Forex/Stocks:
WiLL CHAnGe YoUR All
• See why After 14 Years Our Students TimeContinue
TRAdinG Frames
Life!
To Say “Best Method I’ve Ever Seen”
can be found. The results for a profit target of six per cent are To Say “Best Method I’ve Ever Seen”
ONE SIMplE
The Complete UltimateSECrET
Course. WE TEACh ONE SIMplE SECrET
The Complete Ultimate Course. WE TEACh
outstanding even when including the second half of 2008.
WIll ChANgE YOur TrADINg lIFE!!! •WIll
See WHY After 14YOur
ChANgE Years Our Students Continue
TrADINg lIFE!!!
• See & Hear Figure
Their3 shows
Success theStories
way theOnperformance
our Websitedeveloped using a • See & Hear Their Success Stories On our Website
To Say “Best Method I’ve Ever Seen” –
amazing annualised • See why After 14 Years Our Students
Course /Continue
See why Afterten14
perYears
cent stop
Our loss. While/Continue
Students there is anSupport • Simple
• Simple Approach / Keeps Working Lifetime It’s TheApproach
Complete /Ultimate
Keeps Working Lifetime Support
To Say “Best performance
Method I’ve ofEver per cent accompanied by excellent To Say “Best Method I’ve Ever Seen”
85 Seen”
• All New Course Materials and Studio Produced Video • All New Course Materials and Studio Produced Video
The Complete Sharpe profit factor and Ulcer Index figures, there is a The
Ratio,Course.
Ultimate • See
Trade & HearUs.
Complete
With Their Success
Ultimate
Learn Stories
Course.
with Live On our
Actual Website
Trading
Trade With Us. Learn with Live Actual Trading
See & Hear maximum drawdown
Their–Success –
Stories even calculated
On our Website on a daily basis – of • See & Hear Their Success Stories On our Website
• Easy to Learn A lifetime of Winning Trades •• Simple
Easy Approach/Keeps
to Learn – A lifetimeWorking/ Lifetime
of Winning Support
Trades
only -13.86 per cent.
Simple Approach
Your Best Chance / Keeps Working
of Finally / Lifetime
Succeeding Is Support
Here. • Simple Approach
Your Best Chance / Keeps Working
of Finally / Lifetime Support
Succeeding
•
IsAll NewDon’t
Here. Course Materials and Studio Produced Video
Wait!
AllDon’t
New Wait!
Course Materials and Studio Produced Video
Conclusion • All New Course Materials and Studio Produced Video
Trade With Us. Learn with Live Actual Trading Trade
Trade WithWith
Us.Us. Learn
Learn with
with Live
Live ActualTrading
Actual Trading
In swing trading, profit targets should always undergo an
Put the
Easy to FUN
Learnback
– A in your The
lifetime
examination. trading
of old by going
Winning
trading to our“limit
Trades
adage Website: Put
losses, let profits • Easy the
to FUN
• Easy Learnback
– A-in
to Learn Ayour
lifetime trading
lifetime by going
ofofWinning
Winning to our Website:
Trades
Trades
Your Free
Best Chance
Trading of Finally
run” doesLessons Succeeding
not alwaysandseemAudio Is Here.
Course
to be true – at least as regards the Your Best
Your
Free Chance
Best of Finally
ChanceLessons
Trading Succeeding
of Fainlly Succeeding
and Audio Course
Don’t Wait! strategy presented here and its characteristic of combining Is Here. Don’t
Is Here. Wait!
Don’t Wait!
BreakThroughTrader.com | 713-228-3479 BreakThroughTrader.com | 713-228-3479
a high trading frequency with short holding periods. In any
t the FUN back
case,inityour
wastrading byto
possible going
showto in
ourthe
Website:
previous paragraphs Put the FUN back in your trading by going to our Website:
Put the FUN back in your trading by going to our Website:
Free Trading Lessons and Audio Course are used or not, the
that regardless of whether profi t targets Free Trading Lessons and Audio Course
Free Trading Lessons and Audio Course
strategy with its sub-variants developed here succeeded in
reakThroughTrader.com | 713-228-3479
holding its own during the market turbulences of the second
BreakThroughTrader.com
BreakThroughTrader.com| I713-228-3479713-228-3479
half of 2008, which were like a baptism of fire.
August 2010 | www.tradersonline -mag.com 37

TRADERS´STRATEGIES
Rule Based Naked Put Sell
Trade Like an Insurance Company

When I talk to friends, some of them say that one of the most uncomfortable feelings in the world is when an insurance salesman sits across the table from
them. The insurance salesman would tell you that there is an old sales adage that says, “People hate to be sold, but they love to buy”. Since people love
to buy, sometimes the best thing to be is the one that sells to them. Major insurance companies use things like actuary tables and background checks to
make sure they do not take on too much risk. Traders use tools like support levels, delta, time, and news to do the same. As Stock insurance goes, just like
with any other type of insurance, over time the insurance company will make more money than the insured.
o The Basics Naked Puts? The two main reasons are to acquire Stock at a
Though Naked Puts have traditionally been painted in a very discount and to trade a Stock in a bullish direction.
negative light by many traders, educators, and brokers, they
can be used to capitalize on the aforementioned concept. Selling Puts as a Stock Discount
The definition of a Naked Put, according to Investopedia is “A As we are looking to capitalize on our popular product, we
Short Put Option position in which the writer does not have would want to buy that product, or Stock, at a discount. The
the corresponding short position in the underlier, or has not Stock we will use in this example is FSLR, trading at $132.13 (at
deposited in a cash account an amount equal to the exercise the time of writing this article). A Stock buyer could simply go
value of the Put.” What that truly means is that as the writer, buy the Stock at the $132.13 price, or an Option writer could
you are acting as the insurance company with the obligation sell the July 135 Put Option for $5.05. With seven days left until
to buy the Stock that you are insuring. The Option writer can Options Expiration, this means that the Option writer would
only make the amount of the premium collected, no matter wait a few days to take possession of the Stock. The $5.05
how high the Stock goes. The position actually has the same taken from the obligation to buy the Stock at $135.00 brings
risk graph as a Covered Call. Both positions provide limited the cost basis of the Stock down to $129.95 or a difference of
upside with nearly unlimited downside exposure. With $2.18 per share, thus discounting the underlying asset. This is
nearly unlimited downside risk, why would anyone trade a fundamental concept that should be understood even by
the most novice value investor.
F1) FSLR Stock Chart Rule Based Put Selling for Cash Flow
The second, and often more valuable, reason is to use Naked
Puts as a cash flow vehicle. The key to using Naked Puts as a
cash flow vehicle is to understand and follow a specific and
defined set of rules for the position. The standard rules for
Naked Puts are:
1. Perform only in a cash account and with a Stock you

would not mind owning.
2. Execute with a stagnant to mildly-bullish outlook on the
Stock.
3. Expect no major news that could cause dangerous gaps
in the Stock.
In order to qualify, the stock must be in a stagnant to mildly bullish uptrend with at least two levels of support 4. Sell between 20 and 35 days from the date of the Option’s
between price and the short strike. This chart shows the FLSR position of $132.13 being separated from its expiration date.
breakeven point by two levels of support, $125.50 and $113.51. The stock also shows the beginning of a minor 5. Maintain at least two levels of support between Short
uptrend, as indicated by two consecutive higher swing lows. Strike and Current Strike price.
Source: www.tradestation.com 6. Ensure a maximum delta of .13 on the Short Strike price.

www.traders-mag.com
TRADERS´STRATEGIES
7. Look for a minimum of eight percent return. F2) FSLR Risk Graph
8. Adjust the position by rolling down and out when the
delta of the Short Strike reaches .32.
As we are primarily interested in capitalizing on business

transactions with these popular products, as value investors,
we must be disciplined. These rules are established for the
protection of the seller, especially Rules one through three.
We should only sell Naked Puts in a margin account that has
favorable margin rates for Naked Put traders and never over
leverage. Some brokers require as little as ten percent of the
underlying Stock obligation held back against the income
of the Put. That low amount of margin requirement can be
a double edged sword, which allows for great returns but
also can expose traders to serious financial damage. It is The above risk graph shows the profit and loss of the position at expiration. Blue line represents the value of the
important to remember that the same rules apply for selling position at expiration; the green line shows the value of the position at inception. The blue line being above the
Naked Puts as would apply for purchasing Stocks, which is green indicates that this is a Theta Positive trade, making money from the passage of time. Notice the break even
the reason for both a stagnant to mildly-bullish outlook and line at expiration is lower than at inception moving down as time passes.
the lack of news that could affect the Stock. Source: www.tradestation.com
Rules 4 and 5 are simply put in place to add a level of

probability to the Option expiring worthless. The levels of
support are there to obviously act as insulation between the position is to adjust the position based on the underlying
current price of the Stock and the Short Strike. The stronger delta of the Short Strike. If the underlying Stock moves in
the levels of support the less chance there is of the Stock an unfavorable direction, then the delta of our Short Strike
price falling through them causing the Option to expire in Option will rise. Once that delta reaches .32, the probability
the money. The Option expiring in the money would mean of failure becomes too high, and it is time to roll the Option.
that the seller would be obligated to take possession of The best way to roll the Option is to roll down at least one
the Stock in exchange for the premium, and those levels strike price and out at least one month for a net credit. There
of support will help that. Delta is not only the move of the will be times that more contracts or more time will be needed
Option in relation to a $1 move in the Stock but also, on a to roll for a credit, but if the roll is done early enough, there
short term basis, the probability of the Option expiring in the is typically very little need to incur much more exposure. As
money. Selling an Option with a delta of .13 or below keeps value investors looking to capitalize on a popular product,
the Option with around an 87 percent probability of expiring we are fortunate to have so many vehicles at our disposal,
out of the money. The drawback to the high probability is but we must be educated and aware of how to effectively
that with the higher probability typically comes a lower rate utilize them and protect and insure ourselves against the
of return. In selecting these Options to sell, it is best to make risks.
sure and select an Option that returns at least eight percent
in one month. Conclusion
For example, look at FSLR trading at $132.13 (price at the In the time old tradition of “do what successful people do”, as
time of the article). In the attached chart, it is easy to see that traders we want to follow successful people and companies.
there are two defined levels of support between the current There are very few companies in this world as large or as
Stock price and the strike price of $110. The August 110 Put successful as insurance companies. By using some of these
Option is currently selling for $2.81 with a delta of .13 and probability tools we can act as the insurance salesman,
30 days until expiration. With a broker that requires only ten without the uncomfortable feeling at the table, because
percent margin, the margin required per contract would be people love to buy. n
$1100. The proceeds from the sale of the Option would net
$281 per contract for a 25.5 percent return with approximately
an 87 percent chance of success. This is a prime example of
a high probability trade with an acceptable rate of return in Chuck Fulkerson
the given time period.
Chuck began his trading career in 2006, primarily focusing on the
Risk Management and Adjustments options arena and became proficient enough in trading through
Selling the Naked Put for cash flow is a done to take the use of options that he was able to leave his career and focus
advantage of the leverage made available by the broker’s on mastering the financial markets. Chuck graduated from
margin and high probability, but like any trade it can go California University of Pennsylvania with a degree in computer
against you. Selling a Naked Put has the same downside risk science in 2000. Chuck has hosted trading radio programs and
as holding the Stock, because the underlying Stock could go was a speaker at the International Money Show in 2009.
to zero. The way we can protect ourselves against risk of the

TRADERS´STRATEGIES
Better Signals, Greater Success
Cluster Trading – Draw on Unlimited Resources

Technical analysis is a broad concept. Basically all analytical methods which do not derive from fundamental data or current market news, but
are more or less directly based on a chart, belong to that concept. Primarily, price development over time and visual features play a role here. As a
matter of fact, each instrument, on the basis of certain definitions, delivers signals that suggest either an entry or an exit or, for instance, indicate
a possible trend reversal in the form of supports or resistances. In reality, however, only a few of those signals produce somewhat reliable results.
It is more promising to trade a signal only when it coincides with other signals or when it is backed up by further indicators. The simultaneous
occurrence of several signals and given conditions is called a Cluster. Clusters are particularly appropriate to the trading of pullbacks.
o Why More Promising? kind of near relative of top and bottom picking, where the
That question is easy to answer since, statistically speaking, aim also is to find an ideal entry.
the chances of a given event increase when several
circumstances all prefigure it. A good example would be the General Determination of Trends
question of who will win the UEFA Champions League next How do we determine the prevailing trend? As mentioned
season. Of course, in principle the outcome is uncertain and above, well-defined upward and downward trends play a
each participating team has a theoretical chance. However, major role in the application of Cluster Trading. Sideways
there are favourites e.g. Inter Mailand or Bayern Munich. trends are not of interest. Furthermore, it is of no importance
Perhaps it would be a good idea to bet on those teams, in which timeframe the trend develops. Searching for clusters,
as many aspects seem to suggest that Inter or Bayern will one can analyse the trend of a weekly chart just as well as the
again come out on top. It is nearly the same with a chart in that of a 5-minute chart. But let’s come back to the question
a given configuration in which some signals coincide. originally raised. For a simple determination of a trend it is
sufficient to concentrate on the three following variants.
Objective of the Strategy
First it makes sense to get a picture of the underlying 1) Visual appearance
trend. This is the fundamental question a technical analyst One looks at the chart and decides whether it goes
always raises. It is based on the assumption that prices more or less firmly up or down. A zigzag pattern, as
move in trends and that an obvious trend always prevails. schematically depicted in Figure 1, can be found in many
However, prices never move straight in one direction or charts. However, it is quite difficult to define how exactly
another but swing between small up moves and down a trend is designed on the mere basis of visual criteria.
moves. Depending on which price move shows the biggest It would be left to each trader’s purely subjective and
magnitude, either upward or downward, the well-known emotional judgment to assess the existence of a trend.
zigzag pattern can be observed. In other words, trend Of course at first glance, for example by running through
movements alternate with corrections (pullbacks). The a lot of charts and stocks of a given index, that method
objective of the strategy is now, with the help of a Cluster, can be helpful. Nevertheless, once a candidate for a trend
to spot the end of a pullback as precisely as possible in order has been identified, one should ascertain its validity.
to find an entry (Figure 1).The point is to find the moment
when the market turns, i.e. when the majority considers 2) Counting
the price so cheap or so expensive that the stock should A very simple but effective way of determining a trend
accordingly be bought or sold. Cluster Trading is thus a is the counting of the highs and lows. When each new
40 August 2010 | www.traders-mag.com

TRADERS´STRATEGIES
www.traders-mag.com
TRADERS´ on CD
Order today!
TRADERS´ on CD 2008
All TRADERS´ issues from 2008 on CD.
£ 24.90 / € 34.90 / $ 51.90*
TRADERS´ on 3 CDs
You can choose any three cds from the

following years 2003 to 2008 (each CD
contains all the issues for that year).
£ 49.90 / € 66.90 / $ 99.90*

* for delivery outside Germany additional postage charge applies
Call 00 49 (0) 9 31 4 52 26-15 or send an email to subscribe@traders-mag.com.

All articles are in an easy to use PDF format.
August 2010 | www.traders-mag.com 41
TRADERS´STRATEGIES
F1) Objective of the Strategy the available trendlines contribute to the formation
of Clusters and are therefore relevant to the strategy
presented here (Figure 2).
Fibonacci Retracements
Fibonacci retracements are one of the most popular and
efficient tools to spot entry chances during consolidation
periods. They follow the principle of the “golden ratio“, a
recurrent figure in nature (1.618:1) which became popular
among artists and architects during the Renaissance. It
is considered the ideal proportion and thus epitomises
harmony and aesthetics.
In price charts, too, that ratio can be found in the form
of a pullback movement with a ratio of 1.618:1 measured
against the preceding trend movement. Conversely, the
ratio can also be 1.382:1. In such cases we talk about 61.8%
or 32.8% Fibonacci retracements.
Pullbacks in an existing trend are used for entries. When a pullback has run its course can often be decided in The third important value is the 50% retracement,
Cluster areas. even though it has nothing to do with the golden ratio.
Source: www.tradesignalonline.com Fibonacci retracements have origins that are totally
different from those of other instruments of technical
analysis and are therefore excellently adapted to the
high exceeds the previous high and each new low finding of Clusters. Where, for example, trendlines
exceeds the previous low as well, then a clear uptrend and Fibonacci retracements coincide, the chances of a
exists. Similarly, continually falling highs and lows successful trade increase.
depict a downtrend. The more highs and lows occur in
a row, the stronger the trend. Moving Averages
Besides the fact that moving averages generally serve the
3) Trendlines purpose of trend identification, they can also be a helpful
Drawing trendlines works in a way that is similar to attribute in charts. Long-term moving averages like 80-day
the counting method. This can be done by connecting or 200-day averages are of relevance to prevailing trends
the most significant highs and lows, provided they are and most of the observant market participants attach
aligned. With that method, only some trends come importance to them. It is not rare for prices to evolve along
into play, nonetheless the trendline is a very reliable the line of a moving average before eventually crossing it,
instrument for the identification of trends. Furthermore, initiating a trend reversal.
However, quite often it also happens that prices bounce
against the line. In connection with Clusters, the 200-day
F2) Trendlines Indicate Clusters moving average, for example, is considered a support
(Figure 3).
Bollinger Bands
Named after their developer John Bollinger, the Bollinger
Bands are a different kind of indicator. They consist of
a moving average, generally over 20 periods, and two
volatility bands which represent a standard deviation
above and below the average line.
The logic behind this is that prices usually evolve within
those bands and each movement to or beyond the limits
of the bands represents a temporary extreme. Trading
exclusively with those bands means selling at the contact
with the upper band and buying at the lower band. In what
follows the Bands will only be used as a supportive criterion
for Cluster trading.
Here you can see the hourly chart of the EUR/USD currency pair. In connecting the highs, a trendline has been Oscillators as Filters
designed. Now, the price could again go up towards the line and from there fall further down. Provided other For the more demanding trader it is possible to use an
technical tools confirm this assumption, the Cluster can be traded. oscillator like the MACD or the RSI (Relative Strength
Source: www.tradesignalonline.com Index) as an additional filter. In the case of the RSI it would

TRADERS´STRATEGIES
mean that a cluster occurring in an uptrend will only be F3) AUD/USD Daily Chart
traded provided the RSI is simultaneously in its oversold
area.
This would be a further sign, from a technical
standpoint, of untypically cheap prices and of a price
bounce being bound to occur. In Figure 4 it can be
observed that the RSI is in its oversold area as the Cluster
arises. This Cluster is extremely meaningful.
Trading Clusters
There is an underlying difficulty in trading clusters in
an appropriate way. It is not often that at a given price
and at a given moment all criteria are simultaneously
fulfilled. Only very rarely are moving averages, Fibonacci
retracements and Bollinger Bands converging accurately
towards the same price. A Cluster is therefore more an
area to be looked for in the chart than an exact price.
A cluster can already be detected far in advance, as
Fibonacci retracements can be designed as soon as the In December 2007 a Cluster occurred in the daily chart of the AUD/USD currency pair (box). The chart touched
trend move has run its course, and Bollinger Bands and the lower Bollinger Band in the vicinity of the 200-day moving average. Furthermore, a 50% retracement of the
moving averages evolve in clearly represented channels. previous uptrend has already happened.
This is shown very well in Figures 3 and 4. Source: www.tradesignalonline.com
While a Cluster occurs, it makes sense to look around

for a Fibonacci retracement, as this pattern is like a straight
line. In the +/-1% vicinity of that retracement line it is now Conclusion
possible to define a Cluster box. With the help of this box Cluster Trading is an excellent trading approach. It may take
there are two ways to trade. some time to undertake the preliminary research effort
On the one hand, once all the signals have occurred that must be made before a promising Cluster is identified
and the lines have been confirmed, we can place an order that satisfies the tight criteria. Excellent Clusters are a very
at today’s close or tomorrow’s open and set the stop at rare event. When applied to different timeframes and to
the opposite edge of the Cluster box. On the other hand, a wide selection of stocks, it is possible to find one from
one can also decide not to take the trade initially. This time to time. Basically, Clusters offer a very good chance of
would mean that one waits before opening the trade until successful trades and an outstanding risk/reward ratio. n
the price breaks out from the Cluster box in the direction
anticipated.
In case the price does not respond to the cluster and F4) DAX Daily Chart
the trend does not reverse, one would not even enter the
trade. One would be stopped out without having actively
traded. Should, however, the entry be triggered, the stop
at the other end of the Cluster box definitely makes sense.
In Figure 4 the stop loss is clearly marked in dark green.
Final remark: Should the trade run successfully, it would
be advisable to manage it with a reasonable trailing stop.
Intraday Trading
Cluster trading can be applied to the field of intraday
trading as well. However, in this context the strategy
should be somehow adapted and criteria like pivot points
and the previous day’s high and low should be taken into
account. On the other hand, long-term moving averages
can be ignored. Basically, Cluster Trading can be applied
to any chart.
According to one’s experience and preferences, it
can be individually adapted. The combination of criteria
presented here is, however, a proposal which has proved An ideal Cluster (box) occurred in the daily chart of the DAX. Prices were in the vicinity of the 61.8% retracement,
to be reliable. Provided one combines at least three below the lower Bollinger Band and bouncing against the 200-day moving average. In addition to that, the RSI
signals that occur totally independently of one another, dropped to the oversold area. Eventually the DAX went up by several hundred points.
the Cluster logic has been understood. Source: www.tradesignalonline.com
August 2010 |2010

August | www.traders-mag.com
www.tradersonline-mag.com 43
TRADERS´STRATEGIES
Pair Trading –
The Hedged Strategy
Since 1980 pair trading has been a household word on stock markets. Institutional
investors have been using this strategy ever since in order to produce steady earnings
without any major fluctuations. One essential point you must bear in mind is that in
reality stock markets are not efficient even though they are supposed to be in theory. It
is this inefficiency that you can utilise for your personal trading success. How? To find out
more, just keep on reading.
T1) Potential Earnings – Regardless of Market Development o What Is Pair Trading?

The idea of pair trading is very easy to explain. All you need
with rising prices is two stocks which in the past have had a similar price
Position Starting value Final value Profit/Loss development. From these two price developments you
„long“ Stock A rises by 10% € 100 € 110 +€10 form a relative difference by dividing Stock A by Stock B. If
„short“ Stock B rises by 7% € 100 € 107 -€7 this relative difference subsequently widens, you go short
Overall position +€3 on the stock that has developed better. You go long on the
stock that has developed considerably worse. This is dealt
with falling prices with by the example in Figure 1.
„long“ Stock A falls by 13% € 100 € 87 -€13 Based on the positions entered – they are both long
„short“ Stock B falls by 17% € 100 € 83 +€17 and short – pair trading is also described as being “market-
neutral”. In practice this means for you that you make your
Overall position +€4
profits regardless of the actual market development. The
following scenarios may happen.
with widening difference
„long“ Stock A falls by 5% € 100 € 95 -€5
Selection of Stocks
„short“ Stock B rises by 3% € 100 € 103 -€3
In order to successfully engage in pair trading, you must find
Overall position -€8 the right pairs of stocks. As far as this selection of stocks is
concerned, it is worth remembering this: The more similar
A cautionary note: „market-neutral“ does not mean risk-free. If the relative difference were to widen further, you the stocks are to each other, the more profitably the pair
should also place stops in time. of stocks can develop. The following indices form a good
basis:

TRADERS´STRATEGIES
F1) Differences with General Motors and Ford F2) Trading Range
On the chart you see two companies that show a high degree of correlation. Nevertheless
or for that very reason the spread visibly moves within a trading range of .62 to just below
.48, which is optimal for a pair trading approach.
On the chart you see two stocks from the automobile industry. In the upper areas you see
the General Motors (GM) stock with the Ford (F) company represented in the middle. At first
sight you can see the very similar price development of the two companies. Despite this These data can be found free of charge on the Web for
optical similarity in price development, there are very frequently relative differences. This a large number of companies. The more similar these data
difference, known as spread, is represented in the lower area (red line). You can see very are, the greater is the chance of you finding a profitable
well in this example where lows and highs have formed. pair.
Relative Difference (Spread)

After you have found pairs of stocks, it is very important
Fundamental Data: to analyse the spread derived from the price development
• Industry/Sector of these two companies. A graphic representation in the
• Market capitalisation form of a chart is absolutely necessary. Why? As an investor
• Price/Earnings Ratio (PER) you can draw interesting conclusions when looking at the
• Dividend development of the spread. Among other things, you can
see potential cycles in the course of the relative difference,
Data Calculated: and these cycles then also form the basis of expectations
• Correlation with regard to both the possible investment duration and
• Beta the earnings potential.
• Volatility Ideally, the relative difference moves around a mean
• Difference (Spread) value, forming a trading range. The following chart represents
TRADERS´ is a premier publisher of trading magazines for

the financial markets. Our vision is to offer an international
platform for industry professionals and serious traders alike.
Freelance Authors
Your Point Of Entry To Ideally you should be a practical trader and have considerable
knowledge of technical analysis and all the related subjects like
Finance and Media Industry risk and money management, trading software, trading systems
and trading psychology. You will work from home, on your own
time-schedule and submit articles at specified deadlines.
Please send your application via e-mail to:

jobs@traders-mag.com www.traders-mag.com

TRADERS´STRATEGIES
F3) Upward Trend F4) RSI
Using the additional analysis with the RSI indicator, the CAG/HNZ pair of stocks shown in
figure 2 gives you the optimal turning points for the spread. In the ranges of above 75 or
below 25 you can become active as a trader since there is a very high probability of the
The chart shows steel industry stocks that show an equally high degree of correlation. spread turning and returning to its average.
However, the spread moves in an upward trend. This upward trend occurs when one stock
constantly outperforms the other. Not optimal for pair trading!
spread on the chart and see a price trend, that means that
the two companies are constantly developing away from
a long-term price development of two stocks with a high one another and will not return to an average. And it is this
degree of correlation. As described, you can recognise three very “returning” to a mean value or average that is the pair
important characteristics: trader’s expectation. You are looking for a trading range and
want to use this trading range. A very important rule in pair
1) Trading range of the spread (high and low prices). trading is: “The trend is NOT your friend”!
2) Investment horizon of the pair trade (duration of When looking at figures 1 and 2 you can see the most
difference). profitable variation of this trading approach: Buy when the
3) Earnings potential of the trade. spread is low and sell when the spread is high, since there is
a very high probability that the spread will return again to
When you analyse two stocks as a pair trader, there is one its average.
thing you don’t want to see: a trend! When you look at the Discovering pairs of stocks whose spread moves within
a trading range was only the first step. Since the trading
range does not always turn around the same highs and lows,
F5) Optimal Setup it is important to find conditions that are overbought or
oversold.
Technical Analysis – Relative Strength Index

Overbought means a stock having a very high price and
there being fewer buyers. You can assume that this stock will
soon fall.
Oversold means the exact opposite. A stock has reached
a very low price level, and there are hardly any sellers. It is
safe to assume that this stock will soon rise.
In technical analysis you will find a large number of
indicators that can precisely describe such extremes in a
chart. One of the best-known is the RSI (Relative Strength
You see on the chart the very similar price development of the two companies (blue = Index) by Wilder. Although developed as early as 1970, it can
General Motors; black = Ford). However, you can see that in the past few weeks General still be optimally used today to find overbought and oversold
Motors has had to sustain markedly higher price losses while Ford was even able to gain situations.
slightly in the same period of time. This means that a low was reached in the spread. As The RSI indicator always moves between values of 0 and
a pair trader you can utilise this very situation by, as indicated by the arrows, entering a 100. Once you take a closer look at this indicator you will find
long position in General Motors and shorting the Ford stocks at the same time. Once the that it moves mainly between the values of 25 and 75 und
difference is back to normal again, you will close this position with a profit. only very rarely rises (or falls) beyond these values. If the RSI
has a value of above 75 or below 20, you can become active

TRADERS´STRATEGIES
as a trader since you can assume that the spread has reached F6) Closed Position with Profit
a reversal point. Of course, no indicator is perfect, but at this
point there is a very high probability that a reversal point
has been reached. Another interesting indicator that you
can use for analysis is, among other things, the stochastic
indicator.
What is important for your analysis is the time frame
adapted to your trading style. If you are short-term-oriented,
it makes little sense to analyse weekly charts. You can carry
out pair trading with different time frames. From analysing
weekly charts right down to 5-minute intra-day charts you
can decide yourself where you feel most at home.
Figure 5 provides an example of the way a pair trading
approach is put to work. In figure 6 you can see how the
trade developed. How did the trade in figure 5 turn out? As expected, the relative difference has been brought
into line again and it was possible to close the positions with a profit of just short of 14%.
Risks in Pair Trading
As mentioned earlier, you have to constantly monitor your
positions once you have entered them. In case essential
indices change such as, for example, correlation you must
smooth the position and look out for a new opportunity.
On no account should you as an investor only close
one position and keep the other. Always consider the Manfred Schmid
long and short positions in tandem, i.e. they are opened
simultaneously and closed simultaneously. Any other way Manfred Schmid discovered an interest in the stock market while still
of handling them would increase your position risk. a student. Finding an optimal trading strategy for achieving regular
profits in the markets – as in pair trading – has been Manfred Schmid’s
Conclusion goal for many years.
All this means that pair trading offers an interesting way Contact: schmid@globalvistabond.com
of achieving earnings evenly and steadily. Because of its
special nature you can produce these earnings regardless
of the market environment and you are even hedged at all
times. CFD’s are also suitable for pair trading. Nor do you have
Remember, though, that even in pair trading to be a maths genius to find pairs of stocks. Programs like
diversification is very important. Of course, you can do pair Excel can help you to carry out the necessary calculations
trading not only with stocks, but futures, options, ETF’s or very easily and quickly. n
Become a Member of the Online

Trading Academy Community
• Get access to free online courses.

• Enjoy free education and market
commentary from Online Trading Academy’s
master instructors.
• Plus get full access to our financial
education center packed with helpful
information about trading and investing.
To register go to • And best of all registration is FREE!
www.tradingacademy.com/membershipoffer

TRADERS´STRATEGIES
The 50/20 Strategy
Using Important Psychological Price Levels for Trading
o Introduction – The Premise $5 a share, it becomes very difficult for it to CLOSE above
It has been said that the great astronomer and physicist, $5. The key is where the stock closes, not where it trades
Galileo, once referred to mathematics as „the alphabet with throughout a particular day. How many times have you seen
which God has written the universe.“ As you further educate a stock fall below $5 and it seemed to take an eternity for it
yourself in your trading career, you will notice that the to finally creep back up to $6 or $7 a share? There are various
markets seem to honor certain price levels and continue to explanations, such as lack of institutional support for stocks
provide potential trading opportunities around those levels. under $5, but whatever the reason, $5 becomes a major
The following strategy was designed with that idea in mind. support and resistance level for a stock.
The same holds true for $10, $20, $50, $100 (we could
Stocks Seem to Like Certain Levels continue to $150, $200 and so on, but for the sake of this
After I had been trading for a few years, I noticed – and I am article, we will just discuss a few). Once again, how many
certain others have noticed the same thing – that stocks times have you seen a stock close below $10 and have
seem to pause around certain price levels (i.e. $5, $10, $20, difficulty getting back above $10? How many times have you
$50, $100). The lower price areas are the most difficult to seen a stock attempt to close above $20, but it just cannot
break through, while the higher numbers seem to become quite do it? I think you get the idea and the basic premise of
a little easier to break. For example, once a stock falls below this strategy.
So how can we use this information to our advantage?
You would never want to simply use a break of one of these
F1) Reaearch In Motion (RIMM) price levels in and of itself as the basis for taking a trade. You
want to use this information in conjunction with other factors
or indicators. However, knowledge of and implementation of
a strategy which recognizes these levels as being significant
areas of psychological support and resistance could be to
our advantage and perhaps give us an edge over those who
are not aware of them.
The Rules
This is not designed to be an active strategy, but rather a
swing to position strategy – a few days to potentially a few
weeks or even months. The “sweet spot” price-wise for a lot
of traders is the $20 to $50 level, so those are the levels we
RIMM closing ten percent above 50 on several days, but without volume confirmation. will focus on with this strategy. Here are the basic rules:
Source: TradeStation When the stock CLOSES above/below either the $50
or $20 price levels by at least ten percent and heavier than

TRADERS´STRATEGIES
normal volume, look to potentially enter the trade – along F2) Further Development of RIMM
with confirmation with whatever indicators you would
normally implement as well as identifying additional areas of
support and resistance around those price levels.
The time interval to enter the trade will be based on your
particular trading style. For example, if I was a swing trader,
I will focus more on the day chart as well as a higher minute
chart as opposed to a position trader focusing more on the
weekly and monthly charts.
Set your stop above/below the $50/$20 levels depending
on if you are long or short.
Keep This In Mind

Notice the first rule specifically uses the word “closes” as RIMM closing ten percent above 50 WITH volume confirmation. Just over two months later the stock was up over 40%.
opposed to simply trading at that 10% level above or below Source: TradeStation
$50 or $20. For example, let’s say that you have identified as a
potential candidate a stock which has recently closed around
$21 and you are keeping an eye on it to see if it can get above volume. Perhaps at that point, it could be said that the
that “magic number” of $22. During the course of the trading stock has broken that psychological resistance level of $20.
day, you notice it trading above $22 and other indicators Also keep in mind, that the real purpose of this strategy is
you might be utilizing, such as slow stochastics or MACD are to potentially provide added confirmation that the stock is
giving the indication that it could move higher. Well, to be breaking through a major area of psychological support or
on the safe side, you will want to wait until it actually CLOSES resistance in order to take advantage of a potentially larger
above $22 as an added confirmation. Many times, stocks will move over a longer period of time. I mention that because
touch a support or resistance level during the trading day obviously most traders are not going to sit around and wait
but not break through them and subsequently close away for the stock they have identified as a potential candidate to
from those levels. Patience is key, you do not want to be move ten percent and then enter a trade when the market
premature in pulling the trigger. So you want to wait for a historically has had difficulty making that much of a move
close above $22 in this example – coupled with convincing in a year at times. Certainly, there could be many short
volume. term trades with the stock you are considering prior to this
Notice also that you are to set your stop above or below strategy actually confirming.
the $50/$20 levels. The key is you want to give yourself enough What I have found to be the best way to scan for possible
wiggle room. These areas are so significant that the stock candidates is to look for stocks which are trading between
may have a tendency to gravitate to them upon entering the $45-$55 if you are considering stocks breaking the $50 area
trade. Obviously, the longer your potential holding period is, either long or short. Narrow your search to the stocks which
the more room you can give your stop. Incidentally, when are near $55 (i.e. $53 to $55) and trending up for a possible
it comes to stops, never think in terms of “if” your stop gets long and near $45 (i.e. $47 to $45) and trending down for a
taken out, think in terms of “when” your stop gets taken out possible short. Conduct an analysis to determine the overall
– what will the loss be? Of course, you have to make sure that trend of your candidates and at which point you will be
based upon your analysis the potential reward is sufficient prepared to enter. For the $20 range, scan for stocks between
but also keep in mind how much of a loss you will suffer $18 to $22. Pay attention to the stocks which are trending
when your stop gets executed. Always think of the worst case
scenario. If you could suffer a significant loss in your account
based on your stop’s execution, then perhaps lighten your F3) Wynn Resorts (WYNN)
initial position until you have confirmation that the trade is
going in your direction – then you can add to it. (Remember,
when it comes to trading, we do not know that we are right
until we actually are).
Additionally, when it comes to volume, the key is you
want to see higher than normal volume. This is almost
subjective. For example, if the average daily volume of the
stock you are considering is five million shares and when
it closes above $22 the volume is about five million give
or take a hundred thousand shares, then that would not
qualify as “convincing” volume. If, however, the average
daily volume is five million shares and the stock closes above
$22 with volume in excess of eight million shares, then that WYNN closing ten percent above 20 with volume confirmation.
would certainly qualify as higher than normal, “convincing” Source: TradeStation

TRADERS´STRATEGIES
F4) Bank of America (BAC) that you identify a stock trading at $45 – which is currently
trending up – and then not touch it until it is trading above
$55 with strong volume. Identify potential longs and shorts,
based on each stock’s trend and then focus your attention
on the stocks right on or near those 10% levels, where any
day there could be a confirmation of a break of support or
resistance. Remember, this strategy is helping to potentially
provide additional confirmation that those price levels have
been broken.
Let’s Take A Look At Some Examples

Figure 1: Notice on RIMM that $50 represented a significant
“area of concern” as I call it – as well as our “magic number”
BAC short opportunity closing ten percent below 20 with volume confirmation. of $55. When the stock approached $50, it had some initial
Source: TradeStation difficulty breaking through. It eventually did and then
appeared to even break above the $55 level. However, the
volume never confirmed and this trade would not have been
down and currently trading around $19 or $18 for possible taken – at least for this strategy.
shorts and for the long side, focus on stocks currently trading
around $21 to $22 which are trending up. Figure 2: Here you see RIMM giving it another shot at
Let’s say a stock appears on your scan which is trading that $55 level. This time the stock closed just beneath $50
at $54. You have identified the overall trend being up, so, and then the next day closed well above $55 with volume
therefore, it is a potential long. Now you have a candidate to confirmation. Keeping with the rules of this strategy, you
observe and consider for a possible trade. I am not suggesting entered the following day in the $58 to $59 area (as that is
about as low as it traded the following day) and just over two
months later the stock was up over 40%. As a position trader,
F5) Potash (POT) you did very well with this strategy.
Figure 3: WYNN ran into some difficulty, as expected, in the

$20-$22 range. Finally, it closed above $22 on higher than
normal volume. That was the catalyst that propelled the
stock to reach $50 just a month later. Look closer at this chart
and notice also that back in the beginning of 2009, the stock
closed at our magic “$55” level – only problem was no volume
confirmation. As a result, the stock eventually fell to a closing
low of $15.40 – only to gravitate back up to that $20 level. Are
you starting to see the significance of those price levels?
Figure 4: It also works on the way down. Here is BAC going

POT reversal from 180 and bouncing off 50 area. down and pausing at the $20 level. Finally, it closed below $18
Source: TradeStation (ten percent below $20) with convincing volume. It actually
fell to $14.88 on November 13, 2008 but closed that day at
$17.10. Notice how it gravitated back to that $18 level. So, if you
F6) Further Development of POT took the trade the following day in the $17 area, a week later
it was trading as low as $10.01, but closed that day (November
21, 2008) at $11.47 (more than 10% above $10). Notice also
that the low of the day was right about $10 – remember $10
being one of those important price levels we discussed at the
outset – but it could not break it. Early in 2009 it would break
$10, but not here on the first try. So, after you received your
confirmation, you could have potentially traded this from the
$17 level down to around the $10 level in about a week.
The Power of These Levels

Let’s now take a look at the “power” of these price levels just
POT made a strong move back up after hitting 50 area. in case you are not convinced. We will look at a couple of
Source: TradeStation stocks which were in major reversals – only to pause and turn
at about the same price area.

TRADERS´STRATEGIES
Figure 5: F7) Goldman Sachs (GS)

Here you can see POT trading in the $180 range prior to
a major reversal. How far did it reverse? All the way down
to the $50 level before beginning its upward move again.
Notice how it honored $50.
Figure 6: Within two months, it was trading well above

$90 and four months later it was trading in the $120 range.
Figure 7: Here you can see GS with a major reversal from

$170 all the way down to – you guessed it – the $50 area.
Once it hit that area it was off to the races – bouncing off of it
all the way to $130 less than five months later. GS honoring the 50 area after a major reversal from 170.
Source: TradeStation
In Summation
Hopefully you have been able to see the importance
of these price levels and going forward you will begin
to recognize them in your trading – even if you do not
implement this strategy verbatim. Humans are emotional Eric Waddell
beings, with a tendency to do the same things over and
over again. Since human behavior has essentially remained Eric Waddell has been trading for over ten years and teaches with Online
the same since the dawn of man, there is a good chance Trading Academy. He has developed various strategies in the equities and
that these price levels and these rules will continue to Forex markets, which he has shared with students in various parts of the
hold significance far into the future. world. Eric spends quite a bit of time focusing his classes on trader psy-
It is simply a matter of having a plan and executing chology, risk management and discussing what not to do with regards to
that plan along with logical money management. Good trading – not just what to do.
trading! n

TRADERS´BASICS
TRADERS´BasicS
A New Look at Risk and Money Management
The DDRL Equation©

As you sit looking at the monitor, eyes transfixed on the screen, you keep going over all the analysis in your head that led to the decision to buy. Your heart
begins to pound as you reach for the mouse. You pause for one last look at the chart before committing to the trade. With a push of the button you are in
and then, suddenly it hits you, the one thing you forgot. How could you have overlooked it? An analysis of your individual direction, discipline, risk, and
leverage equation: the DDRL.
o Money management addresses the preservation of existing segments of the equation are buy, sell, and leverage. Each
and accumulated capital. Without the implementation and phase of the trading decision can be analysed based on
strict adherence to money management principles, even the your individual section and total score. Let us examine
best trading strategy may not succeed. Money management what each part of the equation can tell you. Please refer
is a critical element of a successful trading plan. It is a long- back to Table 1 as each segment is explained. This will help
held belief by many professional traders that “it is not how you further understand what buying, selling, and leverage
much money you make; it is how much you do not lose” that tell you.
ultimately determines success. This article is not about the
traditional application of money management such as how Buy
much total capital should be risked or how much should be When you make the decision to buy, you are selecting the
risked in any one individual trade. Your screening selection, direction or trend of a trading vehicle: stock, index, ETF, or
risk management, and the proportion of leverage can be commodity. You are taking a position, either long or short,
ascertained from your DDRL score. Understanding this based on your analysis of the direction. When analysing
simple but powerful equation is, in my opinion, the key to all your buy decision, you will be able to tell if you were correct
aspects of money management and skill. or incorrect in your assumptions of the direction.
The buy side of the equation also reveals the
What is the DDRL and What Does it Tell You? effectiveness of your individual screening selection. No
Direction, discipline, risk, and leverage (DDRL) are the matter which selection methodology you use – technical,
components of an equation that examines your ability, fundamental, or both – the result is revealed when those
trading methodology, and ultimately your skill. Solving individual vehicles make or lose money. If you have a large
the equation answers the questions of how good you number of losses, examine your selection methodology.
really are and it focuses on your individual problem areas. You can be correct on the direction and selection and
It pinpoints in which phase of the trading process you are still lose money because your timing (entry) was wrong.
deficient: Trading vehicle selection, timing, direction, risk When you buy, timing is of the utmost importance because
management, or money management. Are you risking more you are trying to capture gain in the shortest amount of
than your trading skill allows and using too much leverage? time possible. This limits risk and it makes little sense to
Your DDRL score will reveal all of this to you. tie up capital in a position that goes sideways or down.
The basic DDRL equation has three segments. Each An examination of your timing or entry point can be very
segment tells you a great deal of information about helpful to you. Again, if you have a large number of losses,
your trading. View the equation as three columns, with timing might be a factor. If it is, reassess your entry criteria.
each column giving you different information. The three As the old saying goes, “Timing is everything.”

www.traders-mag.com
Traders’ Bookshop - over 10,000 books in stock for active traders
TRADERS´BASICS
Spread Betting the Forex Markets 7 Winning Strategies Trading Forex for
An expert guide to spread betting for Trading Forex a Living
the foreign exchange markets Real and actionable A practical guide to
David Jones techniques for profiting from achieving financial
the currency markets independence with the
If you were to make a list of financial
Grace Cheng foreign currency markets
topics that have grabbed the interest
of the wider public over recent years Grace Cheng highlights seven Andrei Knight
then spread betting and foreign trading strategies, each of which is to be applied Andrei Knight is a highly sought-after
exchange trading would surely be near the top. These in a unique way and is designed for differing speaker and coach for professional traders
have both been around for decades, but market conditions. She shows how traders can use and individual investors alike, and holds
developments in technology and financial markets in the various market conditions to their advantage international certifications as both an
the past five to ten years have made them extremely by tailoring the strategy to suit each one. Filled NLP Practitioner, and a Professional Life
hot topics right now. with practical advice, this book is a must-read for Coach. His new book is a detailed guide
traders who want to know exactly how they can to how to trade the forex markets.
If you are looking to trade forex then this book
make money in the forex market. Code 401327, £29.99 (RRP £39.99) Save 25%
provides an expert introduction - helping you to
succeed by avoiding the most common pitfalls of this Code 27045, £12.39 (RRP £19.99) Save 38%
highly volatile but fascinating market. The Handbook of Trading Systems
A new approach to system
Code 421773, £13.19 (RRP: £19.99) Save 34%
Alternative Assets development and portfolio
The Naked Trader’s Guide to Making money from art, rare optimisation
Spread Betting books, coins and banknotes, Emilio Tomasini &
forestry, gold and precious Urban Jaekle
A guide to making money from
metals, stamps, wine and other
shares in up or down markets Every day there are traders who make a
alternative assets
fortune. It may seem that it seldom
Robbie Burns Peter Temple happens, but it does - as William Eckhardt,
The Naked Trader is back - and this Alternative assets offer a proven means of Ed Seykota, Jim Simons, and many others
time he's spread betting! The ultimate diversifying your financial portfolio away from remind us. You can join them by using
guide to spread betting - how to do it, the volatility of the markets. This comprehensive systems to manage your trading. A trader
have fun and make, rather than lose, a and authoritative book shows investors and their can never really say he was successful, but
few bob in the process. advisors how they can use tangible assets as a only that he survived to trade another day;
means of diversifying a portfolio and securing the “black swan” is always just around the
Code 401334, £10.49 (RRP £14.99) Save 30% wealth for the long term. An essential handbook corner. Trading Systems will help you find
Predatory Trading and for anyone interested in making rare, valuable your way through the uncharted waters of
and often beautiful possessions a part of their systematic trading and show you what it
Crowded Exits investment strategy. takes to be among those that survive.
New thinking on market volatility Code 401331, £24.18 (RRP: £39.00) Save 38% Code 263875, £20.99 (RRP £34.99) Save 40%
James Clunie
Predatory Trading and Crowded A History of the London Stock The Guts & Glory of Day
Exits is the perfect book for traders Market 1945-2009 Trading
looking to gain an edge through a George G. Blakey True stories of day traders
superior understanding of how Written in a down-to-earth, who made (or lost)
markets work, both in theory and in practice. journalistic style, this book reads $1,000,000
It will also be of interest to longer-horizon almost like a novel as it takes you Mark Ingebretsen
investors who are seeking to avoid timing through over 60 years of stock
errors, and to risk managers wanting to A rediscovered trading
market history. Blakey provides a classic. In The Guts and Glory of Day
understand better the subtleties of risk beyond fascinating perspective on the movers and shakers
traditional risk statistics. Trading, you'll read the astounding stories
- the winners, the losers, and the reasons why - of those traders who have been skilled
Code 289041, £27.99 (RRP £34.99) Save 20% giving a rare insight into the workings of the enough to make significant money, and the
stock market, plus profiles of key players and the
Behavioural Technical movements and effects of new, upcoming
gut-wrenching dramas of those who were
unfortunate to lose vast fortunes.
Analysis markets.
An introduction to behavioural Code 414717, £33.99 (RRP: £39.99) Save 15% Code 443996, £16.99 (RRP £19.99) Save 15%
finance and its role in technical
analysis For hundreds more offers on books for active traders, visit:
Paul V. Azzopardi www.global-investor.com/traders
Behavioural Technical Analysis is an accessible
Global-Investor
introductory guide to how human nature impacts the Harriman House Ltd
TO ORDER telephone +44 (0)1730 233870, go to www.global-investor.com/traders, or post to 3A Penns Road
markets and those who trade in them. Petersfield
GU32 2EW
Code # Qty Unit £ Total £
With an introduction to the six main areas of Mr/Mrs/Ms
I enclose a cheque to ‘Global-Investor Bookshop’
behavioural finance and an overview about how they Charge my VISA MASTERCARD AMEX SWITCH
can affect the work of technical analysts, this book

is a lucid and practical read for all those who want to
understand what happens when human nature and Valid from to Issue #
(Switch)
financial markets collide - and, most importantly, UK: £2 per book unless otherwise
indicated above
Subtotal
how to profit from it. Postcode

Europe & Eire: £4.00 for the first
book, £2.00 for each extra book | www.traders-mag.com
Signature
August 2010 53
TOTAL
Code 238781, £.74 (RRP £24.49) Save 30% Daytime tel.
ROW: £6.00 for the first book,
£3.00 for each extra book
Date
TRADERS´BASICS
The amount of capital risked and how much should be +1, leverage is not justified. Ignoring your true abilities
risked in any single trade is critical to success. If poor money and using leverage when your skill does not indicate
management principles exist, your trading plan will not be competence, its use will be disastrous. A score of +1.2 to +2
successful. The buy side of the equation will reveal if you means leverage is justified. A score of over +2.4 indicates
are risking too much capital or not enough. The buy side margin, options, and futures may be used as well. This part
reveals information on direction, selection screens, timing, of the equation not only tells you your competency level
and money management. but it also addresses the leverage justification.
As your skill improves, you can use more leverage. For
Sell this reason, you should use leverage on a sliding scale. If
The sell segment of the equation examines your self- using margin, start with 20-30 percent of available buying
discipline, trading psychology, and risk management. If power and increase it as your DDRL score, skill, trends, and
your score is good, it indicates that you are able to cut a loss risk projections dictate. Also, remember that margin is more
quickly and you do not hold on to losing positions. It also cost efficient than paying an option premium and margin
indicates that you are able to take profits and move on to has no time restriction so use margin first as a choice of
the next opportunity. By keeping your losses small, relative leverage. See Table 2 for details about the DDRL Leverage
to your trading account, a margin call will be very unlikely, Score.
and the use of leverage should be considered. Once you start using DDRL it will go on through time
Your analysis may reveal that you are selling too soon. If as long as you trade. This brings up an important point
this is the case, examine your stop placement strategy and about the score. Do not acknowledge the DDRL score until
risk-to-reward projections. In most cases, it is better to sell you have a minimum of 20 trades. This will reflect a more
too soon and take a profit than to hold out for the last dime realistic picture of the score. When you begin, your scores
only to have a large drawdown. Under no circumstances will be artificially high. As the number of wins and losses
should you allow a profit to turn into a loss. A large number take place, the DDRL will fall into a tighter zone between
of losses may indicate that you are being stopped out too one and four.
often. If this is the case, you may be trading stocks that are For very active traders with hundreds of trades a year
too volatile and your stop placement does not reflect this it is highly suggested that you start a new DDRL every six
volatility. In general, markets change their volatility profile months.
every 2 ½ years and in some cases more often than that. As a Let us take a look at how to use the DDRL equation in
trader, you must adapt to these changes. the following example:
Leverage 1. Trader X has ten wins and six losses.

The leverage segment is a factor of both the buy and 2. Trader X’s average dollar gain was $ 900.
sell sides of the equation. The leverage side tells you just 3. Trader X’s average dollar loss was $ 400.
how good you actually are (competence level). This is a 4. Trader X’s gains were $ 9000.
true reflection of your abilities, and one that cannot be 5. Trader X’s losses were $ 2400.
exaggerated, because it is based on your performance
up to that point in time. If you do not achieve a score of Plugging these figures into the equation gives us the
following:
F1) Direction Discipline Risk Leverage Equation 10 Wins x $ 900 Average $ Gain $ = 9000 Gains
Wins Total Average $ Gain Gains 6 Losses x $ 400 Average $ Loss $ = 2400 Losses
x = DDRL Score
Losses Total Average $ Losses Losses 9000 / 2400 = 3.75 = DDRL SCORE
In most cases an excellent DDRL score will be from +2 to

BUY SELL LEVERAGE
+2.5. A score greater than +2.5 reveals a high degree of skill.
Direction Self-discipline Competence Over time a score greater than 3.0 will be a rare occurrence.
Selection and Screening Risk Management Leverage Factor You should strive to achieve a score of at least +1.4 to +2.0.
Timing Under +1 no leverage or skill
Money Management +1.2 to +1.4 Small Leverage Monthly DDRL Score
Run a DDRL score every month. This will give you a better
+1.5 to +2.0 33-45 % Margin
picture of your performance over time and under different
+2.4 to +4.0 Full Leverage
market conditions. Everyone can have one or two good or
Margin, Option, Futures bad months. By taking an average of your score, you have
The three segments of the equation are buy, sell, and leverage. Each phase of the trading decision can be analyzed a more precise idea of your true ability under real market
based on your individual section and total score. conditions and psychological stress. What you find may be
Source: www.tradingschool.com very interesting and useful to you.

TRADERS´BASICS
Summary of the DDRL Equation F2) DDRL Leverage Score

Wins and Losses: If the ratio is unfavourable and the number
of losses is equal to or greater than the number of wins, begin 0 to +1.0 = 0 leverage and skill
your search for the problem on the buy side. Remember, the +1.2 to +1.4 = 20-30% of available leverage margin
buy component of the equation will give you information
about direction, selection and screening, timing, and money +1.5 to +2.0 = 33-45 % of available leverage margin
management. For example, you might discover you are +2.4 to +4.0 = Full leverage Margin, Options, Futures
placing too much capital in the trade and your direction and
timing are off. Risk and money management should be scalable based on your skill and ability. The DDRL
Equation helps you identify your problem areas. Is it on the buy, sell, or leverage side? It also
Average Dollar Gains and Average Dollar Losses identifies how good you really are through time.
This segment of the equation identifies problems in self- Source: www. tradingschool.com
discipline, risk management, and trading psychology. The sell

component identifies things such as the inability to cut a loss
or holding on to a losing trade too long. Average dollar losses
have a dramatic effect on average dollar gains. The sell side also
addresses your stop placement and risk management strategy.
Gains and Losses

The last segment of the equation identifies your competence
level, how good you really are, and the degree of leverage
justification. In other words, how much leverage you can Robert Deel
use based on your true skill and ability by giving you a DDRL
score. Money and risk management should not be based on Robert Deel is author and trading strategist, and CEO of Trading-
mathematical formulas alone. Ultimately, risk and money School.com. He created the DDRL Equation© and has used it for
management benefit by applying DDRL Equation© and over 20 years. Contact: www.Tradingschool.com.
answering the questions it causes the trader to ask. n
August 2010 | www.traders-mag.com 55

TRADERS´BASICS
Volume in Technical Analysis
A Real Trend Setter

Besides the particular price action, chartists also research another important component in their market analysis: volume. What is meant by that is the
number of stocks traded daily or weekly, also known as transaction volume. Even if volume is less important than price, it has great significance because
it confirms the price action displayed in the chart and may suggest an upcoming change of trend. In combination with price action it also provides
information about the strength or weakness of the current trend. Regardless of whether it is trend behaviour, formations or indicators – volume is a
common thread running through technical analysis as a supporting analytical tool and is therefore indispensable to every trader.
o Display during an uptrend and higher volume with a decline in price

Volume is displayed in the chart by vertical bars below the during a downtrend. Correspondingly, shorter bars indicate
price pattern. Longer bars stand for high volume and appear a lower volume. These appear in the chart when there is a
when a lot of transaction takes place. It is generally assumed corrective price adjustment in a downtrend or a rally in prices
that volume confirms predominant trends. This means that during an uptrend.
there should clearly be higher volume with a rise in price
Chart Formations
Volume plays a significant role in the development and
F1) BMW Daily Chart with Volume closure of chart patterns. Basically, there is a decrease in
volume during the development of a price pattern (e.g. a
triangle of several daily candlesticks). If it then comes to a
breakout with higher volume, you have to attach special
importance to it. Also, the development of a trend is all the
more firm the larger the turnover – i.e. volume – is. In other
words: If volume is high, the probability of a continuing
trend increases. This is true even if the trend happens to
be interrupted by a consolidation phase. By contrast, lower
volume is an unmistakable sign that a trend movement
will change or the current trend or breakout should be
considered to be more on the weak side.
On-Balance Volume (OBV)

To measure volume several indicators are available to the
chartists. The most simple and effective among them is
the so-called On-Balance Volume (OBV). This is all about
calculating the cumulative total volume (EV) which in
turn is determined by comparing the volume during price
increases to the volume during price declines. If the market
Here you can see the BMW share and its volume. In early August a volume peak was formed that confirmed the closes higher than the previous day, the volume of the day
supporting trend line. is deemed to be positive and added to the total volume.
Source: www.tradesignalonline.com If, however, the market closes below the previous day, the

TRADERS´BASICS
volume is called negative and subtracted from the total F2) Yahoo! Week Chart with A/D-Line
volume, resulting in up and downtrends of the OBV. If the
OBV develops an uptrend, that means that more volume
exists upwards than downwards, which is a bullish sign.
Conversely, a falling OBV line is a bearish sign. However, it is
advisable to make sure that price and OBV line trend in the
same direction. Otherwise there will be a divergence that
could signal a reversal of trend.
Accumulation/Distribution Line (A/D)

The On-Balance Volume was drawn upon by Marc
Chaikin who then developed the so-called Accumulation/
Distribution Line. In this volume indicator, price changes are
relativised and weighted on the basis of total shares traded.
The A/D Line is calculated by adding to or subtracting a
certain percentage of the daily volume from the previous
day’s A/D value. On days that close above the average
daily price, this value, weighted with a corresponding part
of the turnover, is added to the previous day’s value of
the indicator. On days that close below the average daily Here you can see how trade signals can be generated by a moving average (20 periods) and the A/D Line. Sequence:
price it is exactly the other way round. On the one hand, buy, sell, buy (circles).
you can identify divergences by using the A/D Line: If the Source:www.tradesignalonline.com
basic value develops new record highs in contrast to the

indicator, this is a negative signal. However, if lows within
the price development can still be detected, but not within advance indication of an upcoming change of trend. It is
the indicator, this is a positive signal On the other hand, the always seen in connection with the basic value and thus
A/D Line can be used as a signal generator by calculating provides precise information about the strength or weakness
a moving average (MA) on it. A buy signal exists when the of a trend since it reflects the pressure underlying a price
indicator crosses its MA upwards. A sell signal is there when movement.
the indicator crosses its MA downwards. The many different indicators are used to measure
trading volume. They determine whether the volume trend
Volume Price Trend (VPT) confirms the price trend or differs from it, thus generating
The Volume Price Trend (VPT) developed by Steve L. Kille, is buy or sell signals. n
a simple combination of momentum and trading volume.
This indicator is calculated by multiplying daily price
changes and trading volume. However, smoothing occurs F3) Yahoo! Week Chart with VPT
not by calculating a moving average, but by adding up the
separate daily amounts. The result is a diagram oscillating
around the zero line with theoretically unlimited extremes.
On days of gains they are positive and on days of losses
they are negative. The level of the particular value depends
on turnover and price movement. The Volume Price Trend
does not primarily show the trends of total shares traded,
but rather changes of price. The stronger the gains, the more
steeply it rises. Conversely, the lower prices fall, the heavier
the losses. If the indicator turns downwards within positive
territory, it is a sign of a decreasing upward momentum and
a probable downward movement of prices. An upturn within
negative territory signals a decreasing downward trend,
suggesting soon-to-rise prices. The most sensible thing to
do is to calculate an MA on the VPT and use the intersection
of the two lines as trade signals. A buy signal exists when the
VPT crosses its MA upwards and a sell signal exists when the
VPT crosses its MA downwards.
Conclusion The same chart here as in Figure 2, but instead of the A/D-Line the VPT serves to generate signals. It performs a
Volume plays an important part within technical analysis little better in this example. Sequence: buy, sell, buy.
because it confirms price action and also often gives an Source:www.tradesignalonline.com

TRADERS´PEOPLE
Mark Jurik
TRADERS´ Interview
Innovative Concepts of a Trading Maverick

Mark Jurik is a real discoverer that scrutinized chemical processes and experimented eagerly when he was a child. He has a diploma in chemistry and
graduated college with degrees in both electrical engineering and psychology. In the course of the years, Jurik was molting into a specialist for data
modeling and forecasting methods in the most different areas, e.g. in biology, chemistry, military, and financial markets. In doing so Jurik referred to
the theoretical and practical aspects of neural network technology and developed many formulas and indicators. In 1988, he founded the company Jurik
Research (www.jurikres.com) that develops algorithms for identifying and classifying complex data. These add-on modules for technical analysis are sold
to trading software platforms such as TradeStation, eSignal, or NinjaTrader. At the beginning of the year, Jurik Research was honored with the Technical
Analysis of Stocks & Commodities Readers’ Choice Award in the category “Best Software Plug-ins”. Moreover, Jurik is an author (“Neural Networks and
Financial Forecasting”), speaker at congresses and in seminars, as well as writing for popular financial magazines. In our TRADERS´ interview, we talk to
him about his innovative inventions, his trading strategy, and his way to becoming a successful trader and CEO.

www.traders-mag.com
TRADERS´PEOPLE
TRADERS´: Please tell us a little bit about yourself and commonplace, such as low lag noise filtering. So I started
your way to trading. developing a suite of technical analysis tools that eventually
Jurik: At age 12, I started my career as a beta tester for new became the basis of my product line today.
board games my uncle would invent. They usually involved
rolling dice and using math tables to estimate the likelihood TRADERS´: Can you please tell us a little more about Jurik
of achieving various goals. His games modeled reality and I Research?
learned very quickly the advantage you can have in life by Jurik: Jurik Research sells add-in modules for technical
understanding why things are the way they are. And at that analysis to many trading/charting software platforms, such
age, I had two questions that always intrigued me: 1) Why as TradeStation, eSignal and NinjaTrader. My modules are
does adding salt to water raise its boiling point and lower its low-lag, low-noise versions of classic indicators. For example,
melting point? 2) Why is bronze harder than its constituent our second most popular product is called RSX, an alternative
elements, copper and tin? Not exactly the kind of questions to Welles Wilder‘s RSI (relative strength index). The chart
a 15 year old boy ponders on, but my family always said I was compares both indicators. It is easy to see why smooth and
a little strange. timely curves support simpler and quicker analysis (Figure 1).
My high school was Brooklyn Technical, whose science Our flagship product is JMA (Jurik Moving Average). JMA
teachers all had PhDs. And that made a big difference. By 18 is a very different kind of smoother, as it uses Shannon‘s
I had a diploma in chemistry and was making smoke bombs Information Theory, rather than classical frequency analysis,
for the neighborhood kids. (I think it’s a rule that every guy as the basis for adaptive filtering. Information Theory assigns
in Brooklyn must get into trouble at least once.) I graduated every event some number of bits of information; the more
college with degrees in both electrical engineering and unlikely the event, the more informative it is and thus the
psychology. more bits it is assigned. JMA pays close attention to events
I never liked solving problems “by the book”, preferring of high information value, and ignores events with low
instead to start with fundamental concepts and derive new information value. A price gap would be relatively rare, and
solutions, just for the fun of it. For example, my final project so JMA tracks price gaps very closely, while at the same time,
for an EE course at Cornell was to wait until every student ignoring (and hence smoothing out) common market noise.
had finished their project and then gather up all the circuit This is something frequency based filters cannot do very
logic boards (with switches, relays and light bulbs) and well, if at all.
wire them all up to make one colossal arcade game that Figure 2 shows the difference between JMA and a low
involved catching a blinking light bulb that raced across lag, frequency based filter called HMA (Hull Moving Average).
all the boards. When you succeed, all the lights and relays The Hull filter uses a combination of fixed, weighted moving
would trigger randomly, simulating the noise you get when averages. It is specially crafted to produce very small lag
winning money at a casino slot machine. The professor gave while tracking trends, but overshoots during reversals. Note
me the highest grade. how the adaptive nature of JMA keeps it from overshooting
My unconventional ways paid off soon after school where, in response to gaps. The HMA on the other hand exceeds the
without realizing it, I re-invented fuzzy logic while working waveform twice.
on a classified project for the Air Force. It helped solve a
difficult problem on how a wide-band receiver could process
“zillions” of radar pulses and detect previously unknown T1) Traditional vs. Jurik Research Indicators
patterns. For that I received a letter of commendation from
the U.S. Strategic Air Command. Traditional Name Jurik’s
When the Berlin Wall came down, I decided to stop Momentum MOM VEL
working on military applications and start my own Relative Strength Index RSI RSX
commercial business in data analysis. Jurik Research came
Directional Movement DMI DMX
into being on some unusual projects, such as optimizing the
Moving Average EMA JMA
use of furnaces at a major aluminum manufacturing plant,
and detecting which natural gas pumping stations were Average direction Index ADX CFB
operating inefficiently. Eventually, most projects involved Commodity Channel Index CCI CCX
market analysis, and certain math operations were becoming Table 1 compares the names of some traditional indicators and Jurik’s version.

TRADERS´PEOPLE
F1) RSX vs. RSI The goal of pre-processing is to squeeze out all redundancy
in order to minimize the number of different time series
streams being fed to a model. This reduction allows for
simpler models that are easier to build. Models can be used
to perform difficult estimations, such as predicting the
value of our RSX indicator, several bars from now. It’s not
predicting price exactly, but useful enough to influence a
trading strategy.
We also offer some tutorial-based products (book, audio
lecture, etc.) and our website has lots of good, free material,
if you have the time to wander around looking for it. This is
especially true in my forum at http://finance.groups.yahoo.
com/group/Jurik_Tools/. Some postings are easy reading
and some are quite advanced.
Two people run the entire show at Jurik Research. I invent
formulas and maintain the website. The other guy (Norman
Smith) handles sales, customer and tech support and software
development. He also gets all the phone calls, thank God. I
need absolute quiet to think, which is why I live at 9400 feet
(2865 meters) in a forest in the Rocky Mountains.
TRADERS´: How do your indicators support the analysis

opposite to classic indicators?
Jurik: I‘ll show you this with the help of an example. As I
mentioned earlier, the JMA filter is anything but a linear,
spectral frequency filter. The use of information theory
The chart compares the classic RSI of Welles Wilder and Jurik’s RSX, as applied to 500 tick bars of SP500 emini. allowed JMA to decide how much market action is informative
Although both oscillators are aligned, RSX is almost 100% noise free. versus uninformative. Typical market noise bears almost
Source: www.tradestation.com no information, and so that is filtered out, regardless of
spectral content. This permission/removal process operates
dynamically on a sliding scale. The result is a filter that defies
Jurik Research has similar low lag, low noise versions of spectral analysis but is terrific in removing market noise.
many traditional indicators. In Table 1 is a list of some that To see how well it works, here is an example where I
we have available. We offer tools for pre-processing market employ a modified version of the Lane Fast %K stochastic to
data, a necessary task when feeding data to math models. include JMA smoothed price as a low-noise proxy for actual
price. The chart shows the SP500 emini and my JMA based
Fast-K oscillator. The trading logic is to enter long when
F2) JMA vs. HMA the signal is above the lower threshold and exit when the
signal crosses below the upper threshold. The green lines
are winning trades, the red lines are losers. It tends to lose
during down trends with large pullbacks. But that doesn’t
occur much. This simple logic works because the oscillator
has very low noise.
TRADERS´: How long did it take you to become

successful?
Jurik: Well, let’s start from the beginning. I started working
for TRW in 1983. TRW is an American corporation involved
in a number of businesses, some defense-related, but also
including automotive, aerospace and credit reporting. No
one I worked with back then could explain what the letters
„TRW“ represented. It was originally „Thompson Ramo
Wooldridge Inc.“, then shortened to TRW Inc. in 1965. I
worked for a sub-division called „ESL“. We joked that it was
The JMA of Jurik Research and the HMA are compared when applied to a synthetic noisy signal with large gaps. The an acronym for „English as a Second Language“, because we
adaptive nature of JMA helps it avoid overshooting right after each gap. were not allowed to tell the public that we were working on
Source: MATLAB classified military software. When I left TRW and became self-
employed in 1988, my first goal was to create a videotape

TRADERS´PEOPLE
tutorial course on neural networks, called “NeuroTapes”. F3) JMA Fast-K Stochastic
Promoting it was tough as there was no Internet as we know
of it today; just user groups that allowed you to read and post
text messages. Nonetheless, I managed to sell over $20,000
worth my first year in business. California University at
Berkeley used my video set as the basis for their independent
studies course on neural nets.
By 1990, all sorts of jobs came my way: predicting
potato chip sales, detecting inefficient natural gas pumping
stations, assessing whether specially made carpets were
under or over priced based on how complex it was to make
each piece, forecasting the market price of various metals,
and predicting the error in bookies’ predictions of American
football. American football betting is a multi-billion dollar
market. Eventually I settled on analyzing stocks and futures
markets. That’s where the really big money is.
My first invention was an alternate way to “train” neural The JMA based Fast-K oscillator is used to trigger entries and exits, as it crosses above and below pre-set
network models. I called it Back-Percolation, a takeoff on thresholds. Green lines are winners, red lines are losers.
the original Back-Propagation algorithm. I first made public Source: www.tradestation.com
this new formula at an A.I. conference in Dusseldorf in 1990.

Soon afterwards, a U.S. company licensed Back-Percolation
for BrainCel, a neural net add-in for Microsoft’s Excel. Experimentation requires creativity. I truly believe
In 1994, I was writing for the Journal for Computational that the more you integrate arts with science in your life,
Intelligence in Finance (aka NeuroVest). I presented what the better scientist you will become. Soon after college I
might have been the first article on combining concepts spent years learning ballet, jazz, and other forms of dance,
in signal processing and fractals to estimate the optimal especially “contact improvisation”. I fell in love with it. It
forecast horizon of any market. This procedure estimated the requires intense focus, lightning reflexes, stamina, strength
30 year US Treasury Bonds’ forecast horizon to be 5.5 trading and continuous creativity with your dance partner. Years later
days. I was happy to learn that traders had determined the I taught classes in contact improv at a local college, and later
same value empirically. That article launched more projects produced choreography for dance students. I didn’t realize
and speaking opportunities. until it was too late that the reason no one choreographs a
In the course of 20 years, I produced only ten original piece for 4 men at a community college is that it is virtually
formulas. That’s one idea every two years. Turtle speed impossible to find four guys willing to wear leotards in front
as far as I’m concerned. That’s what happens when only of an audience. I could only find three, so I became the 4th
two people run the entire business. I plan to expand my dancer.
workforce soon, so we can offer online trading classrooms I was also a musician for over 20 years and played
and webinars. Anyone interested in setting up a similar mostly drums and some piano. One time I was to perform
operation in Europe? Let me know. in an orchestra at the New York Philharmonic. Since my
parents lived in Brooklyn, I got permission to see them and
TRADERS´: Were there any specific stumbling blocks? return before the show starts. However, while sitting in
Jurik: Start-up capital. It takes money to make money. I the NY subway returning to Manhattan, I realized I had no
would like America’s tax laws changed to allow start-up idea where the Philharmonic was located. I stepped out
operations to delay paying tax for three years. Every time I of the subway station, in Harlem, at night. Picture this, the
had just enough profit to get a real computer, it was given only Caucasian for miles walking the streets of Harlem in a
to the IRS instead as income tax. I eventually had to sell tuxedo. Eventually I got directions from a local who laughed
my home to get adequate start-up capital. That one issue hysterically and found my way back to the auditorium. The
delayed success more than anything else. performance had already begun. I got hell for that.
Eventually, other hobbies became paramount, like
TRADERS´: Did you visit any training courses or did you figuring out how to raise aggressive African cichlids with
have a mentor? harmless communal fish (guppies and mollies) in the same
Jurik: I refuse to take training courses or have a mentor. My 100 gallon aquarium tank. It took a few years to discover the
vocation requires developing strategies that out-maneuver secret. So it went, with one hobby after another, and always
the “other-side”, and that requires thinking outside the box. pushing the limits.
For me, the less I know about something, the more room there
is for creativity. That’s the key. So, instead of taking classes and TRADERS´: Can you reveal the secret?
getting a mentor, I experimented and learned. It’s very time Jurik: OK, here it is. This will not work with cichlids you buy
consuming and not everyone is willing to wait years. They from a pet store. So, as soon as they produce offspring, place
want a profit-making, push-button system, today. the newborn into a community tank that has plants they can

TRADERS´PEOPLE
F4) Short Strategy on SP500 emini TRADERS´: Wow, that is a bitter pill. This was your worst
drawdown, wasn’t it? And what was your biggest win?
Jurik: Finding my future wife at a Halloween party! I do not
remember having any big wins playing the markets. The
lesson I learned is that to play the game well, I need a stable
system that works day-in and day-out. No big wins and, more
importantly, no big losses.
TRADERS´: And what is your biggest strength as trader?

Jurik: Knowing I need to sit on my hands and let automated
strategies do their thing. My wanting to intervene is like a
video game addiction.
TRADERS´: What kind of trader are you, and what is your

personal trading strategy?
Jurik: When I trade for myself, I prefer watching cyclical
stock sectors. Sectors are relatively stable and reveal where
the money is flowing to and from. Trading sectors is very
effective yet very slow, producing 1-2 worthwhile trades
per year. That suits me fine, as I have neither the time
nor patience to monitor a trading screen. In contrast, my
clients prefer several round trips per day. For that, you need
Figure 4 shows the equity plot of my customized short position strategy for a client. The trading logic entails leveraged markets.
measuring cycle size, setting entry limit orders and exiting at the centre of the same cycle. This delivers a steady
stream of profitable trades. TRADERS´: How would you describe your trading approach?
Source: www.tradestation.com Jurik: For my clients, I develop strategies that scalp reversals.
It satisfies their thirst for action. The difficult part is avoiding
getting eaten alive when the market decides to trend one
hide in. Baby Cichlids have excellent hiding instinct. As they way and I’m on the wrong side. You can minimize that by
grow up, they exhibit a natural tendency to be territorial. using stop loss limits and by using filters to avoid entering
When the tank has just a few fish, initial territorial protection such trades. This is where market volume analysis plays
behavior is rewarded and reinforced each time it successfully a significant role. And to that end, I am now focussing on
chases other fish from the area. But when cichlids grow up volume with millisecond time resolution. This high frequency
in a tank with over 50 communal fish, they learn the futility trading is where some big players are moving towards.
of doing this. As soon as a cichlid chases away an intruder,
other fish move in from behind, so it never gets to have a TRADERS´: Give us an important rule you follow during
space of its own. In the absence of reinforced behavior, they strategy development.
eventually become just another communal fish. Jurik: You want a large number of trades to statistically
validate your strategy; however, fast trading nets small
TRADERS´: Did your experiences as musician and che- profits and large commission costs. Striking a balance
mist prepare and help you as trader? between profitability and statistical validity during strategy
Jurik: Roughly speaking, music and dance trained my right development and testing can be a science unto itself. To
brain and science did my left. Magic occurs when I can get compare strategy performances, I consider these factors:
both halves to cooperate, because I do not think linguistically, number of trades, average profit per trade, total net profit,
that’s way too difficult for me. I think graphically, with rules of profit factor and peak-to-peak maximum drawdown.
grammar imposed on visual sequences. That requires both left When optimizing various parameters in a strategy, I
and right brain cooperation. It can be extremely effective. require the system produce at least 200 trades per parameter.
For example, if I am adjusting four parameters in a strategy,
TRADERS´: Which weaknesses and strengths do you have then statistically valid performance evaluation will require
as trader? there be at least 4x200=800 historical trades.
Jurik: I don’t know how to say this eloquently ….. I suck as a
trader. No matter how well my technical analysis performs, I TRADERS´: And which time frames do you use?
always think I can do better improvising. I lost over $100,000 Jurik: For my clients’ strategies, I prefer using 300 – 1000 ticks
by failing to get out of Y2K software companies in 1999, per bar. This way, I can use bar volume to calculate the average
when their stock prices were on a permanent decline. All number of contracts/shares per trade. Retailers trade small
my indicators pointed to selling, but I believed things would lots, commercials trade large lots. To follow the money, you
turn around and held everything until stock worth $24 was need to follow the commercials. However, it’s not as easy as it
now under $1. Stupid, stupid, stupid. Live and learn, I guess. sounds: commercials try to conceal their trades by iceberging,

TRADERS´PEOPLE
breaking a large order into many smaller ones. Without limit orders to catch small swings, because any slippage would
proper computer analysis and synthesis, all you see are small only increase the trade’s profit. When trying to get into and ride
floating chunks of ice. Here’s a great idea for some software an uptrend, it is true a market order will suffer from slippage.
entrepreneur: create software that reads a market data stream However, if I take a position in the direction opposite of a trend,
and recombines a sequence of iceberged trades back into one a limit order will benefit from slippage. The longer it takes for
large trade. It will be the commercial traders’ nightmare. If it’s my order to get filled, the higher the entry price, and that‘s good
really good, consider having Jurik Research sell it for you. for my short position. A higher entry delivers a larger profit. The
same is true in the opposite direction. In a downward trend, I
TRADERS´: Which instruments do you trade? want to go long with a limit order. As slippage drives the entry
Jurik: I design strategies for the SP500 and Euro FX. I now price down, my long position becomes more profitable. I pick
have a client who is keen on trading base metals, so I will a market that’s likely to exhibit several cycles per day, then
probably go there next. estimate the size of those cycles and place position entry limit
orders where I think the next cycle has about an 80% chance of
TRADERS´: Do you also use other tools beside your own hitting. Placing the trigger lower, in order to increase the hit %
indicators? rate, will reduce profit in each trade. Moving the trigger farther
Jurik: Yes. For a smooth moving average with lag, I prefer the out will seriously decrease the number of hits, also reducing
DWMA (double-weighted moving average). The formula is overall profit. There is an optimal placement.
For exits, I use an indicator I developed called “MTS” or
DWMA = weighted_MA ( weighted_MA ( price series, market trailing stop. MTS looks for the center of each intra-
length ), length). day cycle. It lags behind trending markets, but stays in
the center of cyclic trading ranges. This implies that when
For superb stability, I use median filters, which takes a strategy enters a position at near the top or bottom of a
the middle value of a collection of N numbers, sorted from cycle, it exits near the center of that cycle, not at the other
lowest to highest. The median is commonly used in the real extreme. This reduces potential profit per trade by half, but
estate industry to represent the middle price of homes. This almost guarantees each position will exit with a profit. This
is because home prices are not Gaussian distributed. Some approach delivers a modest but steady profit stream and
homes may be extraordinarly expensive and will distort that’s the way my clients like it.
calculations using the standard average. Median filters
can be extremely slow for real-time use when the filter’s
window is 2048 data points wide. That‘s because it must sort
all 2048 points, which involves making 2,097,152 pairwise
comparisons in the sorting process. Repeating this process in
real-time as each new tick arrives requires a super-computer.
To deal with this, I created what I believe to be the world’s
fastest large window moving median filter. For example, a
2048 point window can slide over 10,000 data records per
second. Now that’s fast enough for real-time trading.
TRADERS´: Are you discretionary or systematic trader?

Jurik: Because I run a business, I cannot spend time trading
anything but long term (one or two trades per year). For
anything faster, I design strategies and sell them to clients.
But first, they have to wait until I run the developed system
on at least 500 additional trades for statistical validation. Limit Screentime
Find profitable pairs
For my own trading, the process is simple: plot all the
sector values of the U.S. market and note which ones are rising
and which are falling. Select those that are in the early stages
of rising. For each rising sector, select those stocks that have
neither remained flat nor already shot up, but are steadily Trade a winning strategy with
rising. Buy a basket of all those qualifying stock in that sector.
Repeat for another sector or two. And exit out of those sectors
that are falling, regardless of individual stock performance. This
approach does not use stops or special technical analysis tools.
I think of my personal trading method as both discretionary Click here
and systematic. I decide what cycles to take on (discretionary),
www.fx500club.com
but the analysis is so dead simple, there really is little chance
of getting it wrong (ergo it’s also systematic). For my clients’
Forex Education • Trading Analysis • Professional Mentoring • Daily Alerts
strategies, I am very limited as to what I can reveal. I prefer using

TRADERS´PEOPLE
F5) VEL-on-VEL Oscillator TRADERS´: What roles do risk and money management
play?
Jurik: After 1000 trades, I measure risk as five times the
maximum consecutive drawdown. That’s my estimate of the
amount of money needed to safely trade the strategy. To
minimize risk, I try to stay in the market as little as possible.
I believe no strategy should be in the market for more than
20% of the time. I also use dynamic stop loss triggers, which
expand and contract as a measure of the market’s volatility.
TRADERS´: How do you handle emotions?

Jurik: Because the strategies I develop trade tight reversals,
the only thing that can go wrong is when the market takes
off on a long trend and I am on the wrong side of the trade.
Stop loss limits help, but since you don’t know when the
trend will end, my strategies try to get back in and keep
The VEL-on-VEL oscillator is used to trigger entries and exits, as it crosses above and below pre-set thresholds. losing until the trend ends. But that’s part of the statistical
Green lines are winners, red lines are losers. win-loss behavior one needs to accept right up front.
Source: www.tradestation.com Bad days will happen. But if I believe in the statistics that
say my strategies will recover, I don’t get too upset. Even
professional poker players lose a game now and then. The
I do not use profit targets. I do use stop loss triggers, worse thing to do is over-react and stop trading after just
where the stop loss amount is dynamically varying as a one bad day.
function of market volatility.
In Figure 4 is the equity chart of that strategy taking only TRADERS´: Which advice do you have for trading novices
short positions. A similar chart exists for long positions. Nice and for professionals?
and smooth, except during market upheavals in September Jurik: For trading novices: put your money in the bank and
and October. Average time in the market was less than 5%, keep it there. Don’t trade unless you have …
which is critical to attaining small drawdown. 1. read at least one book in at least five categories, as listed
I think this would be a good place to mention another here: http://www.jurikres.com/faq/booklist.htm#top
analysis technique I use. It’s my view that the predator-prey 2. simulated trading your strategy for at least 1,000 trades.
relation between commercial and retail traders causes intra- I think magazine editors ought to require all articles that
day market cycles. With low lag, low noise analysis (my tools), discuss strategies to include performance results on at
one can measure the market’s velocity and acceleration least 500 consecutive trades.
and create trading rules that use those measurements. 3. enough trading capital to cover five times the trading
For example, VEL is my version of the classic momentum history’s maximum peak-to-peak drawdown.
indicator. It measures market velocity (1st derivative). 4. a steady income that’s paying all your bills. Don’t trade to
Feeding VEL to another VEL creates a measure of acceleration cover your mortgage payments. That’s foolish.
(2nd derivative). The slope of that curve is the 3rd derivative. For professionals:
You can only do this with very smooth oscillators because 1. Understand the impact that iceberging can have on your
each derivative amplifies signal noise. Applying successive market and your analysis.
derivatives to the standard momentum oscillator produces 2. Be in the market as little as possible, preferably below
a seriously noisy and unworkable signal. 20%.
Each derivative of a sinusoid produces a similar sinusoid 3. Market’s change their dynamics. Just look at what
that phased advanced by 90 degrees (phase shifting). happened to the SP500 in 2009. Intra-day cyclic volatility
However, VEL is designed to lag out that phase shift, so it fell by half. If your system’s performance is taking a nose
appears aligned with the signal being fed to it. So, no matter dive, do you have an automatic trigger to get out and
how many derivatives you take using VEL, the result appears stay out until you devise something new?
aligned with the original signal. Consequently, combinations
of 1st, 2nd and 3rd derivatives lend themselves to very simple TRADERS´: What are your future plans?
yet effective trading rules. Jurik: I want to expand on my hobby of developing
For example, the chart in Figure 5 shows a segment of nutritional formulas for various physical ailments. I already
the SP500 emini and the VEL-on-VEL oscillator. The simple have concoctions for treating Alzheimer’s, arthritis, the
logic of entering long when the signal crosses above a common cold, dry wrinkly skin, scalp psoriasis, brittle nails,
lower threshold and exiting when it crosses below an and a program that speeds up, by a factor of 4, physical
upper threshold produces the trades as shown. Green lines rehabilitation from muscle/tendon/bone surgery. I give my
designate winning trades, red lines are losing trades. It’s not formulas to friends and family on a confidential basis. It’s a
perfect, but pretty good for such simple logic. fascinating field of study.

Join Thousands of Futures and Forex
Traders in Las Vegas This Fall...
• Discover tools and strategies relevant to

the futures and forex markets that you trade
• Learn proven techniques from industry
leaders that you can implement for profit
immediately
SEPTEMBER 23-25, 2010 • Gain the advantage and knowledge
CAESARS PALACE • LAS VEGAS successful traders need to stay ahead of today’s
futures and forex markets
Register FREE at
www.FuturesandForexExpo.com
or call 800/970-4355.
Mention priority code 019169.
Rob Booker John Carter John Forman Todd Gordon
...and many more! GOLD SPONSORS MEDIA PARTNER
a Production of
Githler Center • 1258 North Palm Avenue
Sarasota, FL 34236
TRADERS´SEMINARS
TRADERS´SEMINARE
SEMINARS
Date Seminar Firm Location Website
03.08.2010 Stock Market WIN Investing St Albans www.wininvesting.co.uk
03.08.2010 Collective Investment Schemes – Unit Trusts, OEICs and Investment Trusts TD Waterhouse London www.tdwaterhouse.co.uk
05.08.2010 Stock Market WIN Investing Southhamptons www.wininvesting.co.uk
05.08.2010 Technical Analysis For Beginners, for less experienced traders TD Waterhouse London www.tdwaterhouse.co.uk
06.08.2010 Stock Market WIN Investing Portsmouth www.wininvesting.co.uk
07.08.2010 Learn. Trade. Succeed! eSignal Tarrytown, NY www.esignallearning.com
07.08.2010 Upcoming Trading Opportunities Finspreads London www.finspreads.com
07.08.2010 Introduction to Advanced GET eSignal Tarrytown, NY www.esignallearning.com
10.08.2010 Stock Market WIN Investing Nottingham www.wininvesting.co.uk
10.08.2010 A Guide to Long Term Investing with TD Waterhouse TD Waterhouse London www.tdwaterhouse.co.uk
11.08.2010 Stock Market WIN Investing Derby www.wininvesting.co.uk
11.08.2010 Technical Analysis for beginners with Sandy Jadeja FInspreads London www.finspreads.com
12.08.2010 An Introduction to ETFs with Ishares TD Waterhouse London www.tdwaterhouse.co.uk
13.08.2010 Stock Market WIN Investing Bexley www.wininvesting.co.uk
15.08.2010 Stock Market WIN Investing Gattwick www.wininvesting.co.uk
16.08.2010 Stock Market WIN Investing Heathrow www.wininvesting.co.uk
17.08.2010 International Markets: Getting exposure to investments outside of the UK TD Waterhouse London www.tdwaterhouse.co.uk
17.08.2010 Stock Market WIN Investing Basingstoke www.wininvesting.co.uk
17.08.2010 Interactive Workshop – Introduction to spread betting Finspreads London www.finspreads.com
19.08.2010 Introduction to the Stock Market – A Guide to the Basics TD Waterhouse London www.tdwaterhouse.co.uk
20.08.2010 Stock Market WIN Investing Colchester www.wininvesting.co.uk
21.08.2010 Learn. Trade. Succeed! eSignal San Jose, CA www.esignallearning.com
21.08.2010 Stock Market WIN Investing Ipswich www.wininvesting.co.uk
21.08.2010 Introduction to Advanced GET eSignal San Jose, CA www.esignallearning.com
23.08.2010 Stock Market WIN Investing Sutton www.wininvesting.co.uk
24.08.2010 A Guide to Trading on a Short Term Basis with TD Waterhouse TD Waterhouse London www.tdwaterhouse.co.uk
24.08.20101 Stock Market WIN Investing Epsom www.wininvesting.co.uk
25.08.2010 Using the TD Waterhouse Website; Making the Most of Your Account TD Waterhouse London www.tdwaterhouse.co.uk
26.08.2010 Stock Market WIN Investing Farnborough www.wininvesting.co.uk
01.09.2010 Stock Market WIN Investing Bolton www.wininvesting.co.uk
04.09.2010 Stock Market WIN Investing Liverpool www.wininvesting.co.uk

TRADERSĆOLUMN
Emilio Tomasini
Emilio Tomasini is a full time professional
trader. He trades both stocks discretionally
and futures in a systematic way (commodities,
stock and bond futures). He advises
institutional players on quantitative trading.
For more info www.emiliotomasini.com. His
email is tomasini@emiliotomasini.com.
The Hope of a Dream Machine
o The “dream machine” is something that every trader seeks but it happened only when something bad took place in the
or has sought at least once in life, whether he admits it or not. markets, Greece‘s sovereign debt difficulties, for instance.
But what is the “dream machine”? The reply to this question Otherwise, the dream machine nets 200 – 300 Euros per day,
is very important, because to look for the “dream machine” nuggets in comparison to its top days.
you should know first what it is and secondly, if it exists. We Around 13 years ago I saw another “dream machine” on
could even arrive at the conclusion that the “dream machine” the derivative market buying and selling stock index futures
does not exist and so we need to stay mindful if we think we on 50 tick bar charts. But it went bust after some months,
can come close to it. notwithstanding the traders that devised it ended up with
The “dream machine” is an algorithm that makes a lot of some hundreds of thousands of today’s Euro.
money without any risk. You think of the “dream machine” Today there are many software houses selling products
as a tool that makes some dozen if not hundred trades per which allow the trader to build up a system with ordinary
day with very low drawdown and a daily profit which is a sure indicators such as RSI or Stochastic though using somewhat
thing. If drawdown occurs, it takes place during the day and fuzzy logic as well as rather genetic optimization processes.
since the algorithm makes a lot of trades it will be very easy Usually these programmes are black box so that you really
to recover breakeven and then reap some profits. need to trust in God before using them. I have indeed
In books you usually see the function that associates the experienced that good profits on the DAX using codes that
length of drawdown and the rate of return with the number came from this kind of software can be made. So there is
of trades: it is self-evident that if you make hundreds of some experience that tells us that this could be an alternative
trades per day it is the same as making hundreds of trades way to make some money on the markets.
over a whole lifetime so that what you see in one average All in all, we can say that some form of dream machine
trading day will be seen in a full career. This is what the exists today or at least they have existed in the past. There
“dream machine” is all about: it makes many intraday trades, are many rumours among traders these days involving “high
it has drawdown only during the day and every day will end frequency programs” making fortunes every day but seldom
in profits. Like the “dream machine” so far? Is this a “high does it happen that you can see them in action. And if I may
frequency trading system”? Who knows? Nobody knows offer my honest opinion about this topic, I would absolutely
what a “high frequency trading system” is but everybody not lose faith in the “dream machine” idea. It is something
knows what a “dream machine” is. every trader has and the idea has become almost a religious
Now that we have defined what a “dream machine” is, let’s belief that makes you feel good. So please do not throw
talk about the possibility of its existence. The first thought the “dream machine” overboard but leave me the hope of
is, have we ever seen a “dream machine” in action at some someday building a “dream machine” that will make me rich
point in life. Yes, I have seen it. Last month for example, some painlessly and with no drawdown, pouring money in my
fellow traders made 300,000 in profits scalping financial wallet like the tap pours water into the bottle.
markets with an Excel program that automatically places What would our life as traders be like without the hope of
bids and offers. Trading capital was 100,000. Not too bad, eventually finding a “dream machine” ? n

TRADERS´ media GmbH
Barbarastraße 31
D-97074 Würzburg
www.tradersonline-mag.com

E 08 Web

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

E 08 Web

Uploaded by

Copyright:

Available Formats

Interview: Mark Jurik – Innovative Concepts of a Trading Maverick

What‘s Really Priced in?

2 August 2010 | www.tradersonline-mag.com

56 Mark Jurik – Innovative Concepts of a Trading Maverick

6 Wish and Reality

4 August 2010 | www.tradersonline-mag.com

Address of Editorial and Advertising Department |

Barbarastraße 31, 97074 Wuerzburg

32 Developing Swing Trading Strategies – Part 6 Editor-in-Chief | Lothar Albert

48 Using Important Psychological Price ISSN | 1612-9415

52 Of Lines, Candlesticks, and Bars

August 2010 | www.tradersonline-mag.com 5

Wish and Reality

6 August 2010 | www.tradersonline-mag.com

Get Started Today! www.ablesys.com/567 Reader’s Choice Awards

August 2010 | www.tradersonline-mag.com 7

The Psychological Factor in Perception

Accordingly, we will evaluate and process a piece of

Reality Whatever We Concentrate on Intensively

8 August 2010 | www.tradersonline-mag.com

Selective Perception in Practical Trading

and subsequently breaks the next one, tests both former

10 ways ShareScope users

August 2010 | www.tradersonline-mag.com 9

Why Selective Perception?

10 August 2010 | www.tradersonline-mag.com

signals that met our goal of profit realisation. In the final

August 2010 | www.tradersonline-mag.com 11

4) Make your own trading plan

… and trade accordingly. The less you have to interpret,

12 August 2010 | www.tradersonline-mag.com

Do You Really Need It?

14 August 2010 | www.tradersonline-mag.com

Love and Doubt

August 2010 | www.tradersonline-mag.com 15

It Does Not Quite Add up, Does It?

16 August 2010 | www.tradersonline-mag.com

What Moves the Markets?

18 August 2010 | www.tradersonline-mag.com

August 2010 | www.tradersonline-mag.com 19

T4) Existing Home Sales Housing Starts

T5) Housing Starts New Home Sales

Existing Home Sales Conclusion

20 August 2010 | www.tradersonline-mag.com

Behavioural Technical Analysis

22 August 2010 | www.tradersonline-mag.com

Behavioural Technical Analysis

Subtitle: An Introduction to Behavioural Finance and Its Role In Technical Analysis

August 2010 | www.tradersonline-mag.com 23

Stock Selection à la Scan

The recommended requirements are:

To allow the user to work comfortably and hassle-free,

24 August 2010 | www.tradersonline-mag.com

August 2010 | www.tradersonline-mag.com 25

26 August 2010 | www.tradersonline-mag.com

L ast year the WhichWayToday LIVE trading made

The room has a one year, transparent profit history, which

I n the room the trades are classified into two main

I n summary the WhichWayToday seminar teaches the

What Can You Expect From Your Option?

PowerOptions – Find Your Best Strategy

F1) Start Page o Mode of Operation

28 August 2010 | www.tradersonline-mag.com