Publication

december 2012
www.tradersonline-mag.com
your personal trading coach
IntervIew: Marc rIvalland effectual Gap tradInG In forex flat lIners BreakInG out weather-proof Your wealth
High Frequency Trading Shows Its True Colours
Why SometimeS FaSter iS Not Better
edItorIal
2012 I 12
wHY You sHould Go to tradInG faIrs

every year there are various trading fairs taking place around the world such as, world of trading in frankfurt, traders expo in new York or the world Money show in london. some traders who have not attended fairs may think that the same things get discussed repeatedly therefore such fairs are not worth bothering with. after all, you are ultimately on your own when trading anyway. However, this is a fallacy, and I want to tell you why. If you constantly isolate yourself from the outside world in terms of exchanging ideas and consulting with other traders , you will eventually lose touch. this doesnt have to happen immediately. especially not when you have found a profitable approach and trade consistently. But the markets just keep changing all the time. after all, if you dont go forwards, you go backwards. sooner or later there will, figuratively speaking, be a huge wave that you are not prepared for. one revelent and current example of this is the possible consequences of high frequency trading having a major impact on the setting of stops. the best channel to detect such current trends or developments and to immediately arrive at suitable solutions that may meet these new challenges, is still, talking to other traders. and there is no better place to meet them that at a trading fair. In addition, there are lectures and seminars where experts discuss specific topics. You have every opportunity to acquire the necessary knowledge and then deepen it or critically question it while consulting with other traders. always remember this: the market is smarter than you are. this also applies to any trading knowledge. the benefit of attending a trading fair is the learning effect in a sense, an investment in the future. and this will especially be the case if you think you already know everything. after all, as is the case in trading itself, it is at these very moments of arrogance that the next drawdown is not far away. so stay tuned and attend trading fairs on a regular basis. Your trading account will thank you for it in the long run. Good trading lothar albert editor in chief
puBlIsHer Lothar Albert suBscrIptIon servIce www.traders-mag.com; www.tradersonline-mag.com abo@traders-mag.com; Tel: +49 (0) 931 45226-15 address of edItorIal and advertIsInG departMent Barbarastrasse 31 a, 97074 Wuerzburg edItor-In-cHIef Lothar Albert edItors Prof. Dr. Guenther Dahlmann-Resing, Corinne Endrich, Marko Graenitz, Lena Hirnickel, Sandra Kahle, Nadine von Malek, Rodman Moore, Stefan Rauch, Karin Seidl, Bjoern Sommersacher, Tina Wagemann, Florian Walther, Christine Weissenberger, Sarina Wiederer artIcles Steve Burns, Richard Chignell, Steven Giles, Andrew Hecht, Ralf Kraemer, Conrad Mattern, Nick McDonald, Azeez Mustapha, Florian Erik Neinert, Dan Valcu, Dirk Vandycke, Paul Wallace pIctures www.fotolia.com prIce data www.captimizer.de; www.esignal.com; www.metaquotes.net; www.metastock.com; www.tradesignalonline.com; www.tradestation.com Issn 1612-9415 dIsclosure The information in TRADERS is intended for educational purposes only. It is not meant to recommend, 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. 2012 TRADERS media GmbH, Barbarastr. 31a, D-97074 Wuerzburg, Germany
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 for us to constantly improve our magazine. please write to: feedback@ tradersonline-mag.com.
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2012 I 12 Dr. conrad mattern, Slobodan cvetkovic
dr. conrad Mattern is on the board of directors of conQuest Investment advisory aG and is a lecturer at erding college of applied Management in Germany. His main focus in research is in behavioural finance and high frequency trading. slobodan cvetkovic is a graduate engineer and sits on the board of directors of prosperia aG, an investment company. He deals with closed funds and analyses high frequency trading from the technical point of view.
why sometimes faster Is not Better
HIGH freQuencY tradInG sHows Its true colours

Algorithmic trading volume is increasing steadily. Technical advances have influenced trading strongly. In the following article well show you the advantages and disadvantages that these developments present as well as take a look at the regulatory market requirements and how traders can deal with this new world. www.tradersonline-mag.com
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Opponents of HFT say that HFT influences the markets in a negative way and inexperienced investors or investors who trade rarely are discriminated against. HFT destabilises the markets because liquidity is blown up in ordinary times or even squeezes usual market makers out of the market. In phases where liquidity is too low because of other reasons (for example prior to the publication of economic data), they disappear from the markets. Therefore there is no real liquidity but feigned liquidity. Such trades where false liquidity is imagined are called Wash Trades. TradIng aCTIvITy InCreaSed STeadIly on THe markeTS Data analyst Nanex conducted a very interesting analysis of the trading activities on different US-stock exchanges. In addition to the two best known stock exchanges NYSE and NASDAQ, there are many stock exchanges in the USA where securities are traded. The analysis (found on the website http://blogs.reuters. com/felix-salmo0n/2012/08/06/chart-of-the-dayhft-edition/) shows the development of quotations during the period of January 2007 to January 2012. InCreaSIng quoTaTIon volume aT uS SToCk exCHangeS Whereas the activities are very low at the beginning, from 2008 on there is a spike shortly before the end of the trading day. It shows that intraday traders close their positions. In the following months trading activity increases during the day as well. At the end of the period under review, the spikes show high
In the past weeks and months there have been more and more announcements about single stocks or even whole markets showing a massive change in price within a few seconds and that recovered equally as quickly. Especially impressive was the flash crash of 6th of May, 2010 when the Dow Jones lost nearly 1000 points within minutes, regained 550 points during the trading day and quoted above the high of this crash day only three days later. According to the classical capital market theory there must not be such extreme price fluctuation, because rational investors only trade if they receive new information. But in this case, there was no new information, but prices made these considerable moves offhandedly. High Frequency Traders (HFT) were suspected to be the reason. But High Frequency Trading (HFT) is only a buzzword and only a few know what it is. This business is highly intransparent for other market participants as well as for regulatory authorities. The market changes very fast, the trading strategies used are rarely revealed and information gets lost during the process of the aggregation of data. In this article we will clarify different sorts of trading techniques that are used by HFT and we look at the impact of this new trading technique on traditional traders. In addition, we describe the regulatory efforts of the authorities. HIgH FrequenCy TradIng ouTweIgHS TradITIonal TradIng By now the different variations of HFT account for more than 60 per cent of the daily trading volume of the US-stock exchanges. In Germany the percentage is a little lower. Supporters of HFT argue that trading volume and therefore liquidity has increased because of HFT and simultaneously the bid/ask-spread has decreased. Furthermore, HFT advocates say that the function of this trading style is to generate profitable orders very fast with statistical arbitrage, which develops based on short term price differences. Therefore HFT provides for the strengthening of the efficiency of the markets.
F1) tHe flasH crasH of 6tH MaY 2010
on the 6th of May 2010 the dow Jones lost 1000 points within a few minutes to gain nearly the same immediately. source: www.investox.de
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Because of this shortened time frame it is the trader who has the speed advantage that has the edge to invest successfully and not the investor who knows about the real value of the investment. This shows in the education of the market participants. In the past investment banks hired the best economists or the best traders today the best mathematicians or programmers who are getting the jobs. This can also undermine the theory of homogenous price in the markets. Basically you assume that a stock
volume throughout the whole trading day, but it also has increased intensity that exceeds the maximum of the start of the period under review by a multiple (Figure 2). FeIgned quoTeS SHould noT be exeCuTed This development is based on the fact that HFT place many quotes on the market for only seconds without wanting to really make a trade at these prices. The quotes only cause other market participants to take action and the HFT then try to use these actions to their own advantage. Basically we are talking about the tactic of decoy quotes, feigned quotes or quote stuffing. HFT place short term quotes in the market that seem to be attractive and cause market participants to delete their quotes from the market. Then the HFT delete their seemingly good quotes but still have worse quotes in the market. And then they hope that other traders have seen the better quotes and place orders, which will be executed at a worse quote because the good one has already been deleted. Behavioural finance theory opposes the rational investor, who believes in classical theory the concept of noise traders, who do not trade based on information but on different signals like rumours, feelings and market signals as well. In this spirit HFT produces much more noise and thus tries to confuse other market participants. HFT uSeS THe advanTageS In Speed and undermIneS THe law oF THe HomogeneouS prICe The uniqueness of HFT is its sheer trading speed. In contrast to the early days where market time frames were measured in months, then weeks and finally days, and since the dot-com bubble we have seen the phenomenon of the intraday trader, who trades in the traditional way, but does not hold positions overnight. In the meantime, time frames are so short that they are not shown on standard charts. We are talking about milliseconds.
F2) developMent of tHe order voluMe at tHe us stock excHanGes
the us-stock exchanges show clearly how Hft increased. the four single graphs show the development of the quotations per second on daily basis for the years 2007 (up left), 2009 (up right), 2010 (below left) and 2011 (down right). the different colours represent the volumes at different usstock exchanges (electronic communication networks, short ecn). while the activities in 2007 were very low, from 2008 on we see a heavy increase shortly before the close of the trading day. this shows that intraday traders close their positions. In the following months trading activity increases during the day as well. 2011 the intensity of spikes increases dramatically and reaches a volume that is very high during the entire trading period.
source:nanex
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costs the same on different markets. Fluctuations are possible in the short term and are balanced immediately. If human beings do the trading activities nobody can systematically take advantage of short term price differences. HFT is different. If there is a stock that costs the same on two different markets, the HFT can try to buy it more cheaply in one market by using the minimal price step (as a rule one cent). If there is a seller who will sell the share for example, not at 8.45 EUR but at 8.44 EUR a trade is made. This is registered and published in the usual way through the stock exchange information service. There is a short time span, the so-called latency, between the execution and the publication by the stock exchange information services. It is only a matter of fractions of a second. But if an HFT reacts prior to the publication of this information, it can make use of the advantage in speed. It knows that it bought the stock at one stock exchange at 8.44 EUR. The system shows the best price at 8.45 EUR. He can sell it at this price on another stock exchange and earn a profit of 0.01 EUR per share almost without risk. advanTageS In Speed Have been exploITed For a long TIme This behaviour is not an invention of our time but it is only a new step on the evolutionary ladder of the market. Julius Paul Reuter, the founder of the news agency Reuters, knew about the meaning of fastsubmitted information. He submitted news between Brussels and Aachen with carrier pigeons. Therefore he could transport information to Paris faster than the competition to Berlin, who still used couriers. He was similarly innovative with news from the USA when there was no intercontinental cable yet and the London telegraph circuit went only as far as the west coast of Ireland. He arranged for ships from the USA to deposit information on the coast of Ireland and then it was transmit telegraphically to London. That gave him a time advantage against the information that was delivered by ship to London and he used it to increase profits.
F3) Hft can endanGer IndIvIdual Market partIcIpants
the stock price of knight capital plummeted after a faulty algorithm produced a loss of 440 million usd within 45 trading minutes.
source: Bloomberg finance l. p.
ServerS are plaCed near SToCk exCHangeS HFT uses the advantages in speed also by the fact that they place the servers that produce trading orders near the stock exchanges that execute the orders. Stock exchanges have recognised this need and rent rooms that are located next to their data centres. These strategies are only interesting for large companies private investors are generally not in a position to afford them. Here as well, the advantages of such a strategy are in the milliseconds-area. This counts for short as well as for long distances. In the year 2011 a new transatlantic data cable was installed between New York and London and the data transmitting time was reduced by six milliseconds to 59 milliseconds. This was possible because it is a new route that decreased the length of the cable by 570 kilometres. The cost of the installation was 300 million USD, which the provider earned back by charging a fee that was 50 times higher than the one for the old cable. HFT tries
to use the same speed effect by placing their servers next to the data centres of stock exchanges because the shorter distances enable faster order execution. FaST reaCTIon To eConomIC daTa Another way to develop profitable strategies based on the speed advantage is in connection with economic data and company news (news reader strategy). As soon as they are published, the news are evaluated with the help of computers and algorithms which search for certain key words or analyse the published data and then orders are placed that promise profit because of the predicted reaction of the markets. In this context HFT does not do anything different than normal investors the only difference being that they place their orders much faster and therefore take full advantage of the speed. In this way an HFT can analyse positive information on a company within milliseconds and generate orders accordingly, whereas human beings www.tradersonline-mag.com
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Often an investor has the same trading identification that is used to identify him. This information is collected by the stock exchanges and sold to interested clients often HFT are such clients. With the help of this information HFT can aggregate the behaviour of different investor groups and can analyse their behaviour in certain market situations. If there is consistency, HFT has the possibility to place orders in expectation of a certain behaviour or even influence prices in a way to provoke a certain behaviour. Up til now we have shown how HFTs try to fleece other market participants or to profit from their advantages in pure speed. Whereas the second aspect has always been an investors cornerstone, the first aspect has to be clearly criticised. But there can be disadvantages for markets and other investors based on other behaviour as well. For example trading signals are not executed manually but by computers based on developed algorithms. The danger here is that algorithms can be defectively programmed and destabilise the markets only because of the large amount of signals that they transmit. markeTS are deSTabIlISed A typical example took place on the 1st of August, 2012, as the US broker Knight Capital started a faulty programmed algorithm, which automatically bought the ask price and accepted sell orders at bid price. That led to massive fluctuations in many stocks and the broker sustained a loss in every trade. The trading program could be stopped only after about 45 minutes and during this period of time Knight Capital suffered a loss of about 440 million USD and because of this its stock plummeted about 80 per cent within two trading days. Whereas in traditional man-machine-systems a manual intervention in realtime is still possible (circuit
need at least some seconds to analyse the information. In this short period of time the market can change considerably and slow traders only get worse prices. amounT oF quoTeS Can InFluenCe markeTS Besides these effects based on the advantages in speed HFT influences the markets because of the high volume they use to place quotes in the market but delete shortly after. And even if a part of these orders is executed, HFT tries to use such strategies in the areas of technically important levels. They try to break those levels and trigger stop orders and therefore a self-enhancing market move follows. HFT tries to produce a fake momentum for a stock (spoofing). HFT uses market depth information provided by the stock exchanges as well(liquidity detection). If they recognise that several stop orders are placed at a certain price level, they try to influence the market with their quotes and some executed trades in a way which triggers the stops. This causes further price decreases and they can buy the stock back at a better price. The same is applicable to stocks where many buy stops are in the market. This insight is very frustrating for an investor. During times when HFT had a less important meaning, stops helped to reduce the risk in a trading strategy in the meantime algorithms have been developed and used that increase the risk of placing stops. HFT can see and analyse the market depth with their computers and use it to their advantage. This practice is called predatory trading. knowledge oF mICroSTruCTure oF THe markeT IS exploITed Of course you need excellent knowledge of the microstructure of the market. This is enabled by the analysis of information provided by the stock exchanges, but it is used completely different than originally planned by the HFT. In addition to the necessary information when placing orders like ISIN, position size and limit price, information is published that can be used to draw conclusions from the investor.
F4) unIted aIrlInes suffers froM old news
the misinterpretation of old news concerning united airlines led to heavy price movements.
source: Bloomberg finance l. p.
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negatively. The first is programmed trading where big orders are executed with the help of algorithms. The danger that the market is influenced by big orders is not as great because the orders are executed by a predefined pattern. That can even influence the market situation in a positive way. The second area is the quotes of market makers, thus the market participants that are bound to provide a certain liquidity and to take care of a certain price management for the respective share. In this case HFT leads to more efficient markets. Even spreads may be narrower. But the requirement is that the market makers actually trade at the particular quotes. However the sheer observation of the number of quotes or the bid/ask-spread are not a reliable insight into the actual liquidity of the market especially if the market is distorted by feigned quotes. An additional observation of the average number of the stock volume connected with the quotes as well as the average period of time of the placement of the quotes in the market deliver a better picture. Some time ago the NYSE published an analysis of all trading days from January 2007 to September 2011 and arrived at the conclusion that during this period of time there were 535 billion quotes but of that number only 35 billion were actual transactions. This ratio alone is astonishing. If you look at the above-mentioned Nanex graph and think about the development of the number of quotes during past years you can assume that the indication of this average is misleading. The ratio of trade to quote may be even more one-sided in the more recent past. This also shows in the fact that at the beginning of 2007 about six quotes were necessary to generate a real transaction volume of 10,000 USD. At the end of the observation period, 60 to 80 quotes were necessary for the same volume, as we see in Figure 5. The higher the ratio of quotes to trades, the more inefficient the market is; because you need more information units that have to be converted to generate the same trading volume. regulaTory requIremenTS oF HFT Financial markets need safety mechanisms to reduce or eliminate the impact of disturbances because of a lot of bad trades or unwanted volatility. Intervention in realtime is not possible most of the time because circuit breakers which interrupt trading at strong price movements only react after the disturbance. You have to consider how fast the intervention has to take place. And not every major market move is caused by HFT. Ex-post-intervention of the stock exchanges or
breaker) if there are unexpected developments, with HFT-systems t is possible only under most difficult conditions and with lengthy time delay. In the past months market faults have increased considerably. An overview can be found on the website of Nanex (www.nanex.net/FlashCrash/OngoingResearch.html). In addition to faulty algorithms there is also the danger of misinterpretation. For example on September 8th 2008, news was spread that the US airline United Airlines filed bankruptcy. The stock price plummeted from 12.30 USD to 3.00 USD within a day before it was suspended from trading. HFT algorithms had interpreted the news accordingly and sold the stock. But they did not consider the fact that there were no signs of insolvency prior to the news. Finally it turned out that it was a statement published six years before that had no relevance whatsoever. After the news was denied and at the resumption of trading the stock closed at a price of 10.92 USD that day, the following week the prices quoted above the prior day high. algorITHmS Can Fool you Such algorithms are in danger of being misinterpreted and might deliver trading signals that are reinforced by other HFTs and therefore lead to an unstable market situation. Such erratic movements that do not follow any traditional patterns of explanation can lead to long term negative outcomes for the markets in addition to the short term problems. Investors will only be active in markets if they have the feeling that they understand the movements. It is completely irrelevant if this is really the case it is enough that they have the feeling that it is the truth. Behavioural finance speaks of control illusion. If this illusion is not valid any more there is the danger that investors will withdraw from these markets. Trading will get more erratic and therefore it will less and less match the model of a rational market. markeT makerS HFT Can InCreaSe lIquIdITy In addition to these many negative aspects of HFT there are at least two areas that cannot be viewed
faQ to HIGH freQuencY tradInG (Hft)

Does hFt increase market liquidity? this can be the case if for example market makers quote the prices. the sheer number of quotes does not say anything about market liquidity, because many Htf quotes are not executed. can i participate in hFt as a private investor? not really, because you need special technical equipment, very fast pcs and special software that usually exceeds the a private investors budget. Shall i concentrate on certain stocks that are concerned less by hFt? there is no consistent pattern as to which stocks are preferred by Hft. the individual algorithms are too different, some are specialised on large caps, others on small caps. and others are not specialised on a certain market segment at all. can i still make a profit at all at the markets? every investment strategy has an optimal time frame where it is profitable. as long as the trader does not think about trading in the time frames where the Hft do there is no reason to stop trading. and the longer the time frame, the less is the influence of Hft. until now i have always used stop-loss orders. can i still use them in the future? stop-loss- and limit orders are still a tool for every trader. But maybe you should not always place them at obvious levels where many other traders have their orders as well. the skill of an experienced trader shows here. Why are there so few regulatory rules for hFt? the authorities are working on it, but strategies of the Hft change very quickly and therefore it is a tortoise and the hare-game. this will not change in the coming months and years.
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the authorities (for example the cancellation of faulty orders after a flash crash) as well can only compensate the resulting damage to a limit, because you have to decide individually at which price change faulty prices were given. This may protect the HFTs who caused these movements and affects the traditional market participants who in good faith believe they took a trade and placed follow-up-orders. This is the reason why there is the need of an extensive regulatory body that recognises risks and difficulties of HFT ex-ante and eliminates them to a large extent. Only in this way markets can function transparently, efficiently and solidly. At the same time progress must not be prevented and the cost and side effects of these rules have to be low to avoid harmful unintended consequences. It must not happen that the regulatory framework reduces real market liquidity and influences investors behaviour in a negative way. To confront the problem of feigned liquidity it is necessary that HFTs must leave liquidity in the market for a certain period of time (for example at least one second) and thus even a human being with an average reaction time can react. Market makers who use HFTstrategies are forced to place quotes even in times of high volatility. But this is a problem if the traditional market makers are allowed to suspend the quotation at times of unusual market phases. Furthermore HFT market makers can easily avoid this rule by placing unattractive quotes where no trade is executed at times when they do not want to be in the market. Another possibility to eliminate the problems that are caused by HFT is to pass on costs to the traders. In general quotes are placed are free of charge. But a stock exchange may start to charge a fee for quotes, if the ratio of placed quotes to actual trades of one market participant exceeds a certain level. For example, every trader can place a certain number of quotes per day. If he places more quotes that are not executed he has to pay a fee. The same could be executed for quotes that only stay in the market shortly for example less than a second and are then deleted. In these cases the
F5) tHe noIse on tHe Markets Increases
the average number of quotes (y-axis) that are necessary to execute an order of the volume of 10,000 usd increased heavily during recent years. the x-axis shows the time. source: nanex
existing information is against the HFT. Because the above mentioned information provided by the stock exchange could be used to identify the trading player and therefore the HFT. ConCluSIon HFT is not a tool to increase the market efficiency but leads to less efficient markets. The necessary information to analyse investment strategies is not improved but is clouded by the highly visible number of quotes. Therefore HFT-strategies are similar to Spam-mails. The senders have nearly no cost but the receivers do. The forwarding as well as the converting of the information cause major problems at the stock exchanges and for the other market participants and partly increase costs. If these market participants do not
identify the quotes as noise in the sense of behavioural finance and trade on it, the main requirements of market efficiency are eliminated. That may lead to a self-energising effect and the percentage of HFT will increase further because the actions of traditional investors do not lead to successful strategies. Regulation could help to reduce the negative impact of HFT for example by demanding transparency, by restricting the existing advantage of technical progress for single players and even by prohibiting behaviour that damages the market. This should be ultimo ratio, but if the function of the markets is in danger without such an interdiction, the advantages and disadvantages should be measured. Until now the negative impact of HFT outweighes any positive impact. The authorities should react now. www.tradersonline-mag.com
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Jo in Th eP ro s
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The Leader In Market Guidance
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The Size of Major Bull Markets Japanese Banks Liquidity and Eagerness to Buy Bonds Back
the nations major banks posted far bigger net buying of domestic public- and private-sector bonds in september than in the previous month. their net purchases totaled 1.278 trillion, a 4.5-fold jump from 285.9 billion in august. for long-term bonds, the major banks logged net buying of 1.422 trillion, the biggest since october 2010. while unloading high-yield issues in the medium-term sector to realise profits toward the september 30 end of the fiscal first half, many banks actively bought long-term bonds to make up for anticipated drops in interest income. source: www.japantimes.co.jp
Why Indian Banks Are Attractive for Investment

Indian banks fetched more deposits than loans since the start of the financial year in april as high deposit rates prompted individuals to park funds with the lenders. as of august 10, deposits with banks since March-end increased 2.8 per cent to 62.8 lakh crore, while credit growth was muted at 0.4 per cent to 47.2 lakh crore. In the fortnight to august 10, deposits rose 0.6 per cent and credit 0.4 per cent. Banks have been unwilling to reduce lending rates across sectors despite a sharp cut in the policy repo rate by the central bank in april due to high deposit rates. High loan rates has kept loan demand low. traditionally, banks launch schemes with lower loan rates for the housing and auto sectors to woo borrowers in the second half of the fiscal year. source: www.businessstandard.com
Egypt Association Plans List of Islamic Stocks

an egyptian association plans to launch a list of sharia-compliant equities as part of its efforts to raise awareness of Islamic finance in the country. the list will filter out companies which fail to meet religious guidelines, such as avoiding excessive levels of debt and steering clear of industries that are deemed unethical, including alcohol and gambling. details of the stock list will be announced in the next weeks, giving investors assurance about the stocks that they can legitimately buy and sell, he added. the organisations sharia board will approve the list, with rules based on the standards of the Bahrain-based accounting and auditing organization for Islamic financial Institutions (aaoIfI), a major standard-setting body source: www.egyptindependent.com www.tradersonline-mag.com
sources: Barry ritholtz, John paul koning, www.financialgraphart.com
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High Frequency Trading World Europe 2013

High frequency trading world europe 2013 is europes leading event for high frequency traders to learn about the latest strategic and technological innovations in the industry. this high level business forum will identify future opportunities and showcase the latest solutions. Gain insights from leading traders, cutting edge academics and key regulators on how to adapt your Hft business model and overcome the challenges of regulation, liquidity and latency. Hear practical case studies from pioneering Hfts and industry experts and discover how you can replicate their successes in your business. to get 10% off, please follow this link: http://www.terrapinn.com/hfttradersMagregister or use this voucher code: sMlc when: 12-13 february, 2013 where: Guoman tower Hotel, london, uk subject: technology, strategy and innovation for high frequency traders Brochure download link: http://www.terrapinn.com/HfttradersMagBrochure event website: http://www.terrapinn.com/conference/trading-show-eu/?pk_campaign=op-tradersMag&pk_kwd=op-tradersMag
Google Ate the Entire Newspaper Industry

the chart to the left, from statistas felix richter, plots Googles digital advertising revenue against the print advertising revenue of all u.s. newspapers and magazines. If Google and content providers are indeed partners, its pretty clear that one partner is getting a lot more out of the deal than the other. and as for that stake Google had in helping newspapers monetise online? well, the Guardians roy Greenslade estimates that Googles total revenue also now exceeds that of the entire u.s. newspaper industry even when you count digital ads. If Google did have a stake in the newspaper industrys success, now might be a good time to go ahead and pull it out. the bloods probably already dry. source: www.thereformedbroker.com
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STAR Awards 2012 Please Vote for TRADERS

from november 16th, 2012 through January 31st, 2013 traderplanet presents its star awards 2012. for this, traderplanet considers commercially available trading platforms, strategy software, market data, newsletters, financial magazines, courses and books. traders is nominated as best financial magazine. so please support us and vote for us at www.traderplanet.com/l/nlc each voter will be registered in the star awards raffle for a chance to win a prize package valued at over $10,000. only one ballot submission permitted per voter, per day. to prepare the ballot, select first, second and third place choices (through the drop-down lists) in each category listed on the form. votes are not required for every category, or every position within the category. once your selections are made, click the vote now button to submit your completed ballot. winners will be announced on traderplanet.com in february 2013. thanks for your support! source: www.traderplanet.com/l/nlc
Financial Centre London Becomes Less Important

according to a study by the centre for economics and Business research (ceBr), the financial centre london is becoming less important in worldwide comparison. according to that study, 280,000 people were engaged in the financial markets in the British metropolis in 2011. In 2012, there will be only 249,500 people who are active in the markets, said the think tank in london. In 2014, the number of those people will fall to 236,000 a third less than at the climax of the financial boom in 2007 when the number was 354,000. so london has already fallen behind new York with 254,000 in this year regarding the number of employees. Moreover, the institute found out that the trading volumes in important areas have also decreased. By 2015, london will be overtaken by Hong kong as well. once, Hong kong was only half as large as london and now it will overtakes london within ten years, ceBr economist rob Habron said to sunday times. one part of this development was the inevitable result of a changed economic geography in the world. But over-regulation, penalty tax, and banker bashing have accelerated this development. However, the ceBr has more bad news for the bankers of the city of london. the institute assumes that the volume of the bonuses will decrease to 4.4 billion GBp this year from 6.75 billion GBp last year and 11.5 billion GBp in 2008. But the biggest loser of this development was the treasury, according to ceBr boss douglas Mcwilliams. He assumes that city of london will ensure 40 billion GBp tax receipts this year. at the climax of the financial boom, there have been around 70 billion GBp. source: www.n-tv.de
Bank of England Cuts UK Growth Outlook and Sees Tough Times Ahead
the Bank of england said the u.k. economy may shrink in the current quarter as it cut its outlook and said growth may be weaker for longer due to a bigger impact from the financial crisis. the weaker gross domestic product profile reflects the judgment that the broader causes and repercussions of the financial crisis may bear down more forcefully on demand and productivity than assumed previously, the central bank said in its quarterly Inflation report published in london today. there seems a greater risk that the u.k. economy may be in a period of persistent low growth. the Monetary policy committee halted expansion of its bond-purchase program after some officials raised doubts about the effectiveness of the program and others highlighted inflation risks. Moreover, the central bank said it will transfer income from gilts it holds under that program to the treasury in a move that Governor Mervyn king equates to an easing of monetary conditions. the central bank said its new forecasts take into account the impact of that transfer of income to the treasury. It sees annual quarterly Gdp growth of about two per cent in two years, according to projections published as fan charts with the report. the euro-area debt crisis remains the biggest risk to the u.k. economy, according to the central bank. It also said higher energy costs may damp spending, while the governments fiscal squeeze is also pressuring activity. the recent strength of the pound is affecting companies competitiveness, it added. source: www.businessinsider.com www.tradersonline-mag.com
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paul wallace spent six years in the royal air force controlling fighter jets before embarking upon a career in the city. He is one of the principal forex traders at kaizen wealth Management uk and runs tradingbeliefs, a performance support practice for traders. contact: paulwallace@tradingbeliefs.com
Paul Wallace
part 11: range vs. trend trading
wHat tYpe of trader are You?

Achieving consistent success in trading comes only once we learn to trade in line with our individual personality, character and beliefs. It is garnering this self-knowledge that becomes the real treasure on your trading journey. This series of articles will help you raise your awareness, develop self-knowledge and improve your approach to your trading business as you gain clarity on what type of trader you are. www.tradersonline-mag.com
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After a couple of instalments regarding goal-setting and stop-losses we shall return to more basic trading elements. Regardless of whether your approach is fundamental or technical in bias, all markets tend to be in one of two states. Markets are either rangebound or they are trending. In this instalment we shall look at what type of trader are you in terms of whether
They like to buy when things are cheap and sell them when theyre expensive. Trend TraderS In the simplest terms you could define trend traders as people who like to buy high and sell higher! They like to buy into a rising market and keep the position
trades) need to watch a market frequently. Longer term trend traders, on the other hand may get away with looking at markets once a day, or even a week, depending upon their outlook. It also true that range traders tend to have a higher frequency of trades and a higher percentage of winning trades. High Frequency Trading (HFT) is often perceived to be the ultimate
High frequency trading is often perceived to be the ultimate form of range trading.
you should be a trend trader or focus on range bound environments range TraderS In the simplest terms you could describe these people as traders who like to buy low and sell high! If you look at any market they tend to be range-bound for 80 to 90 per cent of the time. By which we define as the market moves between discernible levels of support and resistance. This can be across all time frames despite appearing random at times. On intraday levels this can mean traders being very active and requiring good reflexes (if not automated). Some CHaraCTerISTICS oF range TraderS They can often (but not always) be left-brain dominant individuals. They will be practical and methodical in their trading approach. They will look to achieve steady growth in their equity rather than looking to hit a home run. They are likely to have a strong work ethic and be detail orientated seeing just the individual trees rather than the entire wood. Theyre happier taking a profit than dealing with a loss (though it might be said all traders are like that). for some time. We define a trending market as a rising (or falling for short-sellers) that continues to make higher highs and higher lows. However markets only act like this for perhaps ten to 20 per cent of their time. A trend trader requires a great deal of patience to be able to avoid the period of whipsaw in range bound times whilst they prepare themselves for the next period of trending markets. Some CHaraCTerISTICS oF Trend TraderS They can often (but not always) be: right-brained individuals who are creative and artistic. In terms of equity growth they often look for game-changing up-lifts in their account. They definitely see the wood as opposed to the individual trees. They dont really care where the price is or its perceived value; merely that if theyre buying then its going up. They will have a strong performance ethic that will lead them to focus on whats working well and then they repeat that tactic until it is no longer valid. range verSuS Trend TraderS There are other differences between the two styles of trading. Range traders (especially on intra-daily form of range trading associated with frequency, length of trade and direction. Whereas longer term trend traders maybe of a lower frequency in term so the number of trades is lower as is the number of winning trades. They make their money on riding the trades that position themselves early into long running trends. So, What Type Of Trader Are You? Are you someone who has the patience to wait for trending market conditions to appear? Or are you engaged in being a steady builder of wealth through periods of trading between ranges of support and resistance? Whilst many people would claim to be able to do both your results will likely tell a different story. Its rare for a person to be truly good at both environments. Once you have discovered which environment suits you the best, youre likely to experience greater levels of success by working on honing your skills in that area till you truly own that particular style. As always neither style is better than the other (though many would fight over the perceived superiority of their trading style all day long) its about which style truly suits you and being able to do what is necessary master that trading style. www.tradersonline-mag.com
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2012 TraderPlanet STAR Awards
Please vote for
Online Magazine*:
http://www.traderplanet.com/l/nlc Thanks for your support!

*and win a prize package valued at over $10,000
InsIGHts
2012 I 12 Dan Valcu
dan valcu is a certified financial technician (cfte), Board Member of the International federation of technical analysis (Ifta), founder and technical analysis consultant with educofin ltd, and a private trader. He is the author of the first book on heikin-ashi Heikin-ashi How to trade without candlestick patterns. for more information visit www.educofin.com.
part 2: novice vs. experienced traders Brain
neurotradInG: know Your (tradInG) BraIn

Trading is a complex process which involves an invisible body mass of only 1.4 kg in average: The brain. Although the statement sounds trivial, the approach and results of very many traders contradict the reality that all information processing and decisions involved during the trading process take place inside the Grey Box. Traders, and especially retail traders and investors, in their rush for quick money tend to circumvent many commonsense steps that would help reveal smaller and bigger faults in their thinking. The scope of this article is to make traders aware, at a very high level, how the brain affects all steps taken during the trading and investing process, with focus on chart reading. Hopefully, the facts will bring traders to the point of realising that they need to rewire their approach to financial reward behaviour. It is not an easy change but sometime, somewhere, somehow, this must be done to the benefit of own trading. www.tradersonline-mag.com
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THe braIn or THe blaCk box? Lets see how the main brain areas previously discussed (TRADERS 11/2012) are activated when an insecure or an experienced trader looks at charts before deciding to place a trade. For a very emotional or novice trader the sequence is the following. He looks at the chart and the image with all patterns is projected back in the occipital lobe where the vision center (V) is located. Next stop is the hippocampus (HI) where memories are stored. Since our subject is far from a secure and skilled trader, doubts install quickly. The hippocampus does not recognise the pattern as being stored previously and asks for help. The limbic system comes into play and through the hypothalamus and amygdala, attaches emotions reflecting a lack of security, even fear. There is a negative convergence between what the trader sees and the response of the brain due to his/ her lack of experience or excessive emotional profile. These noisy signals go to the CEO, the frontal lobe (P) to decide what to do: To take the trade or not? There is high uncertainty and the motor cortex (M) is sidetracked. No impulse to the hand is sent. There is also another outcome to this scenario: With all this mess, a decision to trade is taken in the frontal lobe (P), the motor cortex (M) sends a signal to the hand to click on the Buy or Sell button and initiate the trade. When you add stress to the lack of skills, the result is easily anticipated: A loss if luck doesnt strike at random. Whats the flow of brain signals when a top trader sees a chart with patterns that have been seen hundreds or thousands of times before?
He looks at the chart and the image with all patterns is projected back in the occipital lobe where the vision center (V) is located. Next stop is the hippocampus (HI) where memories are stored. Since our subject is a seasoned trader, confidence dominates the picture. The hippocampus recognises the pattern as being
stored previously and does not ask for additional help. The limbic system comes into play and through the hypothalamus and amygdala, attaches emotions that reflect confidence. No sweat, no tears. There is a positive convergence between what the trader sees on the chart and the response of the brain due to his/
F1) novIce/eMotIonal traders BraIn
this is how the brain works when you are (highly) insecure in trading. due to the lack of internal communication and understanding, the motor cortex (M) is not engaged to send execution signals to the hand. a = amygdala (limbicsystem), Hc = Hippocampus (memory), Ht=Hypothalamus, (motivation, rewards), M=Motor cortex (movement, not activated), p= prefrontal cortex (decisions), v = vision center photo source: shannon Muskof
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her extensive experience and simple routine trading. These signals go to the frontal lobe (P) to decide what to do: To take the trade or not? There is a high convergence towards taking the trade and the motor cortex (M) is activated. Impulses to the hand are sent. The order is placed. Its well known that many retail traders dont have the mental preparation (Figure 1) to confront markets. Patience, intense and disciplined training, simplicity are missing qualities. These traders are in a continuous race to gain pips and ticks using all types of short cuts. The loss of capital leaves a sour taste making room for another wave of victims. Many are looking for something easy: The robots. Even experienced traders (Figure 2) may get to a point when they are looking for robots to relieve the stress and make their trading better. Robots are black boxes that shut the brain off during trading. You make or buy them, test them, and connect the box to the trading platform hoping that market behaviour is correctly incorporated into the trading rules. Trading takes place now outside the neural space, no emotions, no personal involvement. We understand better now why these boxes are so attractive (and dangerous): They circumvent the Gray Box. ConCluSIonS Looking objectively at the role the brain plays in trading and investing (all information is processed and translated there), it is time to rethink trading education and preparation. Today, most traders jump directly into the markets using technical indicators and other visual/quantifiable techniques. Some also look seriously into risk control and capital allocation. But almost none consider how the brain works and especially how it works in a trading environment full of confusing information and noise. If today a typical trader looks at this sequence 1. Technical tools (frequent) 2. Fundamental/event-driven information 3. Risk and capital management (rare)
F2) experIenced/confIdent traders BraIn
this is how the brain works when you know what to do. the motor cortex (M) sends the message to the hand push the button! a = amygdala (limbic system), Hc = Hippocampus (memory), Ht=Hypothalamus, (motivation, rewards), M = Motor cortex (movement), p=prefrontal cortex (decisions), v=visioncenter photo source: shannon Muskof
he/she should reconsider and change the sequence into 1. 2. 3. 4. Know Your Trading Brain (frequent) Risk and capital management (frequent) Technical tools (frequent) Fundamental/event-driven information
Weve seen that during a simple trading task, several areas of the brain are involved and trigger a string of actions between them in order to reach a decision. An important key to success is when the volume of information processed by the brain is kept to an optimal level and this information is found stored in the memory
center (hippocampus) as having already been seen and processed in many similar trading situations. Repetition of simple tasks is an additional positive step in reducing the noise between the limbic system and the neocortex. The positive or negative divergence between what a trader sees on a chart and what his/her trading experience is, leads to a state of comfort or discomfort in taking a trading decision. A boring routine and vast trading experience make almost everything fall into the right place. The lack of experience, a poor or non-existent trading plan, or a fluid in-context strategy will cause an intense noisy dialogue between neocortex (decision) and the limbic system (emotions). The result is in most cases a financial loss.
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products
to Barclays own proprietary research, as well as fxcMs extensive research offering, including sentiment data, trading signals, educational video content, how to training and tutorial videos. for additional details, please go to www.barclaysmarginfx.com their preferences. It is an integrated trading and order management platform. dt is free for the first 30 days and for customers who trade 25 times or more in a month. More information can be found at www.dittotrade.com resolution Maximum entropy spectral analysis (Mesa) measurement of the spectral content of market data. a low lag, accurate measurement of the dominant cycle is extracted from the spectrum. the Mesa9 collection of indicators are not only dynamically adjusted by the chartIQ launched real-time ipad stock and forex charts, based on market data from Barchart. customers can now subscribe to real-time equity and forex feeds directly through chartIQ pro on their ipad and receive live, streaming stock charts anytime, anywhere. apple ipads have untethered investors from their desktop, allowing traders to participate more frequently in market activity. chartIQ is the first charting software with advanced analysis capabilities that is fully optimised for ipads, in addition to the web. with these new, affordable data feeds, traders can now have access to real-time, intraday stock and forex charts directly from their ipad. existing chartIQ pro users will continue to receive free end-of-day stock data, also supplied by Barchart, but can now elect to add on real-time stock and forex data subscriptions, starting at $9/month. additional details can be found at www.chartiq.com
Barclays stockbrokers has launched Barclays Margin fx a new and significantly enhanced retail foreign exchange trading platform in partnership with fxcM. the trading platform provides access to 50 currency
BarclayS StockBrokerS
BarclayS StockBroker
chart iQ
Jurik research has released toolsets for three more charting platforms: Multicharts, Market delta, and extreme charts. these toolsets are now compatible with 20 charting platforms. Jurik tools are currently being upgraded for 64-bit applications. tools are now available for 64-bit Multicharts and will soon be released for 64-bit versions of esignal and ninja trader. a list of the compatible platforms is available on the website. additional information at www.jurikres.com
Jurik reSearch
Ditto traDe
pairs and traders will benefit from live streaming, competitive, neutral prices with speed and certainty of execution and no intervention from a dealing desk. traders wont be subject to requotes the price they
chart iQ
Ditto traDe
see is the price they will get. traders can also execute trades directly from charts and using one-click trading. furthermore, clients will benefit from exclusive access
ditto trade has introduced dt, a new active trader platform. dt gives active traders a suite of tools to help them capitalise on market opportunities as quickly as possible. dt is an extension of ditto trades technology. followers can attach to the actual trades placed by their lead trader on dt. with dt, ditto trade expects to become the go-to solution for active investors and their networks. It is also fully integrated with the ditto trade mobile app. dt offers flexibility and customisation, helping traders build personalised environments to match
Marketspulse announced the launch of an HtMl5-based trading platform, compatible with tablets such as the ipad. the added tablet support comes as a welcome addition for customers of Marketspulse. the new tablet trading solution is enabled by adding tablet platform recognition to the desktop trading platform and allows for an optimal tablet trading layout. support for HtMl5 also allows traders on ipad and similar devices to use the charting function, while legacy browsers are still supported with flash technology. the Marketspulse mobile trading platform is one of the only native iphone and android binary option trading platforms. additional details can be found at www.marketspulse.com
marketS PulSe
dominant cycle, but advanced digital signal processing (dsp) techniques are used to produce low lag and non-causal anticipatory signals. Mesa9 is as easy to
marketS PulSe
Mesa software has announced the release of the Mesa9 indicator set. Mesa9 is a collection of dynamically tuned indicators that derive their adjustments from the high
meSa SoFtWare
use as any of the indicators built into neuroshell trader. the premise of Mesa is that market cycles are the one characteristic that can be scientifically measured. the Mesa algorithm makes a high resolution estimate of www.tradersonline-mag.com
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and north africa (Mena) region, announced it has signed an agreement with flextrade systems, Inc. to operate as an Independent software vendor (Isv) of the Bfx. under this agreement, flextrade systems is authorised to provide sophisticated trading front-end technology via its flextrader eMs to the members of the Bfx. flextrader is a multi-asset trading solution with pre-defined strategies and tactics for both portfolio and single stock trading. the platform provides organically developed real-time and post-trade analytics (flextQM), predictive analytics (flexedge) as well as risk and cost optimised portfolio trade scheduling (flexpts); advanced integrations with major oMss; integrated real-time allocations and cash management; smart order routing; a fully integrated high performance complex event processing (cep) engine; commission management; complete transaction and IoI quality management, a dynamic strategy matrix. the Bfx presently offers four additional connectivity systems, which include ffastfill, rts realtime systems, automated trading technologies and odIn since the launch of its derivatives division in november 2011. for more details, please visit www.bfx.bh
the entire range of potential cycles. experience has shown that there is typically only one tradable cycle in the market at a time. this is the dominant cycle that is extracted from the spectral estimate by using a center of gravity approach so that the dominant cycle is the one
thomSoN reuterS
BahraiN FiNaNcial exchaNge
containing the majority of the cyclic power. More details can be found at www.neuroshell.com
Wall Street JourNal
thomson reuters announced the launch of the thomson reuters Global sukuk Index, an independent and transparent benchmark for investors seeking exposure to sukuk (shariah-compliant) fixed-income investments, to be used to monitor the performance of the sukuk market. the thomson reuters Global sukuk Index will attempt to bridge the challenge of information asymmetry in the global sukuk market. pricing is sourced from thomson reuters eJv database. thomson reuters produces pricing evaluations using two primary methodologies: Model and dollar pricing. Most issues priced by the model approach incorporate a benchmark for each market, credit spreads and other variables. thomson reuters dollar pricing is applied mainly to issues that are unique in their structure or to high yield securities particularly when the issuer of those securities has defaulted on a bond or has fallen below investment grade. all issues are individually priced and inputs include quotes from the primary dealer and other market makers, and traded prices in the security. all indices will be dollar denominated and rules for inclusion will be sukuk with amount outstanding of not less than $100 million and above. for more information, please visit www.thomsonreuters.com
what techniques do professional currency traders and successful amateurs use to identify trading opportunities and (more importantly) to manage their risk? In his book sound fx: the sound approach to foreign exchange tradingtony, tony loton aims to answer those
thomSoN reuterS
questions, so as to provide a sound basis for your foreign exchange trading. while the choice of trading platform is yours, the authors demonstrations via a single trading
ForeigN exchaNge traDiNg
the Bahrain financial exchange (Bfx), the first international financial exchange in the Middle east
BahraiN FiNaNcial exchaNge
the wall street Journal has released wsJ worldstream, a global video newsgathering and publishing platform for short-form videos shot via smartphone by journalists from across the global wsJ and dow Jones news organisation. It is available on wsJ.com and as a free web app. wsJ worldstream consists of footage captured on smartphones utilising the resources of more than 2000 journalists. for further information, please go to www.wsj.com/worldstream
Wall Street JourNal
ForeigN exchaNge traDiNg
foreign exchange trading (commonly abbreviated to forex or fx) has grown in popularity with nonprofessional investors and armchair speculators. Youve probably heard of it, and maybe even tried it, but youre wondering... why should you trade currencies on the foreign exchange markets? which currency pairs should you be trading? what is the best way to trade currencies via your pc, iphone or android tablet or mobile phone?
account provider, based on the increasingly-popular Metatrader 4 (Mt4) trading platform, leads to a degree of consistency rarely seen in books of this nature. additional details can be found at soundfx.lotontech.com www.tradersonline-mag.com
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review
Point & Figure charting may be the oldest method of charting the market in the Western world but, as Jeremy du Plessis is keen to tell us, that does not mean it should be overlooked as a technique by chartists in the twenty-first century. In this revised and expanded second edition of his Definitive Guide, du Plessis shows why making a strong case for Point & Figure as the most vital, and most useful, Technical Analysis tool around. Whether you are as yet unfamiliar with Point & Figure, or have dabbled and know a little, or feel that you are already familiar with the technique but would like to know more ways to apply it, this comprehensive guide is for you. Point & Figure charts are unique to Technical Analysis and they are unique within Technical Analysis. No other discipline uses a technique like this and in technical analysis itself no other chart or approach looks the same or uses quite the same method of construction. So unusual are Point & Figure charts that most students of Technical Analysis avoid them completely, but this is a mistake as they can enhance market analysis and improve trading. There are many books on Point & Figure available, so why did du Plessis feel the need to write another? He explains that of all the books he knows, none give a detailed coverage of the original 1-box reversal charts. These charts are where Point & Figure began and this book goes into more depth on traditional Point & Figure charts than any other book I have read. The www.tradersonline-mag.com
a comprehensive Guide to the theory and practical use of the point and figure charting Method
tHe defInItIve GuIde to poInt and fIGure

By Jeremy du Plessis
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been added in the shape of the low/high and ohlc methods. The author has also dedicated more space to explaining the parameters that are required to draw a Point & Figure chart and then how to choose the correct parameters in particular circumstances. The implications of showing gaps on Point & Figure charts and how this can provide more information about any column is also covered in more detail. Two new Market Breadth indicators based on Point & Figure are also covered Bullish Trend Percent and X-column Percent. Both of these give a different perspective on Market Breadth measurement and analysis. Horizontal Activity histograms are also introduced; these are based on price activity and volume at each Point & Figure box level. These histograms give additional information about the strength of support or resistance at any level. Point & Figure is a graphic representation of the supply and demand, and the fear and greed, that is part of the market. It is almost as if the Point & Figure chart is the mouthpiece or voice of the market. As such, technical analysts cannot afford to be without a working knowledge of Point & Figure and du Plessis guide does an excellent job of building this.
purpose of this is to ensure that you understand the history, development, calculations and the analysis of Point & Figure charts; these basics are essential in order that a chartist fully understands how to apply the technique. This book starts by describing the history of how Point & Figure developed. This is useful background as it explains how Point & Figure charts do what they do. The author then moves on to the construction of Point & Figure charts, the patterns and signals they produce, and how to use trendlines with the charts. The focus then moves to analysing the charts, including how to project price targets, the implications of changing the chart parameters and then a step-by-step walkthrough analysis of the FTSE 100 Index and the NASDAQ Composite indexes. In the final chapters, du Plessis looks at how to optimise Point & Figure charts, advanced techniques for use when the basis have been grasped and a chapter full of real-life chart examples that employ the theory described throughout. The enhancements made for this second edition are as follows. In addition to the Point & Figure chart construction methods already covered in the first edition, two new construction methods have
Title: Subtitle: Author: ISBN: Price: Publisher:
The Definitive Guide to Point and Figure A Comprehensive Guide to the Theory and Practical Use of the Point and Figure Charting Method Jeremy du Plessis 9780857192455 59.46 Harriman House
About the author: Jeremy du Plessis, CMT, FSTA, trained as an automotive engineer, then an economist, but gave them both up to become a Technical Analyst. In 1983 he founded Indexia Research and pioneered the development of PC-based technical analysis software with the Indexia range of technical analysis systems. He is an expert on Point & Figure charts, and the Indexia software was the first PC-based system to draw them correctly and clearly in the early 1980s. In 2001, he agreed to merge his company with Updata plc, where he is now head of Technical Analysis and Product Development, and the designer of the Updata PC and SmartPhone technical analysis software.
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review
THe new alerT TICker The Alert Ticker, the addition in eSignal 11.5 that most supports the trader's workflow, brings alerts based on price, studies, and drawing tools, into one convenient window. Traders can fully customise which of their alerts will be displayed using a variety of filters, and alerting for key conditions is possible across multiple indicators and drawn objects. All alerts can be funneled into one straightforward Alert Ticker or sorted and spread across multiple Alert Tickers. In addition, this new functionality integrates with several new drawing tools and studies also introduced in 11.5. Time range: Select to display alerts that fired based on time. Symbol: Filter alerts by symbol. Interval: Filter alerts by interval. pages: Apply the Alert Ticker to all open pages or selected pages. Categories: Filter by Price, EFS, Line Tools or Study. windows: Selections include All, Chart, Watch, Dashboard, Market Profile and Other. Instruments: Select the specific type of alert to be filtered, such as horizontal lines, Type 1 trades, moving average crossovers, and so forth. Types: Select the type of alert to be filtered, such as lines, strategy signals, and so forth. price/value: Filter by a specific price or value. message: Filter by a specific message. These filters can all display in customised backgrounds as they scroll through the Alert Ticker window (see Figure 1). alerTS on drawIng ToolS As a trader, no matter how you trade, you keep track of various levels in your markets determined by drawn objects. These can be as simple as horizontal lines from previous pivots and Fibonacci levels or as complex as Gann Angles and Gartley patterns. In the 11.5 release of eSignal, you can now draw out your choice of patterns and levels and, then, turn www.tradersonline-mag.com
Making You the trader aware of Your opportunities
esIGnal 11.5
eSignal has addressed many of the top requested legacy features and greatly improved the traders workflow with the release of eSignal 11.5. Market Profile, Point and Figure, Forward/Yield Curves, Japanese chart types, and other enhancements asked for by eSignal users are all included in the latest version. Not only has eSignal added these features back, but it has expanded eSignals capabilities to include the latest advancements in these features.
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them into living, breathing alerts so that you know exactly when markets are hitting your levels. Because it is helpful for traders to know when a market approaches the level of any drawn object, you can also set a customised envelope around these levels to be alerted as they are approached. This will allow you to be prepared as markets either break out of or are rejected by these levels of price. Additionally, now, Drawing Tool alerts work on studies, as well as price charts. So, you can draw trendlines on studies (such as RSI) and be alerted as they break out of that trend. All the Drawing Tool alerts feed the new Alert Ticker window. new drawIng ToolS Triangles: Although it appears simple on the surface, this shape can be a powerful way to mark support and resistance regions or establish patterns of trend retracements or extensions. With the new triangle drawing tool in eSignal 11.5, you have a straightforward and precise method of drawing these powerful geometric patterns on your charts. polyline: Continuing on the theme of shapes, you now have the ability to draw multi-sided shapes and swings or connect tops and bottoms of trends to create a living channel of sorts. The polyline tool is formed by a series of unlimited clicks. A line segment is drawn between each click, and the line is completed with a final double-click action. new pitchforks (modified Schiff, Inside): Besides adding new tools, eSignal 11.5 has extended the uses of existing tools. The new Modified Schiff Pitchfork is similar to the standard pitchfork but has the basis of its median (middle blue) line adjusted to 50 per cent up the first two clicks. The new Inside Pitchfork is typically used for trading activity occurring within a previous trend range because the angle of the bottom prong is based on 50 per cent of the first two clicks. pitchfan: This drawing tool is a unique hybrid of the Pitchfork, Gann Fan and Speed Resistance Line
F1) alert tIcker
an alert ticker window captures many triggered alerts and centralises them in one, easy-to-access area. source: esignal
F2) auto wave
the auto wave study is made up of three parts: ZigZag lines, the fibonacci pattern finder and fibonacci projections. source: esignal
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and is a veritable Swiss Army knife of the drawing world. With it, you can create any pitchfork style, as well as create your own style. You do this by adjusting the slope value of the parallel lines. In addition, fan lines are included in the mix for an additional layer of support and resistance. The trick with this tool is to find what slope settings work best over time for the symbols you trade, and when these lines are respected in the past, they are more likely to be adhered to in the future. Channel Tool: Drawing parallel lines was always possible in eSignal; it has just been made a lot easier with the new Channel Tool. You start by drawing a basic trend line off the highs or lows of a trend; then a parallel line attaches to your mouse cursor, so you can place the top or bottom of the channel. These can also be extended to either side of the channel in customisable ratios of the original channel. rotated rectangle: In a similar way, the new rotated rectangle provides a channel but can also provide a defined end-cap to the trend. Its a great way to encapsulate a trend with this shape, but now it can be at an angle of your choosing.
F3) cHannel tool
drawing tool alerts work on studies, as well as price charts as seen in this channel tool example. source: esignal
new TeCHnICal analySIS STudIeS auto wave: The new Auto Wave study defines swings, finds patterns and projects future support/ resistance levels all in one study. The Auto Wave study is made up of three parts: ZigZag lines, the Fibonacci pattern finder and Fibonacci projections. auto wave ZigZag lines: ZigZag lines are the foundations of the Auto Wave study; they define the high and low extremes that occur as a market moves up and down. This is typically used to help remove noise in active markets to assist pattern traders, such as Elliott Wave or Fibonacci traders. In Auto Wave, the minimum distance between each ZigZag peak and valley can be adjusted to make the waves more or less sensitive. Typically, this is done to form-fit the ZigZag lines against a markets natural swing patterns. The price distance between each zig and zag is included in a small
box on each line to easily see the actual underlying movement of each wave. This is important for system traders who have defined rules for validating trends or patterns. Some traders may use the Auto Wave just for the ZigZag lines because they are a powerful tool in their toolbox. With each swing defined via the ZigZag lines, the Auto Wave can perform analysis on those waves. One method for looking at trend retracements and continuations is using Fibonacci ratios. These mathematical values are found all throughout nature and are also often used in financial markets to highlight possible support and resistance levels. It is commonly accepted that the more often a ratio occurs historically within a symbol, the more likely it is to reoccur. The Auto Wave will automatically search the historical patterns in a symbol and show you which have come close to a Fibonacci ratio by highlighting them in green.
auto wave Fibonacci projections: The Auto Wave is great at finding what Fibonacci levels have occurred, but what about future price activity? This study will automatically display Fibonacci price levels that will satisfy a Fibonacci ratio. This really just touches the surface of what the Auto Wave study can do. There are numerous knobs to adjust with respect to the wave size, Fibonacci pattern sensitivity and number of projections that should be shown on the chart.
eSIgnal 11.5: wHaTS In IT For you? eSignal 11.5 is full of helpful enhancements for your trading workflow. eSignal has been known for its high quality financial information and charting for the active trader, and the latest offering is no break from that. The new studies and especially the new enhanced alert functionality make it a workflow-enhancing tool for traders. New traders should definitely take advantage of the 30-day trial. www.tradersonline-mag.com
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review
where traders Gravitate
www.traderplanet.coM
Are you just stepping into the world of trading or are you a seasoned hand at playing the market? No matter your skill level, ongoing education is important to your success. If you want to win at the game, you have to know how to play, how to play well, and you have to have a winning strategy. The staff at TraderPlanet. com understands this. The website offers you education and information about the market by providing current financial data, market-data feeds, advanced technical trading tools, extensive commentary across asset classes, insightful analysis, and an abundance of educational materials (webinars, videos, ebooks, and more). The mission of TraderPlanet.com is to help you become a better trader, to help you improve your trading strategies and your investment performance.
TraderPlanet.com is divided into four sections, each containing a number of categories that can help you learn to trade or improve your trading and investment skillset. Home Markets on the Move, Featured Stories, and Market Commentary offer top-flight financial writers from the financial world who cover the gamut of trading and investment topics ETFs, futures, managed futures, forex, options, commodities, and stocks. This section offers in-depth articles that are easy to read, informative, and educational in www.tradersonline-mag.com
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more ways than just giving you information. These experienced and knowledgeable writers provide both technical and fundamental insight that is hard to find in one place out there on the Internet. Daily and weekly market views from the best staff writers at TraderPlanet.com round out the writing selections. eduCaTIon In this section, you will find a Resource Library that includes recent TraderPlanet.com articles and
F1) HoMepaGe
the writers provide technical and fundamental insight.

weekly newsletters that bring together the best articles from TraderPlanet.com on a variety of topics for the week. More specific to your education, TraderPlanet.com offers you educational eBooks and tutorials that provide information and specific methodologies to help you improve your trading and investment skills, as well as helps you develop successful strategies. For those of you who want to learn more about Managed Futures, a sophisticated approach to diversifying your portfolio through globalised investments in commodities futures, TraderPlanet.com provides comprehensive insight into this program, as well as access to a 12-step, introductory e-Course on the ins and outs of investing in Managed Futures. The Multimedia tab offers you interviews and podcasts with top names in the financial industry discussing specific strategies and approaches to making money in the world of trading and investing, as well as educational TraderTube Videos and webinars designed to help you improve your trading and investing skillset.
traderplanets enthusiasm for trading ideas is evident on their home page with quick and simple access to analysis offered by their top tier financial writers.
source: www.traderplanet.com
F2) trader tuBe
a hidden gem in the education section are the tradertube video channels which feature video commentary from industry influencers such as John Murphy, the former anchor of cnBc. source: www.traderplanet.com
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On a more practical note, the Education section also includes a Calculators tab that provides calculators for mortgage loans, personal loans, and auto loans, as well as calculators for business and insurance, investment, and calculation tools to help you with your finances and your retirement. If you are planning a trip abroad, TraderPlanet.com provides a handy currency converter.
F3) Hot stock
traderplanet.com is a one-stop shop.

markeTS The Market Overview section covers the current financial news on forex, ETFs, options, futures, as well as technical charts and fundamental financial data on specific stocks. As a bonus, you also get the Hot Stock of the Day. CommunITy This is the interactive aspect of TraderPlanet.com. Here you will find members asking and answering questions about the trading and investing world, daily market commentary, free educational events, premium educational events, and economic events all listed on TraderPlanets Events Calendar. You can also hook up with other members through chat forums or simply by exchanging information. Here is where you will find TraderPlanets avenue to charitable giving. There is always a featured charity, a list of all charities associated with TraderPlanet.com, and how much TraderPlanet.com members have raised for specific charities. You will also find the TraderPlanet STAR Awards, the annual review of top products and services found in the world of trading and investing, as well as the one-of-a-kind, sometimes irreverent, and the always
traderplanets Hot stock of the day offers solid fundamental and/or technical analysis on stocks so readers can make better informed decisions.
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spot-on advice column, Ask Trader Ed. If you want the macro view of the global economic picture often reduced to a single play, Trader Ed is your go-to read. ConCluSIon TraderPlanet.com is a one-stop shop that offers information, tools, commentary, analysis, reviews of products and services, and educational materials totally free of charge. TraderPlanet.com does offer some premium products and services, but it offers most all of the material mentioned above at no charge to you. You see, the good folks at TraderPlanet.com believe in educating people to become better traders and investors. If you succeed, TraderPlanet.com succeeds, especially if you share your success through charitable donations to the community at large. They believe we all are part of the same, large community and giving to those in need demonstrates a caring about our fellow community members.
F4) star awards
the star awards program, now in its fourth year, generates healthy competition among providers of trading platforms, strategy software, education, brokerage services, book and newsletter authors, bloggers and live trading room providers.
Read in the TRADERS January issue

coverstorY
How to Trade the Futures Markets
December,
people
Chris Cashman
20th
after all, trading futures is like entering the lions den and competing against the best pros. so what is important to remember here is that knowledge is power! this article is designed to show the tradable markets and explain what you should know and keep in mind when switching to a futures-market account.
christopher t. cashman is the portfolio manager at equanimity capital partners, lp. His focus is ongoing research and study, with the refinement and continuous improvement of his strategies. His history of trading and investing in the equity markets has evolved since 1989.
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azeez Mustapha is a trading professional, an official analyst and representative at Instaforex companies Group, a blogger at advfn. com, and a freelance author for trading magazines as well as a provider of trading signals at a number of websites. He is also a unique content contributor at fxempire.com, and many of his articles are posted on other websites like www.ituglobalforex.blogspot.com. contact: azeez.mustapha@analytics.instaforex.com.
effectual Gap trading in the currency Markets
tradInG wItH Insane accuracY

There are many professional gap traders in the financial markets. Although many articles have been written on gap trading, especially in stock markets, this piece discusses a gap trading technique in the currency markets. Inexperienced traders tend to show the white feather when significant gaps happen in the currency markets because they do not know how to deal with that kind of price action. Gaps offer unique speculative opportunities as they happen. A currency pair/cross whose previous move has been desultory so far could assume a noteworthy bias after a gap occurs on it. How could we take advantage of that? This piece explains this in detail.
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gapS In THe CurrenCy markeTS Gaps are taken to mean a break in price. They occur in all time frames but, for the purpose of this Forex gap trading strategy, we are mostly concerned with hourly charts. There are fewer gaps on big time frames, while there are many gaps on small time frames. Hourly charts thus ensure that the gap signals are not too many so as to cause overtrading, and at the same time, not too few so as to caused missed opportunities. A gap in the currency market occurs when a pair closes at a price on a Friday and opens at a significantly different price on Sunday (late in the evening). This is possible because bull and bear pressures (which tend to occur during weekends when the markets do not move) occur right before the markets begin to move at the open, which causes the price to open higher or lower than the Fridays close. Obviously, it is more probable for gaps to form when the markets are closed, like stock markets overnight and Forex markets over the weekend. There are breakaway, continuation and exhaustion gaps. Breakaway gaps happen as breakouts in ranging markets, continuation gaps (otherwise known as runaway gaps) take place when price movements are very conspicuous, and exhaustion gaps take place at the expiration of the overall trends; therefore signaling the beginning of a noteworthy reversal. deTeCTIng boguS SIgnalS There are gaps that occur during the trading week, but with this strategy, we would like to take signals on gaps that form at the open of the Forex markets on Sunday. Normally, trading signals are taken from naked charts (with almost no indicators used). Based on past experiences, a gap that forms on Meta Trader
4 (MT4) from one reliable broker must also be visible on MT4 from another reliable broker. For example, we consider a signal only if a gap on the MT4 from Alpari UK also appears on the MT4 from FXOpen. Otherwise the signal would be disregarded. Besides, a gap trade is not immediately taken when entry criteria are met; we wait a few hours a maximum of four hours after the markets have opened before orders are opened based on the gap as the signal. The four discrete rules below must be borne in mind when taking signals off this strategy: 1. A gap-up that occurs when the Simple Moving Average (SMA) is going up (signifying an uptrend) is a trap. It should be ignored. We do not want to go long in an uptrend after the price has gapped into resistance levels. This kind of trade has a high probability of going against us. 2. A gap-down that occurs when the Moving Average is going up (signifying an uptrend) is a good trading signal. It should be traded. We would like to go long after the price has gapped down into support levels in an uptrend. This kind of trade has a high probability of going in our favour. 3. A gap-up that occurs when the Moving Average is going down (signifying a downtrend) is a good signal. It should be traded. We prefer to go short in a downtrend after the price has gapped into resistance levels. This kind of trade has a high probability of going into a positive zone. 4. A gap-down that occurs when the Moving Average is going down (signifying a downtrend) is a trap. It should be ignored. We do not like to go short after the price has gapped into support levels in a downtrend. This kind of trade has a high probability of going into a negative zone.
strateGY snapsHot
strategy name: strategy type: suitability: time horizon: Indicator: Instruments: trading period: signals: filter rule: position sizing: stop-loss: target: Break-even stop: trailing stop: risk per trade: risk/reward ratio: Maximum trade duration: winning probability: recent performance: forex Gap trading system swing trading Good for both part-time and full-time traders Hourly charts simple Moving average (sMa) period 50 all pairs and crosses whose spreads are below 15 pips each a few hours after the forex markets open on sunday In an uptrend, buy after a gap-down in the price. In a downtrend, sell after a gap-up in the price please check the section titled detecting Bogus signals 0.01 lots for each $2000 100 pips from the entry price 200 pips from the entry price Move the stop to break-even after you have gained up to 70 pips on a trade You may apply a custom-set trailing stop of 50 % after you have gained at least 180 pips 0.5 % 1:2 2 weeks around 50 % a minimum of 10,000 pips in 18 months
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Trade exampleS Period separators are used on the hourly charts to indicate where one trading day starts and ends. A vertical red line on the left shows where a trade was opened while a vertical red line on the right shows where it was exited. Spreads were not considered in the examples. example 1: In Figure 1, we see a small gap-up occurred on AUD/CHF. This happened on July 23, 2012. What looks here like a small gap was definitely a bigger gap in small observation periods like 30-minute, 15-minute and 5-minute charts. The gap-up occurred when the SMA was showing that the market was in an uptrend. The signal would have been a crashing failure if one had gone long on it. If this is so, why cant we sell short if there is a gap-up in an uptrend? This question might come to your mind. The answer is that it is better not to trade this kind of signal, since one would be essentially trading against the trend. It is more sensible to stay out of this kind of market. example 2: On May 28, 2012, the USD/CHF market opened with a clear gap-down on the hourly chart (in the context of an uptrend). This can be seen at Figure 2. This was a territory where bulls outnumbered bears, plus further confirmation was made in a few hours as the price had a higher possibility of going in the expected direction. A long trade was opened after a few hours. The take profit was eventually reached. entry price: 0.9550 Initial stop: 0.9450 Take profit: 0.9750 break-even stop: 0.9550 Trailing stop: 0.9650 exit date: June 1, 2012 exit price: 0.9750 profit/loss: 200 pips example 3: Look at Figure 3. There was a gap-up in the context of a downtrend on May 28, 2012 (as shown by the SMA and the price action). This event took place on the EUR/USD. The short signal was followed a few hours later, and it hit the take profit level on the third day.
F1) Gap-up In an uptrend
on July 23, 2012, a small gap-up occurred on the aud/cHf cross. what looks here like a small gap was definitely a bigger gap in small observation periods like 30-minute, 15-minute and 5-minute charts. the gap-up occurred when the sMa was showing that the market was in uptrend. the signal would have been a crashing failure if one had gone long on it.
source: www.metaquotes.net
F2) Gap-down In an uptrend
on May 28, 2012, the usd/cHf market opened with a clear gap-down on the hourly chart (in the context of an uptrend). a long trade was opened after a few hours. the take profit was eventually reached.
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Instrument: EUR/USD order: Sell entry date: May 28, 2012 entry price: 1.2565 Initial stop: 1.2665 Take profit: 1.2365 break-even stop: 1.2565 Trailing stop: 1.2465 exit date: May 30, 2012 exit price: 1.2365 profit/loss: 200 pips example 4: In Figure 4, the SMA 50 is shown in blue so that it can be distinguished from other lines. A gapdown happened on the USD/CAD on June 18, 2012, as the SMA was sloping downwards. The price then hit a demand zone and shot up. Even the consequent bearish pressure on the price was halted by recalcitrant demand zones, as happened on the second and third days (horizontal red lines at the bottom of the charts). The price eventually rallied significantly on the fourth day. If a short trade was opened based on this signal, it would have been a flop, as it would have found it difficult to move in the expected direction. We may not open a new sell order after a gap-down in a downtrend context. ConCluSIon Using this strategy, gaps are searched for on a weekly basis. Even if a week has been great, that does not mean every week will be so. But if you keep to the rules of this trading method then you are in the correct lane to success as it is true of other winning strategies. Survival ought to be judged from whether a strategy rule is followed with discipline, not from the positivity and negativity sustained from the strategy. It has been shown that negativity sustained when a strategy rule is followed is more psychologically satisfactory than positivity sustained when the strategy rule is violated. This strategy, when followed as recommended, has the potential to generate average gains that are much bigger than average losers in the long run.
F3) Gap-up In a downtrend
there was a gap-up in the context of a downtrend on May 28, 2012 (as shown by the sMa and the price action). this event took place on the eur/usd. the signal was followed a few hours later, and it hit the take profit level on the third day.
F4) Gap-down In a downtrend

a gap down happened on the usd/ cad on June 18, 2012, as the sMa was sloping downwards. the price then hit a demand zone and shot up. even the consequent bearish pressure on the price was halted by recalcitrant demand zones, as it happened on the second and third days (signified by the horizontal red lines drawn at the bottom of the charts). the price eventually rallied significantly on the fourth day. If a short trade was opened based on this signal, it would have been a flop, as it found it difficult to move in the expected direction.
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dirk vandycke has been actively and independently studying the markets for over 15 years, with a focus on technical analysis, market dynamics and behavioural finance. He writes articles on a regular basis and develops software, which is partly available at his co-owned website www.chartmill.com. Holding master degrees in both electronics engineering and computer science, he teaches software development and statistics at a Belgian university. Hes also an avid reader of anything he can get his hands on. He can be reached at dirk@monest.net.
finding potential Big winners with little effort
flat lIners BreakInG out

Technical analysis is not about predicting what any stock will do next. In fact, any useful study of historical prices has no opinion at all about a particular financial asset, most of the time. Prices are the net result of all orders getting executed. Hence measuring them is about what people, rather than prices, do. We cant predict the future, but we definitely can get telltale information from charts. This article goes into one possible setup based on a system dynamics model. www.tradersonline-mag.com
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One of the most useful books written dealing with financial markets is, without a doubt, Secrets for Profiting in Bull and Bear Markets by Stan Weinstein. Although this book goes back to 1988, it is definitely a must-read for any self-respecting investor or trader, who takes their education seriously. One of the reasons this author likes it is that it throws out all complexity in looking at markets and even dares to zoom out, looking at charts and goals in a longer term way, something new generations of traders seem to have forgotten in a never ending arms race for ever more and faster information, suggesting at least partly, their susceptibility to some illusionary feeling of control. The setup we will discuss takes Weinsteins phase model and superimposes it with a quantified system dynamics model. This system dynamics model states that financial markets, like any dynamic system, are subject to cycles, gravity, inertia, laws of force and, of utmost importance for the setup in this article, capacity. THe pHaSe model Every equity, at any particular moment, is going through one of four phases. The first phase, called the basing area by Weinstein, is more popularly known as the accumulation phase. This is where the public at large is quickly losing interest in a stock or the market in general. In this phase money ebbs away, resulting in lackluster activity and shrinking volatility and together with it, more often than not, the waning of liquidity. At that time, stock is accumulated in the hands of a smaller public consisting of, often institutional, long term investors willing to sit things out, often by necessity, and take shares out of the hands of the crowd who throws in the towel and wants out. In the second phase, called the advancing phase or up trend, the crowd is coming back. This might be initiated by the marketing of the accumulators in the previous phase. In this phase we see higher bottoms and higher tops. When enough money has fled into the market, theres almost nobody left holding cash to pay higher prices. Thats where the heavy distribution of stock
strateGY snapsHot
strategy name: strategy type: time horizon: setup: entry: stop-loss: take profit: trailing stop: exit: risk- and money management: average number of signals: average hit rate and profit to loss: chartmill channel Breakout trend following, long (works especially well with the resurrection of fallen Ipo angels) weekly, with entry on daily near or over one freefloat rotation Breakout of the chartmill channel last swing low in the chartmill channel or right beneath the upper chartmill channel line no last or next to last swing low or anchored vwap, whatever is closest on stop being hit 0.5 % on intitiation, adding 3 to 4 times as many shares with a trailing buy stop on the first swing high outside the chartmill channel tend to cluster when markets take of, making this a nice breadth indication High p/l, low hit rate (about 30 %)
F1) weInsteIns four-pHase Model
www.chartmill.com
at any time a stock is either being distributed or accumulated and is either declining or advancing. these phases do not necessarily have to follow each other in that order. an advance, for instance, can be interrupted by another accumulation phase. notice the fact that this is a weekly chart, giving a much clearer view of what phase an equity is in. source:
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can even be proven to some extent. But that would be a whole other discussion. Nevertheless there is some quite useful information to be gleaned from historical trade numbers if we look at them from the viewpoint of how participants feel at any moment, in addition to the facts we have at particular points on a chart. The blue arrow in Figure 2, which is a zoom-in on the accumulation phase of Figure 1, points towards such certainty. What do we know for sure at the lowest point in a chart? Of course, we only know what that lowest point was later on, so lets pretend were at the right side of the chart when doing this analysis. Its a certainty that no one was holding shares with a profit there. After all, this would imply they bought shares at a lower price. But at no point were there shares sold at lower prices. Since shares cant be ownerless, all of them belong to someone and everybody is seeing a loss. Every shareholder is in pain. Its like a battery of pain that was fully charged at the lowest point on the chart. Now, what happens when shares are traded after that point. Theres a distinct possibility that they leave the hands of someone remembering the pain of the preceding downtrend and go to a new owner who never experienced that same loss. At that moment those shares shrug off their pain, depleting the pain charge of all shares outstanding.
from the small group into the hands of the crowd, which started in the up trend, comes to an end. This process increases volatility as the last ones are trying to get in and distributors need to support their own prices while net selling their positions. This is called the top area or distribution end. When distribution is fulfilled, no support is needed anymore and nobody is left with interest and cash to pay the current or higher prices. This is where the final and forth phase takes off starting a down trend which Weinstein calls the declining phase, characterised by lower tops and lower bottoms. These phases are illustrated in Figure 1. This is but an example though. The phases dont necessarily have to come one after another, in that order. Several accumulation stages, for instance, can separate different parts of the same up trend, resulting in different intermediate horizontal bases on the way up. up THe STaIrS, down THe elevaTor In addition, prices tend to fall (down trend) quicker than they appreciate (up trend). This is the gravity part at work. To push prices higher, more money has to come in from new buyers for them to be able to pay more than the current shareholders did. This comes with financial limitations. When selling the stocks one holds however, there are no such limitations. People can throw out at $1 whatever it was they bought at $100 the day before, if they really want. No money is needed for that. Hence prices have to be pushed up a hill but can end right where they started in a fraction of the time they needed to get up there in the first place, by the tip of a finger. In each of these phases an equity has to be approached far differently. Here we are going to look at a possible setup that can emerge while in an accumulation phase. addIng SySTem dynamICS A lot of whats going on in technical analysis is nothing more than chasing the illusion of control, although most market technicians would never admit this. It
F2) accuMulatIon pHase up close
a zoom in on the accumulation part of figure 1. Going back to basic market dynamics and how participants feel at any moment does uncover some useful information in such a setup. the article goes in depth on how to analyse such a situation.
source: www.chartmill.com
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been the end of the bottom after the financial storm of 2008. Another useful tool to measure pain and relief is a volume weighted average of price. This implies transactional data being available, instead of merely open, high, low and close (OHLC) interval data. Such an average clearly shows what the average price of all traded shares (volume-weighted average price, VWAP for short) has been over its movement window. It gets even more interesting when we hold on to a certain starting point for this window, while adding more and more data to it, thus moving only the endpoint of the interval. This anchoring can be done at important price lows and highs as shown in Figure 3 where we anchored the VWAP to the bottom, after the breakout. It kept us rebuying the stock about a week later after being stopped out of it halfway through May and once more after the retracement low of July, having been stopped out once more halfway through June. Anchoring VWAPs are a great way of estimating support and resistance and placing stops. Anchored VWAPs can be visualised on the advanced charts section of www.chartmill.com by simply right clicking a chart and choosing add anchored VWAP here. nuTS and bolTS Once the total free float has rotated, or nearly so, the Chartmill Channel, as an objective parameterless
With this dynamics in mind we can try and quantify the amount of pain and the number of shares subject to it. Lets do that. a baTTery oF paIn Back to Figure 2. Remember, were analysing the chart on April 1th, 2009, at the rightmost candle available. When we look back at the lowest point, somewhere around the end of October 2008, we can start counting the number of shares traded. Those shares might now be in the hands of people who dont remembering the previous decimation of the stock. Right, there might still be people holding shares with a loss, even with a major loss resulting from the downfall. But they become outnumbered as time moves on. And there probably will be shares that have been traded more than once since the lowest point on the chart. But we have to look at this as a healing process where more and more shares come of the hands of people who suffered the severe blow in 2008. A healing process which depletes the battery of pain. At the right side of the chart, the total number of shares that were traded since the battery was fully charged amounts to 75 per cent of all shares outstanding. Taking this just a wee bit further, this amounts to 108 per cent of the free float in this stock (thereby excluding all shares like the ones locked into institutional and insider hands and not generally available for trading). On the chart we further use Chartmill Channels, as discussed in TRADERS 10/2011. Whats more, in the horizontal channel we can see relative strength appreciate, from performing worse than the market to a less weak and even better performance than other stocks. That means that when and if the stock starts its advance most of the pain of the previous decline will have disappeared from public memory because of renewed ownership without the share price starting an uptrend. This is exactly the kind of healing we want to see in this setup. This setup made us buy this particular stock at 3.18 when it broke out of the channel, at what now seems to have
F3) MeasurInG paIn and relIef In a stock usInG an ancHored vwap
In the chart to the left the calculation window of the volume weighted average price (vwap) is anchored with its start to the bottom of where the uptrend starts, measuring what the average price is shareholders paid up until the end of the calculation window. anchoring vwap to important tops and bottoms, make great support lines, as can be witnessed on the chart during the first half of June. source: www.chartmill.com
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horizontal channel, can act as the trigger for an entry on a buy entry stop just above the upper channel line. If intraday peaks through the channel were often the case before, set the stop above the highest peak. I want to stress once more that as a new low is reached the whole exercise has to be done over again from this new low. As is the case with Facebook, one also has to watch the free float and adjust calculations accordingly. In the case of Facebook, a lot more shares close in on their lockup end date by November 14th, including the shares of Mark Zuckerberg himself. After this insecurity is removed, if the stock doesnt start a new down leg, a bottom could well be set and the stock has to be watched closely. According to adjusted free float rotation velocity the whole rotation could be over by the beginning of December. Once a first position (0.5 to one per cent risk) starts to materialise, the position can be tripled or quadrupled with a buy entry stop just above the first swing high above the Chartmill Channel. This buy entry stop could be trailed down as a retracement towards the upper channel line would happen to take place. A retracement to the upper channel line in a matter of days after the breakout without breaching the channel again, should serve as a very high probability of a strong trend on the way. If no retracement occurs and the stock just takes off, keep stalking it for an entry on the first retracement with a trailing entry buy stop. Exit is done by a trailing exit stop just below the most recent or second to last swing low. The initial stop after entry could be placed just below the last swing low or, if thats too far away, just beneath but not too close to the upper channel line. wrappIng up We discussed a workable setup while going through accumulation. These kinds of setups are mostly available in large numbers after markets have gone down for a while, but they might pop up on individual stocks at any moment. They seem to work even better with fallen IPO angels. One such stock were currently watching for this setup is, in fact, Facebook. Of course as more shares come out of lock-up by November
F4) faceBook as a More recent exaMple
with the lock-up of 1.323 billion shares ending on november 14th, the stock will either come under more pressure or the insecurity will be gone setting ground for a breakout. Based on the current free float rotation speed, the setup could materialise as soon as the start of december. the recent upheaval, a part of the healing, could not make the stock penetrate the chartmill channel permanently. It changed perception with the crowd though that a bottom may have been set. date of analysis: 26 october 2012. source: www.chartmill.com
14th, the calculation has to be recalibrated every time the free float changes. There are two tremendous advantages to this setup. First, if an uptrend starts, we know most of the shareholders have fun on their positions in the green. And as buying begets more buying, theres no telling how long such a trend might go on, giving very high P/L trades if they materialise. Secondly, while in the sideways accumulation phase, one can extrapolate the free float velocity into the future based on the average daily volume. Doing this for Facebook results in having total depletion of the pain battery somewhere around the start of December. So perhaps were in for an early Christmas present.
However, this setup doesnt tell a thing about the possibility of an up trend starting. So the downside of this setup might be weariness while constantly trying to dipp a toe in the water and getting stopped out as the stock falls back in the horizontal channel. In summary, in April 2009 and ending in May, numerous signals for this setup popped up on our radar after having seen nothing for months. This certainly was no coincidence, as the market was telling us the first green leaves were appearing from the scorched financial earth. That makes this setup a nice base for a breath indicator and a really great telltale, giving better and earlier signals than any index will.
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andrew Hecht is a commodities trader and expert with over 30 years of trading experience. He has traded a wide range of physical commodities and commodity derivatives over the course of his career. andrew currently writes weekly for the sovereign Investor as well as for a number of trading services including trader Hunter and commodity trend alert. contact: www.sovereign-investor.com
How to technically trade with fundamentals
a contrarIan plaY In coffee

Over the course of a trading career that has spanned more than three decades the author has learned many lessons. But it is one lesson that has made him the most money. That lesson is to be a contrarian. If the price of a commodity (or any asset) is depressed, look for flaws in consensus opinion. In 1995 the author did just that in silver when the price was below $5 and no one on earth wanted it. Today silver trades at over $34 an ounce almost seven times higher! The same was true earlier this year when the price of natural gas dipped below two bucks. Natural gas proceeded to move over 65 per cent higher in only a few short months. Any successful investor will tell you that the best profit potential lies in going against the crowd and conventional wisdom. Today there are signs that the price of coffee, which has been depressed throughout this year, is about to take off and it seems that almost every analyst in the world is complacent or bearish. Coffee is lining up as a great contrarian play. When coffee takes off higher it may just impact a high profile stock!
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CoFFee SpenT THe laST year plummeTIng After peaking at more than $3 a pound in May 2011 the price of coffee has plunged. A bountiful crop in Brazil, Vietnam, Columbia and Indonesia (as well as other producing nations) satisfied demand causing prices to fall. As Figure 1 illustrates, while prices dropped almost 50 per cent over the past year coffee is a commodity that is historically prone to price spikes. Recently coffee has experienced a long, multi month period of consolidation after the sharp price drop. Coffee is one of the most volatile commodities that trade. Today the downside price risk in coffee is limited given its tight supply and demand but the upside is explosive. weaTHer In growIng regIonS SuggeSTS CurrenT prICe IS Too CHeap The weather was ideal for growing coffee beans in 2011/2012 but there are signs that 2013 may be a different story. Brazil is the worlds largest exporter of coffee. Brazil exports more than two times as much java as the second largest exporter, Vietnam. A very wet summer in Brazil resulted in pre-mature blooming of coffee trees during their normal resting period. This will put a strain on the new coffee crop and reduce yields during the coming harvest. In fact, expectations for this coming offseason crop of 51 million bags may actually come in at only 45 million bags which would be a ten million bag reduction from last year. Additionally, the likelihood of El Nino could reduce the crop yields from large coffee producers in Vietnam and Indonesia. We have seen weather issues wreak havoc on grain crops in the U.S. this year. A bountiful coffee crop last year does not guaranty the same for the coming year. demand remaInS STrong Coffee demand has been rising around the world. Global consumption has grown by 1.2 per cent since the early 1980s according to the International Trade Center. While there has been very little growth from the U.S. and Europe growth from Asia has been
F1) QuarterlY coffee prIces
the quarterly chart of coffee futures illustrates that coffee is a very volatile commodity and is prone to dramatic price spikes.
source: www.cqg.com
strateGY snapsHot
strategy name: strategy type: time horizon: setup: entry: stop-loss: take profit: trailing stop: exit: risk and money management: average number of signals: average hit rate/profit to loss/ return per month: contrarian technomentals counter trend fundamental, seasonal and technical signal 3-6 months long or short In combination with fundamental analysis and other technical tools. entry based on seasonal patterns in a commodity after a significant price move and significant period of consolidation when market drops below support levels (or above resistance levels) established during the consolidation period discretionary n/a discretionary discretionary discretionary Medium-term trade 3-6 months Medium-term trade 3-6 months
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impressive. Japans coffee demand has grown at 3.5 per cent a year over the same period. In other Asian countries demand has grown by over six per cent. Demand for coffee has contributed to a decrease in stockpiles. The stock-to-use ratio for coffee has been trending lower. This means that there are fewer stockpiles of java beans to make up for any shortfall in production. A recent article in Futures magazine illustrated the trend of coffee stockpiles and had some surprising projections for 2013 to 2014. Figure 2 clearly shows that the stock to use ratio for coffee will be the lowest in more than a decade which is a fundamental buy signal for the commodity. If these projections are even remotely correct then the price of coffee has nowhere to go but higher. As a highly volatile commodity coffee prices will explode before consumers have a chance to protect themselves! TeCHnICal IndICaTorS are TurnIng Figure 3 shows the action in the coffee futures market over the past. On the technical front, coffee has found support at around $1.50 per pound. The relative strength index (RSI) at 45 is not overbought nor is it oversold. The slow stochastic is approaching oversold territory. Resistance on the active month futures contract currently lies at $1.81, the recent high that was established on July 19th, 2012. Once the coffee price pierces that price coffee can move much higher. It was only a little over a year and a half ago that coffee traded above $3 a pound which is almost double the current price. As you can see the coffee price has a tremendous upside potential at todays bargain price. As one of the most volatile commodities that trade once coffee breaks above resistance it will move with a vengeance. A bullish move in coffee will dramatically increase daily price ranges and volatility will explode higher. Once coffee breaks higher the risk of getting into a long position will increase. That is because higher volatility often washes out short term traders. Currently it makes sense to put on a medium-term trade in coffee with a 3-6 month horizon.
F2) stocks versus use for coffee
the global stock/use ratio for coffee is estimated to fall to decade lows in 2012/2013. this is a fundamental buy signal for the commodity.
source: www.futuresmag.com
F3) relatIve strenGtH Index and slow stocHastIc
the short-term coffee chart indicates that the rsI of 45 is neutral and the slow stochastic is approaching over sold territory. a multi-month consolidation of price has occurred after the sharp drop in the coffee price that began in May 2011. source: www.tradesignalonline.com
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SeaSonal FaCTorS Favour a long poSITIon In CoFFee Historically purchasing coffee in October/November and selling in January/February has been a great seasonal trade. Coffee consumption tends to decline by twelve per cent or more during the warm summer months and picks up in the fall and winter season. If you glance back at the period between October and February over the past 20 years you will find that coffee futures tend to rally during this period. a Sudden SpIke may HurT your porTFolIo When the price of coffee spikes higher two things will happen. Consumers who have become complacent will suddenly have to pay higher prices for the commodity. And, higher prices will cause demand to decrease. It is very difficult for a coffee consumer to hedge their price risk on a long term basis. As an agricultural commodity coffee cant be stored over very long periods of time. Coffee will rot and deteriorate. So hedging price risk becomes difficult for consumers. Higher coffee prices will affect the economics of companies like Starbucks (SBUX). Starbucks will have to pay more for the precious beans and they may not be able to raise prices fast enough to keep up with the increased cost of their main ingredient. Even if they do raise prices consumers will not necessarily be willing to pay even more than the already inflated price that is charged for their cup of java. In either case a sudden spike in the price of coffee will decrease profits causing the price of SBUX to drop. Figure 4 illustrates that SBUX has moved from under $10 in 2009 to over $50 a share a 400 per cent increase. The coming rally in coffee will cause a retracement in this stock so beware! It may be a perfect time to cash in on SBUX if it is still sitting and brewing in your portfolio. Based on the current fundamental and technical indicators in the coffee market the authors conservative upside target for active month coffee futures is $2.50 per pound, which is almost 50 per
F4) starBucks (sBux) 5-Year cHart
sBux has moved up by almost 400 per cent since 2009 a sudden spike higher in coffee prices could cause lower earnings for sBux causing the stock to correct lower.
source: www.finance.yahoo.com
cent higher than the current price. Remember it was less than two years ago that coffee prices were above $3.00! For a more direct play on the java market you might want to look at two ETN products. The iPath Pure Beta Coffee ETN (CAFE) invests in the two nearby futures contracts. It is highly illiquid and only has net assets of $2.7 million. The iPath DJ-UBS coffee TR Sub-Idx ETN (JO) is slightly more liquid with net assets of $27.06 million. JO also invests in coffee futures contracts. While both ETNs are illiquid, this could work in a buyers favor. Both are trading close to 52-week lows and when coffee starts to move higher these ETNs could explode suddenly as the world wakes up and realizes that coffee is too cheap. For those traders who are comfortable with the futures and options markets, ICE coffee futures and options contracts are liquid and offer the opportunity to trade the commodity in the most direct fashion. Purchasing call options on coffee futures may be the
best method of capturing higher future prices for the commodity while limiting risk. Remember the purchase of a call option limits risk to only the premium paid for the call option. In todays quiet coffee market you can expect to pay a lower volatility for these options making them cheap on a relative basis. When the coffee market starts to percolate not only will call option owners benefit from a higher coffee price but also from higher implied volatility for coffee options. ConCluSIon A contrarian approach always provides the opportunity for spectacular profits for those who are brave enough to take the risk. Today an investment in coffee is a contrarian play backed up by some compelling fundamentals and technical indicators. Ponder taking profits on SBUX, buying one of these two ETNs or adding a few coffee call options or futures contracts to your portfolio as you sip on your next cup of java.
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Mr ralf kraemer studied sports science at university and is a licensed stock market trader. as a full-time trader, he trades his own account. contact: seeralf@yahoo.de
ralf kraemer
part 2: Jeff cooper the Hit and run-strategist
tHe leGends of wall street and tHeIr strateGIes

Jeff Cooper was a daytrading-icon of the new economy and during the dot-com boom. He became a role model for a whole generation of daytraders at the turn of the millennium. He became well-known with his book Hit and Run Strategies, where he introduced a series of effective strategies for short term trading. In the second part of this series you will learn how this trading legend came to be and how his successful trading strategy works. www.tradersonline-mag.com
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How IT all began A teenager sits behind his father and watches the charts on the screen over his shoulders. It is 1958 and Jeff Coopers father is an executive at one of the worlds first hedge funds. He had sold his clothing company for a few million dollars and was living and
THe way To THe wall STreeT Jeff later graduated from the University of New York after the family had relocated to the east coast. At the beginning of the 1980s he went to work for the well known brokerage firm Drexel Burnham Lampert in Los Angeles, then after some years Jeff Cooper
speculation is observation and thinking isnt always necessary.

sharing the American dream with his family. Jeff learns the first rules of the financial market analysis from his father: Speculation is observation and thinking is not always necessary. Fascination with the charts determines the life of Jeff Cooper from that point on. The family lived in Beverly Hills in Los Angeles and Jeff later studied film and literature at college. His interest in humanities became the background for his later interest in trading psychology. Those were the golden times for the family. Wall Street had stayed in a bull market since 1954 and stocks seemed to know only one direction: upwards. Brokers convinced the father to buy stocks on credit, because stocks only increased anyway, if you stay with them long enough. But at the beginning of 1962 everything changed and the stock prices started to decrease. After the building of the wall in Berlin in 1961 and the beginning of the Cuban missile crisis, investors started to get cautious and withdrew their money from the financial markets. The Dow Jones dropped 27 per cent by June 1962 and the Cooper family went bankrupt. That was the next lesson for Jeff Cooper: Markets are not always suited for a buy-and-hold strategy. worked at his fathers for some time. His father had developed a strategy for trading of new issues and had,in the meantime, earned another fortune. But Coopers interest was in short term trading and so in 1986 he decided to become self-employed and moved to Wall Street.
His idea was to trade the newly introduced S&P 500-future contract. As Jeff says about this time: We did not trade with a plan, but with intuition. The first week it worked well, with a profit of 20,000 USD and even the second week he made a profit of 15,000 USD, but the third week the Dow Jones dropped ten per cent. Jeff Cooper got his first margin call, the trading account was depleted and memories of his fathers bankruptcy came back in full force. In an interview Jeff Cooper talked about the feel of the kiss of death. Later, the Dow Jones increased again, from 777 points to 2500 points until 1987. Business had been good for the young trader until October 1987. On the 19th October 1987 the Dow Jones dropped 22.6 per cent. We remember this date as Black Monday. Though he did not have to file for bankruptcy, he was hit hard. Like his father did 20 years before, he started the search for a method to consistently beat the stock market.
strateGY snapsHot
strategy name: strategy type: setup: filter: entry: stop-loss: exit: risk: Money management: average hit rate: 1-2-3-4 Jeff cooper trend following long: consolidation in uptrend with three lower highs and three lower lows, inside day possible; short: all rules vice versa long: adx over 30, +dMI over -dMI; short: analogue stop-order above the high of the third day Below the low of the third day five day time exit 5 % of the trading capital at maximum one position at the same time, further details not defined 63 %
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4. The direction of the whole market is secondary It may be interesting to philosophise about the market, but most of the time it is unnecessary. You cannot predict the direction of the stock market. has already fallen ten per cent can drop another 20 per cent and further. Jeff Cooper makes it clear: If a position moves against you close it!. THe 1-2-3-4 TradIng STraTegy Another big challenge for a trader is to find the right time for the entry. Often the stock moves strongly in one direction, but there is no opportunity to buy. Cooper developed the 1-2-3-4 strategy to find an entry after a consolidation of three days. The following rules apply: The setup for long The market has to make a consolidation on three consecutive days. Three lower lows and three lower highs must form. A combination of two lower lows and two lower highs and one inside day is valid as well.
THe developmenT oF THe HIT and run-STraTegy After reading The Secret Trading Methods Of Gann Jeff Cooper examined the cycles of the markets.
the market has to consolidate on three consecutive days.

Using W. D. Ganns methods, Cooper calculated the astronomic equinox the high of the markets for the 13th of July 1990. He started selling Compaq shares short, but prices increased. Cooper had a large number of shorted stocks and had to cover soon, if he did not want to go broke again. From the 13th of July prices started to fall massively, about 15 per cent within four weeks, and Cooper made huge profits. This experience encouraged him to change his trading style drastically. He developed trading strategies that made him independent from the development of the markets. In the following overview the main rules that are the result of Jeff Coopers 15-year-learning-phase on the markets are presented: 1. Cut your losses Every big loss started as a small loss. Therefore it is important to have a precise exit strategy for every position. The amount of the possible loss must be calculated prior to entering the position. The number of positions must be manageable. 2. Follow the trend Jeff Cooper trades mainly in the direction of a strong trend. To define the trend, he uses the ADXindicator and moving averages. Which indicator you use depends on the strategy. 3. Trade familiar stocks As a trader you do not have the time to wait for investors to discover a stock. You should trade stocks that are well known and are bought by institutionals to earn short term profits. The strategies of Jeff Cooper are based on short term factors. 5. do not add to a losing position The biggest mistake in trading is to add to a position that is already in loss. It is often reasoned by the reduction of the entry price. But a stock that
F1) lonG trade In s&p 500
figure 1 shows a long trade in the daily chart of the s&p 500. the candles 1, 2 and 3 form lower lows and lower highs. the adx (green) quotes above 30 and the +dMI (blue) is above the -dMI (black). we enter on the high of candle 3 on 26th of March 2012 at 1399 points. the stop is placed at 1386 points at the low of candle 3. the position is closed at the open of day 6 at 1418 points.
source: www.tradesignalonline.com
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precise description of the rules can be found on the homepage of Tradesignal Online. If you do not take slippage and transaction cost into consideration you would have earned very good profits from September 2006 until June 2012 (Table 1). Figure 2 shows the strong equity curve of the above mentioned trading system. Following Hit and Run Strategies, Jeff Cooper published two more books and from 1999 to 2006 Cooper was cofounder of the financial website The Street. In his column he commented on the current market situation and advised interested traders in a forum. Jeff Cooper still advises active traders and trades from his home in Malibu, California, where he resides with his wife and his daughter.
The filters The ADX is used as a filter to define a trend. The ADX (14) should have a value above 30. In addition the +DMI-value with parameter 14 should be over the -DMI-value. The entries You buy on the fourth day, if the price increases above the high of the third day. The entry is executed with a stop-order, because you know the setup on the third day. The stops The initial stop is placed below the low of the third day. If the position earns a profit, the stop is trailed. The exits There is no exit defined. Cooper states in a later interview, that he uses the Ganns 9-square for target definition. The setup for short This strategy can be traded on the short side as well. The requirements are valid vice versa. Cooper recommends using this strategy on the daily chart only. a CurrenT example Trade Figure 1 shows an example trade on the 26th of March 2012. The candles 1, 2 and 3 fulfil the criteria for the long setup. The ADX quotes above 30 and the +DMI is above the -DMI. The high of candle 3 on the 25th of March 2012 quotes at 1399 points. Entry is executed on the 26th of March 2012 with a stoporder at 1399. The stop is placed at the low of candle 3 at 1386 points. We use a 5-day time-stop here and we close the position at the open on the sixth day at 1418 points. In its original form the system is not very successful under current market conditions, however, with minor modifications a profitable system for trading the S&P 500 can be had. We adjust this 3 Bar Setup for the long entry where three candles define a consolidation. The filters are removed. A long entry is executed if the price exceeds the high of the third candle. The system can be traded long or short. A
t1) perforMance stats

Number of trades
76
Profit factor
4.1
Per cent profitable

63.2
losing trades
28
Winning trades
48
average profit/ average loss

2.4
table 1 shows the very good performance key figures of coopers modified Hit and run-strategy in the s&p 500 from september 2006 to June 2012.
F2) eQuItY curve of tHe tradInG sYsteM 3 Bar setup
figure 2 shows the strong equity curve of the system 3 Bar setup. You see the results of an hourly chart from 2007 to 2012. please notice the low drawdown.
source:www.tradesignalonline.com
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after completing his information-technoloy studies, Mr neinert worked as a researcher in finance and technology. for many years he has been busy studying the various aspects of trading and speculation. In addition to technical analysis, the major focus of his interest is on the psychological aspects of trading. contact: florian.neinert@trentix.de
Florian erik Neinert
How to protect Yourself from the next crash in the financial Markets
weatHer-proof Your wealtH part 1

The turbulence that shocked the financial markets after the Lehman disaster in 2008 seem to be over. But history tells us that a crash can occur in all markets at any time. In part 1 of this series of articles we will look at the historical slumps and discuss the current situation in Europe. In part 2 we will address some precautionary measures that traders and investors can take. www.tradersonline-mag.com
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1637, THe neTHerlandS The country is in tulip-fever. Houses in the best locations in Amsterdam are sold and the
construction industry, which in the boom period had boosted land prices. Many enterprises go bust during the crash.
the danger of inflation is still present.

transactions are settled in tulip bulbs. Up to 5500 gulden are paid for the bulb of the most desired kind of tulip, the Semper Augustus,. That amounts to about 8000 EUR nowadays. The actual ownership of tulip bulbs is not necessary: Options enable everybody to take part in the fantastic opportunities without getting hold of a bulb at all. Peers and countrymen, rich people and have-nots, all of them incur debts to get in the game and hope for further increases in value. In 1637 the bubble bursts. In the end the bulbs lost 99 per cent of their value and many speculators lost houses and farms and were stuck with a high amount of unpayable debt. 1873, german empIre The country is booming after the unification and foundation of the German Empire. After the end of the Franco-Prussian War the economy booms, with seemingly everybody investing money. Numerous public companies and banks are founded and the stock exchanges flourish. Many entrepreneurs and citizens quickly achieve great wealth. In 1873 the boom is over and stock prices decrease by 46 per cent, many companies go bankrupt and two thirds of the new banks fail as well. The hardest hit sector is the 1929, uSa Stock fever! Private investors, financial institutions
and investment trusts speculate mainly on credit. The boom ends in a disaster: Stock prices tank on average by 89 per cent, about 40 per cent of all American banks fail, mass unemployment and a worldwide depression follow. THe STory goeS on 1987: Black Monday in the USA, 1997/98: Asian Crisis, 1998: Crisis in Russia and LTCM-disaster, 2000/01: Bursting dot-com bubble. The list of recent crises goes on ending with the current misery that began with the
F1) dax sInce tHe BeGInnInG of tHe suBprIMe crIsIs
the dax performed a rollercoaster-ride in the years after the subprime crisis with losses of up to 50 per cent within a year and similar recoveries. In recent time nervousness increased in the markets again. source: www.tradesignalonline.com
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did not take place. Prices soared again and (nearly) reached their old highs. The DAX and with it most of the other world indices took a roller-coaster ride in the years after the subprime-crisis: From highs of over 8000 points it too big, debts too high, the volume of bad loans at banks is too high, the banks are too vulnerable and the peoples trust in banks and governments is too low. Not a week goes by without a downgrade in the credit rating and even the ugly term Bank
bursting of the housing bubble in the USA, leading to the Lehman collapse and which is yet to be resolved today. Looking back historically, two interesting facts stick out:
every trader should take measures accordingly to protect his wealth.

1. Nearly all economic, financial and stock exchangecrises in the past develop because of one or more of the following problems: excessive speculation (usually with high use of borrowed capital), excessive public and private debt, a lack of budget discipline, ineffective or a lack of regulation, increasing isolation of the relationship between price and value of products and the formation of bubbles (tulips, stocks, real estate), as well as excessive monetary growth. 2. After every crash measures are taken to avoid such crises in the future. Each time participants believe that they have learned, have done their homework and that another disaster cannot occur in the future and each time this prediction is proven wrong with the next crisis. Crises do not only occur again and again, they tend to be more severe with the increasing integration of the world economy and financial markets. Therefore every trader should think about a possible future crisis and take measures accordingly to protect his wealth. THe SubprIme CrISIS, THe leHman dISaSTer and THe reCovery It was not that long ago that the prophets of doom predicted the end of the world as we know it and after Lehman, nothing could be the way it was before. But some might have rubbed their eyes in amazement that a real major crash of the global financial system went down nearly 50 per cent within a year to prices at 2004 levels. After a brief recovery to nearly 4000 the DAX again lost 2000 points after the Fukushima catastrophe, then made up some lost ground before tanking once more. on THe way To THe nexT CrISIS? It is unlikely that the situation in the troubled European countries will ease. The problems are Run has appeared more often in the media recently. A bank run happens when out of fear of an instiution failing, depositors withdraw huge amounts of money. To make matters worse, the danger of inflation is everpresent due to central banks flooding the financial markets massively and repeatedly with money and the purchase of government bonds with central bank money is viewed as virtually printing money by many
F2) developMent of natIonal deBt 2008 to 2011
calculations of the author
the debt ratio increased in most of the industrial nations since 2008. on average, the eu-states had a third more debts in recent years than in 2008. source: eurostat, own
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worldwide. It is evident that until now no change in behaviour has occurred and another recent example of banks still speculating in high-riskstyle, is JP Morgan Chase, the largest American bank, which sustained a record loss of five billion dollars after recklessly speculating with Credit Default Swaps (CDS) which went the wrong way. Higher amount of equity or forced closing of leveraged positions Higher taxes on capital gains
commentators. And finally most observers do not view the future of the European Monetary Union very optimistically. prIvaTe HouSeHold and governmenT debT High private and public (government) debt is another reason for the current misery. But it seems
Nobody can tell the future and not all of the problems and challenges mentioned above are of the same probability. Some may seem unlikely from
Many banks worldwide are still too big to fail.

that debt reduction has been out of the question in recent years, on the contrary: The debt ratio in most of the industrial nations has increased since 2008. On average, the EU countries had a third more debt in recent years than in 2008; front runner Ireland doubled its national debt during this period. no CHange In beHavIour In addition to the excessive household debt, speculating with high-risk financial contracts is one of the main reasons for the economic and financial malady of many financial institutions In this context it is questionable, if the stricter regulations, which were announced after Lehman and were implemented only partly, are really sufficiently effective to prevent such extremes in the future. Even the popular term Too big to fail is still valid: Many banks worldwide are still too large to be allowed to go under. wHaT problemS Could oCCur? These conditions do not portend a stabilisation of the current fragile situation. A look in the past shows that a further deepening of the current problems could lead to: Restrictions of local capital flow Restrictions of cash availability at banks Temporary freezing of accounts Insolvency or bankruptcy of banks and concurrent loss of value of those banks securities Restrictions on cross-frontier capital movements Sharp currency volatility Currency reform Break up of the European Monetary Union Strong drop in stock prices Restrictions or suspension of stock exchange trading Temporary or permanent prohibition of certain investment products or investment strategies (for example derivatives and short-selling) todays point of view until they occur. And then when we read about it in the newspaper it is too late to react adequately. So, you should examine these points, and decide, which may become reality and take measures today. be prepared Ask yourself the following question: What is the financial standing of your bank? How efficient is its security system? How long does it take to transfer your bank balance from one bank to another? What is the notice period? Are transfers or securities-transactions limited? Do you have long term investments? Which asset classes do you use? What is the issuers risk on your open positions? Do you own physical gold or do you own gold certificates, which depend on the financial health of the issuing bank? Is there any danger of your deposits being lost with the failure of your bank or are they separated from the banks assets? Are your securities stable in a crisis? Do you own the underlying, for example the stock, that ensures a part of the company and whose value is independent from the bank that holds your account, or do you own a derivative, whose value depends on several factors? Do you have liquid funds? You can find answers to all these questions in the info-box. In the next part you will get precise ideas as to how investors can position themselves in crashscenarios.
weatHer proof Your InvestMents

open accounts at banks with high financial standing use institutes that have joined a security system take care that your investments are managed separately from the banks assets Invest in securities that are terminable/transferable at short notice Invest at least partly in underlyings: Gold instead of gold certificates, real estate instead of funds reduce investments in foreign currency or hedge your investment against fluctuation in exchange rates keep a part of your capital in cash or money market funds adjust the portion of borrowed money/investment leverage use a stop-loss for every open position
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steven Giles is a uk based trend following trader and trading coach. He runs the website www.thetrendfollower.com, principally dedicated to trend following individual equities. He can be contacted at trader.steve@btinternet.com.
Steven giles
new application of a Historially proven Method
trend followInG on IndIvIdual eQuItIes part 1

Trend following has been used as a profitable trading method for decades. Some of the most famous traders and Market Wizards, such as Ed Seykota, Larry Hite, Richard Dennis and the Turtles, John W. Henry and many, many others have reaped the rewards of trend following methods. This article outlines how to construct a systematic trend following approach, together with a brief discussion on the psychological aspects of following such a method. The second article focuses on how to construct a system specific to trading equities. www.tradersonline-mag.com
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Historically, trend following has been the domain of Commodity Trading Advisors (CTAs) or hedge funds, who normally restrict themselves to a basket of commodities, indices, foreign exchange and other
reading, we have an uptrend. If it is lower, we have a downtrend. Traders often look at a series of highs and lows attained over a period of time to determine the trend. A series of higher highs and higher lows signify
identifying a trend, as well as the time frame used. One trader who uses a long-term trend following system may be trading in the opposite direction to a different trader using a short-term system.
a trend is a general drift or tendency in a historic set of price data.

liquid futures contracts. This has the advantage of having to monitor a relatively small number of instruments, and to create the necessary returns a trader needs to react to all signals generated. While it is not as well known, with some minor tweaks to the basic rules of the system, such an approach can be used to generate healthy returns trading individual stocks. overvIew The beauty of such a method is that you need to concentrate on one metric to signal potential entry and exit points price. In a pure trend following system, other factors such as economic or earnings reports, or buy and sell recommendations, are ignored. The use of technical indicators, which may indicate overbought or oversold conditions in a market, is also avoided. wHaT IS a Trend? A trend is a general drift or tendency in a historic set of price data. To identify a trend, comparison is made between the current price and a historical price level. If the current reading is higher than the historical an up-trend, while a downtrend is identified by a pattern of lower highs and lower lows. There is no one trend in play at any given time. There are numerous trends, depending on your method of A trend is extinguished when the general drift in the price data reverses direction. Figure 1 shows a basic graph identifying a series of price movements and the areas we look to profit from.
F1) IdentIfYInG tHe trends
trend followers avoid entering positions when price is in a consolidation area. to maximise the potential profits, we enter when price has moved out of those zones, and hold our positions until the new trend has reversed.
source: steve Giles
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Backtesting a particular system will give you a series of results and performance metrics to give a trader an idea FIrST THIng FIrST Trend following is simple, but not easy. The first decision a trader has to make is to determine their preferred time frame or holding period. Once that has been decided, there are several questions that you need to consider when setting the basic parameters for any trading system: How much are you prepared to lose on any individual trade (what are your risk parameters)? How much are you prepared to lose across your portfolio (what is your portfolio heat)? What market are you looking to buy or sell (what markets are in your trading portfolio)?
The most common methods of visually identifying a trend involve the use of price channels, moving
trend following is simple, but not easy.

averages, or plotting the peaks and lows made over a period of time. wHaT we look For In a Trade Trend following basically revolves around identifying a trend in an instrument, and then following it until a signal is given that the trend has ended. You buy on strength, and go short of weakness. Exits should only be taken when an appropriate exit signal has been given there is no discretionary closing of existing positions. Basically a market that is traded, be it an index, commodity or an individual stock is either in a trending or non-trending state. This is combined with differing levels of volatility. Figure 2 shows the combination of these states in the NASDAQ index very well. Trend followers love stable, trending markets, and try to avoid volatile, non-trending periods at all costs. Similarly, there is no attempt to try and pick tops or bottoms in markets you simply wait for the previous trend to finish and for a new trend signal to be given. This could be in the same direction (following a period of volatility and/or uncertainty), or in the opposite direction. A trend follower usually is comfortable in trading in either direction in the same market sometimes switching the direction of their trade in a particular instrument or stock in a short period of time, depending on the parameters used in their system. No matter how robust or profitable a system is, a trader will not achieve the results indicated or desired if they do not exhibit rigid discipline in executing the rules, and sticking to the pre-set parameters. whether such a system has a positive expectancy, but fails to give you an insight as to whether, in the cauldron of trading the system live, a trader will be able to faithfully follow all aspects of the system. This is where having the necessary mindset becomes critical to your success.
F2) tHe four Market states
this chart of the nasdaQ shows the typical setup a trend follower uses, with the entry and exit lines clearly showing what needs to be done when price goes through these levels. this chart also shows the various market states, going from a volatile, non-trending state, to a stable trending state at the turn of the year. the second period is an ideal market state for a trend follower to generate profits. source: www.It-finance.com
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of the portfolio. The higher the overall heat, the more volatile the results will be. For example, if you were able to open a maximum of ten positions risking two per cent per trade, then your portfolio heat would equate to 20 per cent. As trades progress, and trailing stops can be moved up following the price trend, this reduces the open risk per trade. All being well, stops will end up ahead of entry price, meaning that potentially there is no capital at risk. Remember to factor in the possibility of a price gapping through any stops placed, meaning that losses greater than the amount initially risked can occur. This should also be factored in when considering both risk per trade and the overall portfolio risk. cent, the previous maximum drawdown? In other words, is the trader truly compatible with that system? There is only one person who can answer that question. It is also important for a trader to have complete discipline in adhering to the various system rules. Examples of overriding the rules include the following: Second guessing entry or exit signals. Taking profits off the table too early (i.e. when a system exit signal has not been generated). Trading too many positions all at once. Trading too large a position relative to your equity, in an attempt to recover losses made.
When do you buy and sell a position (what are your entry rules)? When to exit a losing position (where is your initial stop placed)? When to exit a winning position (what are your exit rules)?
Notice that the questions regarding risk management are at the top of the list. Most inexperienced traders solely occupy themselves with entry rules, thinking THAT is the most important factor in trading success. If truth be told, it should come after risk parameters have been set. A traders capital is their lifeblood if they have no capital, they cannot trade. Risk management means
trend following is very difficult psychologically.

that when a losing run hits, traders are able to stay in the game, with the minimum of pain and loss of capital. Getting through these drawdown periods will enable traders to profit when a winning run occurs further down the line. However, ensure that you never get too optimistic and take bigger and bigger risks as a result of overconfidence. SeTTIng your rISk lImITS Suppose a trader has 100,000 to trade with, and a long entry signal is given on a particular stock. How much are should be risked on this one trade? 100,000? 50,000? 1000? Generally accepted wisdom states that no more than two per cent be risked on each individual position, and some people would say that is even too aggressive a level. As to the overall risk in a portfolio (being the number of positions able to be opened multiplied by the risk per trade), the famed trend follower Ed Seykota, refers to this as being the heat THe mInd gameS Involved This is where a trader has to have the correct mindset to absorb periods of losses or drawdowns, and remain faithful to the system, either in terms of having the discipline to follow the system rules while suffering periods of losses, or the tendency to try and second guess and override the system rules on individual trades. Suppose a trader has tested a system which generates great results, but historically the largest drawdown was in the region of, say, 30 per cent, several years ago. You can see the subsequent performance, where the system powered back onto new highs and beyond. All sounds great. Now what happens when, after implementing the system, within six months a significant drawdown occurs 20 per cent, 30 per cent and increasing. According to the historical record, this is perfectly possible, but is the trader able to accept this drawdown, or do they bail out, dump their positions and ditch the system? What happens if the drawdown is more than 30 per Trend following is very difficult psychologically, in that perhaps 80 per cent of the signals generated and taken in a year will equal themselves out small losses covered by small winners. Its the remaining 20 per cent of the trades that produce the pure profit of such an approach. The problem is that a trader never knows which positions will generate that profit. Its a question of being disciplined, following the signals with no questions asked, and letting those trades play themselves out. For anybody to claim they are truly compatible with their system, a trader needs to have used the system through both an uptrend and a downtrend in the markets, as well as periods of high or low volatility. For a trading system to be classed as robust ideally it needs to be able to generate profits in all of these market states, or alternatively the trader needs to incorporate rules in to their system about when to step aside until the market conditions are more favourable for their system to work.
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nick Mcdonald is a leading independent trader with a global following via the company he founded, www.tradewithprecision.com. a specialist in technical trading strategy for any market and any time frame, nick possesses a unique approach to modern technical trading which forms the basis of the strategies that he teaches. nick is in high demand as a speaker on the global trading circuit with speaking engagements on multiple continents each and every year.
Nick mcDonald
the path to trading success
part 4: tecHnIcal analYsIs vs. tradInG strateGY

If you have been following this series of articles from the start hopefully by now you have taken the time and effort to thoroughly assess whether you are better suited to swing or day trading and assess which market(s) best suit your personality and lifestyle. The next logical step is to learn about technical analysis and equip yourself with the tools and techniques necessary to profit from the markets. Unfortunately its this step which is the cause of most aspiring traders downfall.
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THe TypICal TraderS Journey Lets follow the typical path of a new trader (we will call him Bob). Bob is looking to make some extra income and has heard about using technical analysis to trade the stock market. He decides to find out more so visits his local bookstore and buys a book about technical analysis. Bob is amazed and excited about
to succeed. This time he learns about Gann, Fibonacci, pivot points, pitchforks and Gartley patterns. Needless to say Bob continues on this merry-goround until he finally loses all his trading capital and stops trading forever. Bob has made a very common, and very critical, error. He doesnt realise that technical analysis and a
Relating that analogy back to trading, technical analysis would be the ingredients and trading strategy would be the recipe. Bob was learning every sort of ingredient possible but he had no recipe on how he should mix them together, in what quantities or in what order. What would you get if you randomly mixed eggs, flour, cocoa, butter, milk and sugar and
technical analysis and a trading strategy are two very different aspects of trading.
this whole new world which has been opened up to him. He learns about OHLC bars, trend lines, support and resistance and double bottoms/tops. Bob believes he has found the hidden secrets to the markets riches. So he applies what he has learnt in the markets and before long he has lost a substantial portion of his trading capital. He rationalises this by believing he doesnt have enough knowledge about technical analysis and therefore decides to learn additional technical analysis tools and techniques. This time he learns about candlesticks and memorises 25 candlestick patterns and their names. He also learns about Elliott Wave and ascending/descending triangles. He tops up his account and resumes trading. Once again he loses a substantial amount of his capital. Again he believes its his lack of knowledge which is the cause of his unprofitable trading and therefore he must learn even more technical analysis tools in order trading strategy are two very different and separate aspects of trading. aS SImple aS bakIng a Cake The simplest way we have found to explain the difference between the two is to use the analogy of a baker wanting to bake a chocolate cake, which is synonymous to a trader wanting to make a profit. In order to achieve the same perfect chocolate cake (ie flawless trade) each and every time the baker (ie trader) will use a recipe (ie written strategy with checklist). The recipe is basically a set of rules that the baker must follow if they are to achieve their desired outcome of a perfect chocolate cake. The recipe will tell the baker which ingredients are required, the quantities of those ingredients and also how those ingredients are to be combined and baked in order to achieve the desired outcome of a perfect chocolate cake. expected to get a chocolate cake from it? Most likely an inedible mess! Bob was getting similarly poor results because he was randomly mixing various technical analysis techniques together hoping to make a profit. Without a written trading strategy your chances of success over the long term are close to zero. So what then should have Bob done when designing a trading strategy? modern day TradIng STraTegy A trading strategy should have three components: 1. Entry criteria 2. Risk Management 3. Trade Management We will cover risk and trade management in later articles so for now lets focus on entry criteria. www.tradersonline-mag.com
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bonus checklist ingredients they meet. This will allow us to decide which of the five set ups (if any) we wish to place orders for. Some people wrongly believe that having a trading strategy with multiple technical ingredients is difficult and confusing when in reality it doesnt need to be. Assess the following short trading checklist: 1. Trade with the trend direction. 2. Look for a break of resistance (a level of resistance is defined by a price level which has been tested a minimum of three times). 3. Ensure price and indicators converge on the break. Can you see how that is actually no more difficult than saying, add flour, mix in milk and then add cocoa. Both are simple once you have a bit of experience and know how to do it! How many one step recipes have you ever come across in your time? Trading strategies are no different. FlawleSS exeCuTIon The job of the trader now becomes one of ensuring that they flawlessly execute time and again versus their checklists. By following their checklists they will produce flawless trades, just as the baker produces a perfect chocolate cake each time they follow their recipe. One difference worth mentioning in trading is that a flawlessly executed trade does not guarantee a profitable result from that trade, whereas a flawlessly executed recipe would result in a perfect chocolate cake. To grasp this concept you must understand probabilities in trading and how to think like a trader both topics for later in the series. wHaTS nexT Now that you understand the vital difference between technical analysis and trading strategy over the next three articles we will cover which technical ingredients we use in all of our trading strategies and checklists.
How many TeCHnICal IngredIenTS? It is impossible to bake a chocolate cake with only one or two ingredients and neither can you design a high probability trading strategy with only one or two technical ingredients. At Trade With Precision we recommend that a strategy should contain a minimum of 8 technical ingredients. If you were to use eight ingredients you should be able to make an average tasting chocolate cake, but increase that to 15 ingredients and you should be about to (with a bit of experience) make a truly delicious chocolate cake. Trading is no different. You can design an average trading strategy with eight technical ingredients or you could design a truly great strategy with 15 ingredients. However, be careful not to overcomplicate your strategy by having too many technical ingredients. Between eight and 20 technical ingredients is usually the optimal number. TradIng STraTegy FormaT Recipes are written down so they are never forgotten and can be flawlessly followed consistently. A trading strategy is no different. We also prefer to divide our checklists into an essential checklist and a bonus checklist. The essential checklist will contain all of those technical factors which absolutely must be present before we would even consider a set up as being valid. Then the bonus factors are those technical ingredients which are nice to have. If they are present then that is great as it will increase the probability of the trade being profitable but if they arent present then it wont prevent us from entering a trade. Typically we scan the markets looking for trades that loosely match our essential checklist. At the end of the scan if we have for example five such set ups then we will check them off more closely to ensure they meet all the essential ingredients before then applying the bonus checklist. We are then able to rank those five set ups in order from highest probability to lowest probability of success based on how many
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HOMETOWN: Manhattan, New York INTERESTS: UConn basketball, Yankees and now obsessed with the showtime TV drama series Homeland TRADING STYLE: Day Trading WEBSITE: www.smbcapital.com
Part 3: mike BellaFiore

tHe pros process
In this series we are asking Pro Traders about their psychological processes. Delving a little into how it feels to them when trading. The good and the bad. How this has changed over time and what preparation they do mentally for performing as a trader. One of the key features for us was that we wanted traders with experience who have been through the mill over the years and of course those who were kind enough to broach this subject publicly. We hope this gives developing traders more to learn from. Each interview in this series was conducted by Richard Chignell who is himself a trader. Please visit his blog at http://embracethetrend.com.
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what happens is you make too much of each trade. If there arent things outside of your work that give you gratitude, that bring you happiness you can find yourself placing way too much importance on your trading, on that one trade, and thats not good, its not healthy. Its a performance sport and youve got to keep it in perspective its important but its not everything. richard Chignell: Is that something you have always done or is it something you have learnt to do having been in the business a long time, or were you always quite active in making sure you had a holistic outside life alongside your trading? mike bellafiore: Before I started SMB Capital and I wrote about this in One Good Trade I used to actually close up shop after the close, then walk across Central Park from the East Side to the West Side and spend a couple of hours playing hoops and then head home and get a little dinner and then maybe watch a Yankees game. Then brushing up on some charts and maybe talking to some of my friends and then getting ready for the next day. And then when I started SMB I got away from that. It was 24/7. It took up every bit of energy I could muster. It still takes up a tremendous amount of effort but you know I have recognised that there is only so much good work I am going to get done during the day and if something doesnt get done today it doesnt get done today. Its better for myself to do some of the things I want to get done during the day, have a little bit of downtime for myself, and then go about tackling the next day the next day. So I definitely noticed when I started SMB that I was spending too much time working and I was starting to burn out a little bit and I had to get back to doing some of the things that I enjoyed which I did when I was just a trader. richard Chignell: with your role of obviously having traders working for you is the importance away from the screen and having other things in their lives, maybe like shooting hoops, doing yoga etc something you actively try to enforce with them? mike bellafiore: Yeah. What we actually try to do after the close is when one of our guys starts to be
richard Chignell: were doing a series of articles looking into how professional traders actually go through the psychological processes of trading but also some of the aspects that they might do outside of trading which people dont typically think of. I remember in mike martins book The Inner voice of Trading that you have a thing for running round the big loop in grand Central park and I know others have yoga and other things as a way to balance their trading. So Id like to delve into that a little bit. mike bellafiore: Yes lets tackle that. You dont want to make trading too important in your life. Not that its not important but you need to have other things outside of trading that are important to you. Youve got to have good friends, youve got to be close to your family, you want to have hobbies that interest you whatever they are. So for example after the close I kind of like reading up on politics, Ill watch Morning Joe or a Hardball (US politcal televisions shows) that I recorded. I certainly like my sports so Ill catch a bunch of Yankee games. I just got married so my wife and I will make sure that we go and find a restaurant that we havent gone to at least once a week. Well travel were going to France in the fall, last year we went to Italy. So whatever the things are that you enjoy you want to spend time after work doing that because
MIke BellafIore
Mike is the author of the trading classic one Good trade: Inside the Highly competitive world of proprietary trading (wiley trading) and co-founder of sMB capital, a proprietary trading firm in nYc. Mike is also the co-founder of sMBu, an educational company that helps new and developing traders globally build their trading foundation in all products, including systems trading, utilizing the principles of elite performance. Bellas blog offers new and developing traders ideas on how to improve their trading. Mike will share the lessons the market has taught him over the past fifteen years, wrapped inside of trading stories and his own trades. Mr. Bellafiore is a graduate of the university of connecticut school of law. He has traded his own account professionally for more than 15 years.
profitable I start to work with that trader one on one every day. So what they will do is they will send me a daily review in our proprietary review format of what they did well and what they didnt do well and I will ask them along the way to take the temperature of their psychology and it will push them along the way to building their strengths. But I will see, and I have seen over the last couple of months, that there are two guys on my desk who have been talking a lot about doing things outside of work to improve their work. And I have one guy on my desk who is probably going to become one of our best really terrific traders who gets very tired during the day. He has to be careful about just putting too much into it. So like the Miami Heat coach might take out Lebron www.tradersonline-mag.com
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lot of experience in coaching people how to be better and we were talking about the things that we teach on our desk to teach people how to visualise. So yeah its part of our training program. You have to learn how to get better at certain things. The most important thing, the most typical thing that an intra-day trader faces is that they trade on tilt. They just get angry. There is so mike bellafiore: I think you want to keep a list of the things that cause you to trade off your game. So if you for whatever reason get upset a bunch while you are trading you want to sit down and make a list of the things that are setting you off. If there are reasons for why you cant get big in a particular stock or market you want to sit down and write out what those things are. Then you want to start to work on conquering that under performance. A lot of times the answer is visualisation exercises. A lot of times the answer is just practice. I think a lot of people dont understand that trading is a performance based activity. Its not just knowledge based. So you could know a lot about a particular set up or the market but that doesnt mean that you can actually execute in real time. richard Chignell: So you have to serve your screen time to have enough repeatable experiences to make it work for you. mike bellafiore: Yeah and you have to have developed the mental skill to actually execute in real time. So lets say you get angry too much. You make a list of all the things that set you off. Then you do visualisation exercises one by one on each activity. So for myself I get upset when things are unfair. So if there is too much slippage in a particular stock that can upset me. Identify that, write it down. Writing something down on paper is a very important powerful part of learning. You make a nice connection with under performance when you do that. Then you spend a couple of minutes
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James for a blow, well he actually needs to take a blow and maybe take a walk at ten oclock, maybe go for a walk at two thirty, maybe instead of staying every night until seven oclock head out at five oclock one day. Make sure that you grab your buddies for Happy Hour on Thursday and head to the bar and have some fun. So yeah we watch for that.
take your anger and use it as fuel to do better.

richard Chignell: otherwise in his situation he could over cook himself; is that what you are on the watch out for? mike bellafiore: Absolutely. We actually experienced this in the past. From my book one of our really terrific traders we called Doctor Momentum, he was the same way. We actually had him work with Dr Steenberger on this very issue which was he was so bright and he cared so much that it was actually getting in the way of his trading and we needed to teach him how to care but not care so much. Its kind of like in baseball where you dont want to squeeze the bat too tightly. richard Chignell: So these are the kinds of things people dont expect to hear from people on wall St you know. That you are conscious of the psychological side, conscious of having relaxation factors in place, that you have psychological skills central to your trading set up. Its one of the reasons I wanted to speak to people and perhaps put it out there for people who are starting out as its not necessarily something that is seen as going hand in hand with trading and the finance world. mike bellafiore: Absolutely. So well do things like teach our traders how to do visualisation exercises. I was actually with John Locke and Seth Freudberg. John created an options strategy trade for our options trading program and Seth runs our options trading. John has a much rejection in the type of trading that we do, were wrong so much that you have to get used to being wrong. And for guys who are incredibly ambitious and have always been successful in everything theyve done its hard to come to work and potentially be wrong 60 to 70 per cent of the time and still understand that they are in a position to have a really good day. So well teach them visualisation exercises. Well make sure that every day guys are taking their temperature on how they feel. You know we stress youve gotta get some rest, you gotta get your eight hours people perform better if they are well rested. You know we will make sure if they are struggling with certain psychological issues. Another one is a fear of getting too big in a certain stock. Well work with them on that. Its a very important part of trading. A lot of times traders, particularly new traders spend too much time on the things they are actually not that good at and they dont spend enough time on the things that they are good at and pushing themselves to be better. I was screaming at our desk last week. They were all pumping their chests out because they thought they had a really good day and honestly they should have made a lot more. richard Chignell: So mike for someone who is not in a prop firm what would be your one bit of advice that you would say people would have to do to emotionally handle trading? For an aspiring trader if you could give one piece of advice?
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you have to actually train it to have another response. So that after you do that you will have a choice. I can be angry like I was in the past or also now I know how to get myself pretty calm pretty fast and let me try that approach. But you cant just say to yourself Richard its immature of me to get upset because there is too much slippage in a stock and then when there is too much slippage in a stock think that in real time you are just going to be calm. Its not the way it works. richard Chignell: youve given me some great answers thank you. So that I dont take up much more of your time and so that I cover most of the questions I have asked the other traders can I ask you how do you now feel when a trade goes against you? mike bellafiore: The way that Im thinking when Im trading is whats the right thing to do? Todays a perfect example of this (04/06/12). Friday we were very weak in the market and we noticed today that 128.20 on the SPY was a market resistance level intra-day and that 128 was another important trending technical level for us. So all Im thinking about is as long as we are below 128.20 Im going to stay short. If we get below 128.20 and we are holding below there my job is not to be a wuss and not get shorter, and whatever happens happens. Thats the way that I look at the markets. Whats the right thing to do? richard Chignell: So have you managed over the length of your career to be completely pragmatic and calm with the experience of when a trade goes for you or against you? or do you have differing emotions? obviously some people get very excited when the trade is going their way and very distraught when it is going against them. are you completely balanced or do you still get that kind of adrenalin rush when something is going your way and the anger perhaps of it not going your way? mike bellafiore: I think it is impossible to always be calm and Im not sure its a good thing to always be calm. I think you want to actually learn to use your emotions as well. So one of the things that you are going to want to learn to do as a performer is take your anger and use it as fuel to do better. So if for whatever reason I get angry at a particular trade, which I do, then I start blaming all the other people I can blame: the markets rigged, Goldman Sachs those guys are dishonest, JP Morgan they stink, this stock is no good well Im not really using that anger in a constructive way. But if I say wow Im really p**sed off that I now put on this huge market trade at 128.20 and added at 128 when it went against me. Well I want to use that anger to be like well why did it go against me? What were the things that I could have done better? Was I in the wrong stocks? Did I actually make something of the market that wasnt really there? Ill go back and replay the trade and do work and thats positive. Thats really positive. Look there are certain times when you just kind of feel a position isnt really working the way that you want it to and that might upset you a little bit and you need to probably learn to take that position off a little bit, lighten up in that position when you feel that way. So I think the big picture is that generally you want to be as calm and as Mark Douglas says trading in the zone as much as possible but as Denise Shull has recently written you also want to learn how to use your emotions and use it as fuel to get better. We'd like to thank Mike Bellafiore for sharing about the way he tackles the market from an emotional/ mental side of things and for his willingness to allow us to post this as a free resource in the hope that traders who have been in the market for less time or are thinking of entering can perhaps pick up some A-HAs. If you are interested in finding more out about Mike Bellafiore you can find him: On twitter @MikeBellafiore Or on his website: http://www.smbcapital.com/ Contact: mbellafiore@smbcap.com www.tradersonline-mag.com
in a quiet place breathing and getting calm. Then in as much detail as you possibly can you visualise yourself getting upset because there is a bunch of slippage in a stock, what are you wearing, what does it sound like around you, what do you see, what do your screens look like, what does it look like to the
guy to your left and right, and the ceiling and the TVs. Everything that is going on around you you want to replay to put yourself back in that position. You want to get mad. You want to get yourself mad like you were before. Then you want to expose the logic of getting mad by saying: Look this isnt really going to help me, theres no reason to get upset, Im going to make a bunch of trades during the month one trade isnt necessarily going to make my month and then youre going to breathe and get yourself to calm down. So before that activity you are just going to have one response to when there is too much slippage in a stock which is you are going to get angry. Your brain is only wired to one response. But
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CITY: London INTERESTS: Law, Family TRADING STYLE: Futures Swing Trading WEBSITE: www.MarcRivalland.com
marc riVallaND
one of tHe Best-known swInG traders of our tIMe
Marc Rivalland is one of the best-known swing traders of our time. He hails from South Africa, where he completed law school and then worked as a stock analyst early in his career. In 1978, he came to the UK, where his jobs included working as a futures trader on the floor of LIFFE. Later, Marc Rivalland began developing his own trading approaches and exclusively traded his own money, doing so with a remarkable degree of success, as well find out in this interview. He met with Marko Graenitz during the Traders Expo in London and talked to him about his trading, offering fascinating insights into his work. Enjoy!
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F1) 3-Bar swInG: tHe entrY strateGY

TraderS: In 1978, you came to london with nothing but a law degree under your belt. How did you manage to be a successful trader? My girlfriend and I had come to London for three months and I sensed that I would very much like to gain a foothold in this city. It was certainly worth a try. I had previously worked in Johannesburg as a share analyst for certain commodity stocks and then saw in London a matching job advert for a commodity analyst at the London Metal Exchange (LME). Following a stint there, I went on to find a job at a place where I really wanted to work in futures trading at LIFFE. once a minimum three-day countertrend move has occurred, a trigger (new low) will be used to speculate on a repeat of the original trend. source: www.traderfox.de
TraderS: did the breakthrough you had been hoping for materialise there? Not really. In 1985 Id turned 30 and had to make a choice. Was I going to try and devote all my energy to building a career in futures trading or should I rather work on a career in my actual field of study, pursuing legal studies again? I decided to pursue both options for a while and began to develop a trading system with a fixed set of rules. During the day I worked as a court lawyer while my system automatically traded on the financial markets without there being any need for me to intervene. I needed such a system that allowed me to place my orders, along with the stops and limits, with my broker at 7:55 in the morning and then work all day and not have to look at the market again until the close at 4:30 in the afternoon. In the evening I came home with the stock markets closed by then and my trades having been made. And that worked well. Over time, I shifted my focus to trading and also incorporated discretionary components. TraderS: please tell us how you discovered the fundamentals of your trading strategy. From today's perspective, I must say that it was actually by chance. In a book by Richard Wyckoff I read an interview with William Gann dating from the
F2) ModIfIcatIon of tHe entrY strateGY
It is no longer necessary for the three countertrend days to occur consecutively as long as the swing low (day 1) remains as the very low within the countertrend. source: www.traderfox.de
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So I tested the 2, 4, and 5-bar swing line extensively over a long period of time. The result: Gann was right. If you use 2-bar swings, the result will be far too many signals and a poor performance. And if you use 4- and 5-bar swings, there will be too few signals and also a performance that is worse than it is with 3-bar swings. Now whether it was a coincidence that Gann used the optimal number of days or whether he himself had tested that extensively is anybodys guess. But it doesnt matter, the fact is that the 3-bar swings are the right ones at least for index futures, which are financial instruments that I have studied. TraderS: do you just trade index futures, or stocks as well? I dont trade any stocks. This does not mean that the methodology does not work here, but I have not studied it in detail. Besides, stocks are too expensive to trade and there are always cases of manipulation or at least suspected ones. Of course, large high-volume stocks may well be immune from that, but Ill stick to index futures all the same. TraderS: Coming back to the traderfriendliness of the gann swing setups, what is the goal you pursue when you consider improving your setup? My goal is to enter a long position as soon as possible after the low and not to wait until the breakout above a previous intermediate high. Obviously, this doesnt
year 1921. In the book, a large number of trades were evaluated, with an incredible 92 per cent hit rate. It was overwhelming and obviously piqued my interest. TraderS: Can you remember when you read the book and what it was roughly all about ? That must have been in 1984 or 1985. I can recall its contents insofar as Wyckoff asked Gann how he had managed to execute those trades. Gann replied somewhat obscurely that he had applied the laws of vibration. The book also included an explanatory chapter on Ganns swing charts that made the whole thing understandable. TraderS: Can you briefly describe ganns concept? Sure. It was actually quite simple. He identified a swing line which to him indicated the direction of the trend. If a new high was reached, the line was rising, while it was falling when a new low was reached. The swingline is critically dependent on the number of price bars. So a 2-bar Gann swing line is directed upwards when there are two consecutive periods of higher highs. If the previous one was a downward swing, the two higher highs would cause it to be reversed to an upswing. A 3-bar Gann swing would be the same as the above, albeit with three bars. TraderS: Have you used the whole thing just like that? Well, Ive tried it out a few times. In its classical form, there was the problem that inside days were neglected and counting didnt begin until new highs or lows were actually reached. As a result, the method also led to unfavourable risk/reward ratios (RRR) since the stop gaps were sometimes too big, which in turn can lead to bigger drawdowns. So in my view, the whole thing had to be made more trader-friendly. TraderS: what have you tried? Gann used clusters of three days. Three was sort of his number. But why should three be the ideal number?
F3) crIterIa for 2-Bar swInGs
the figures illustrate the change from a downward to an upward swing. the trading should be done in the direction that the trend at the next higher time level points to.
source: c H choong, ensign software
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TraderS: do you have an average rrr target that you want to achieve? TraderS: which market phases do such particularly good trades materialise in?
always work. But if it does, you can significantly improve your RRR since the stop continues to be
You have to make sure that you dont let the profits run for too long.
below the last low, but the entry price is significantly improved. Vice versa, the whole thing applies to short positions. Incidentally, my stops are, on average, 1.3 per cent away from my entry price. TraderS: and then you let the profits run? In principle, I do. However, you have to make sure that you dont let the profits run for too long. Some people will then lose a large portion of their book gains again, and thats clearly not the purpose of the exercise. An RRR of 3.0 is ideal. This means that my profit is three times my initial stop risk. However, it would be too good to be true if I were to achieve an RRR of 3.0 all the time (laughs). Depending on the market phase, I only manage an average of 2.0 to a maximum of 2.5. Over the long term, though, that obviously still allows an excellent trading performance to be achieved. Now and then, there are also trades that have the potential of an RRR of up to 5.0, but that's the exception. Overall, traders should make an effort to win the largest possible amounts in their profitable trades and only have small losing trades. Years ago, Gann said that the first repeat of a buy or sell signal in a new trend is optimal. That is, we are not talking about the first signal in a new trend, but about the second one. Usually, the movements triggered by that grow rapidly to five to ten per cent. TraderS: Can you tell us how you identify the right future contract for your trading? I only trade a few different futures, so I do not need a screening or a special selection process. I used to use the FTSE 100 as a good benchmark for orientation
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purposes. Today my view is that the FTSE has almost become a mining index. Well, that may be a bit exaggerated, but at least it no longer reflects the broad market. Today, my main index is the S&P 500 future. About 60 per cent of the time I trade the S&P future, because it is extremely liquid and therefore perfect for my trading. 40 per cent of my trades I place in the FTSE 100, the NASDAQ and the DAX futures. TraderS: Can you describe to us how you exit your trades? As I have hinted before, I dont think all that much of the old stock-market adage that one should let profits run. I rather take the view that something should always be left over for the next trader to come. This may sound crazy but, in fact, it is not. When in doubt, I always take away profit if it matches the target price rather than risk giving it back to the market. So I'm a little impatient whenever major book profits accumulate. TraderS: why are there so many partly conflicting recommendations as to how to handle ones book profits? The whole thing depends on what is being traded on the market. In the case of stocks, the perfect profittaking strategy is certainly a different one. For my trading purposes, I like to use target prices and start off by scaling out my position once they are reached. Thats also what Ill do when my gut feeling about a trade is favourable. I may then give the trade a little more leeway, but ultimately Ill reduce my position anyway. I've made a lot of money that way and never had any major problems, so it does seem to work quite well. TraderS: How do you determine your target prices? I use indicators such as Bollinger Bands and the Relative Strength Index (RSI). But I will also be guided by my experience, and will listen to my gut feeling. Sometimes there are good exits that can only be
F4) nasdaQ 2006
after the chaotic price movements in the first week of august, the nasdaQ-100 gave a clear buy signal on 15th august, indicating the trend reversal (point a). a subsequent buy signal followed on 25th august (B) and additional ones on 11th september (b1), 23rd october (b2), and 6th november (b3). overall, the swing charts have reflected a nice 20 per cent movement here. source: www.tradesignalonline.com
F5) tHe dax saYs Good nIGHt

Marc rivalland never opens any short positions in december nor does he implement trend-reversal signals during that month. this chart shows a good example of why this rule is borne out by the statistics. the dow was in a downtrend, which began on 6th november 2007. on 10th december the index marked a new high, which according to the classical interpretation would have completed the trend (see the box). But can that be the case? the chart shows us the way. after the new swing high at point c1 the market reaches a swing low at c2. at this point, the dynamic changes again. the swing high c1 will no longer be reached, signalling weakness. that means if the swing low c2 goes even lower, this will confirm the false breakout at c1 and thus, suggest a short trade. this is exactly what Marc rivalland did at point c3. It is on this day that the bear market begins, and it was raining money for the short positions.
source: www.tradesignalonline.com
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identified in a discretionary manner. You can call that a perceived exit. TraderS: whats your trading performance been like in the last few years? which market phases were particularly good or bad? Lets start with the bad phase, which occurred in 2005. That year, it wasnt until the last week of November that I managed to recoup my losses and achieve the overall break-even for the year. I well remember reading on 1st December an interview with John Henry who helped promote the computer trade in the 1990s. He said in the interview that 2005 had been a bad year for him, and that as of 1st November, he was eleven per cent in the red for the full year. Sometimes things just arent going as well as they should, and that may even continue to be the case for a longer time. After all, you can only take away what is offered by the market. TraderS: what about the good years? The good years were from 2007 to 2009. I dont think Ill live to see such a profitable market phase again. I made more money in those three years than in the previous 21 years combined. TraderS: How did you manage to do that? The market was just perfect for my trading style. About 60 per cent of my trades were profitable and my average RRR was above 2.0. You can figure out yourself what kind of a performance that amounts to. I sometimes had consecutive winning series of eight to nine trades. The market resembled a licence to print money. Whenever anyone tells me something about a random walk, this can only make me chuckle. All those people are just plain wrong. TraderS: what kinds of leverage do you use? The subject of leverage is extremely important. Most traders use far too much leverage, and we all know what this will eventually lead to (sooner or later). From 1990 to 1994, I traded with a leverage of seven. While
BuY sIGnals In tHe s&p 500 Bull Market

Most people could not believe that the financial crisis at least in the stock market was over on 2nd april 2009. so they continued to do a lot of shorting. a costly mistake. the chart shows how the market shot upward from an depletion low on 6th March, generating three insufficiently developed short signals in the process: on 17th, 20th and 25th March. the real short signal came on 27th March but it was practically gone again in the blink of an eye. usually, Mark rivalland uses a stop-loss of 1.2 and a profit target of 2.2 per cent for standard trades (five per cent profit target in the case of follow-up buy signals). due to the high volatility at that time, he used a 1.7 to 2.0 per cent stop and a profit target from 2.8 to 3.6 per cent. the short signal of 27th March generated that 3.6 per cent profit on the following day. But in an emerging trend-reversal pattern, the price remained below the last swing high for just four trading days before breaking out upwards with a vengeance on 2nd april, which ended the bear market. this was supported by the fact that besides the s&p 500, other indices such as the ftse 100, the nasdaQ and the dax were also giving clear buy signals on the same day. additional follow-up buy signals promising relatively easy profits included points a1 (at 897.5 points on 18th May), a3 (at 991.75 points on 19th august), a4 (at 1001 points on 2nd september), and a5 (at 1031.25 points on 5th october). points a2 and a6, each of which was also profitable in its own right, were preceded by buy signals that turned out to be premature and hence false signals. Here, the only place where the swing chart throws a spanner in your works is the highlighted area in the blue box. on 6th July the chart indicates a new short-term downtrend, but that is not followed by any downward momentum. Instead, the market is continuing its upward movement six days later. source: www.tradesignalonline.com
I had a small trading account at that time, the risk was nevertheless high. In 1994, I traded a 6-figure account, and in October 1994 I experienced a major drawdown of about 40 per cent with it. Just imagine how that feels. TraderS: Since you have been a successful trader to this very day, we assume that you have learned your lesson from that. It was just absolutely necessary for me to cut back on my risk and trade with less leverage. And thats exactly what I did. Later, I was in luck once again: When the terrorist attacks occurred on 11th September 2001, I just happened to have no overnight positions, which
was more or less accidental. That could well have cost my neck. I have been an even more conservative trader ever since, only trading with a leverage of two. And yet I had a drawdown of nearly 20 per cent in 2002. TraderS: Have you ever thought about working as a hedge fund manager? Yes, absolutely. Ive even had a few offers. But Id have to work full time then and would hardly be able to work at a court of law on the side. Thats something I still do and enjoy doing. Nor do I have to work as a hedge fund manager to make money since I have my own trading. I'd rather look around to see if I can do something productive.
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of options. Unlimited upside and very limited downside for my account. The 90 per cent love to play the lottery by buying far out of the money options and trying to pick the price and the time it will be hit. These are not good odds. Not to mention you have to overcome the theta cost (time value diminishes) in out-of-the money options. Others want to sell options short that they think are too expensive a big risk for a small fee. 4. I will short a stock in a death spiral. If a company has made a huge misstep with investors or customers and it falls and continues to make lower lows I will short it. I like to short 52-week lows. I am a believer in Yes, it can go lower. 5. I do not put on big bets in any one trade, my concern is how the next 100 will play out not just one. When I am just too sure that a trade just has to work I get cautious, not aggressive in that trade. 6. My goal in trading is not to inflate my ego, it is only to make money. 7. My #1 goal is protecting my capital, not making a million dollars. 8. I trade a planned method instead of asking others for their opinions. 9. I have completed thousands of hours of study by reviewing historical charts, reading hundreds of trading books, and back testing systems and methods. 10. I grew my trading position sizes in steps as I developed tolerance for different levels of risk so my emotions and stress levels did not leak into my trading. If you want to succeed in trading you have to be the oddball trader fading into the crowd in the majority of markets the majority of the time. When everyone starts to agree with you that is the time to beware. When I hear the overwhelming majority saying It just cant go any higher. or It just cant go any lower. that is music to my ears. These statements means there are still plenty of sellers and plenty of buyers to fuel the trend.
Steve Burns
steve Burns has been an active and successful trader for over 13 years. He is the author of new trader, rich trader, show Me Your options and How I Made Money using the nicolas darvas system. He has also been a contributor to Zentrader.ca and Business Insider. steve blogs at www.newtraderu.com and twitters as @sJosephBurns. He lives in nashville, tn with his wife, his five children, and his granddaughter.
The strange thing about trading is the vast majority of traders lose money. Most studies put the number of traders losing in the long term at 90 per cent. How can this be? The majority of traders are trading on emotions and predictions instead of what is really going on. They are going short on monster stocks AFTER the stock has broken out to new highs having overcome all sellers right when it is about to explode upwards, instead of making the money in the trend they choose to fight the trend. The 90 per cent that lose think fallen leaders are great deals and buy not understanding the over head resistance that lies on the way back up with all the people that lost money waiting to sell and get out when certain prices are hit as the stock rises creating selling pressure. The 90 per cent tend to finally give up and buy a stock after the run is over due to running out
of buyers in time to get the reversal. The 90 per cent risk too much to make too little. They care more about opinions than what is really happening with price action. Their trading is more about ego than profits. The winning ten per cent generally do the opposite of the other 90 per cent. The 90 per cent is where their big profits come from because they are the ones on the other side of the bad trades. Here is what I do differently: 1. I trade the long side of the very best stocks in the stock market, the world changers, all time high chasing, high earnings expectation having, sales growing, monster stocks. I stay away from going long on mediocre stocks. 2. I buy the leading stocks when they overcome key price resistance points, I do not Wait for a pull back. I will pay up instead of missing a move. My favourite buy point is 52-week highs not 52-week low bargains. Quality is expensive, junk is cheap. 3. When I trade options I use them like stock, I buy weekly or front month, in-the-money options so I can capture the trend in the stock. I do not have to predict the time or price. I win if the direction is correct. I only risk one per cent of my total trading capital per trade even with the added leverage
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december 2012

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why sometimes faster Is not Better

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