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Suri Duddella: This Is How You Trade Chart Patterns Like the Pros!

Your Personal Trading Coach


Issue 02, March 2010 | www.traders-mag.com | www.tradersonline-mag.com

What It Takes to Be a Successful

Full-Time Trader

The Emergence of a Technical Volume New Financial Market Analysis


Discover Your Opportunities in the Sports Exchanges A Predictive Forecast of Price Development

Get an Edge in Your Forex Trading


How to Use FX Chart Patterns

TRADERSEDITORIAL

Learning by Doing
There are plenty of ways to eventually become a better trader. You could improve your knowledge and hone your skills by nearly any means of modern communication. Many great books or TRADERS magazines have been published (print and digital), there are many seminars or workshops available (direct) or one could perhaps think of CD or DVD courses full of audio and video material (interactive). You can keep up-to-date by using the Internet, where you get the latest news and information (digital). Finally, there is the valuable personal contact and exchange of ideas with other traders. Most of you, dear readers, will personally know what all this looks like and may finally ask one defining question: Where do I get those absolutely necessary trading skills in the first place? Our TRADERS editorial office aims to be the centre of the professional trading scene and that means that we keep in touch with all those engaged in the pursuit of better trading. Sit down, observe the markets and go trade. We try our best to introduce all these personalities to you, too, by including various interviews and articles. Just take this issue: Suri Duddella, our interview partner, gained his market experience after ending his career as an engineer and computer scientist 13 years ago. After attending all the major trading seminars and reading many books, he began to develop his own mathematical models and analysis and was highly successful. Mr. Duddellas passion is technical analysis and market psychology. Since his trading approach is based on pattern trading in futures and stocks, he knows (almost) all chart patterns that exist. However, Mr. Duddella had to work hard, to overcome stumbling blocks and to accept defeats on his way to becoming a successful trader. But now he can look back on a great trading career and demonstrate amazing results which you can read on your own from page 62. Back to the question there is an answer: Learning by doing. Sit down, observe the markets and go trade. Some of the most important expert knowledge can only be gained like that. Besides, it is the only way to eventually find your own unique style. I am sure that those of you who proceed to act with a similar sense of commitment will be able to enjoy the fruits of your labours sooner or later. Good Trading,

Lothar Albert On a different note: TRADERS comes to you free of charge. This is possible because of the support of our sponsors and advertisers. So please take a good look at their messages and help them develop their business. Moreover, we are looking forward to your feedback. This is the only way to improve our magazine constantly. Please write to feedback@tradersonline-mag.com.

March 2010 | www.traders-mag.com

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TRADERSCONTENT

CONTENT
March 2010

PEOPLE

58 Suri Duddella This Is How You Trade Chart Patterns Like the Pros!

Suri Duddellas trading career began 13 years ago. After attending all the major trading seminars and reading many books, he began to develop his own mathematical models and analyses. Duddella is a passionate technical analyst and regularly presents his research work in reputable financial magazines. Beyond that, he runs his own website www.surinotes.com offering his trades and scalps on a daily basis. His trading approach is based on pattern trading in futures and stocks. In the TRADERS interview, Duddella talks about his development as a trader, his concept, his future plans, and much more.

INSIGHTS

Insights 12 Day, Hour or Even Minute Trading

Day trading refers to to the practice of buying and selling financial instruments within the same trading day so that all positions will usually, but not always, be closed before the market close of the trading day. Simon Brown introduces the different day trading types from today.

14 Rules for Thinking

Being human simply means we need rules for thinking and information gathering. Mike McMahon shows how to learn what is important and to prioritize your view of the market place and finally to become the clear observer.

16 The Emergence of a New Financial Market Part 1

The sports exchanges are moving forward at a rate of knots and it will be no surprise to see more and more financial traders migrate across to sport. In his series, Paul Carlier introduces this new financial market. Part 1 reveals the differences and similarities to the financial markets as well as the benefits and possibilities of the sports markets.

March 2010 | www.traders-mag.com

COVERSTORY

6 What It Takes to Be a Successfull Trader

From an ordinary floor runner to a successful full-time trader: an English MBA with wife and children tells us his personal trading story. You will experience what moved him, which stumbling blocks he had to overcome, and which strategy finally led him to success. Moreover, he gives replies to the most important questions for future traders.

TRADERSCONTENT

TOOLS

Address | TRADERS media GmbH Barbarastrae 31, D-97074 Wuerzburg Phone Fax E-Mail +49 (0) 9 31 4 52 26-0 +49 (0) 9 31 4 52 26-13 info@traders-mag.com

High Performance Trading by Steve Ward

22 Softwaretest 26 Webreview

Metastock 11 A Veteran Gets Fundamental www.timertrac.com Shows Which Systems Are Really Effective

Publisher | Lothar Albert

30 New Products

The Latest and Greatest from the Industry

Subscription Service | www.traders-mag.com; www.tradersonline-mag.com abo@traders-mag.com Tel. 0931 45226-15, Fax 0931 45226-13

STRATEGIES

Strategies 32 Developing Swing Trading Strategies Part 2

Address of Editorial and Advertising Department | Barbarastrae 31, 97074 Wuerzburg Editor-in-Chief | Lothar Albert Editors | Prof. Dr. Guenther Dahlmann-Resing, Karsten Gore, Marko Graenitz, Theresa Huenoeder, Sandra Kahle, Nadine von Malek, Roman Moore, Stefan Rauch, Tina Wagemann, Sarina Wiederer Articles | Simon Brown, Paul Carlier, Josip Causic, Stan Ehrlich, Faik Giese, Tobias Kittel, Christian Lukas, Nick McDonald, Mike McMahon Pictures| www.photocase.de, www.fotolia.de Price data | www.bis.de www.bsb-software.de www.captimizer.de www.esignal.com www.metaquotes.net www.tradesignal.com ISSN | 1612-9415 Disclosure |

In the second part of his series of articles about swing trading, Faik Giese identifies useful rules of entry both for the long and the short side. For this purpose, he uses trend indicators and shows which conditions have to be fulfilled on the short-sale side.

38 Technical Volume Analysis

Christian Lukas article indicates techniques for volume analysis. These have been carefully selected to highlight an understanding of the price movement with the volume used. This could also be interpreted as latter-day tape reading.

44 FX-Patterns An Unconventional View

Nick McDonald displays essential principles of FX trend trading, ensuring that you always have market momentum on your side. Besides, he delves deeper into the concepts behind technical FX chart patterns and provides an unconventional view that most textbooks do not cover. This will provide you with an additional edge in your foreign exchange trading.

50 Using an Indicator AND a Price Reversal Pattern for Trading Discipline

The combination of technical tools which includes Relative Strength Index and the bullish or bearish engulfing candelstick (= price reversal pattern) provides you with some trading disciplines. Stan Ehrlich shows this successfull strategy with the GBP/USD.

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.

BASICS

Basics 54 Bear Call Basics 56 Traders Camp

Josip Causic defines the option strategy known as a credit call spread and looks at many of the possible outcomes that could happen. Of lines, candlesticks, and bars the variety of price charts to describe developments.

March 2010 | www.traders-mag.com

MASTHEAD
5

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TRADERSCOVERSTORY

All In or

What It Takes to Be a Successful Full-Time Trader

It seems so simple in theory: Just chuck it all in and live the great life of a full-time trader. But reality is a different kettle of fish altogether. So go and read the story of a full-blooded English stock-market operator who will show you what it really means to leave behind a secure life in a safe job and venture into the world of the slippery trading floor.

o The Beginning of a Great Love Affair

When I first set foot on the LIFFE trading floor I was hooked right there and then. This was now meant to be my life. That adrenalin rush triggered by the markets I just wanted to experience every day. Although it had only been a short visit, I knew that I had caught the bug. I was infected by this market virus and from then just kept thinking about one thing: how to start my life as a trader. All this I experienced in 1989. I was nearing the end of my degree course in business administration and was absolutely determined to get my foot in that door. So every day I spent several hours commuting to London to work as a runner on the floor for a ridiculously low hourly wage. My wife pretty much failed to understand why a business graduate had to stoop to doing such low-level work, but she was supportive nevertheless.

I spent the next 13 years filling various positions and learning as much as I could about options and trading while slowly and steadily climbing up the career ladder. At the height of my career I was a vice president at a large brokerage firm, was well-compensated and helped to create a great business enterprise. But something was missing: my dream of trading had not come true yet. I still have vivid recollections of the heated discussions with my wife all revolving around what it was that I wanted or didnt want. While she had grave reservations, she did understand my long-standing passion for trading, eventually lending her support to my plans. And so it happened that in September 2002 I ended my successful career as a broker to begin what at that point was nothing more than a dream. Circumstances at the time were not favourable. I was 13 years older with a family to feed. Our lives were organised in

March 2010 | www.traders-mag.com

TRADERSCOVERSTORY F1) Typical Equity Curve

seeing things from their perspective. When I wasnt on the floor anymore, I worked for one of the largest transaction platforms for institutional and private option traders. Specifically, it was my responsibility to evaluate the margin requirements and the risk of private traders on a daily basis. So while I helped my clients make their decisions, I was able to identify some of the key elements making the difference between success or failure. During my entire career Ive always traded my own account and in the process tried out just about any strategy imaginable. Armed with 13 years of experience in the trading industry, I had the secure feeling that now was the right time for this major step. My experience of the markets had taught me valuable insights, and I kept my eyes wide open. I knew exactly which factors would influence my success. First and foremost, I was fully aware of this: Anxious money will never be among the winners.

This is a schematic equity curve of a trading newbie. In the beginning the trader acts conservatively (see position 1). After a while there is a random series of losses (position 2). Now the trader wants to get his money back. Risktaking is increased in terms of greater position sizing. Only a few further losses would be sufficient now to dramatically cut down the capital available. And often that is the way it goes. It is only a matter of time.
Source: TRADERS

Learning from Losses


Have I mentioned yet that the market once caught even me off-guard? To be quite honest, I had completely destroyed my account at that time. Even today, Im firmly convinced that anybody who has not had that kind of experience cannot make a judgment on whether he is a good trader unless he has tested this low point once in his life. It was not until I had this experience that it dawned on me how deep my passion is, and that experience has enormously increased my respect for the unexpected. Later on, when I was already an enlightened trader I soon came to the conclusion that I would probably be a student of the markets forever, and I therefore used my position size management to control my fear. The total loss I once suffered also caused me to experience the worst moment of my life: I had to make a full confession to my wife. That was a kind of catharsis forcing me to admit my mistakes. But by 2002 I sensed that I had put my house in order and that I wouldnt make those mistakes again. One problem was that I was on my own and didnt have anyone to re-examine my decisions. So it was all up to me to decide where the stop was. I had an agreement with my wife: the supreme stop-loss was at $150,000. Once this capital was spent, Id call it quits. Trading was my dream but I needed some money to fall back on in order to shore up my psyche. An undercapitalised trader would trade with anxious money. I was therefore of the opinion that I had settled this issue as far as I was concerned. Id also agreed with my wife that we would completely re-evaluate the overall situation after one year. My motivation was clear: Trading was my passion. Unlike many others, I didnt want to be rich, I didnt want to spend more time with my family or be my own boss. There are a lot of books around selling this illusion. I was aware that my chances of survival were very slim if I was incapable of living for trading, i.e. for all practical purposes eating, drinking and sleeping for it. I know why real traders are rarely found in pubs. Entry barriers to trading are low, anybody with a little money can engage in it. It is easy to start trading; but establishing oneself as

such a way that I was the breadwinner and my wife devoted all her energy to raising our children. And we both agreed that that arrangement was not about to change. I would continue to be the only source of income for our family. Even at that time it was clearly evident that the brokerage industry would experience tough times and I knew exactly that it would probably not be easy for me to maintain my salary level should things not develop the way they were expected to. In that event, I would probably find the door back to the broker business slammed shut. Compared to previous years, markets had suffered massive losses, and there was the imminent invasion of Iraq. Of course, trading is not a simple business under any circumstances but at that time circumstances were extremely tough. Over the years I had seen thousands of traders burning all their money, and I was well aware of my slim chances of success. At one point in time everybody gets caught off-guard by the market, and I, too, once lost my shirt

Anxious money never belongs to winners.


during my previous attempts at trading. The risks involved were well understood by both my wife and myself. To put it the way they do in poker jargon: we were all in.

Homework done?
Like all budding traders I was under the illusion that I was well prepared and did the right things. On the floor I had studied all the strategies and learned the mechanisms of executing orders. I have always taken the time to talk to the big boys the market makers and over time I succeeded in

March 2010 | www.traders-mag.com

TRADERSCOVERSTORY

a trader over a period of many years is one of the most difficult challenges.

Numbers Games
My account was equipped with $250,000. I traded US shares and I used margins. This meant that I had a buying power of half a million dollars at my disposal, which seemed adequate to me. My idea was to concentrate on day trading. That way I was able to limit the risk of overnight positions. I calculated all my expenses and finally arrived at the amount of $7,500 that I had to make every month in order to be able to pay for all my expenses. Factoring in taxes, I arrived at the amount of $100,000 to break even. So with about 250 trading days a year an average profit of $400 a day would cover my cost. At a daily profit of $500 I would be able to make an annual profit of $25,000. All I had to do then was find one trade a day that would make me half a point on 1,000 shares. Simple as that. But I knew better. When you work for a salary and have a bad day, you go home and feel bad. But you continue to be paid a salary. Its different with trading. You have a bad day and you even have to pay for the market. If you lose $500 in one day, youll have to make $1,000 each on the next two days just to stay within your budget again. Or to put it differently: just to cover my cost I would have to make a profit of 40 per cent on my capital. That is a figure not even achieved by many professionals. So it would be far from easy.

Although I had the feeling that I was on the right path, I did see that the noose was tightening around my neck. I had already completed about a third of the way towards my final stop loss of $150,000. I was aware of the risk and I also knew that wouldnt be easy. In addition, the market looked miserable and it became increasingly clear that the US was going to invade Iraq. However, I didnt allow myself to short the market, which was so heavily oversold that I had the feeling that it resembled a coil spring that kept being wound. It would only be a question of time before a massive upward movement began. At least thats what I thought. Unfortunately, I had no success with my long positions. All my trades were dying a slow death. When reviewing my strategies I learned that I was able to adjust the position sizes and thus control my emotions. This was a new aspect of trading for me. Prior to that, Id always had my salary,

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March 2010 | www.traders-mag.com

TRADERSCOVERSTORY

which meant that not every loss caused me to break out in a sweat.

Im Turning the Corner


By January 2003 I finally saw some light at the end of the tunnel. Like a diligent pupil at school, I kept studying my charts and formations. The Internet continued to improve, opening up a new opportunity for me. In previous months I had already talked to a proprietary trading firm concentrating on option trading. But in order to join their activities a stable and fast Internet connection was necessary to enable me to work with their systems. After a month of training and gradually increasing my position size I was finally profitable. As a rule, I looked at some 3,500 trading opportunities a day and tried 350 times to enter a trade. On average I then made 70 trades a day, trading more than 2,000 contracts. That was very intensive and exciting. This kind of trading required the quick identification and execution of trades. I was in direct competition with Autoquote systems of large firms as well as with other traders working for my firm as well. I began to earn money on a regular basis but it was not enough to make a living. In April the US went to war and the prospect of an early victory caused the market to rise. The coil spring mentioned above was released and there were fantastic opportunities galore. I had made friends with the new systems and now that there was finally some real activity on the market you

those that jump on the bandwagon cause the inefficiencies to disappear. Still, based on my investigations I had meanwhile been in a position to identify movements with a larger amplitude. I continued to be able to use the technology of the firm in order to develop ideas. They made the system less restrictive for me , which meant that I was able to discover more opportunities. The system made situations appear on my computer screen where shares fell through their options strike prices. As soon as these situations appeared on my screen I turned this into a directional trade. So I no longer did any scalping but switched to a larger time window. I gradually understood the power of pattern recognition and integrated it into my search criteria. Up until 2005 I was in a position to earn money with this method. But eventually this method also lost its function when the big boys were beginning to understand how it works. I was still able to earn money as a market maker and by trading conversions and reversals during the expiration dates but that just paid the bills and wasnt really any fun. In addition, the stock exchanges introduced fees for cancelling orders in order to protect their members, and this meant that that kind of business was nearing its end as far as I was concerned. You cannot be a market maker if you have to pay to cancel orders. So I began to look out for other opportunities.

The Next Step


As early as 2004 I managed some large accounts with my system. By mid-2005 I finally produced good results. I had categorised all my search functions, which enabled me to find out at one glance which charts offered any opportunities. The problem was to find a setting that provided me with the right number of opportunities. If your programming is too open youll get too many of those, but if your programming is too restrictive youll miss many of them and ,above all, many good ones. However, my method was a good compromise. The searches limited the universe to some 500 stocks and by means of a rather simple user interface I was able to quickly scan through all the charts in order to identify the best opportunities. I always knew that the most powerful trading tool is a keen eye. Thus I was able to identify some 15 shares a day that were either strong or weak. Then I took a good look at the fundamental data or the stock-market news in order to narrow my selection to one or two stocks. Then I took another look at the technical situation and prepared a trading plan. I always made sure that my portfolio included long and short positions, which enabled me to considerably reduce the inherent risk.

Trading is the hardest way to have an easy life.


only had to delve into the wealth of opportunities to really land a big one. The systems worked outstandingly well und I was able to cover my cost. Id seen the low point and my drawdown was at an end before it had reached the exit point I had chosen myself. I continued to work with my search programs and my trading activities helped me to keep refining everything. Looking at a large number of charts every day you automatically begin to define what makes for good chart formations and where trading opportunities are developing. In the end, six patterns were particularly interesting to me. My software now enabled me to develop search functions that filtered out those shares where these formations appeared. All my work was slowly beginning to pay off. From around September 2003 I noticed that, while still being profitable, my work for the trading firm kept making less and less money. The amount of opportunities kept decreasing and the number of executions was dramatically reduced. There is no doubt that at that time we traded against the Autoquote systems of large firms with deep pockets. However, as is the case whenever people systematically try to exploit minor price efficiencies with the help of technology, it is only a question of time before too many of

My Lessons
The biggest challenge was my ego. I didnt want to join the ranks of all those that come and go in this industry. I had a good name in the brokerage industry and I wanted to defend that. So failure was no option for me. Nor did I have a Plan B just in case trading wasnt going to pan out. While I did stay in touch with my former colleagues, even in darkest

10

March 2010 | www.traders-mag.com

TRADERSCOVERSTORY T1) Questions for Future Traders


u u u u u u u u u u u Is trading my dream? Do I have the complete support of my environment? Am I willing to invest innumerable hours in research?  D o I have at least $200,000 trading capital at my disposal plus the money I need for my livelihood for one year? Have I failed on the markets before? Can I return to my regular job? Have I talked to real professionals (not to speakers at seminars)? Can I accept mistakes? Do I have a mentor? Do I have a system? Do I know my strenghts and weaknesses?

days the idea of returning to them never crossed my mind. Even a little bit of doubt would have had a negative impact on my trading. All this caused an enormous amount of pressure. It was very difficult to talk to friends or family. I like to be open and candid with people so everybody knew when I wasnt doing well. Everybody was worried about me and my family. Fortunately, I was always in a position to discuss everything with my wife, who was a tower of strength for me. Without her help I would probably not have made it. Actually, I only wanted to lock myself inside my office all the time, just looking at charts. I knew that the answers were there, I just had to find them. When the US then went to war against Iraq, circumstances had changed enormously. The opportunities were there for the taking and my performance improved enormously. I spent at least 60 hours a week trading and researching. That hasnt changed until today. To be honest, the amount of time Ive spent doing all that has increased rather than decreased over time. If I were to compile a list of questions that a budding trader should ask himself, those would include the following in Table 1. From day one, the challenge is to develop a system or a method of trading that fits a trader. This must be a standardised routine with well-defined steps. This method must help you to adequately define your position sizes and to control your risk as well as your emotions. That will help

you provide some structure in the midst of chaos. You must develop that yourself but you can get yourself a lot of help from other traders. Professional athletes often tell people about the kick diminishing after a few years. Its no different with trading. Its never easy. However, the more experience you gain the more youll learn how to stay in the game and develop a good sense of trading. Im absolutely convinced that trading will return to you whatever you invest in it. But keep your trading house in order because it will be put to the test quite frequently from top to bottom. n

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11

TRADERSINSIGHTS

Day Traders from Today

Day, Hour or Even Minute Trading


Day trading refers to the practice of buying and selling financial instruments within the same trading day so that all positions will usually, but not always, be closed before the market close of the trading day.

o You can imagine the rollercoaster ride that many day

traders experienced during the volatile markets of the financial crisis. You only have to look at the daily ranges that indices like the FTSE 100 have had to appreciate that whiteknuckle rides are not always the preferred environment for the savvy scalpers. So who are todays day traders ? Well, pre-tech boom (& bust), day traders were predominantly self-financed ex-bank and futures floor traders, who stood shoulder to shoulder in the open outcry pits of the International Futures Exchanges, shouting and screaming while signalling to each other the prices at which they wished to trade. Mayhem it must sound, but actually there existed a very efficient market place for trading the financial markets. Some of these self- financed traders, otherwise known as locals, would wander down onto the floor, sometimes straight out of school, hungry to make their fortune Trading Places style. In the late 90s, technology soon won the exchanges over and these thriving day traders migrated to newly set up Trading Arcades; providing them with a professional dealing environment, allowing them to compete with their banking and corporate peers. And these arcades initially accommodated hundreds of ex-floor traders who provided important liquidity to the worlds futures markets. And then the millennium saw a 3-year bear market that took the FTSE 100 from 6950 to 3380, a whopping 51% decline, well within the definition of a bear market (20% decline !). This down move made many active retail investors, who to that date were nearly always long only merchants, look for instruments and strategies that would allow them to capitalise on falling markets as opposed to good old bull markets. So the search led them to the derivatives markets, including Futures, CFDs and Spread Betting. Speculating on intra-day moves may mean one or two trades a day or may be hundreds of trades a day. To be glued to a screen, buying and selling on a second-by-second basis has created a new breed of trader called the scalper.

A scalper looks for a tiny (and I mean tiny) edge in the market. This may mean scratching (buying and selling at the same price) several trades for every profitable trade. Many of these scalpers will trade spreads between either different futures contracts or indeed different futures months within the same contract. This spread trading requires immense concentration as a badly timed tea break could prove expensive ! A short-term interest rate futures contract, for example, will have several months available to trade. Day traders will study the fair value of one month against another (spread) and when a big order in one of those months moves the price, then there is an opportunity (if you are quick) to trade the other months before they fall in line again. This is where execution technology is crucial, as there may be hundreds of spread traders trying to do the same trade at the same time. Similarly, some spread traders will choose to trade one contract against another. For example, it is increasingly popular to trade the UK government bond (GILT) future versus the US government bond (T-BOND) future. In the equity markets, Pairs trading is commonplace, whereby a trader will find a stock within a sector that he feels is strong, go long, and hedge it by shorting a stock within the same sector that he feels is relatively weak. So he is protected against a sector fall- out and hopes that the spread between the two stocks will widen/narrow in his favour. Another favourite is in the oil market, where the crack spread is a specific spread trade involving simultaneously buying and selling contracts in crude oil and one or more derivative products, typically gasoline and heating oil. Recent market volatility has resulted in a multitude of daily opportunities and indeed a multitude of daily risks, which has sidelined even some of the most seasoned pros. But rest assured, they will be back. With such focus required to catch the opportunities before others do, many of todays day traders are enhancing technology that allows them to automate their decision-making and execution process, allowing them to sit back a little and ride the volatility wave which may well be here to stay. n

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Copyright 2006, The Nasdaq Stock Market, Inc., Reprinted with the permission of The Nasdaq Stock Market, Inc., Photo credit: Rob Tannenbaum/Nasdaq

TRADERSINSIGHTS

Managing Your Mind

Rules for Thinking


There are many things to consider and little time or energy to deal with it all. You need to understand that being human simply means we need rules for thinking and information gathering. It is not good enough to say, If I had more information, I could make a better decision. You need to set limitations on your intake and processing of information. In others words, learn what is important and learn how to prioritize your view of the market place become the clear observer.

o Managing Your Minds Energy Pie Chart

There are too many items to keep track of in the market. The trader must understand that he cannot know it all. If you could, you would be the ultimate trading machine. This being said, we realize that we are imperfect. We have only 100 percent of our mental energy to use in any given time frame. Some of it is used in maintaining our bodies breathing, walking, talking, etc. Some is used in keeping track of our lives what time is it, did I turn off the coffee pot, and did I pay the phone bill? Most of it is used in trying to understand the complexity of our world the sensory input from our senses and their identification and categorization. In using this last energy, we tend to trap ourselves into sorting out signals and identifying them with past similarities, to make things easier and to conserve on this energy. Unfortunately, this means it is difficult for us to learn new things clearly and cleanly. A simple example is the color red. Most of us drive a car; therefore, red indicates stop. If we see the color outside of the context of driving, we still tend to think stop. Many word association tests have proven this out. Thus, if red meant something other than stop in a different setting, we may not learn this new meaning quickly or perhaps if we do; it still has some shading of stop. Thus, new traders often try to interpret the market using the wrong context as the market has little to do with their social world scenario. Thus, the signals that the market is putting out have little meaning or are, most oft, misinterpreted. The confused trader then tries to gather more evidence to bolster his misinterpretation, further compounding the situation.

The more he tries to learn via his old context, the more confusing the data appears to be. As he tries harder, he burns more and more of the energy that is available. Because the energy is finite in any specific time frame, the trader becomes mentally drained, pulling energy from his other needs life support, emotional response, logical thinking and rational control. As these items decrease, certain traits start to take over. The strongest of these are the violent emotions anger, sadness, frustration and projection. Each of these in their turn degrades the traders ability to understand the direction of the market. Dazed and confused, he makes another bad decision based on good information that has not been properly learned and categorized. This is a downward spiral. The trader must learn to learn properly. To clear his mind as best as possible and try to see reality, and then to test it against the market not what he already knows. So many see the price going down, and their social education is to sell, while every market indicator might be screaming oversold buy now. Perverse but true.

Controlling Emotions
Emotion is a mental and physical expression of a perceived stimulus. Some emotions are considered good, others bad however, this is, again social thinking. Emotions simply are neither good nor bad. It is not good to be euphoric at a tragedy, nor is it bad to be angry against injustice. However, emotions are energy hogs that drain our mental capacity quite quickly, and usually, with little benefit in the long run.

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Learning Not to Magnify


We have all been guilty of magnifying a situation. A small personal jibe can bring out a totally out of proportion response. Additionally, the injured party can then use even more energy to mentally challenge his aggressor with the thats what I would have done and concerning himself with the possibility the jibe was a capital T truth rather than the small, meaningless mutterings of an inconsiderate person. What then of trading? Here is an incredibly stressful world, fraught with fears, personal failures and tremendous mental drains. All traders have problems with loss; the successful ones have learned not to magnify the situation. They learn to let go of inherent emotions. None are immune to the natural response, but neither do the profitable ones worry about that piece of history. There is no room for emotions, but these are the very stimuli that invoke the strongest ones. The trader must be ever watchful of his composure as trades go against or with him. Euphoria or happiness can be just as debilitating as anger or frustration. You cannot be without emotion, you are not a robot. You can, however, train yourself to control your emotions by staying focused on the goal to be achieved, by monitoring yourself for symptoms of emotional outbreak and by using simple physical stress relief methods to help keep these animals corralled.

Increased muscle tension Bracing Once any of these symptoms of an emotional release, or stress level breach is identified, the trader must take corrective action immediately. He must close the trade as he is no longer in control of the plan. The plan said no emotions, right? His objective thinking is now being clouded. The next step is to identify the stressor, the item or influence that is causing the response. Then the remediation can begin by limiting that stimulus and using physical techniques to reduce both the mental and physical reactions. This would include deep breathing exercises to calm and soothe. It might require physical exertion to eliminate some of the biochemical reactions in the body. It will certainly mean doing a rigorous inspection of self before going back into the trenches and trying to re-focus.

Outside Influences
At the outset of this, I mentioned that there are simply too many things to keep track of. Thus, we need to develop a plan that walls out extraneous items that do not add to our goal. This is called a trading system. Having a trading system is the reliance on data that you can perceive as having a benefit and eliminating distractions that you have not learned to appreciate. Remember, the market is putting out all kinds of signals. We have to learn, as we go, to disassociate our social conditioning so that we might have a better chance of understanding the markets data. Our trading system must include only data that we know we have learned in a market context. Beginners often want to include everything possible, old Pros have adopted the KISS (Keep It Simple, Sam) principle. Other outside influences must also be considered. Having the support of your family and friends is just as important as a good Economic Indicator. Worrying about what your significant other is going to do or say when all is not going well is certainly a stressor or distraction. Listening to people who have not done the hard work that you have, is yet Mike McMahon another distraction. Announcements, market Mike McMahon has over 20 years of expericalls and chat room gossip needs ence in the market, as an investor, a trader to be accounted for, but never and a licensed Commodities broker. He has followed blindly. At best, they may taught classes in many diverse topics in the be right but they are not working past. His ability to communicate this blend is for your best interests. You must the rare talent that allows an active trader to learn to exist on a few pieces of be a successful trainer. His students at Online information that you have tested Trading Academy are always well-schooled and understand. Trade with those with passion and enthusiasm. for awhile and then add a piece of Contact: Mike@tradingacademy.com the puzzle. Remember, you eat an elephant one bite at a time. n

Staying Focused
Staying focused is a trained response. A coach once offered me his philosophy, If it does not add, it must subtract, there are no neutrals. His point was whatever you are doing, it must be additive to your goal. If it does not bring something to the achievement of that goal, then it is a subtraction, a distraction. Any distraction, no matter how small, is not helping you and, therefore, there are no neutral situations. There are pluses or minuses to your goals; you must try to eliminate the minuses. Trading requires patience at times. It is not all split second decisions. Trades need to develop, charts need time to form patterns and traders must focus. This is not easy. One way is to simply keep going over the plan in detail why did I open this trade, where was my entry point, what is my stop loss, where is my exit, how will I execute, are my trade plan parameters still in place. Otherwise, the mind wants to wander, to think of far away places with strange sounding names a distraction. A trader must love what he is doing - watching the market move, monitoring price action, investigating market and technical indication. It is far easier for this vocation to be successful if it is also your avocation. You need to understand your normal response pattern. If you do not see it coming, you can not control the emotion or the stress. You need to inspect yourself. What is normal respiration, what is normal pulse, what tensions of muscles are natural? Once we can establish this base line of individual performance, we can then monitor ourselves for signs that are subtracting from our trading goals. Common symptoms are: Increased perspiration Increased heart rate Increased blood pressure

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TRADERSINSIGHTS

The Sports Exchanges

The Emergence of a New Financial Market Part 1

It is fair to say that the sports betting industry has experienced a seismic shift over the past decade which now sees traders operating in exactly the same way as they would on the financial markets. This is solely linked to the emergence of the sports exchanges and most notably the introduction of Betfair at the start of the Millennium. The sports exchanges were designed in a simple way to take stock exchange technology to the gambling market using the internet. That meant people could bet against each other rather than a bookmaker, but, more crucially, that they could bet on an outcome to happen (back) or for it not to happen (lay). This technology gave would-be traders the tools to trade any sporting event both pre-event and in-play. The opportunities are now so very similar. Prices move up and down on the sports markets as they do the financials. The only real difference in terms of exploiting this price movement is one of terminology. On the financial markets your objective is to buy low and sell high and with the sports markets your objective is to back high and lay low. This is the first in a series of three strategy articles looking at the emergence of the sports exchanges. In part two we will look at the essentials of trading sport and how to make consistent profits, while in the third article we will focus on taking your trading to the next level.

o Sports Markets v Financial Markets

For many years financial traders all over the world have used technology which has enabled them to trade anything from foreign exchange to futures to derivatives in massive volumes. However, prior to Betfair, punters had very little opportunity to trade any sport event to its conclusion, let alone in-play. Sports traders can now trade in and out of an event for its entirety as prices fluctuate, as events occur and as opinions change in exactly the same way as you would in the financial markets. Example of similar event impact on price:

Non Farm Payrolls release will impact price on fi nancial markets just as a goal being scored will on the football markets The Non Farm Payroll impact on price is greater the further it deviates from the widely anticipated number. The impact of a goal on football market price is similarly greater if scored by the less favoured team

The similarities do not end there. As with the financial markets, good research and analysis, together with sound trading strategy, will give you an edge, as will your

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understanding of the dynamics of the particular market/ s/ that you trade. The sheer number of markets available means there are also numerous hedging and arbitrage opportunities similar to those that exist in the financial markets. Whilst the similarities between the two offer serious opportunities to those with financial market trading experience, it is the subtle differences that make the sports markets a more attractive proposition to an increasing number of traders.

Think of it as trading the FX Market, for example, but doing so purely with FX Options: Your trade size is your premium. Your trade price is your strike. If the price moves against you, you incur no further loss If at anytime the price moves below (if you have placed a back trade) your strike, you are in profit and can hedge some, or all, of your profit if you choose. If the price moves back higher after hedging, you can unwind some or all of your hedge.

The Benefits of Trading Sport


The key principles of discipline, risk management and strategy apply to both the financial and sports markets, but trading sport definitely has many benefits: You have far greater risk control on the sports exchanges. You, and only you, determine your risk If a price moves against you it does not increase your loss as it does on the financial markets, often to such an extent that you are squeezed out of the position entirely, and neither does it necessarily mean that you are wrong How often have you been forced to cut a position due to increasing losses, only for the market to turn, leaving you with a loss instead of a healthy profit? With your risk fixed, you are not susceptible to slippage or questionable execution on Stop Loss orders

And so on. There is another, largely unnoticed but very important, difference between the sports and financial markets that really does make the sports markets a truly level playing field compared to the financials. Namely that with the sports markets you are not trading the actual underlying as you are when trading Futures, Stocks or currencies. By underlying, we refer to the physical item being traded or the item upon which prices are made. For example on the Stock Exchange it is the stocks themselves that are the underlying and the prices are an absolute reflection of what that stock is perceived to be worth. When you take a position in any given stock, the price movement resulting from orders being executed or opinions changing absolutely affects

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the value of the stock and absolutely influences your likely outcome from the trade. In other words, a profit or a loss. In sports trading, the underlying is the event itself, be it a football match, golf tournament or horse race and therefore price movement has no influence on the underlying or indeed its outcome. The outcome of a trade on the sports markets is only influenced by the match, tournament etc. upon which you have placed the trade and not the price itself.

of 100 whichever player won. It came down to the 18th hole where Haas managed a birdie to secure his maiden success. Profit secured.

Key Questions
How do trading strategies change from the fi nancial markets to sport? They do not change as such, it is more that they are adapted. Like the financial markets, and the array of products within them, each sports market has a unique set of dynamics; be it volatility, liquidity or price reaction to an event. It is a question of understanding these dynamics and applying your key disciplines and strategies to them. Why move from the fi nancial markets to sport? There are many reasons. It can be tiring being at the mercy of bigger players with deeper pockets able to force or squeeze the markets and frustration comes from the fact that the financial markets do not offer a level playing field for any number of reasons, despite the claims and illusion to the contrary. If you have been interested in sport and betting in the past, then by employing even the most basic trading disciplines and strategies on Betfair, you can generate consistent profits. Can you make better profi ts from trading sport? In a word, yes. For a start, any profits are tax free which is a benefit that looks better and better by the day. Beyond that it is very much down to the individual. Be under no illusions, though; you must be prepared to apply yourself and put as much effort into your trading as you would have done with the financial markets. Are you not just gambling on the outcome of a sporting event? No, just take a look at the way terminology is different when applied to the sports markets or when financial markets turn sour. After the credit crunch and huge banking losses, commentators described banks as having gambled on the markets when prior to this they were, apparently, investing. The correct description for both is actually neither gambling nor investing. Instead it is the taking of calculated risk. Research and analysis on both the sports and financial markets will indicate a probability of any given market moving in one direction or another, or of having a particular outcome and a position is taken based upon that research. Good discipline and risk management combined with a strategy based upon the analysis will prove just as effective, if not more so on the sports markets.

Why Is This Important?


In simple terms this means that no matter how long or short the market position on a given trade is, this in itself will not influence the outcome of the event as it can with the financial markets. For example, GBP rallied significantly against the USD after the first quarter last year and finished the year much higher than it began it. A major factor behind this move was the overwhelming speculative short positions based, rightly so, on the shocking state of the British economy being unwound purely because of price movement higher. Yet, in actual fact, nothing fundamental had actually changed in respect of the reasons for being short of GBP in the first place. Compare this with the following sports market scenario: Manchester United are overwhelming favourites to beat Hull at home The price is low due to the huge amount of money placed on Manchester United to win Manchester United go 2-0 up and the price moves significantly lower still as weight of position increases Are you going to unwind your position if for some reason the price moved higher? Quite simply, no. Firstly, because you incur no additional risk as a result of the price moving higher and secondly, Manchester United, are still 2-0 up at home to Hull with time running! Another good example of recent in running trading was the Bob Hope Classic Golf tournament on the US tour. At Centaur, we tend to trade mainly on the final round and from our research we had reasons to believe that the four players vying for the lead, Bill Haas, Tim Clark, Bubba Watson and Matt Kuchar, all had problems in closing tournaments out, and were worth taking on. During a dramatic final nine holes, it was possible to have laid all four players at around 3.0 as the lead chopped and changed. This means that had you laid each of the four to lose 200 to win 100 then you would have made a profit

Paul Carlier
Paul Carlier spent 14 years working in The City for several of the worlds largest financial institutions including UBS and Chase Manhattan as a Foreign Exchange trader managing risk on daily turnover in excess of $5bn. Paul was quick to identify the opportunity presented by the introduction of spread betting on sports to apply disciplined trading skills and generate a healthy return. Contact paulc@centaurcorporate.com

Conclusion
The sports exchanges are moving forward at a rate of knots and it will be no surprise to see more and more financial traders migrate across to sport. This truly is a new financial market and the principles that have always applied to any financial trader will stand them in good stead when they start trading the World Cup, Masters or Ashes. In the next article we will look at the essentials of trading sport and strategies to make consistent profits. n

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ast year the WhichWayToday LIVE trading made 8000 pips. Each day between 0630 and 1100 GMT two experienced financial traders operate the live trading room which specialises in making money from short term trades in stock indices and Forex. he room is run by Tom Hougaard and David Paul.

The room has a one year, transparent profit history, which is clearly displayed on the www.whichwaytoday.com website. Each trade is relayed to each room member instantaneously and is complete with stop loss level and profit target. n the room the trades are classified into two main categories. These are intraday and swing trades. When a new customer signs up for the service, they are immediately sent a document which details the money management principles upon which all winning traders agree, that success is built. During the trading sessions, this concept is reinforced and many have

concluded that the WhichWayToday live room is like going on a course in trading in each day that someone else (the markets) pay for. n the last week of each month WhichWayToday run a two day workshop. Here the emphasis is on quickly explaining the various setups and applying them to real markets WHEN the market is open. he setups are simple, but unique. They are taught in an open and friendly environment by two excellent speakers who trade each day themselves. Although many setups are taught the aspiring trader just needs one to be successful. Each seminar student is allowed to repeat the seminar at a nominal cost if it is required. n summary the WhichWayToday seminar teaches the setups and techniques necessary for success in short term trading. The WhichWayToday live trading room shows how to apply these techniques each and every morning as the market is moving. It is an unequalled learning experienced.

T I

TRADERSTOOLS

Steve Ward

High Performance Trading


35 Practical Strategies and Techniques to Enhance Your Trading Psychology and Performance

enjoying enduring success not only in trading, but wherever people have to perform. That covers sport as well. Not for nothing does Ward keep comparing top traders in his book with top athletes, markedly emphasising the similarities they share on their way to a successful performance. Based on his many years of experience as a psychologist and coach for top traders and top athletes, Ward is a real expert in the fields of trading and sport. Who else could compare these two types of people better than he does? Both in trading and in sport long-term success depends on the right planning and preparation, proper execution and discipline and correct evaluation and analysis. What these three components are all about and how traders carry them out correctly will be elaborated on in the following.

can clearly define their goals and apply them to their practical trading. This enables the reader to gradually develop a strategy of his own and create a suitable environment for high performance.

Execution
The second part of the book is called Decision-making, Discipline and Flawless Execution. In it, Ward shows practical approaches to making more effective trading decisions, improving ones own discipline and thus developing a strategy that can be carried out flawlessly. To be successful as a trader requires a great deal of discipline. For example, it is necessary to strictly adhere to ones trading rules and to carefully evaluate ones performance at the end of each and every trading day. This requires discipline, particularly so after a bad day at the end of which one just wants to go straight to bed. Besides that, it is the authors view that traders must be capable of dealing confidently with distractions and surprises such as large price gaps and of staying calm even under great pressure. While it is true that this is frequently difficult especially for neophytes -, it is of utmost importance in order to avoid making a gross error and to survive a bad day with a minimum amount of damage. Of course, the old stock-market adage Let profits run, limit losses must not be left out of a book like this. Ward explains why this phrase is often turned upside down in reality and how best to avoid that. For one thing, it is important for traders to accept losses as an integral part of trading and to try

Planning and Preparation


As mentioned earlier, High Performance Trading is divided into three major sections. In the first part called Planning and Preparation for Trading Success the reader learns how to prepare for success and how to use opportunities to his advantage. With that in mind, Ward first explains what trading basically means and how to become a trader; i.e. - among many other things - which skills one should have and what kind of responsibility one has to assume. One other extremely important component on the way to being a successful trader is constant self-motivation. Traders must be aware of their own motivation and again and again have the mental strength to recover from losses. In addition, Ward shows how traders

o Steve Wards first book High

Performance Trading 35 Practical Strategies and Techniques to Enhance Your Trading Psychology and Performance is a practical guide designed to help traders improve their performance and psychology and thus achieve high performance on a sustained basis. The book is divided into three major sections representing the three areas of the performance cycle: planning and preparation, execution, evaluation and analysis. They are the core components for

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and learn from them. And for another, it is also important for a strict risk and money management regimen to be applied. How this works is also explained to the reader. According to Ward, another key factor to being a successful trader is the time component. In his opinion, a trader must stay in the market long enough to be able to exit profitably. After all, success will not come overnight. It usually takes several years before anyone can call themselves a successful trader.

and provides numerous useful trading tips. Furthermore, the book includes a multitude of mental (psychological) exercises and stress-reducing techniques for breathing, focussing, visualising and blanking out negative thoughts.

Conclusion
High Performance Trading is a users manual for traders containing practical and useful approaches, strategies and techniques that can be integrated into ones own trading in order to improve ones current performance. Steve Ward provides practical and easy-to-follow advice for every kind of trader. Regardless of whether you wish to improve your trading skills and your performance or to achieve a higher level of development in your trading, this book offers some extremely valuable suggestions and inspiration. Especially worth mentioning is Steve Wards pleasant and entertaining style. Throughout his book, his writing is well-structured and easy to follow, peppered time and again for a change of pace, with informal sayings and quotations. All the chapters are short and to the point with helpful tips thrown in. Beyond that, Ward conveys to the reader a basically positive mood causing him to get the sense that he can actually succeed in improving his performance and elevating it to a high level. However, the author makes it quite clear that not every strategy or technique is suitable for each trader. His objective is rather to provide the reader with a plan enabling him to learn on a step-by-step basis to systematically improve his trading and his performance. In doing so, he is not meant to apply each detail on a one-to-one basis but to be given suggestions for him to sensibly integrate into his trading. According to the author, High Performance Trading is a reference book that the reader is intended to draw upon whenever he needs a good idea, strategy or technique in a particular situation. n

Evaluation and Analysis


In the third part of the book called Evaluation, Analysis, Improvement and Maintenance of Performance the author explains how to calculate and evaluate ones trading performance. This allows traders to receive the necessary feedback in order to find out what was good and less than good about their trading approach and what should be improved upon and left out in the future. Subsequently, the reader learns how to improve his performance and change his trading behaviour in order to become a better trader in the end. Since High Performance Trading is a practical guide for traders, Ward provides a list of suggestions on how to develop a winning routine and winning rituals. He holds the view that it is especially important for traders to stick to certain rituals of ones own, such as always getting up and going to bed at the same time or regularly engaging in sport. The idea behind this is to have a sense of steadiness in ones trading. After all, in contrast to markets that defy any control, those rituals may very well be controlled resulting in a certain continuity which in turn provides a sense of security. In addition, such rituals teach traders to better cope with stress and develop the ability to work under a great deal of pressure. Beyond that, the author presents some high performance techniques especially for decisive and exciting trading days

High Performance Trading


35 Practical Strategies and Techniques to Enhance Your Trading Psychology and Performance
High Performance Trading provides proven practical techniques and strategies to help traders of all abilities, experience levels and styles to enhance their trading performance and psychology. Based on practical coaching and training interventions, personal experiences, the latest research and feedback, and advice from leading traders, trading coaches and trading psychologists, this book offers something for everyone who wants to become a better trader. Discover how to avoid the common pitfalls of trading and how to take the practical steps that can set you up for trading success. Strengthen your trading discipline as you discover the art of flawless execution. Develop and hone your mental edge through learning to think like a successful trader. Programme yourself for trading success with powerful mental conditioning techniques. Develop unshakeable focus and concentration and learn how to get into the trading zone. Understand how to achieve and sustain a core of trading confidence.

by Steve Ward Price: 39.00 ISBN: 1905641613 Published by Harriman House, 2009

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TRADERSTOOLS

Softwaretest

MetaStock 11 A Veteran Gets Fundamental


Equis International, the manufacturer of MetaStock and a subsidiary of Reuters for well over a decade now, developed the original version of MetaStock more than 20 years ago, which means eons ago in digital-age terms. Just a short while ago the market saw the entry of its most recent version called No. 11, which for the first time made it possible for fundamental data to be analysed. Equis International has kept reinventing or redeveloping its top seller, marketing a variety of product versions in the process. This means that strictly speaking, MetaStock doesnt exist anymore. Or does it? All product versions share the same interface and structure, which means that switching from a version with daily data to the real-time version will leave the user in the environment he is used it. For those readers who have not yet had any experience with MetaStock, well first introduce the range of functions offered by the software before specifically looking into the new features included in Version 11.

o The MetaStock Versions at a Glance

of InteractiveBrokers, Tai-Pan Realtime or DTN IQFeed are available for MetaStock Professional charts.

MetaStock End-of-Day (Reuters DataLink) MetaStock Professional (eSignal) Metastock Professional (QuoteCenter) Metastock Professional FX (QuoteCenter)

Functions
Lets get down to the nitty-gritty of the software. What does it offer to the trader other than the familiar chart functions which are to be expected? MetaStock is compatible with MicroSoft Office. This means that arrays or charts can be exported into Excel and Word documents without any difficulty. In the Word document the charts are simply updated with a double click or automatically in case the OLE connection is active. Whats more, annotations may be written directly in the charts, which is ideal for any writer of stock-market newsletters. Another option is that charts can be exchanged by email. One single command (File send) is sufficient for the default mail program, defined by the computer, to open a blank mail to which the chart is already attached and the subject field is prefilled with chart caption. But it is the individual modules that are the mainstay of MetaStocks efficiency. These are the Indicator Builder, the Explorer, the Expert Advisor, the Enhanced System Tester and the new Fundamental Analyser, the latter being available only in the QuoteCenter Professional version due to its connection to corresponding data sources. The functions and formulas written in the specially developed MetaStock Formula Language are filed in the individual modules. Users who want to be conversant with this programming language are subsequently free to use their new skill to write formulas of their own for every module and have them evaluated by MetaStock. The following paragraphs contain a description of each of the modules.

In Equis terminology Professional means that the version is realtime-compatible. The words indicated in brackets refer to each versions default data provider usually used. The EoD version which is only capable of processing and analysing daily data allows the user to freely choose from among the data providers; the default provider does not necessarily have to be used. Besides Reuters DataLink, there are a number of suppliers capable of delivering data in the MetaStock format. The more the customer shops around internationally, the more data providers he will find. By now the MetaStock data format has become a standard that other products have adopted as well. The FX version among the professional variants is a special pared-down version developed exclusively for Forex traders. It is less expensive and includes some additional components geared to the FX trader but is only capable of processing FX data. The other two professional versions only differ in data supply. Here, eSignal and QuoteCenter are available as default providers. Are there any more differences between these two versions? Yes, there are. Starting with the price, the QuoteCenter version is cheaper by 350 euros, then there is the availability of the data with eSignal offering six months of intraday hstory as opposed to a whole year offered by QuoteCenter, and finally there is the difference in on-demand capability. In Equis terms, on demand signifies a technology that explicitly does without local data storage, downloading instead the required data freshly from the server including data history. For European stock-market data this works exclusively with the QuoteCenter version. Those who dont want to use any of the default providers may also hook up to other data providers on the basis of the eSignal version and by means of external interfaces. Among others, the data

The Indicator BuilderTM


This tool is designed to be used for programming ones own ideas. The MetaStock programming language makes it possible for personalised indicators of ones own creation to be prepared quickly. For example, the percentage margin between the current quotation of a share and its 200-day average line can be programmed speedily. Like other preset indicators, this

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TRADERSTOOLS F1) Fundamental Analyser I

line in turn can then be analysed with the help of indicators. One feature of MetaStock is its ability to raise the alarm as soon as a programming error occurs - for instance, if a bracket is missing or an entry had been forgotten. It should be noted though that MetaStock only notices objectively false formulas and not false reasoning.

The Explorer TM
Nowadays, hardly anyone is likely to have the time and leisure to look at every individual chart, draw in a few lines, add indicators and drop them again. Using the Explorer, more than 10,000 shares can be filtered or classified according to predefined requirements. One such requirement might go like this: Show me all shares with an RSI 14 of below 30 or Show me all shares quoted above the 200-day average line. A combination of these requirements is possible, too. With only a few movements all these requirements are manifested in MetaStocks own syntax which is easy to learn and can be used intuitively. Equis already comes with more than 80 preset explorations. In Version 10 the columns in which requirements can be defined was doubled. By now, there are twelve columns available for ones own explorations to be developed.

The Expert AdvisorTM


The Expert AdvisorTM is a magnificent device for visualising predefined requirements in the chart without having to reduce, for example, the size of the chart window by displaying one or more indicators. Moreover, it is highly suitable for illustrating trends. And since the Expert AdvisorTM also constantly monitors the predefined requirements to see whether they have been fulfilled or whether they are still valid, it is an excellent watchdog that sounds the alarm as soon as there is any change. Consequently, the realtime version is extremely helpful. For example, optical or acoustic signals may alert the user to the need for immediate action. More than 60 experts are already pre-installed. Youll find big names in this menu: Martin Pring, Gil Raff, Joe DiNapoli and Tushar Chande, to name a few.
The first tab of the Fundamental Analyser provides an overview of the most important fundamental criteria.
Quelle: www.sharework.de

interest for the realtime version. However, the DownloaderTM does make it possible for time series to be tested (for their integrity) and for the collected data sets to be converted into different data formats. Formats to choose from include widely used ones such as Excel and ASCII as well as more special ones like TC2000,AIQ and Quattro/1-2-3

New: Fundamental Analyser


Describing this module leads us straight to the first innovation in Version 11 (Figure 1). The basic idea with Equis according to its creators was not only to provide MetaStock users with a highly capable tool in technical analysis but also via QuoteCenter data to allow access to a fundamental analysis. In contrast to the other markets, you no longer operate here in the area of the MetaStock formula language but will use predefined criteria and choices. It is remarkable that instruments of the most diverse markets are available so, for example, German shares as well. The Fundamental Analyser offers its functions in five tabs. Since this module is new to MetaStock, it will be described in more detail than its predecessors: On the first tab called FUNDAMENTAL the most important indices for a share are shown. This is also where the share is chosen that is to be analysed. Among other items, the information refers to the sector concerned, market capitalisation, 52-week high and low of the share, earnings per share as well as the amount and yield of dividends. In addition, there will be a survey of the after-tax profit development over the past five years.

The Enhanced System TesterTM


By now, more than 50 pre-installed trading systems are found in the MetaStock package. Again, of course, new systems of ones own making may be added. This tool makes it possible for trading systems to be developed, tested and optimised. In developing this device, special attention was paid to its working as realistically as possible. In a single operation several tests can be run at once. Using a wide variety of diagrams and information pages, the Enhanced System TesterTM then shows how successful a tested idea would have been. For each test an equity curve is attached indicating the development of the performance of the individual trading strategies tested, depending on which instruments had been chosen.

The DownloaderTM
This module is MetaStocks data headquarters. In the EoD version it is used to organise the daily update of the data as a download, which is why this module is likely to be of less

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TRADERSTOOLS F2) Fundamental Scanner I

Once the selection has been made, it is easy to find out, for example, which shares exceed a certain dividend yield and are within a certain price range at the same time. Or companies whose earnings per share are higher this year than in the previous year with the minimum earnings per share of any interest being set at 2 euros. As mentioned above, numerous combinations can be chosen and scanned. This concludes our look at MetaStock functions, so lets now take a look at the new function offered by Version 11. After all, besides the Fundamental Analyser Equis has yet a few more innovations in store for us.

Further Innovations in MetaStock 11


Those looking for the indicator are offered a new field of activity by Equis. 17 new indicators were added. Some names are well known so that some MetaStock users may already be familliar with them. Those worth mentioning here include not only the Donchian Channels or Darvas Boxes but also Elder Ray, Pring KST and Turtle Trader Bands. MetaStock is adaptive: At present, 43 additional special indicators are usable. These are so-called adaptive indicators. They are the well-known indicators like MACD, RSI, CCI, Moving Averages and many more that are now calculated adaptively by making a dynamic adaptation of their backtesting parameters. Based on certain algorithms, more or fewer bars of the past are included in the calculation of the current indicator value so that the indicators can react faster to the currently prevailing market conditions. To match that, two new stops were implemented in MetaStock. These are called Intelli stops and Chandelier stops respectively. The former are trailing stops and they are also calculated adaptively, which means that they adapt dynamically. As their name suggests, the latter hang the sell stops on the last-reached extreme high of a predefined period. Tests have shown that chandelier stops combined with other systems can generate profits even if the entries are randomly chosen. The standard instruments of the Enhanced System TesterTM grow with Version 11. Six new systems are included which, among other things, illustrate trading regulations for the Darvas Boxes, the Turtle Trader Bands or Connors RSI and are ready for testing. The four new Forex systems are of interest to FX traders. They were implemented in the Expert AdviserTM module, which means that they provide trading recommendations on the chart. Unfortunately, these rules were not transferred to the Enhanced System Tester so that they cannot be used for any backtesting. These four systems originated by means of the MetaStock ICE-Plug-in, which automatically prepares individually formulated trading rules for every trading instrument. The upshot was one system for each currency pair, i.e. for EUR/USD, GBP/USD, USD/CHF and USD/JPY. If in case this has piqued your interest, Hamburg-based Sharework GmbH offers MetaStock for a trial period of 30 days including data supply. For further information and contact data please visit their website www.sharework.de n

The Fundamental Scanner offers a number of pre-installed criteria, on the basis of which shares of fundamental interest can be found.
Quelle: www.sharework.de

The second tab by the name of REVENUE exclusively concerns the revenue situation of the company. What is displayed here is the ratio of net profit and sales revenues for the current quarter as well the preceding eight quarters and for the current year as well as the preceding four years. PERFORMANCE is the name of the third tab, and this indeed provides highly meaningful information on the strength and performance of the company in the past few years. For one, the development of the dividend and earnings per share is indicated here (each dating back four years), and additionally, the growth rates of earnings per share and sales revenues over the last few years. While the information provided so far refers to past performance, the ESTIMATES tab offers a look at the future. This tab includes the available estimates for the company analysed in terms of sales revenues and profits for the next few quarters and years respectively. This makes it possible to quickly assess to what extent a company may be able to offer a certain potential. The final tab within the Fundamental Analyser is certainly the most exciting one. It has the name FUNDAMENTAL SCANNER and offers a number of filtering possibilities. Unlike its hitherto unknown brother, the ExplorerTM, this tab only allows preinstalled criteria to be drawn upon. Personalised development is not (yet?) possible. A number of the scanners offered can be seen on the printed Screenshot (Figure 2). There is no doubt that making a selection from the symbols to be scanned is somewhat difficult and at least takes some getting used to. There are predefined lists here that are so comprehensive that it seems sensible to pare them down. This can also be done by simply inserting your own lists using copy/paste.

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Award Winning Trading Software


Among all the trading software I bought, AbleTrend 7.0 is the most simple and easy to use, and it makes money.
Dr. Edward Christy, Michigan

REGISTERED WITH THE


SINCE 1995

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*including stock trading systems, futures trading systems & option trading systems

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TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

TRADERSTOOLS

Watch Out, Market Timers!

www.timertrac.com Shows Which Systems Are Really Effective


Every investor tries to buy as low as possible prior to a rise in price and to sell as high as possible prior to a price loss. This MO is simply called timing. Market timing is designed to profit from invariably volatile markets. Numerous websites, financial portals, investors and managers make customised timing systems available that they wish to market profitably. But there will always be black sheep among these marketers stating wild earnings and ripping off the user. While the US Securities and Exchange Commission (SEC) and the US Commodity Futures Trading Commission (CFTC) have the authority to take such people to task, they cannot be everywhere. That is precisely where TimerTrac comes into play. The platform monitors numerous market timing systems and checks them for efficiency. In order to guarantee that it measures and compares the success or failure of timing signals and strategies offered by various firms and investors on TimerTrac. We have been testing whether it is successful and will show you how the platform works.

o Background

www.timertrac.com makes available a remarkable cross section of data including that from some 200 professional and private suppliers worldwide among them some of the most successful traders and money managers from the US. Making this information available is largely done on a voluntary basis and is not requested by TimerTrac. Besides, as a matter of principle the platform does not use any backtesting to check and see how the system has worked in the past. Instead, it watches the current trading signals e-mailed by the systems developers and makes this information available to its members. We try to put ourselves in the position of the trader, says Dave Garrett, the founder of the site. This is the only way we can understand what goes on in his mind, how the

numerous data can be indicated intelligibly and how he can utilise the various systems for his own performance. In 1999 Garrett founded the company Garrett Capital and went on to develop his own trading system which, however, did not do particularly well. He subsequently tested many other systems and finally hit upon the idea of creating a platform which makes various such systems available and compares them to one another in order to find the best strategy for each trader and his performance respectively. That was when TimerTrac was born.

This Is How It Works


Numerous performance data and timing systems can be found on TimerTrac.com. By now, members can watch nearly 700 strategies, and rising. The systems and data are checked

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TRADERSTOOLS

and verified to the utmost precision. For the purposes of illustration and better understanding the information is indicated in the form of texts, tables and graphics. So the platform not only makes available valuable information about the performance of successful traders, but also puts it in a simple and clear form. This makes it possible for the user to very simply compare different trading styles and strategies of the individual suppliers. One example: A company specialising in trading systems has developed three or four different strategies for different markets, different trading instruments or in different time frames. TimerTrac users can now find out which of these strategies was the most successful one during a certain period of time. Whats more, they can see how successful the outperformance strategy was in comparison to similar strategies used by other suppliers.

F1) Signal Performance

Great Comparisons
Not only can the numerous systems be compared to one another but also to other indices such as the S&P 500 or the Dow Jones in order to find the strategy suitable for ones own performance. For the purposes of more userfriendliness and a better overview TimerTrac offers rankings, for example the top performers or of the most frequently used systems. Here the user is free to decide for himself which performance rankings he would like from the various periods of time (for example long and short equity systems on the S&P 500 for one year). Once he has made his choice, a list with all the suitable strategies for this performance will appear from which he can then choose the best (Figure 1). The strategies are given in a ranking listing the earnings or loss rate, the difference to the buy/hold performance from the paragraph previously indicated and the number of trades within the chosen period of one year. Here TimerTrac divides the strategies into different categories: fixed-interest securities, indices and sectors. Beyond that, TimerTrac makes systems for many different indices and products available and indicates which allows the highest profit to be made. For this purpose, the user can have all of the following indicated: the suitable charts, statistical information (drawdowns, correlations, ratios etc) and historical data including entry and exit date as well as the relevant price (Figure 2). This makes it easy for the user to see how the performance differs from market to market and which system is the right one for which investment category and which product respectively.

The figure shows the various strategies for long and short equity systems on the S&P 500 over the period of one year. The systems are listed in a ranking indicating profit/loss, the difference to the buy/hold performance from the paragraphs previously indicated and the number of trades within the chosen period of one year. This means that the user has the opportunity to compare the various systems to one another and so to find the system best suited to his performance.
Source: www.timertrac.com

Whats more, TimerTrac doesnt just simply generate signals but also makes sure they are immediately accessible on the website in order for the users to have enough time to place their trades.

and Useful Background Information


Besides the important performance data, TimerTrac also provides information on the supplier of the system in question and additionally describes the signals used by him. The systems developer explains his system, his strategy and personal timing philosophy and in addition supplies information on his own trading experience as well as his professional and, if he so chooses, personal background. Here, too, the user has the opportunity to have the respective

March 2010 | www.traders-mag.com

27

TRADERSTOOLS F2) Premium Trust SPX Trader Strategy versus S&P 500

graph as well as historical data and statistical information indicated. Whats more, he sees since when the system has been offered on TimerTrac and how many trading signals have been recorded for this system since that time. If there are any further questions, it is also possible to write to each supplier directly (Figure 3). In addition, there is the equally valuable feature TimerTrac Broadcast. This forum allows members to discuss and update their analyses, methods and strategies among themselves in order to find new inspiration for their own trading.

Reliable Signals
Every day TimerTrac monitors and checks hundreds of systems offered by numerous suppliers. In this context, reliable buy and sell signals have the highest priority. To guarantee that, all the suppliers data are carefully monitored. Should TimerTrac come to the conclusion that a suppliers data were falsified in any way and are no longer traceable, they will not be made available anymore on the website. However, a ban from above is not necessary at all since as a rule the suppliers on TimeTrac are reliable and honest. So once a supplier notices that his strategy is no longer successful he will voluntarily stop offering his system. You have probably been wondering all this time why it is that so many companies and investors make their successful strategies freely available on TimerTrac.com. Of course, the suppliers receive something in return from TimerTrac: They have free access to the so-called TimerTrac medal, which they can install on their own website. The medal guarantees that the strategy in question was examined and verified by a third party, i.e. TimerTrac. This way visitors to this website can see that the strategy and the signals respectively are reliable. Moreover, they can view all the data entries, graphs and tables TimerTrac has recorded from this performance and compare them to other strategies and investment categories. This means that the TimerTrac medal makes the suppliers look serious and reliable, which is a valuable service in return for making valuable data available.

Figure 2 uses a graph to represent the comparison between the Premium Trust SPX trader system and the S&P 500. In this case the period is three years. It can clearly be seen that the performance of this strategy, especially in comparison to the index, was hugely successful in this period. Besides the graphic representation, the user also has the opportunity to have the precise statistical information indicated by this strategy in order for him to learn even more about that strategy and its performance.
Source: www.timertrac.com

F3) Background Information on Strategy and Supplier

Conclusion
TimerTrac is an excellent platform for finding the right and, above all, most effective market timing system from among the many on offer. This is made possible by the fact that that platform very closely watches the many different and partly hugely successful suppliers and examines their data and systems. At present, it also makes 700 strategies available from which the user can make a selection and a comparison of those he has chosen in order to arrive at the strategy suitable for his performance. To make his job easier, the user can have all the data indicated as a text, graph or table and can additionally view historical data and statistical information. The information provided about the respective systems developer and the chance to contact him in person are an additional help as is the TimerTrac Broadcast forum in which members can exchange strategies. To be able to use TimerTrac you have to pay to register. In return, you will receive valuable data from successful traders including the guarantee of reliable and well-functioning systems. n

Besides the graphic representation and the statistical information in tabular form, the user can retrieve additional information on a strategy, in our case the Premium Trust SPX Trader strategy. This shows him, for example, since when TimerTrac has made the strategy available and how many trading signals have been received during this time. Moreover, he learns something about the supplier himself, for example his trading experience or his employment history. If he has any further questions, he can just write to the supplier in person.
Source: www.timertrac.com

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www.ablesys.com

5 Interviews at

How Do I Know If The Market Has Changed Its Direction Or If Its Just A Temporary Pullback? AbleTrend T2 Stops Can Help
2. Small red dots are T2 stops for sell positions showing market resistance levels

1. Small blue dots are T2 stops for buy positions showing the market support levels

Award Winning Trading Software

3. T2 stops helps to define the retracements

4. T2 stops helps to define the reversal

For Stocks, Futures FOREX & Options

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AbleTrend T2 offers the following advantages:


1. T2 stops are defined by the markets own support and resistance levels and are therefore 100% objective. 2. The scientific calculations behind T2 stops are universal, not curve-fitted. 3. T2 stops can be back-tested to reveal the characteristics of individual markets. 4. T2 stops are updated with each new tick so there are no delays. 5. T2 stops are proprietary, not shareware, and are for the exclusive use of software owners. 6. Successful AbleTrend users around the world have relied on T2. Their common conclusion: Never fight T2 stops.

With T2 stops, you now can:

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1. Add more positions after the market tests but does not penetrate the T2 stops, and then resumes the original trend. 2. Exit the market when prices penetrate the T2 stops and close beyond that level, suggesting a reversal of the trend. 3. Boost your confidence, because you have seen it happen hundreds of times in both historical and real time. Without confidence, no matter how great your systems are, they are of no practical use. 4. Take advantage of sweet spot entries by entering the market right after prices have tested the support and resistance level (T2 stops) and resumed the original trend. These entry points are often close to T2 stops. The market is always changing, but the way T2 works remains unchanged. Once you see it work time and time again, you will know that you can rely on it and utilize it. Thats the value of the legendary T2 stops. The method is timeless. AbleTrend T2 stops can help you thrive in todays volatile markets.

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

CTA Firm

TRADERSPRODUCTS

NEW PRODUCTS
Market-QSM 3.2 Java-based desktop solution that optimizes bandwidth costs by eliminating the need for additional on-site technology infrastructure such as servers, circuits and routers, while offering complete Internet accessibility. In addition to these new advanced tools, Market-Q 3.2 is more appealing to investors interested in Canadian equities. Market-Q now displays Canadian fundamental market data, providing users more robust financial information on Canadian companies. Market information available to customers includes: net house summary, block trades, market movers, performance data, company profiles, analyst ratings, financial statements, valuation ratios and mutual fund profiles. For more information, including pricing and a complete list of Market-Q features, please visit www. Market-Q.com. E*Trade Securities has released CNBC Plus on its newly redesigned premier desktop trading software for active traders: Power E*Trade Pro. CNBS Plus provides commercial-free live streams of CNBC TV from the USA, Europ, and Asia. The CNBC Plus video-on-demand archive offers the ultimate research library with more than 150,000 interviews, analysis, and commentary, and more than 100 new clips added each day. Moreover, Power E*Trade Pro now features a new look and feel, new console header, improved windows management, RSS feed capability, and redesigned stocks and options order tickets. You find more information at www. etrade.com. Tradingsim.com is a new trading simulator specifically geared for daytraders. In the simulator, tick data is streamed through the web interface. So the user can practice and fine-tune his trading skills through a historical market replay. Since the last five weeks of trading data for all Nasdaq symbols is stored, the user can trade any symbol he wants for any Tradingsim.com

Interactive Data Corporation, a provider of financial information, analytics and related solutions has launched Market-QSM 3.2. This new version of Market-Q provides financial professionals with upgraded features to track real-time streaming market data directly from their Web browser, including advanced charting, alerts, option chains, and Canadian fundamental market data. Market-Qs virtual desktop solution allows users access to powerful information from any PC with all the benefits of a centralized enterprise desktop management system. Among the latest updates, Market-Qs alerts tool has been enhanced to enable users to fully customize the alerts they receive either in their browser or via email. Users can set high and low limits on a symbol; easily acknowledge, edit or dismiss alerts; add color codes to alerts in the Watch List; and track all alert activity in the alert log. The option chains have also been upgraded in Market-Q 3.2, allowing users to display options based on key features, including expiration date, strike price, strike range, and standard and non-standard, as well as the ability to drag and drop options symbols into another window. In addition, the updated advanced charting tools provide customers the ability to use symbol overlays, study overlays and data tables. Using advanced Java technology, these powerful analysis tools are designed to allow customers to conduct analysis customized to their exact specifications and provide real-time, streaming data from the exchanges they select. Market-Q 3.2 also supports NASDAQ Basic, which offers users real-time quote and trade data for securities listed on the NASDAQ, NYSE and AMEX exchanges at a reduced rate. Market-Qs platform allows users access to their own customized workspace through any Web browser regardless of location, giving them instant access to the services many features. Market-Q is a fully hosted

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TRADERSPRODUKTE

Alpari US

environment that provides direct access and trade execution capabilities via streaming prices or request-for-stream (RFS) with a transparent view of both price and order book depth. Key features include an intuitive design which makes it easy to manage orders, query trades, and view deep pricing from all liquidity providers. For more information, please visit www. gaincapital.com. CQG now provides access to real-time market data through the BLackBerry wireless platform. Data from more than 100 exchanges worldwide is available to CQG Mobile users, bringing real-time quotes on futures, stocks, options, foreign exchange, fixed income, indices, and cash to traders on the go. CQG is an order execution, charting, and analytics provider for global electronically traded futures markets. CQG partners with more than 40 Futures Commission Merchants and providers direct market access to more than 35 exchanges through its worldwide network of collocated CQG Hosted Exchange Gateways. Additional details can be found at www.cqg. com.

of those days. The application offers the time and sales information as well as the Level 1 info. The web-based app, which is free of charge, requires no downloads. The user hast just to create a free account to work through the simulator. For further details, please visit www.tradingsim.com. Alpari, a regulated foreign exchange company and global provider of online forex trading, has introduced spot trading of precious metals, gold and silver. These instruments are available to Alpari (US) retail account holders. Both the gold and the silver trading instruments can be located in the Market Watch window at the top left of the Alpari MetaTrader 4 platform. Gold is represented by the symbol par XAUUSD, silver by the symbol pair XAGUSD. Those interested in trading with Alpari are encouraged to test out the spot trading of gold and silver trough a demo account available on the companys website www.alpari-us.com. Gain Capital has released GAIN GTX, an independent foreign exchange electronic communications network (ECN). GAIN GTX offers qualifying financial institutions, hedge funds, CTAs, high-frequency traders, brokerdealers and high net worth individuals access to diverse and deep forex liquidity sources. The GTX trading platform is an anonymous trading Gain Capital

Citis CitiFX Pro online forex trading platform for active traders offers customers free access to Autochartist, a pattern recognition tool. Autochartist detects a range of patterns in real time and highlights emerging patterns that provide early trading opportunities. CitiFX Pro Autochartist

delivers competitive pricing and liquidity to active private and small institutional traders. Customers can trade more than 130 currency pairs on proprietary web, mobile, and desktop platforms as well as MetaTrader. Besides, they receive Citis research and FX market commentary free of charge. Additional details can be found at www.citi.com, www.citifxpro. com and www.autochartist.com. DTLink Software announced Personal Stock Monitor Gold 9.0, a platform for screening, monitoring, and trading stock market securities within the privacy of a personal Window desktop application. Personal Stock Monitor Gold supports tracking stocks, options, mutual funds, and ETFs (exchange traded funds) covering major markets worldwide. It contains a multiaccount portfolio manager that displays gain or loss of open positions, a desktop stock ticker tape, a complete multicurrency transaction register, intraday and end of day charts with technical analysis indicators, paper trading, asset allocation, trade executions through select brokerages, and more. For more information, visit www. personalstockmonitor.com. n

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31

TRADERSSTRATEGIES

Part 2: Development of Swing Trading Strategies with a Discretionary Component

Adaptation of the Entry Criteria to the Different Market Phases

In the first part of this series of articles dedicated to the development of professional swing trading strategies, we defined entry criteria by means of detailed statistical analyses, which led via holding periods between one and nine days to a decisive edge in comparison with standard calculations. We have not yet considered short selling or concrete exit rules such as stop-loss or profit taking. In the following section we will focus again on the entry. First, we will check and see if on the basis of the defined entry criteria on the long side, the support of trend following indicators brings an additional improvement. In the second section we will then deal with short selling, a strategy which aims at making money by trading falling stocks.

o Starting Point and Continuation of the Analysis

In the first article see TRADERS 01/2010 we presented a set of results for two indicators with three variants as a whole, which led without exception to a statistical edge regarding the entry points. For further detailed analyses, we arbitrarily chose the three-day Relative Strength Index, in short RSI(3). So far, the defined setup rules for the long side are as follows: 1. The stock is priced above 2 US dollars. 2. The value of the RSI(3) is below 20. Just with this setup and the immediate purchase

at the next days opening price, the benchmark can be outperformed by more than 100% with a holding period of one day. While the benchmark gains 0.05%, the average trade makes 0.11% with that setup before slippage and commissions. As demonstrated in the first article, the performance gap increases further by several 100% when the trade is entered per buy limit order x% below the closing price of the setup day. If the stock opens with a downside gap below the limit, the trade is entered directly at market opening. The figure x is variable and was set at 3%, 5% and 7% in the previous

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March 2010 | www.traders-mag.com

TRADERSSTRATEGIES T1) Results for the RSI(3)-Indicator and Several Trend Following Filters Long Side
RSI(3) < 20 without Trendfilter 3% Buy-Limit Count of Trades Avg. Winner/Loser Profitable Trades Avg. Winning Trade Avg. Losing Trade 28,427 0.49% 57.42% 2.56% -2.32% 3% Buy-Limit Count of Trades Avg. Winner/Loser Profitable Trades Avg. Winning Trade Avg. Losing Trade 10,575 0.55% 59.74% 2.21% -1.91% 3% Buy-Limit Count of Trades Avg. Winner/Loser Profitable Trades Avg. Winning Trade Avg. Losing Trade 9155 0.50% 59.38% 2.12% -1.88% 5% Buy-Limit 10,033 0.89% 60.72% 3.44% -3.09% 5% Buy-Limit 3351 1.17% 64.79% 3.09% -2.37% 5% Buy-Limit 2842 1.09% 64.46% 2.98% -2.34% 7% Buy-Limit 4212 1.20% 63.03% 4.34% -4.16% 7% Buy-Limit 1270 1.87% 70.16% 3.97% -3.09% 7% Buy-Limit 1087 1.78% 70,.29% 3.81% -3,03% 9% Buy-Limit 1997 1.26% 62.14% 5.28% -5.33% 9% Buy-Limit 532 2.35% 72.37% 4.79% -4.02% 9% Buy-Limit 470 2.19% 71.91% 4.49% -3,71% 3% Buy-Limit 5281 0.46% 57.26% 2.42% -2.17% 3% Buy-Limit 12,864 0.56% 58.87% 2.30% -1.93% 3% Buy-Limit 6588 0.47% 59.12% 2.06% -1.84% RSI (3) < 20 & ROC(200) > 30 5% Buy-Limit 2022 1.09% 63.06% 3.19% -2.50% 5% Buy-Limit 4182 1.17% 64.56% 3.14% -2.42% 5% Buy-Limit 1989 1.00% 64.10% 2.88% -2.37% 7% Buy-Limit 838 1.90% 70.88% 4.01% -3.24% 7% Buy-Limit 1608 1.86% 70.34% 3.95% -3.10% 7% Buy-Limit 761 1.61% 68.99% 3.73% -3.11% 9% Buy-Limit 368 2.44% 72.55% 4.96% -4.23% 9% Buy-Limit 667 2.35% 71.96% 4.87% -4.11% 9% Buy-Limit 350 2.03% 71.71% 4.26% -3.64%

RSI(3) < 20 & ROC(126) > 0

RSI(3) < 20 & ROC(200) > 0

RSI(3) < 20 & Closing Price > SMA200

RSI(3) < 20 & Closing Price > SMA100

The calculations are made on the basis of a one-day holding period. One assumes that each trade where the stock reaches the buy limit is being executed.

analyses. The following analyses will also take into account a 9% limit. The reasons for that will be made clear later on in future articles. As for the analyses shown in the first article, the following investigations take into account stocks which were part of the Russell 1000 as of 27 June 2008 just before the rebalancing which occurred on this day.

Enhancement of the Entry Advantage


Successful short-term oriented systematic traders know that good results can be produced by considering the mid-term trend of a stock in their trading decisions, i.e. the direction of its move over six months or longer. This leads us to the question whether the statistical edge we currently have in our constellation of entry rules could be enhanced through the application of common trend following indicators. As trend following indicators two simple moving averages with periods of 100 and 200 days (SMA100 and SMA200) were tested as well as the rate of change (ROC) over 126 and 200 days (ROC(126) and ROC(200)). The rate of change (ROC) is a momentum indicator, which gives the rate of the price evolution of a stock over a given timeframe. However, unlike classical momentum indicators, the value of the ROC is a percentage rate. If, for instance, at todays close the ROC(126) shows a value of 20, it means that the stock price is 20% above the closing price 126 days ago (which corresponds to roughly half a year). What happens

between day 1 and day 126 doesnt matter for the calculation. In Table 1 you can see the results for all four variants with the above-mentioned four different buy limits. Slippage and commissions have not (yet) been taken into account. The holding period is one day. This means that the sale of a stock which was bought today occurs at the next day at market opening. In order to allow a comparison, the table furthermore shows the results for the RSI(3) without trend following indicator. The use of trend following indicators leads not only to a drastic reduction of the amount of trades (which is the purpose of a filter) but also to a strong performance improvement for all five variants. In order to avoid misunderstandings, it has to be mentioned that there is a multitude of mid-term trend following indicators and that the selection presented here is already the result of several time-consuming analyses conducted by the author. For pragmatic reasons and in the context of this series of articles, further results related to this field of study wont be shown. Indeed it remains our aim to show analytical methods and system development approaches as well as giving food for thought for further analyses. It must, however, be noted that the use of several famous trend following indicators, as for instance the ADX (Average Directional Movement Indicator), did not lead to an improvement of the results. This is not generally true and must be seen in the context of the entry rules already determined.

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TRADERSSTRATEGIES F1) Long Side: Average Return per Trade

Average return per trade for buy signals, for holding periods between 1 and 11 days with RSI(3) < 20, 7% buy limit , with and without trend following indicator ROC(200)>0. The entry is made through a 7% buy limit. The results shown rely on the assumption that the order is really executed as soon as the limit is reached. For holding periods longer than one trading day there will always be overlapping positions when the RSI(3) indicator is below the buy level of 20 several times in a row and the trend following indicator ROC(200) is greater than 0.

day period and the condition ROC(200) > 0. Although the average winning trades generate higher profits with the condition ROC(200) > 30, the setting ROC(200) > 0 allows a higher amount of trades than with the other trend following indicators. Figure 1 answers the question whether an improvement of the performance per trade can be achieved with holding periods longer than one day. With the additional condition that the price evolution of the stock was positive over the last 200 days, it is possible to increase the average return per trade by at least 30% with an unchanged 7% buy limit for all holding periods (1, 3, 5, 7, 9 and 11 days). Thus the average trade can, for instance, be improved from 2.71% up to 3.54% with a holding period of 5 trading days and the use of a trend following filter. This performance over five trading days is impressive. As already mentioned in the first article of this study, this performance of 3.54% means, on the assumption that there are 250 trading days in a year, a theoretical performance of 469% p.a. The hit rates with a 7% buy limit can also be increased further with the help of trend filters: after a holding period of one day (HP(1)) from 63% to 70%, after HP(3) from 62% to 69%, after HP(5) from 62% to 67%, after HP(7) from 61% to 66%, after HP(9) from 60% to 66% and after HP(11) from 59% to 65%. There are similar improvements for other buy limits. It is also noticeable in Figure 1 that for the variant without trend filter and for holding periods longer than 5 days the curve clearly flattens and the average trade hardly improves. The picture is different with a trend filter: there is still a positive effect after a nine-day holding period. This effect suggests that stops and particularly profit-taking stops could be implemented in such a way that a trader is able to let his profits run over several days. Preliminary conclusion for the long side So far, our strategy buys stocks which are moving in a midterm uptrend and go through a strong short-term pullback. The rules to identify such a setup for the long side were defined as follows: 1. The stock price is above 2 US dollars. 2. The value of the RSI(3) is below 20. 3. The rate of change of the stock over the last 200 days was positive: ROC(200) > 0. The above conditions being fulfilled, should the stock fall on the day after the setup by a minimum of 7% compared to the closing price of the day before, the entry will be so advantageous that even after implementation of stops the position will be profitable. The exit techniques and their possible negative effects on the average return per trade will be analysed in detail in the next article. Figure 2 shows a chart of the New York Stock Exchange stock MOSAIC Company (Symbol: MOS). On the basis of the setup rules, all the generated signals with a 7% buy limit over the last seven months are shown with a holding period of 5 trading days.

Results with Trend Following Indicators over Several Holding Periods


The selection of one of the trend following indicators presented in Table 1 seems to make sense (again for pragmatic reasons). With each trend filter from Table 1, the analyses which will be shown in a moment deliver similar positive results. Every interested trader is free to choose the trend following indicator he prefers. In the next few investigations and the future articles we will, unless indicated otherwise, exclusively take into account the rate of change over a 200-

F2) Long Side: Average Return per Trade

Several buy signals between January and August 2008 with a 7% buy limit are shown. For a buy signal the conditions RSI(3) and ROC(200)>0 must be fulfilled. Both indicators are part of the summarised calculations of Table 1.
Source: www.wealth-lab.com

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TRADERSSTRATEGIES T2) Results for the RSI(3)-Indicator and Several Trend Following Filters Short Side
RSI(3) > 90 3% Short-Limit Count of Trades Avg. Winner/Loser Profitable Trades Avg. Winning Trade Avg. Losing Trade 8048 0.17% 53.89% 2.07% -2.05% 3% Short-Limit Count of Trades Avg. Winner/Loser Profitable Trades Avg. Winning Trade Avg. Losing Trade 2094 0.01% 51.77% 2.42% -2.59% 3%Short-Limit Count of Trades Avg. Winner/Loser Profitable Trades Avg. Winning Trade Avg. Losing Trade 2413 0.05% 52.18% 2.36% -2.48% 3%Short-Limit Count of Trades Avg. Winner/Loser Profitable Trades Avg. Winning Trade Avg. Losing Trade 2509 0.10% 52,69% 5.46% -2.55% 5% Short-Limit 2595 0.35% 56.99% 2.68% -2.77% 5% Short-Limit 837 0.02% 51.02% 3.03% -3.14% 5% Short-Limit 914 0.08% 52.19% 2.98% -3.10% 5% Short-Limit 1003 0.14% 51.45% 3.09% -3.02% 7% Short-Limit 1090 0.51% 59.27% 3.19% -3.45% 7% Short-Limit 393 0.03% 52.67% 3.44% -3.82% 7% Short-Limit 423 0.20% 54.61% 3.51% -3.84% 7% Short-Limit 476 0.24% 55.46% 3.39% -3.76% 9% Short-Limit 530 0.55% 61.13% 3.68% -4.38% 9% Short-Limit 209 0.08% 55.98% 3.87% -4.73% 9% Short-Limit 225 0.19% 57.78% 3.81% -4.78% 9% Short-Limi 250 0.34% 58.40% 3.89% -4.63% RSI(3) > 95 3% Short-Limit 2711 0.27% 55.81% 2.22% -2.22% 3% Short-Limit 580 0.15% 53.28% 2.65% -2.71% 3% Short-Limit 691 0.18% 52.97% 2.56% -2.51% 3% Short-Limit 749 0.33% 54.74% 2.67% -2.54% 5% Short-Limit 880 0.42% 57.50% 2.96% -3.06% 5% Short-Limit 237 0.28% 54.01% 3.33% -3.31% 5% Short-Limit 267 0.28% 54.31% 3.16% -3.20% 5% Short-Limit 302 0.55% 56.95% 3.32% -3.20% 7% Short-Limit 391 0.40% 58.31% 3.39% -3.79% 7% Short-Limit 109 0.07% 52.29% 3.72% -3.93% 7% Short-Limit 124 0.21% 53.23% 3.72% -3.68% 7% Short-Limit 141 0.49% 56.74% 3.62% -3.69% 9% Short-Limit 213 0.70% 62.44% 4.04% -4.86% 9% Short-Limit 68 0.37% 55.88% 4.00% -4.23% 9% Short-Limit 74 0.27% 56.76% 3.71% -4.24% 9% Short-Limit 86 0.99% 62.79% 4.02% -4.11%

RSI(3) > 90 & Closing Price < SMA200

RSI(3) > 95 & Closing Price < SMA200

RSI(3) > 90 & ROC (126) < 0

RSI(3) > 95 & ROC (126) < 0

RSI(3) > 90 & ROC (200) < 0

RSI(3) > 95 & ROC (200) < 0

The calculations are made on the basis of a one-day holding period. It is assumed that each trade where the stock reaches the short limit is being executed and that the stock can be sold short.

Analysis of the Short Side


The investigations for the long side being so promising, the question comes up if inverting the entry rules of the long side allows profits to be generated with short selling. First of all, a remark is in order here: The short selling of stocks isnt that easy in practice. A lot of brokers or depository banks do not allow this trading variant at all or only with a restricted number of stocks. Every day other brokerage houses publish a current list of more than 1000 securities which can be sold short. It remains to be noted that in any case the Russell 1000 Index, chosen for the implementation of our strategy, automatically comprises the common stocks which belong to the biggest securities traded in the USA. Hence, the chances that those stocks can be sold short via a broker are very high. Furthermore, one must keep in mind that depending on the broker, short selling may generate additional costs. Every trader should be aware of that before getting started in order not to experience nasty surprises.

What do the results look like when the buy entry rules are simply reversed? Table 2 gives the answer. The results presented are based on a one-day holding period and do not take into account commissions and slippage. First of all, it is remarkable that the RSI(3) criterion had to be tightened: up to the level of 90 (left column) and 95 (right column) respectively. Tests with the RSI(3) below the level of 90 are of no advantage to short selling. In other words: the benchmark cannot be outperformed sustainably. Table 2 also shows the results for both RSI(3) criteria in combination with three trend following indicators. It can be observed that compared to the long side not every combination leads to a statistical advantage at least when a one-day holding period is applied. After further detailed analysis one single combination remains which delivers satisfying results even for a oneday holding period, i.e. better results than in the case of trades without trend filter: the combination of the conditions RSI(3) > 95 and ROC(200) < 0.

March 2010 | www.traders-mag.com

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TRADERSSTRATEGIES F3) Short Side: Average Return per Trade

Strength Index to be raised. Thus the number of trades in the timeframe considered has been markedly reduced to 302. Furthermore, the comparison with Figure 1 shows that the average trade after three days and up to eleven days is less profitable on the short side than on the long side. However, the future analyses will show us to what extent the use of the short side can improve the performance on the one hand, and maybe even reduce the drawdown (maximum price decline) in the portfolio on the other hand. In any case a new option has been generated through the definition of criteria for short selling. As this option doesnt correlate with the long side, it will be taken into account in the next few investigations. Outlook: problem with overlapping positions Unfortunately the analysis of entries cannot yet be closed on the basis of the studies made for the long and the short sides. There is indeed still an outstanding point which has a negative impact on the performance achieved so far for an average return per trade on both the short and the long sides: the problem of overlapping positions. Overlapping positions always occur when the entry conditions are fulfilled and positions in the same stock were already entered. This phenomenon occurs quite often for markedly falling stocks (for the long side) and for markedly rising ones (for the short side) respectively. Figure 2 shows such a case on the buy side. In January 2008, right after the first position, a second one was opened on the next day. Both positions were sold after a holding period of 5 days and with a corresponding time delay of one day. In principle, overlapping positions lead to an averaging down of the position and thus exactly to the issue every trading novice has been warned about. Does it mean that the strategy presented here is specifically building on this cheapening effect? This point will be analysed in detail in the next article. However, the answer can already be provided. No, the gradually developing strategy presented here which should particularly motivate you to conduct your own research is not based on the idea of a cheapening entry price.

You can see the performance over several holding periods with different trend following indicators and the criterion RSI(3)>95. The entry occurs through a 5% short limit. The results shown rely on the assumption that the order is really executed as soon as the limit is reached and the respective stock can be sold short.

Analysis of the short side for longer holding periods The results shown in Table 1 lead to the assumption that trend filters are not suitable for the improvement of short selling signals. Instead of increasing the average return per trade, most trend filters rather seem to worsen the average trade. With a short limit of 5% and the condition RSI(3) > 90, for instance, the average trade performance amounts to 0.32%. After adding the trend following criterion close > SMA200 (the closing price is higher than the 200-day simple moving average) this value decreases to 0.02%. Figure 3 shows that in the field of backtesting it can be profitable not to give up too quickly. In this picture the results without slippage and commission for holding periods from 1 to 11 days are represented in graphical form. It can be clearly seen that the negative effect of all the selected trend filters is no longer there for holding periods longer than one day. In this context it is not surprising either that after integration of trend following indicators the hit rates are well above 60% (not shown, but based on corresponding calculations). For the subsequent analyses Faik Giese in the next few articles we will employ the same trend following Faik Giese is managing partner of the Swiss indicator as for the long side. The based asset management firm effinX AG, a trend following criterion for the trading coach and personal consultant. Beginshort side accordingly will be: ners as well as advanced persons find various ROC(200) < 0. educational programs and a trading letter
about the American markets, attended by a real time trading account+, on his website www. thewayoftrading.com. Contact: giese@thewayoftrading.com

Conclusion
For both long and short positions we defined entry rules which allow traders to identify entry points with a very attractive statistical edge. The conditions for short selling had to be defined in such a restricted way that by completion of the strategy the expected amount of generated short trades was considerably smaller than the number of long trades. However, that short selling option will play an important role in the next few articles, where the focus will be on combining entry signals with stops, on trading an account under real conditions and especially on reducing the market risk in the portfolio. In the 3rd part of this series the difficulty related to overlapping positions will be dealt with and analyses for the implementation of stop-losses and further exit rules will be presented on the basis of the entry rules defined in this part. n

Summary for the Short Side


Unlike the long side, the short selling strategy notably required the criteria for the Relative

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TRADERSSTRATEGIES

A Look beneath the Surface

Technical Volume Analysis


This article presents techniques for volume analysis. The techniques have been carefully selected to highlight an understanding of the price movement with the volume traded. This could also be interpreted as latter-day tape reading. The use of indicators requiring a particular time adjustment is deliberately dispensed with. The rhythm of the market is subject to constant fluctuations that do not always materialise slowly. There is also the possibility of rapid and erratic changes. That is exactly the weak spot of most time-based indicators. They give a signal either too quickly or too slowly. That is why there is no such thing as an adjustment that has universal validity and is always correct.

o Basically, the indicators presented here show market

changes regardless of wave rhythm. That is why the description of popular indicators is dispensed with here such as, for example, money flow or force index. The tools listed below can be used to analyse stocks or futures. They work on any time basis both intra-day and on a weekly basis.

Benefits of a Volume Analysis


The typical chart with closing price, high, low, and opening price includes 4 variables that represent price development. However, it does not show how the price development originated. Were many market participants involved and how much was bought or sold? If you look at volume along with price development, you will get a complete picture. Anybody who has looked at the chart development of obscure penny stocks knows how randomly many developments materialise. If price

Christian Lukas
Christian Lukas studied economics and engineering and has been devoting hisself to the markets since 1998. His central topic is personal trading of DAX-Futures and Bund-Futures. Derivatives are only traded via automatic trading systems. Within these trading systems volume is the most important factor in producing signals. Contact: info@volumen-analyse.de

development occurs with too little volume, any chart analysis will become less meaningful. Charts with little volume tend towards randomness. Only through the fifth variable, volume, is it possible for the price development to be confirmed. This means that volume is always required for any clean chart analysis. The candlestick technique can be given as a good example. The simple formation of a hammer in a downward movement is a potential reversal signal. But the significance of a hammer with a relatively high volume increases the effect of the candle pattern tremendously. That then is a real beauty of a hammer. The essence of volume analysis is the emphasis on volume to describe a price development as being strong or weak. The price is known to be dictated by supply and demand. Volume analysis is nothing than an attempt to forecast supply and demand. The price is the value of the volume. In general, volume analysis provides information on the health of a trend. The focus is on the right balance between price movement and the volume used. The crucial advantage in drawing on volume is also apparent in the predictive significance of volume. Using volume, an additional predictive quality is gained. Any significant reversal of a market can be recognised early by way of trading volume behaviour. The three types of volume activity 1. Rising volume with a rising price punctuated by reversals. The reversals have a reduced volume. This is a healthy upward trend (vice versa for the downward trend). 2. Rising volume with an unchanged price. The market has

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TRADERSSTRATEGIES

a distributive behaviour. A possible reversal is being prepared. 3. A weak volume and a sluggish upward price development. A small supply meets little demand. The market is characterised by technical false signals and quick insignificant reversal patterns. Basic principles of volume analysis 1. A healthy bullish trend shows special features. It has rising volume, combined with a rise in price. In between there are reversals that are accompanied by reduced volume. The market behaves in this same rhythm when the trend is healthy. Of course, all this is also true of bearish markets with the exception that the downward movement carries with it the increased volume. 2. A sudden volume peak suggests high emotional involvement of the market participants. The volume peaks carry within themselves the reversal potential of a movement. 3. A sluggish upward price development without any volume indicates a lack of interest on the part of market participants. In such a case there may be quick reversal movements. The market is very hard to predict it requires new impulses for new market participants.

Volume Trend
The paramount basic principle on any stock market is that prices move according to the principle of supply and

demand. With regard to volume this means: Demand rises by more volume coming into the upward movement, and supply rises by more volume coming into the downward movement. Consequently, a basic rule can be established: The price cannot go far without volume confirming the direction. For trading this statement is of particular significance since the likelihood of success is increased by exclusively trading in the direction of the volume trend. Within a trend it is particularly easy to break resistance or support lines in the direction of a trend. That is a feature of any trend market, which is why a trend should be determined prior to any forecast. What this is all about is nothing more than the raising of probabilities within trading systems. Standard indicators are very suitable for determining volume trend since they offer a quick overview. Examples include OBV in relation to a moving average or the volume price indicator. How well a trend is developed can be examined on the basis of two characteristics. For one, to use the example of an upward trend, the upward wave should carry volume with it, and for another, the downward wave should reduce volume. This you can check up on yourself by doing some elaborate work on the chart yourself or by using certain aids. It doesnt make any sense now to list all sorts of possible volume-based indicators that make a trend analysis possible. Basically, a single meaningful indicator is enough.

March 2010 | www.traders-mag.com

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TRADERSSTRATEGIES F1) Allianz with Volume Trend Indicator

The volume trend indicator presented here originates from the addition of NVI and PVI. Additionally, another MA (34) was added as a trigger. For comparison purposes, the PVI and the NVI were placed underneath as MA(5). Volume Trend Indicator = NVI(5)+PVI(5) -> red line Volume Trend Indicator (34) -> black line In this case the adjustment of the indicator is of secondary importance since no direct signals are called for but only the rough direction is to be emphasised. The smoothed adjustment of the indicator here is only meant to make it look better. The example of the Allianz stock (Figure 1) shows the break of the upward trend between July and October 2007. A break of the high in order to reach new levels requires the volume trend indicator to intersect its trigger line. Its very rare for a clean break to be possible by way of a resistance line/support line without the volume trend not pointing to this direction as well.

The Allianz stock in a weekly chart. Description of the volume trend indicator in comparison to PVI and NVI.
Source: www.amibroker.com

Of the well-known volume indicators there are two indicators that possess salient characteristics. They specialise, so to speak, in certain volume behaviour. These are the positive volume indicator (PVI) and the negative volume indicator (NVI). The PVI will add the volume if the current volume is larger than the previous one. If the volume is smaller than the previous one, the indicator remains at its old level. So the PVI confirms the volume wave. The NVI is the opposite number of the PVI. The NVI only adds the volume if the current volume is smaller than the previous one. So the NVI confirms the consolidation wave. These two specialists may also be combined with one another. This will then result in a first-class trend indicator which allows you to read the health of the trend. at one glance. In Figure 1 you can see the Allianz stock in the weekly chart and the trading volume trend indicator. The PVI and NVI are placed underneath as informal additions.

Significance of Volume Waves


The volume analysis is highly suitable for the short-term trading period. Specifically, the waves and subsequently the individual candles can be analysed. If you look at the waves, an individual high volume is less interesting than the accumulation of above-average volumes. This can be examined on the basis of the moving average of the volume (VMA). In doing so, the VMA should be adjusted quickly but with a steady hand. The following formula has proven to be suitable: VMA =EMA(EMA(V,3),3) Basically, any short-time adjustment is possible without affecting the results. A basic assumption is this: A strong volume-driven wave leads to a second subsequent movement in the same direction: An empirical investigation of the Dax future on a daily basis has produced the following results as the effect of a volume wave: Period from June 2002 to December 2007 Total number of volume waves: 87 Failures: 25 (29%) False breaks: 22 (25%) Breaks: 40 (46%)

F2) Example of Volume Waves

For the purpose of the examination the following definitions were established (volume wave in upward direction): A volume wave is a wave that has at least 3 volume candles in the same direction. The VMA serves as the criterion of an increased volume. An up break has been achieved if after a 261% Fibonacci time extension the price is above the resistance line. The

The Allianz stock with drawn-in volume waves.


Source: www.amibroker.com

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TRADERSSTRATEGIES F3) Example of Volume Peaks

Fibonacci time extension is based on the start and end of the recognised volume wave. A false break is defined here to occur when the price again touches the resistance line after consolidation but after a 261% Fibonacci time extension is below the resistance line. A failure is defined as a price movement where the price drops further and first touches the start of the volume wave. A movement is also counted as a failure if prices subsequently move in the desired direction. It goes without saying that the rules also apply in inverse form to volume waves in a falling direction. The effect of the volume wave can be seen when you consider that after consolidation the resistance line was touched again at a percentage rate of 71. In Figure 2 there is an example of the volume waves. This is the Allianz stock on a daily chart. It shows the volume wave and its consequence. A total of 7 volume waves are drawn in on the chart. Only the fifth wave in mid-November is a closing wave. All the other ones again lead back to the past low or beyond after consolidation. That means that a volume wave makes a certain prediction possible and is therefore tradable.

The Allianz stock with drawn-in volume waves and volume peaks.
Source: www.amibroker.com

Volume Peaks
Volume peaks are interesting objects of investigation. On the one hand they show the emotional commitment of the market participants and on the other hand they often lead to reversal movements of the market. Volume peaks operate like safety belts in a car. If you pull the belt gently (normal volume), you can easily extend it. Giving the belt a jerk (similar to the volume peak) causes the movement to stop. However, volume peaks do not necessarily lead to the reversal of the market, they frequently just generate a breather. After the volume peak the future movement of the market is defined by new market participants. It all depends on how many buyers and sellers subsequently enter the market. For the individual analysis of the candles you have to carefully pick out the candles that contain an above-average volume and relatively little upward price development. A Doji with plenty of volume would be ideal. This combination of the two criteria always has reversal potential. The overall look at a defined time period along with the analysis of the high-volume candles provides an indication of the lightness of the movements. The visual description of the volume peaks can be seen in Figure 3 on the basis of the Allianz stock. The volume peaks influence the course of the chart and have an effect as a total. The number and position of the volume peaks make it possible for the stocks momentum to be diagnosed. An independent wave with corresponding sub-waves usually includes only 2 to 3 volume peaks in the same direction before the stock or the market turns.

into waves and calculates for each wave the average volume used. So if a wave consists, for example, of 8 candles, he adds up the volume of the individual candles and then divides it by 8, calling the average value calculated an Ord volume. Ord volume = Sum of the volume of a wave/ Number of candles per wave. The Ord volume calculated is now drawn upon to compare the waves to one another. Using the Ord volume a stock or a market can be divided into individual segments. The power of each movement is calculated quite simply. As is the case with the volume waves described above, the high-volume wave has special significance. Where a wave finds a resistance or support line, there originates a basis for the subsequent analysis. This wave towards the line is the yardstick for comparison. The subsequent consolidation then generates the data used for the comparison. Tim Ord defines an entry signal to be there when there is a decrease of volume by approx. 50%.

F4) Weakening of an Upward Movement

Ord Volume
A very interesting approach for measuring the power of a movement comes from Tim Ord. He subdivides the market
Representative example of the interpretation of the Ord volume.

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TRADERSSTRATEGIES F5) Allianz Stock with the Ord Volume

The Ord volume in the zigzag representation. Above and below the zigzag there are the corresponding high and low points of the chart.
Source: www.amibroker.com

F6) Long Signal on the Basis of the Ord Volume

Representative example of the long entry, using the Ord volume.

F7) Long Signal with Complex Consolidation

Representative example of the long entry, using the Ord volume and a complex consolidation.

Figure 4 is an example of how the Ord volume could be interpreted. The interpretation of the course of a chart is relatively simple. The first wave with the Ord volume of 2.2 is the benchmark for the subsequent consolidation. For a bullish consolidation the value should be below 2.2. However, there follows a consolidation at 3.5. This value is so high that it exceeds that 2.2. value by 59%. This is a strong warning signal for the continuation of the upward movement. The last wave with the Ord volume of 2.0 again shows signs of weakness. A future reversal can be expected. Figure 5 is a representative example of the analysis with the Ord volume. The waves of the Allianz stock are drawn in on the zigzag chart with the high and low points and the Ord volume each properly assigned. In Figure 5 you can monitor the downward movement since early October. The first volume wave reaches an Ord volume of 3.57. The correction of 3.01 is somewhat smaller. So far the downward movement is intact, and you can expect a subsequent wave. This then promptly materialises right at the beginning of November. There originates another volume wave of 8.05, which is largely determined by the strong downward candle of 9th November 2007. The volume peak here should be paid attention to. Then a minor upward counter-movement with an Ord volume of 5.69 occurs. This is a first strong signal indicating that the downward movement and hence the low price are attracting new buyers. Nevertheless, the stock then once again reaches a new low with an Ord volume of 7.25. Basically, this is a strong volume wave which can bring with it new downward potential. The answer is provided by the bulls. The next upward wave amounts to 6.94. This value is so high that it must not be interpreted as a consolidation wave of the 7.25 wave. For the time being, the market has turned. The analysis of the waves by way of the Ord volume also makes it possible for trading signals to be created. Figure 6 shows the basic principle for a long entry in the market. The wave with the Ord volume of 20 is the starting movement with the top forming the resistance line. The subsequent downward movement should ideally have a minimum 50% volume reduction. After the wave of 10 the upward movement is continued again. Entry will be made once a closing price above the top of the wave of 20 is achieved. The crossing candle should have at least as much volume as the candle that formed the top in the wave of 20. Figure 7 provides information about interpretation in a complex consolidation. The 50% volume reduction does not necessarily have to appear as a direct subsequent wave of the original wave of 20. Figure 7 shows that the 50% rule can also be applied to complex consolidations. Using the volume analysis makes it also possible for a false break to be traded. In the example given in Figure 8 the wave of 20 again is the starting point. It is followed by a wave of 16, which is only 20% smaller. Then there is the extremely weak upward wave of 10, which even briefly breaks the resistance line of the top. With such a weak

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TRADERSSTRATEGIES F8) Short Signal with a False Break

crossing there is very high degree of probability that prices will drop again. Should that happen entry should be made at a closing price below the resistance line of the previous top. Figure 8 shows the approach used with a false break.

Resistance and Support Lines on the Basis of Volume (Market Profile)


Modern chart programs offer a horizontal description of the price with the volume used. While designations very, one worth mentioning is value-at-price or market profile. The idea is actually not new, the trail having been blazed by Peter Steidlemayer who in the eighties conducted a professional analysis based on this. The market profile is no indicator in the typical sense of the word where buy and sell signals are indicated. The analyst is given an idea of where a fair price can be found. The chart does not reveal the entire history but only the time segment in the chart window. This means that the market profile changes along with the decrease/increase of the chart window. It is an optical processing of prices, volume and time. The example chart in Figure 9 represents Nokia with a market profile. The market profile is entered in the left-hand margin. The more pointed the form of the market profile is, the more profound is its effect on prices. The strength of the resistance and support area increases proportionally to the pointedness. Volume also is the key to an understanding of the market profile. If the price moves away from the profile peak and volume dries up, the price is likely to bounce back. The picture shows how in early November and also December prices try to move away upwards. However, the volume used in the price range of 28 is relatively weak, causing efforts to end in a decline. The theoretical interpretation of the market profile is to be provided by Figure 10.

Representative example of the short entry, using the Ord volume if after a long break the price again falls below the resistance line.

F9) Formation of Resistance and Support Lines

Conclusion
The instruments for analysis presented here must not be understood to be the Holy Grail. As is the case with nearly all indicators, a certain amount of practice is required for interpretation. Just as the joiner needs to practise using his tools, any analyst is in need of training in the use of his technical tools. Unlike most other indicators that show subsequent behaviour, volume indicators make a predictive forecast possible. Prices rise and fall faster at certain times and more slowly at other times. Volume allows a look beneath the surface. Comparing the stock market to a car, the car can go up and down the street. However, the car will always need fuel to move. Volume may be compared to the fuel driving an engine. If you run out of fuel, the car is also guaranteed to come to a halt. It should never be forgotten that even the best trader can be wrong at times. The best advice to give any trader is to think in terms of scenarios. What is the most likely scenario after the analysis and how should you react if you are wrong? The precise definition of the characteristics relevant to the possibility of an error may be the key to success. n
The Nokia stock in the daily chart with drawn-in resistance and support lines on the basis of the market profile.
Source: www.amibroker.com

F10) Theory of the Market Profile

Shaping and zones of the market profile.

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TRADERSSTRATEGIES

Get an Edge for Your Forex Trading

FX Patterns
An Unconventional View
Most traders with a little technical knowledge understand the concepts behind trend trading and price patterns or at least they think they do. To trade profitably requires more than just the basic concepts. Trading successfully requires an edge! This article covers essential principles of FX trend trading, ensuring that you always have market momentum on your side. It then delves deeper into the concepts behind technical FX chart patterns and provides an unconventional view that most textbooks do not cover. This will provide you with an additional edge in your foreign exchange trading.

o FX Moves!

The best time to trade is when there is a trend! Buying and selling of stocks may dry up due to the economic conditions of a particular country, yet, for the world to go on, the buying and selling of foreign currency must continue. Countries import and countries export. For these transactions to take place the buying and selling of currency is essential.

These ongoing transactions as well as investment flow into and out of a country creates the movement that we require. Even if one economy or currency pair goes into a range, there are almost always others that are moving. For the best trading opportunities you should look for the best trends. Do not limit yourself to trading any one currency pair, rather, look at a selection of the majors and trade those pairs that have the strongest trends.

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TRADERSSTRATEGIES F1) Chart Patterns

One Reason is Never Enough


Virtually every trading seminar and book teaches trend following principles and breakout patterns. Typically, the chart examples that are usually shown lead new traders to believe that there is little to it. In reality, the majority of new traders applying these techniques find it extremely difficult to become profitable. Why? Because most trading these patterns, are looking at the pattern in isolation. Professionals on the other hand know that one reason to enter a trade (i.e. a basic chart pattern such as a double bottom) is not enough for a high probability trade. Professionals look for a multitude of reasons for every trade they place. The good news is that these patterns can make you money. Professionals profit from them day in and day out! To join them you need greater skills than simple pattern recognition and we will build upon these skills starting now. This article provides you with a trading edge in three ways: 1. By differentiating Tradeable price patterns from Directional price patterns - Understand the difference between the high probability chart patterns and those that should be used as no more than a guide of direction. 2. By understanding the probability of price direction before you enter - Apply trend following principles and ensure that the trade has a higher probability of moving in your direction. 3. By saving on losing trades Through applying the above you will have a greater understanding of which trades not to take.

Chart patterns can be categorised into those patterns which provide good trading opportunities versus those that do not. The patterns to trade are images A to H because they all have horizontal breakout levels with more than one test at the same level. Direction only patterns have either one touch at a level only or are breakouts from sloping levels.

not enough information to give you an edge with which to achieve consistent results.

What They Dont Teach about Chart Patterns in Textbooks


All tradeable patterns can be classified under one word BREAKOUT! Forget consolidations, channels, ascending and descending triangles. Do not spend your time looking for a double bottom or a head & shoulders reversal. Rather, understand the simple concepts that make these patterns work and you will know what the chart is telling you without having to remember the patterns name. Learning the names of all these patterns is simply useless information that you do not need to clog your mind with. When you learn to drive a car, do you need to know the name of the parts under the hood? Of course not! It is useless information for most people and if you spent time memorising the names of all the parts then it would take you longer to learn to drive. The same is true in trading. Focus on understanding price movements rather than trying to place names on them and your trading ability will accelerate. To elaborate on this further you first need to understand: 1. Trends 2. Support and resistance All reversal patterns (some of which are tradeable but most of which are not) are based on a very simple change in trend direction. If you understand trends then you understand reversals and do not need to know the names. All breakout patterns are based on support on resistance.

FX Price Patterns What They DO Teach You in Textbooks


Most patterns tend to be classified as either: 1. Continuation patterns Patterns that indicate there is a likelihood the price will continue to move in the direction it was moving preceding the pattern, i.e. price is moving up, a continuation pattern forms indicating a probability of a move higher. 2. Reversal patterns Patterns that indicate there is a likelihood the price will change direction from the direction it was moving prior to the pattern forming, i.e. price was moving lower, a reversal pattern forms indicating a probability that direction will change and the price will begin to move up. Figure 1 illustrates some of the most common continuation and reversal patterns. They are not named, and they are further classified into different categories for reasons that will be explained shortly. Traders are generally taught to trade these patterns as they break out of the patterns range. This is true for some patterns and not so true for others. Most importantly, this is

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TRADERSSTRATEGIES F2) Uptrend

Why Is It so Important?
First, imagine a flat stone that someone has thrown and skimmed across the surface of a pond why does it continue to bounce on the water? It bounces because it has momentum! When this momentum is lost, the stone will sink through the surface of the water, make new lows and sink to the bottom of the pond. The water is acting in exactly the same way as a trend. A currencys price will continue in one direction so long as it has momentum in that direction. Buying momentum = HH (as buyers of a currency pair push the price higher) + HL (as sellers step in and buyers take profits; yet both lose the battle to the new buyers who buy from them, create a HL, and push the price back up to a HH). Would you want to trade against the direction of such momentum? Would you step in front of a raging bull? Obviously not! In which case it is important that you understand and apply this concept. Momentum is lost when the price eventually fails to make a fresh high (LH), indicating that buying momentum has ended. If the price makes a new low (LL) this can mean a reversal of the trend from up to down. So, you now understand when there is strong trend momentum in either direction. To summarise, see Table 1. We have now established that it is sensible to always trade with the momentum of the market when there is a clear trend. You should not trade when: 1. The currency has no clear trend (often referred to as a ranging market) 2. The trend is losing momentum 3. The trend has recently ended (instead trade in the direction of the new trend)

Chart A: Uptrend is over when the price makes a lower low (point a) and then confirms with a lower high (point b). Chart B: Uptrend is over when the price fails to makes a higher high (point a) and then confirms with a lower low (point b).

Reversal Patterns
You now know them all! Every single reversal pattern is simply a change in trend from one direction to another. There is nothing more to it! For information only, some examples of reversal patterns follow. This is purely for reference and to show you that these patterns are a lot easier to understand than initially thought. To reiterate, the names are of minor importance and, in fact, are often interpreted differently depending on whom happens to see them. The reversal patterns in Table 1 are some of the most well known and most often referred to. There are many possible variations of these patterns. There are also many other reversal patterns, named in many different ways by many different people. Look at any one of them and you will see that regardless of what someone calls it, there is always one thing that every reversal pattern has in common - the price changed from uptrend to downtrend or vice versa. For new traders, looking for a textbook head & shoulders can be tough work! Notice that the head & shoulders in Figure 2 A is not a typical textbook example. Focus on understanding simple trend concepts and you will see how much easier it is to understand the price action of a currency.

Trends
An uptrend is a series of Higher Highs (HH) & Higher Lows (HL) in the price as shown in Figure 2. A downtrend is a series of Lower Highs (LH) & Lower Lows (LL) in the price as shown in Figure 3. These definitions are all too often overlooked. If you are going to understand just one concept in trading, it should be this basic principle of trend analysis.

T1) Momentum and Trend


Definition Loses Momentum when price makes either Trend is over when either Uptrend HH and HL LH or LL Downtrend LH and LL HL or HH

the price makes a LL and the price makes a HL and then confirms with a LH then confirms with a HH (see Figure 2A). (see Figure 3A). the price fails to make a HH and the confirms with a LL (see Figure 2B). the price makes a HH and then confirms with a HL (see Figure 3B).

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TRADERSSTRATEGIES F3) Downtrend

Support & Resistance


The Collins English Dictionary defines resistance as, Any force that slows or hampers movement. This definition applies to trading. The inverse is true for support. In fact when spot currency trading, the words support and resistance (S&R) can almost be used interchangeably. You will always be buying or selling one currency versus another, and thus, while one currency is being supported, another is being resisted. The difference is that: Resistance is an upper point on a currency price chart that resists the price moving higher above it Support is a lower point on a currency price chart that supports the price from moving lower below it

What is it like? Imagine you are standing on the second level of a three-story building. The floor below is supporting you from falling down to the first level. Let us say you take the stairs down to the first level. Now that same level that was supporting you is resistance, i.e. what was the floor is now the ceiling. Back on the second level again, the ceiling above is resisting you from going higher. When you make your way up to the third level, that same level that was resisting you is now support, or the ceiling is now the floor. The same is very true in trading and in fact, you will often hear people refer to support as a floor and resistance as a ceiling. The important thing to understand here is that true resistance, once broken, becomes support and vice versa. This can give you an edge in trading breakouts on currencies. First, you must understand the different types of S&R, as they are often misinterpreted. Trend Support & Resistance Trend S&R has just one test of a level and is within a trend. This is considered the weakest kind of S&R. For example, look at Figure 4 and imagine you are trading long at point b. As the market is up-trending and therefore expected to make Higher Highs & Higher Lows, point a provides only very slight resistance. In an uptrend, expect the trend to continue until proven otherwise. Thus, expect the level at point a to be broken and the uptrend to continue until proven otherwise, such as; the price makes either a LH and/or a LL. With no other indicators to guide you at this stage, this is the most probable outcome. True Support and Resistance Horizontal S&R with two or more touches on the same price level is the strongest (See Figure 4). This type of S&R provides tradeable opportunities. Two components here are essential in finding a tradeable chart pattern: 1. Two or more price tests at the same level. 2. The level must be horizontal. Why is this? Horizontal levels of true support become resistance once broken. Horizontal levels of true resistance become support once broken. Refer to the dotted line examples in Figure 5 where resistance, once broken, became support.
Chart A: Downtrend is over when the price makes a higher low (point a) and then confirms with a higher high (point b). Chart B: Downtrend is over when the price makes a higher high (point a) and then confirms with a higher low (point b).

Sloping Levels of S&R or Trend Lines Study the illustrations I, J & K in Figure 1. These patterns are important as a guide to direction and do not provide strong trading opportunities for various reasons: 1. Resistance does not become strong support once broken (and vice versa)

F4) True and Trend Resistance

True support or resistance has tested the same horizontal level on at least two occasions. Trend support or resistance has only tested a level once and is within a trend, therefore it is very minor. Breaks of trend resistance should not be traded.

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TRADERSSTRATEGIES F5) True Support and Resistance

The solid lines show true levels of support and resistance. Breaks of these levels provide trading opportunities. The dotted lines show where true resistance, once broken, now becomes support when the price comes back to test the same level.

a. Even if resistance did become support, that support would be moving away as the price moved in your favour. For example, if you traded the channel breakouts illustrated in Figure 1, images J & K. b. This makes placing a protective stop more difficult. 2. Sloping levels are very subjective a. Levels can be drawn differently depending on timescale, scaling and personal views. Horizontal levels on the other hand are objective they exist or they do not. This way you know that others are seeing the same level that you are seeing. You cannot make up levels to draw on your charts.

in the direction of the trend. Tradeable breakout level rules: 1. 2 or more price tests, 2. Price tests are as precisely on the same level as possible, 3. Trade is either in the direction of the overall trend; or 4. Trade is in the early stages of a new trend such as in Figure 1, examples E to H.

Entry, Stop Loss and Profit Targets


Entry Your entry is when the price breaks out above or below the level of true S/R. If you are watching the screen then you can wait for the break to occur and enter with a market order. If you have to leave your screen then you should use a stop order to enter. See points A, B & C in Figure 5. All of these provide suitable long entry points as the overall market is trending up and these levels represent breaks of true resistance in the direction of the trend. Stop Loss Your stop loss should always be placed at a level where it is technically supported, i.e. below a support level if you are long or above a resistance level if you are short. The best place for a stop in FX pattern trading is at the opposite extreme either of the pattern or at the prior low if long (or prior high if short). See Figure 5 points A1, B1 & C1 that highlight sensible stop loss levels for trades A, B & C consecutively. In each case, the stop has additional protection because once the true resistance has been broken, it now becomes support.

Trading the Tradeable Patterns


The patterns that you should focus on trading are those illustrated in Figure 1, A to H. This list is by no means exhaustive. You will rarely find patterns that look identical to these drawings, so do not worry. Instead, focus on finding strong trends and then trade breaks of true support and resistance

T2) Reversal Patterns


Pattern Double Top Requirement Price change from uptrend to downtrend; or a series of HH & HLs makes a LH followed by a LL (see Figure 2 A) Head & Shoulders Bottom Price change from downtrend to uptrend; or a series of LL & LHs changes to HH & HLs (see Figure 3A)

Profit Targets
Option 1 Take full profit at 1:1 reward to risk. For example, if your stop

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TRADERSSTRATEGIES

loss is 30 pips from entry, then you should also have a limit order to take profits 30 pips from entry. Option 2 Take half profit at 1:1 reward to risk and trail half to breakeven. For example, if you are long 2 contracts and your stop loss is 30 pips from entry, you should sell 1 contract at 30 pips profit and when this happens, trail the remaining 1 contract to breakeven (your original entry price). The purpose of this is to try to squeeze more profit out of the remaining 1 contract while being in a free trade. Trail your stop behind technical S&R levels as appropriate.

Nick McDonald
Nick McDonald is an independent full-time trader as well as a mentor in foreign exchange & Dow Jones futures trading strategies. Through his company, Precision Trader, Nick aims to cut through the nonsense and teach people real trading strategies in a practical trading environment, omitting irrelevant information that is not conducive to trading successfully. You can find out more at www.tradewithprecision.com or contact Nick via email nick@tradewithprecision.com.

Important Rules
Never risk more than 1% of your trading capital on any one trade. Always have a stop loss! As soon as you have entered a position, you should also enter your stop order. To gain consistency in your trading, decide if you will use profit target option 1 or 2 and then apply it to every trade. 2. Stay out when the trend is unclear either trade a currency that is trending or stay out and wait. 3. Use patterns with a break of a sloping level as a guide for direction Do not trade these patterns! 4. Trade patterns with a break of a horizontal level that has been tested more than once. This trading strategy provides very effective stop loss levels and ensures that you are trading only in the direction of well establish market momentum. You now have an edge over those who trade all continuation and reversal patterns in isolation. n

Conclusion
This article has provided you with a Foreign Exchange trading edge! You now know how to: 1. Trade with the momentum or trend of the market at all times.

Become a Member of the Online Trading Academy Community Get access to free online courses. Enjoy free education and market commentary from Online Trading Academys master instructors. Plus get full access to our financial education center packed with helpful information about trading and investing. To register go to www.tradingacademy.com/membershipoffer And best of all registration is FREE!

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TRADERSSTRATEGIES

Combining Relative Strength Index with a Bullish or Bearish Engulfing Candlestick

Using an Indicator and a Price Reversal Pattern for Trading Discipline


Most traders or investors do not have a game plan, or strategy. As a result they are often throwing darts at the market trying to make profitable trades. Strategy trading is all about waiting for specific circumstances to develop. This combination of using an indicator along with a price reversal pattern provides you with some trading disciplines.

o Overview

This combination of commonly used technical tools which includes Relative Strength Index and the bullish or bearish engulfing candlestick, are applicable to the stock market,

F1) General Overview of RSI and the Bullish Engulfing Signal

the futures market, and Forex market. The example is using daily data, but other time frames can be useful. For the sake of example we will be using the Forex currency pair British Pound/US Dollar, and daily data. The signal often happens while other commonly known patterns are developing, i.e. head and shoulders, or double tops or bottoms among many others. The setup and trigger contains entry orders and exit orders for either bullish or bearish trades. We are going over the rules and providing examples for two bullish signals in the British Pound/US Dollar during the last few months. This trading strategy provides automatic money management, i.e. stop loss orders, and can produce shortterm trades as well as longer-term position trades. When the setup and trigger occurs, we have no way of knowing how long the trade will last or how far the market is going to go just because of the signal. That is why we use trailing stops. The use of other technical tools may provide clues as far as distance and duration of the trade. We are going to let our profits run, and of course limit our losses.

The Buy Signal Setup


A and B are two examples of significant divergence as prices make lower lows and the RSI does not during the same time frames. This is also a potentially bullish situation but not necessary for the setup and trigger.
Source: TradeStation

The first thing to watch for is an oversold condition to develop. This happens when markets drop too fast and too far. We are using a customized version of the original

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TRADERSSTRATEGIES F2) Detail of Bullish Engulfing Trigger A

Wilders oscillator, Relative Strength Index, RSI to measure this common price condition. The input number in this technical study has been changed to seven periods which makes the oscillator significantly more sensitive. Generally, when markets get oversold, they are entering a technical situation which often provides the proper conditions for the beginning of a rally. So you watch for markets that have been very weak and have entered an oversold condition. In the example in this article (Figure 1) you will also see two examples of significant divergence as prices make lower lows and the RSI does not during the same time frames. This is also a potentially bullish situation but not necessary for the setup and trigger.

The Bullish Trigger


Once the market is oversold, the trigger to place your orders is a bullish engulfing candlestick. This is also called a bullish Key Reversal. Again, we want this to happen while the market is in an oversold condition. This single candlestick or vertical bar is defined as a candlestick which has its high, higher than the previous candlestick high by one or more ticks, AND its low is lower than the previous candlestick low by at least one or more ticks, AND the closing price is higher, by at least one tick or more than the previous candlestick close. So, you are oversold, AND have a bullish engulfing candlestick to get the complete signal combination.
This is a close up of Example A from Chart 1 showing the 3 orders used in this strategy. Order 1 which is the sell stop placed below the low of the engulfing candlestick, Order 2 which is the Limit order to be placed at the halfway price of the engulfing candlestick, and Order 3 the buy stop placed one tick above the high of the engulfing candlestick.
Source: TradeStation

Three Orders to Place


There are three orders that are placed for the next few trading sessions, using daily data. All three orders need to be placed at the same time.

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TRADERSSTRATEGIES F3) Detail of Bullish Engulfing Trigger B

Order 2: A new long bid, which is a regular buy limit order, is placed at the mathematical middle of the range of the bullish engulfing candlestick. This common limit order may get filled at a better price if the market opens below the bid price. This situation happens sometimes and serves two purposes. If the trade still works out properly the profit will be larger. If the trade does not work out, the loss will be smaller. Order 3: A new long buy stop market is placed one tick above the high of the bullish engulfing candlestick, i.e. yesterdays high. This prevents the market from running away from the bullish engulfing candlestick trigger, without getting into a trade. We do not consider this running after the market which is not a good idea. It is a short-term bullish breakout. Be careful of markets that may gap significantly higher on the opening which will cause an unduly high, new long entry price, and therefore increase the dollar risk and also change the profit to loss ratio dramatically. Not a good thing. Orders 2 and 3 trap the market so it cannot move much before one or both orders are filled. At first the protective sell stop is for one unit. If both entries are made, then you need the protective sell stop market to double in size to protect the both positions. We are providing you with examples for bullish signals. For bearish signals, they are exactly the opposite using protective buy stop market order above the high of the bearish key reversal during an overbought condition, and new short orders to provide entry points when bearish engulfing lines occur. One problem we encounter is trying to calculate how far the market may move when the signal works correctly. You may use measurements made from various chart formations i.e. head and shoulder patterns or double tops or bottoms. One could consider using Fibonacci projections. When these setups and signals occur in support and resistance areas they tend to be significantly more reliable. There are a variety of tools which can help in this area. There have been sell signals which produced the historic high which lasted for many months in some markets or signals which produced much smaller moves which may last only several days. All of which presented some profit potential. We are using a trailing stop to get out of the positions.

This is a close up of Example B from Chart 1 showing the 3 orders used in this strategy. Order 1 which is the sell stop placed below the low of the engulfing candlestick, Order 2 which is the Limit order to be placed at the halfway price of the engulfing candlestick, and Order 3 the buy stop placed one tick above the high of the engulfing candlestick.
Source: TradeStation

From the Bottom Up


Order 1: A protective sell stop market, is used because it gets you out of a long position when a long position trade does not work. This sell stop market order, (also called a sell stop loss) is placed initially one tick or pip below the low of the bullish engulfing candle which was the previous days low, assuming we are doing this just before the market reopens. This is the beginning of a trailing stop. As the market moves up, you will raise the protective sell stop higher using a specific method which will be discussed shortly. For the moment, I simply stair step the sell stop market order higher just one tick under the previous candlesticks low, assuming that low is at a higher price than the previous low. This will slowly begin to lessen the loss if you are stopped out. This will also begin to lock in a profit when the price on the stop order starts to get higher than the entry point or average entry price assuming you get filled on the stop order at the price on the order. The method used to trail the stop can be varied, i.e. percentage of value, fixed number of ticks, dollar amount, etc, can be used. We are keeping our example very simple.

Conclusion

Stan Ehrlich
Stan Ehrlich has been involved in technical analysis for almost 40 years, as an inventor, software developer, lecturer world-wide, broker, company president, mutual fund technical consultant, and currently an Online Trading Academy instructor. Contact: SEhrlich@tradingacademy.com.

If you find yourself being provided a setup and trigger which carries too much dollar risk for your account you might consider trading an option as opposed to a position in that particular market. There are many other trading strategies which might be employed as opposed to an outright long or short position in that particular market. We have seen this setup and signal combination provide many excellent trades in the indexes as well as individual issues. This strategy can also be used with ETFs, Exchange Traded Funds. n

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with modern technical analysis and visit the magic land in Italy where the major dream car producers are based !

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Visit the Ferrari, Panini, Lamborghini, Stanguellini Museum Have your lunch where Enzo Ferrari used to go Breath the air of the famous Italian Motor Valley

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And Learn how to trade with modern technical analysis Test your bravery in throwing away the classical technical analysis (head & shoulders, oscillators, Japanese candlesticks, etc.) Acquire the skill to develop winning trading systems Start trading with Tradestation 8.7 Understand how to build a successful futures portfolio Trainer: Dr. Emilio Tomasini, Adjunct Professor of Corporate Finance University of Bologna, Italy
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TRADERSBASICS

The Basics and Many Possible Outcomes of the Credit Call Spread

Bear Call Basics


This article will briefly define the option strategy known as a credit call spread and then it will look at many of the possible outcomes that could happen. Many times the assumption is made that the spread trade either makes its entire profit or loses the maximum loss, when in fact the spread trade can make some of the maximum profit or loss less than the maximum risk.

o Bear Call Spread

For instance, lets assume that an underlying is trading at the time of entry at $81.82 and a vertical call spread is sold. The sold vertical call spread is also known as a Bear Call, for it is built by calls, yet the strategy is not a bullish one. The

T1) Scenario 1
Stock at expiry $95 $95 Premium at expiry Sold 95c = zero Bought 100c = zero Initial premium cost $1.90 ($1.15) Total for both calls P/L $1.90 ($1.15) + $0.75 or Max Profit

aggregate of the two options deltas (sold call and bought call) produces a negatively correlated delta. Whenever the delta is negative, the positions outlook is bearish by nature since it makes money when the underlying drops in price. A short Bear Call benefits from time decay, hence, it is wise to sell a Bear Call when the implied volatility is high or at its higher range.

Strike Determination Where Price Wont Be


When placing the actual Bear Call trade, it is essential that the trader determines where the price will not be at expiry. If, for instance, the trend is bearish and an underlying is trading below a major area of resistance, then that resistance could be used for strike price selection. As an example, if an optionable stock is trading at $81.82 and the $95.00 zone

At expiry the stock closes below $95 and the spread trader keeps the Max Profit.

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TRADERSBASICS T2) Scenario 2


Stock at the expiry $100 $100 Premium at the expiry Sold 95c = -$5.00 Bought 100c = zero Initial premium cost $1.90 ($1.15) Total loss on both calls P/L ($3.10) ($1.15) - $4.25 or Max Loss

is acting as a significant level of resistance, then selling the front month 95 call would make perfect sense. However, prior to the sale of the 95 call, the next higher strike price needs to be purchased to cover; otherwise, the trader would end up with a naked 95 call position. Such a position would require large maintenance by the brokerage house, or the trade might not even go through if the size of the option traders account is not big enough. In that case, the trade would simply get rejected.

The underlying closes above 100 and the trade, if held until the expiry, achieves the Maximum Loss.

Details
Lets assume that a sold vertical call spread is made up of the following components: Long February 100 call and short February 95 call. The specifics below are for a single contract of each leg. BTO stands for buy to open, while STO stands for sell to open. BTO Feb [0.16 Delta] 100 calls at -$1.15 (4 strike prices out of the money (OTM), a minus means a debit to the account) STO Feb [0.24 Delta] 95 calls at +$1.90 (3 strikes OTM, a plus means a credit to the account) Max Profit = +0.75 (Max Profit could also be known as Max Reward, Credit, Prize, or Gain) Max Loss = -$4.25 (Max Loss also known as Max Risk, Cost, or Pain) Max Loss is calculated by subtracting the Max Profit from the spread width (100 call 95 call equals five points, and $5.00 $0.75 leaves $4.25) Risk to Reward Ratio or ROI (Return on Investments) is found by dividing the Max Profit by the Max Loss. RRR = 0.75/4.25 = 17% BEP (Break Even Point) = (sold call strike price plus the credit received) 95 call + $0.75 = $95.75 There are three possible scenarios that could happen to this Bear Call Spread. The reason why there are three is because the market can only go in three directions: up, down, and sideways. There are three possible variations of the in between the spread scenario: Outcome A is when the price closes exactly at its BEP (Break Even Point), Outcome B is when the price is near the higher strike price, and finally Outcome C when the price action is near the lower strike price. The reason for the small gain is that our BEP (Break Even Point) was $95.75. In the case presented here, the price has closed at $9.25 providing a $0.50 gain.

T3) Scenario 3
Outcome A Stock at the expiry $95.75 $95.75 Premium at the expiry Sold 95c = -$0.75 Bought 100c = zero Initial premium cost $1.90 ($1.15) Total for both calls Outcome B Stock at the expiry $99.95 $99.95 Premium at the expiry Sold 95c = -$4.95 Bought 100c = zero Initial premium cost $1.90 ($1.15) Total for both calls Outcome C Stock at the expiry $95.25 $95.25 Premium at the expiry Sold 95c = -$0.25 Bought 100c = zero Initial premium cost $1.90 ($1.15) Total for both calls P/L $1.65 ($1.15) $0.50 P/L ($3.05) ($1.15) ($4.20) P/L $1.15 ($1.15) Zero

The price closing within the spread is the most complex scenario to explain, for it cannot be clearly stated whether price is closer to the Max Profit or to the Max Loss. When the price closes in between the 95/100 call spread, then things are in that fuzzy gray area and the specific outcome depends on where exactly the price has closed in between the strike prices. OUTCOME A: Outcome A shows the BEP of $95.75 OUTCOME B: Outcome B is less than the Max Loss of $4.25, at $4.20 OUTCOME C: Outcome C shows a small gain.

planned out. Once it is planned, it is so easy to follow the predetermined course of the action. Once again, plan the trade exits beforehand, and trade the plan. Good trading. n

Conclusion
In conclusion, this article has presented multiple scenarios for a sold vertical call spread. Out of all the scenarios presented, a trader should not allow the sold vertical call spread trade to come to the point of achieving Scenario 2, the Max Loss or even to the point of any of the outcomes of Scenario 3. The sold spread trade must be monitored and if the price goes against the trade, action needs to be taken. Pro-active traders are more profitable than the ones who react after the fact. There is no time for hesitation when your trade is clearly

Josip Causic
Josip is an instructor with Online Trading Academy. In class, Josip uses his hands-on experience of options trading, both directional and volatility plays, to teach students to be successful traders. He particularly loves to focus on teaching the risk adverse options strategies such as time spreads and iron condors. Contact Info: jcausic@tradingacademy.com

March 2010 | www.traders-mag.com

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TRADERSBASICS

The Variety of Price Charts to Describe Developments

Of Lines, Candlesticks, and Bars


Wherever statistical records are kept and data sets are recorded and evaluated, their optical representation is by means of charts. Whether it be climate change, population explosion or oil prices, their chronological sequence is represented in a chart. This is exactly what is done when individual financial shares are looked at. In order to gain a better perspective, people generally first look at the chart that goes with them. Since the price development of a commercial paper may well provide quite a bit of information for analysts after all, a good prognosis is key for the future -, they draw on a variety of ways of representing such price developments in order to be able to get a more accurate picture.
o The Classic Line Chart

The simplest and most widely used chart to describe developments is the so-called line chart and this is true not only of the financial world. You enter the time period on the x axis, and on the y axis the price, and in certain chronological sequences (e.g. days) the appropriate price for that time period. Usually, the respective closing prices of that time period (e.g. closing prices of a particular day) are drawn upon. These dots are then connected to each other

and what you get is a price curve. This is then called a line chart because the price development is described by way of a line. Figure 1 shows one such line chart.

American Bars and Japanese Candlesticks


However, there are concepts in describing charts that also take into account several time- period-related data. Just leaf through this magazine! In specialist literature line charts are actually rarely used. This is because in addition to the close, the respective open, high and low of the period under consideration are included. This procedure at first takes some getting used to, since no individual continuous line can be formed but each period must be represented as a self-contained element with individual opens, highs, lows, and closes. In order to visualise these elements, two different varieties are available: On the one hand, bars which became common in Western countries, and on the other hand, candlesticks which have been in use in Japan since the 18th century. Even then, people in Japan traded rice and clever traders made use of this technique. Many of these candlestick-analysis terms still in use today go back to this early phase. Ultimately, they describe exactly the same as a bar chart, but are considered by many to be the more graphic of the two methods. By now, these two more extensive ways of representing developments have found a great deal of acceptance and favour and have therefore become a standard function of each software program

F1) Daily Chart as Line Chart

Line chart (as of September 2007): The closes of the individual days are connected to each other by a line.

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TRADERSBASICS F2) Comparison of Bars and Candlesticks

designed for chart analysis. See Figure 2 for an additional detailed comparison of bars and candlesticks.

Meaningful and Graphic


But what is the advantage of these different ways of representation over the traditional line chart? How does one make use of the extra information that is undoubtedly available? First off, you can simply see more this way. Most highs and lows dont, after all, originate at the close of trading, but during the day. This results, for example, in an all-time high having, as a rule, a lower value in a line chart than in a bar chart, which also represents the intra-day highs. However, precisely numbered all-time highs are important price data for many analyses. As can clearly be seen in Figure. 3, in early November the large black candlestick far transcends the range covered by the line chart in Figure 1 because the opening price is appr. 4.8% above the close. This immediately reveals that on 9th November this commercial paper must have caused a bit of a stir since such a wide price range within one day is rather atypical of a stock. In fact, this stock had its quarterly results published on that day. Besides, there is a gap in mid-September, which is a striking price pattern. It would be impossible to see such a thing in a line chart. Furthermore, several individual bars or candlesticks appearing consecutively may generate price patterns which are optically striking and can be drawn upon for price prognosis purposes.

Bars vs. Candlesticks: As you can see, the candlesticks are the more graphic kind of representation, but actually contain exactly the same information as bars.

F3) Daily Chart as Line Chart

In Combination with other Price Factors


Obviously, lines, bars, and candlesticks do not yet cover the entire spectrum of different charts. In passing, the most important other techniques of representation are to be dealt with briefly here. For example, there is the possibility of combining the available chart with its volume, i.e. another numbered and analysis-relevant factor. The equi-volume chart reflects on its vertical axis the full price range per time period and on its horizontal axis the corresponding volume (volume of trade). Candle volume, therefore, is a candlestick chart on which the respective candlestick has the relative breadth of its corresponding volume. Consequently, highvolume days immediately stand out from the rest because of thick candlesticks.

Candlestick chart (as of September 2007): Each day is represented as a candlestick with the respective opens, highs, lows, and closes. This may cause analysis-relevant patterns to develop. Clearly visible in mid-September: a gap.

F4) Daily Chart as Point-and-Figure Chart

And Now at the End: The Somewhat Different Variety


Finally, there is yet another interesting form of representation from which the chronological component is totally absent since nothing but the price and its changes are looked at. This means that the chart is not extended each day by the respective close but precisely whenever the price has experienced a certain change defined earlier, e.g. 3%. The effect achieved by this causes minor movements or longer periods without any movement not to be included in the representation in the first place. This allows existing trends to be more easily recognised. One example of this would be the point-and-figure chart as used in Figure 4. Lastly, this group of charts also includes Kagi charts and Renko charts. n

Point-and-figure chart (as of September 2007): If the value rises by 2, there is a cross. If it falls by 2, there is a circle. Time is irrelevant here.

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TRADERSPEOPLE

Suri Duddella
TRADERS Interview

This Is How You Trade Chart Patterns Like the Pros!


Suri Duddellas great passions are mathematics, logic, computers and money. Its not surprising then that the university-trained engineer and computer scientist discovered trading for himself 13 years ago. He was especially fascinated by technical analysis and market psychology. After attending all the major trading seminars and reading many books, he began to develop his own mathematical models and analyses and was highly successful. From 1998 to 2005 Duddella ran his own financial business specialising in research and analysis, a company that was twice awarded the title Best of the Web. Beyond that, Duddella regularly presents his research work in reputable financial magazines such as Forbes or Stocks&Commodities and runs his own website www.surinotes.com offering his trades and scalps on a daily basis. In addition, in 2008 his work Trade Chart Patterns like the Pros appeared in which Duddella explains 65 different chart patterns together with their application in a clear and easy-to-understand way. This is where his unique trading approach is revealed: Pattern Trading in Futures and Shares. How this works, why market psychology and money management are so important to him and why he never enters into stock positions before 3.00 pm New York time can all be learned here.

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TRADERSPEOPLE

TRADERS: How did you get in touch with the markets?


Dudella: After my studies, for about 8+ years, I worked as a robotics engineer for Fortune 50 companies in the U.S. on applications of robotics/automation and computer graphics (CAD/CAM). During 1993-1995, the Internet was becoming popular in the U.S and I knew that that might be the technology of the future. I was involved with internet security projects and internet applications in general. In 1995 I was lucky enough to land a job as a consultant for a power utility trading company to build Internet security aspects of a trading software. There I was around traders who were using software and mathematics to make trading decisions. As I got curious about trading, some traders introduced me to the markets and taught me some key aspects of trading. Since then I have learnt about the applications of mathematics in markets and there I truly discovered my passion mathematics, computers, logic, trading and money!!!

TRADERS: Were there any specific stumbling blocks?


Dudella: There were quite a few... The first one was to realise my strengths and weaknesses in trading. During my entire education (undergrad/graduate studies), I never really focused on psychology and was never prepared for the psychological side of the markets. When I first started learning about markets, I was so focused on learning the mathematics, software and trading about the markets that I never prepared for psychology. On my journey of discovery to a private trader, I learned that psychology has a huge impact on markets and trading. Then I have to learn about myself, prepare for the psychological aspects of the markets. Even though it is not a stumbling block per se, accepting psychology was a challenge to a scientific brain. I am still learning about many areas of psychology and am involved in many market psychology seminars/presentations/books etc. Now market psychology is my favourite hobby.

TRADERS: How long did it take you to become successful?


Dudella: When I first started trading, I was part of a group of very seasoned traders and they used to teach me and instruct me how/what/when to trade. As part of a group, success was instant. But after 3+ years or so, the company which I was working for was sold and we all went our different ways. I became an individual trader to continue my passion. At that time in 1998 - I also founded a financial analysis and research company (100% automated analysis of equities), which became a huge success the year we started. I ran the company from 1998 to 2005. As an individual trader I have to rediscover myself and figure out myself what really works for my psyche. Group trading was great but those methods did not suit me as an individual trader. So I went on a path of self-discovery for a few years and I finally figured my real strength is in mathematics and geometric chart patterns and how they evolve and what they offer for my trading. That took a few years to figure out fully. But I have successfully transitioned from group trader to a private trader using the methods I built and learnt in the markets (with pattern trading as background). Traders have to develop constantly in order to be successful. A single method or single system will never work all the time as markets constantly change their behaviour . Traders also have to keep changing with the markets. Continuous education, keeping abreast of current market events, technology and interaction with a network of other successful traders is the key to success.

TRADERS: Why is psychology so important for you as a trader and when does it come into play in your trading?
Dudella: How has your trading changed since you began focusing on psychology? Has it changed for the better? Fear and greed are two key (strong) emotions of human psychology and influence every traders decision-making processes. Markets work between fear and greed as traders use greed to enter a trade and fear to exit the trade. Knowing how these two emotions influence our decisions may help traders to succeed. Simple examples of psychological preparation in trading are knowing a traders reaction when he/she incurs a sizable loss, how long and what processes it takes for him/her to move on to the next trade; or how a trader reacts to an unexpectedly profitable trade creating a euphoric mental state, which in turn may result in a series of losses in the following trades. I focus on preparation for the markets every day. This preparation includes meditation, pre-market preparation of the market & chart analysis/news and an overall trading plan. This gives me mental confidence to approach the markets. When I know I am not prepared, I will avoid trading that day and will spend my time catching up on other work. I am still developing as a trader but I know that since I started understanding market psychology and myself, I have changed my trading approaches, techniques and discipline to become a better trader.

TRADERS: You mentioned your weaknesses. What are your strengths?

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TRADERSPEOPLE F1) Fib.Grid System

suit all traders. But some traders may focus their time better in research and trading while they are alone. I am a private trader now but I do have a great network of friends/traders and we also interact well as a group.

TRADERS: What kind of trader are you? Could you explain your trading approach? Is it a system or a set of setups?
Dudella: I am a pattern-based trader. I trade equities on swing-based patterns (1-5 days) and trade Emini Futures Intraday, very short-term (1-30 minutes). Patterns provide both continuous and reversal setups to trade. Patterns also offer both trend and counter- trend trades. A few years ago, I was trading exclusively counter-trend trading and traded very well. Counter-trend trades are very short-term and can be quite profitable, but when you are wrong counter-trend trading is unforgiving whereas trend trading can be forgiving and traders can stay in the trade for a longer period of time, which may be more suited to most traders. Counter-trend trading also creates a negative mentality as you are constantly looking for a trend to end. About nine months ago, I made an effort to abandon the exclusive counter-trend methodology and adopted both trend and counter-trend trading. I have a few sets of patterns I trade. My book presents 65 patterns with illustrated charts of entry/exit and stop/targets. All these patterns are also grouped into 13 different chapters for users to pick their own interest. I recommend that users learn about just 3-5 patterns from the book of their choice and master them with their own instruments, time-frames and other indicators. I myself probably know 10-12 patterns very well. Mastering these patterns will take time (it took me 8-10 years, and I am still working on them...) I use my mathematical background to analyse the patterns and I find harmonic patterns (ABCs, Gartley, Butterfly..) to be my primary patterns to trade. I also detect these patterns in a market context using a Fibonacci grid system which uses a set of pivots (to show support/resistance), market structures (to show potential tops/bottoms) in a net like Fibonacci. band structure. All patterns are analysed in this Fibonacci grid system. I also trade geometric patterns like Triangles/Rectangles and Double Tops/Bottoms with my own set of rules.

The Fib.Grid system includes Fibonacci bands (showing price reaction and trends), pivot levels (showing historical support and resistance areas) and market structures (showing potential turning points). I am placing this structure on each chart in order to demonstrate how the current price reacts to the Fibonacci bands, whether the price is nearing its end, whether you trade above or below the extreme bands and whether the price uses support and resistance levels that are determined by the pivots. Once I have discovered such a Fib.Grid Ill look for the harmonic patterns within this grid.
Quelle: www.tradestation.com

Dudella: My greatest strength is my ability to trade (pull the trigger) when I see market setups/patterns regardless of my prior trade (loss or win) to achieve my objectives/ goals. My market strengths are my ability to decipher intramarket relations/patterns, and to analyse mathematical trend relations and geometric chart patterns. I also have strong skills in developing the market software to help my own trading.

TRADERS: What happened to your company? Why did you stop running it?
Dudella: I built a financial analysis and research company in 1998 and ran the company until 2005. As the company evolved, we successfully managed business models from research & analysis, financial modelling/analysis, Data distribution for many financial institutions and other financial companies. We also had a retail model for individual clients via a destination website. In 2005, we merged some of the R&D models with another company and closed the retail model/destination website. I have been a private trader since 2005.

TRADERS: Could you explain to us your Fibonacci grid system? How do you identify this Fib.grid and how do you identify the harmonic patterns in it? And what do you do after identifying the grid and the patterns?
Dudella: Most technical traders use chart analysis with market context concepts to trade. Market context concept is described as a concept that looks at how the current price is reacting to certain levels (pivots, support and resistance) and how indicators are performing relative to historic price conditions (like oversold, overbought) and where/how patterns are developing in current time-frame or multipletime frames etc. Each trader develops his own market context to trade. My way of looking at market context is through a Fibonacci grid structure (Figure 1). Fibonacci grids consist of Fibonacci bands (showing price reaction, trends),

TRADERS: Is it easier to trade in a group of traders or as an individual trader? How did group trading prepare you for your career as an individual trader?
Dudella: I think the answer may be different from trader to trader. As part of a group, I enjoyed the interaction as I was learning the ropes of the markets/trading and analysis. There was a big support group to share my experiences. As a single trader, you are responsible for all of your decisionmaking processes and that environment may or may not

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TRADERSPEOPLE

Pivot levels (to show historic support/resistance areas) and market structures (to show potential turning points). All these patterns are well explained in my book, which includes clear examples. On each trading chart I lay out this Fibonacci grid structure to show how the current price is reacts to the Fibonacci bands and if the price is exhausted -- trading above/ below the extreme bands and how the price is using support and resistance levels defined by pvots etc. while identifying the market structures. The confluence of these levels in the Fibonacci grid structure along with emerging pattern structure or pattern target/stop level helps me make a clear trading decision. Pattern trading is very precise as each pattern has specific rules to enter/stop and targets. When combined, pattern analysis with market context gives a great edge to trade. Patterns also fail but their failure levels are clearly defined and that information is clearly known prior to the trade; Hence, pattern trading is much more advantageous than trading other methods. I have written all the software to show/plot the Fib. grid structures, pivot structures (floor, Globex, Opening Range, Fibonacci. Zone) and market structures. I have also written harmonic pattern identification methods (like ABC, Gartleys/Butterfly... ) which plot in real-time while identifying trades. These patterns also automatically plot entry/stops and target levels without any delays to give potential trade opportunities.

research going into my equity trading. I have many models to look at (like relative strength, pattern confluences, multiple time-frames) and some basic fundamentals like earnings, news etc. My typical day takes me beyond close into the late hours for my research. I prepare for the next day by scanning charts for potential patterns/setups and trades. I have a great network of friends and we catch up every day with market news, trading ideas and news about markets, technologies and general topics. I also develop all my software/indicators/ systems in TradeStation, SQL and ColdFusion.

TRADERS: Could you please give us two or three examples of a typical trade explaining your strategy, entry and exit points, stops etc?
Dudella: Yes, certainly. I trade patterns with market context. In the following examples, I will explain my recent trades with details of how my trades are detected and how the entry/exit process was executed. One of my favourite patterns is called trading the Perfect ABC pattern (Figure 2). ABCs occur in all time-frames and all instruments. I automatically detect these patterns (with visual display on the charts) while they are forming in TradeStation platform. These patterns are also coded to automatically display entry, stop and target levels while these patterns are detected. In addition, I use RadarScreen to scan ABCs in multiple time-frames. A Perfect ABC setup is explained as follows. I plot Fibonacci grid structure (explained above) on my trading charts (@ES, 610 tick chart) along with ABC and other pattern detection methods. A Perfect ABC (Bullish) occurs when the price is in a downturn and makes A point below the lower Fib. band, B above or near the mid-Fibonacci band, and C below the mid-Fib band with at least 50% retracement. When this perfect ABC is detected, I will start watching the price action from C levels to show the reversal. I also plot entry and stop levels from C. When the price closes above the entry level (or mid-Fib band, in case very close), that is my long entry into my trade. I place stops below the C level to protect my trade. Once I have entered long trade, my typical targets are near 100 to 127% of AB levels. Depending on the size of ABC, I use multiple targets to exit my trade. In Figure 2, around 9.29 am, auto ABC setup is detected within the market context as price traded outside the extreme Fibonacci bands and marked A and B near the mid-Fibonacci band and C below the mid-Fib. band with 64.52% retracement. Once the price started to trade above the Entry level and the mid-Fibonacci band level, a long trade was entered at 844.5. A Stop was placed below C level around 841.25. Multiple targets are placed from the entry to 100% of AB level to 849. One of my other favourite patterns to trade is called 2B Top/Bottom patterns (Figure 3). These patterns are explained well in my book Trade Chart Patterns Like The Pros. 2B Top/Bottoms are described as variations of Double Top and Double Bottom patterns. 2Bs have specific rules to trade and I have built an auto detection program (in TradeStation) to plot them with entry/stop and target criteria.

TRADERS: Would there be different patterns for different types of markets?


Dudella: Most conventional price patterns work in all timeframes and in all markets. As long as each price bar has the same information like Time, Open, High, Low, Close, and Volume, all pattern formations will work in any markets. Certain patterns derived from auction theories or volume theories may vary from market to market but all conventional patterns work in all markets.

TRADERS: What does a typical trading day look like for you?
Dudella: I really look forward to beginning my trading day and I consider this time is the best part of the day for me. My typical trading day I must start with meditation and trading visualization exercises for about 90 minutes. This really prepares my focus and confidence for trading. I trade both futures and stocks every day. I trade futures intraday (short-term trading) and stocks swing trading (1 to 5 days). From the pre-markets to about 3pm I trade Emini Futures. I do not hold any futures positions overnight. During the intraday I am also updating my website continuously (within seconds of my trades/setups) as a blog with my setups/ideas/trades. I have a six- monitor PC to watch my trades in real-time and another two-monitor PC setup for trade execution and backup purposes. From 3pm Eastern Time, I stop trading futures and start looking at the 100 or so equities/major markets/indices that I track for patterns for me to enter new positions. I only enter into new equity positions from 3 pm until close. Then on the following days (1-5days) I manage positions to close them (either stops or targets) during the entire day. There is a lot more

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TRADERSPEOPLE F2) Perfect ABC Setup

Figure 3 shows 2B Top pattern with market context at Emini S&P 500 Future on Apr. 27, 2009. Around 11 am, the chart formed outside the Fibonacci bands a Market Structure High (MSH) to signal a potential top. Around 12 noon, this MSH top was retested but failed to continue to make new highs. When price trades below the breakout bar (second time) low, a 2B Top is signalled. Also note, price closed below Point of Control (POC), Previous days High and Globex High (all part of market context). After 2B signal, if prices close below the 2Bs low, then a trade is signalled with an entry marker (short below) and a stop marker. Around 12.15pm, a short trade was entered at 862 with a stop at 865. Targets are placed at major swing lows prior to MSH (first Top) at 857-858. This chart shows completion of 2B pattern pattern. Targets are shown.

TRADERS: Why do you open up a position for equities after 3:00 pm?
Dudella: Based on many years of experience traders will realise that it is important to know the type of instruments and chart time-frames and time-zones that works best for their own trading. I trade E-mini Futures intraday (short-term) and historically my trading results in the morning hours are very good. I also know historically I incurred losses in the last hour of futures trading... hence, I stop trading futures in the last hour (from 3pm Eastern Time onwards). So, from 3pm, I start looking for patterns formed in the U.S. equity markets (using 5m, 60m and daily charts, RadarScreen scans) for new swing positions. Once I find a few key patterns/setups for swing positions, I still have about an hour or so (until 4pm) to take new equity swing positions. On the following day to the next few days, during the premarket/intraday I manage to close the equity positions (stop or targets...).

Figure 2 shows a perfect ABC setup in the E-Mini S&P 500 Future at 9:29 ET on 28 April 2009. The price was quoted outside the extreme Fib. bands and marked A and B near the mid-Fib. band and C below the mid-Fib. band with a 64.52% retracenent. As soon as the price traded above the entry level and the mid-Fib. band, I opened my long trade at 844.75. I placed my stop below C at 841.25 und set several targets from the entry up to 100 per cent of the AB level.
Quelle: www.tradestation.com

F3) 2B Top/Bottom Pattern

TRADERS: Have you any favourites among the equities?


Dudella: I have a list of 100 or so stocks I keep a close watch on. I have been trading these stocks for a dozen or so years. I have added and removed a few stocks from this list, but the core set is the same. I try to trade stocks whose business models I am familiar with, some basic fundamentals, earnings and price action. No favourite stocks per se, but I do like high-beta stocks like GOOG, RIMM, BIDU, AAPL and they tend to be better for my style of trading.

TRADERS: Can you give us an equity trade, too? With a chart, please.
Dudella: Patterns work in all instruments and in all timeframes. This example shows one of the popular chart patterns inverse head & shoulder development in AMZN Daily chart (Figure 4). I have traded AMZN many times as swing trade and Ill explain the Equity pattern concept here. From October 2008 to February 2009, AMZN developed an Inverse Head & Shoulder pattern with head at $34.50 and shoulders from $44 to $48. A neckline is formed around $60 connecting the head and shoulders. When price closes above

Here you can see the 2B top on the chart of the E-Mini S&P 500 Future on 27 April 2009. At around 11:00 ET a MSH was formed outside the Fib. band which signalled a potential top. About half an hour later this MSH top was retested , but couldnt reach any further highs. If the price trades below the breakout bar low, a 2B Top will be signalled. Moreover, the price closed below the POC, below the highs of the previous days as well as below the Globex high. Finally, at around 12.15 ET a short trade was entered with a stop at 865. The targets were placed at the big swing lows prior to the MSH (first top) at 857.
Quelle: www.tradestation.com

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TRADERSPEOPLE F4) Inverse Head Shoulder Pattern

the neckline with a strong gap or wide-range bar, that signals a potential breakout and strong momentum as the pattern completes. Notice price also closed above the mid-fib band. A long trade is triggered above the high of the breakout bar ($62.5) and stop is placed below the mid-fib band. The first target is about 62% ($75.7) of the price above the neckline of the distance from head to the neckline and the second target is 100% ($84) of the same range from the neckline.

TRADERS: What about your geometric patterns? How do they work? Could you give us an example of it?
Dudella: The easily recognisable patterns like rectangles, triangles which have some ratio relationship to prior swing/ side with other swings are called Geometric Patterns. For example, when you notice a market pattern making a series of swing highs/swing lows at the same levels for a long time, it may be forming a rectangle pattern (like a channel). For this pattern, the prior direction before the rectangle pattern (channel) is monitored for the breakout/breakdown. Similarly, the symmetric triangles also form continuation patterns. When they form in the middle of a trend, watch for the breakout in the prior direction. The target for the symmetric triangle is the swing length prior to the formation of a triangle from the breakout level. As an example of a Rectangle channel pattern, BRCM daily chart is shown here (Figure 5). After a prolonged decline from June 2008 to Oct. 2008, BRCM posted an ABC pattern formation outside/within the Fib. bands. In January 2009 to mid-March 2009, BRCM traded between $15.50 and $19 in a rectangular chart pattern reaching the top and bottom channel multiple times. The pre-condition for this rectangular pattern condition is 1) An exhaustive sell-off. 2) Potential ABC Bullish pattern. 3.)Range trading between two levels. The direction prior to the consolidation is up. So the upside breakout is anticipated in the direction of the trend before the rectangle pattern. In late March 2009, the channel breakout was triggered as price closed above the channel high. A target is placed at 100% height of the rectangle channel from the breakout level. A stop was placed at the mid-range of the channel below the entry.

From October 2008 to February 2009 Amazon formed an inverse shoulder-head shoulder pattern with the head at $34.50 and the shoulders at $44 to $48. The neckline is at about $60. Should the price close above the neckline with a strong gap or a long bar, a potential breakout as well as a strong momentum will be signalled. Make sure that the price has also closed above the mid-Fib. band. A long trade will be triggered above the high of the breakout ($62.50) und the stop placed below the mid-Fib. band. The first target is at more than 62 per cent ($75.70) of the price above the neckline and the second one at 100 per cent ($84) of the same range of the neckline.
Quelle: www.tradestation.com

F5) Geometric Pattern

TRADERS: What does your stop strategy look like?


Dudella: In both equities and futures, I extensively rely on my pattern-based entries and exits. All these methods are coded (mathematical algorithms) into my pattern detection methods. For example, when I am trading Emini Futures (intraday), every trade I look for something called V-Stop (Vertical Stop) which is computed from my entry to the nearest support (for long trades) or resistance (for short trades). It is the vertical distance between entry to prior major swing-low or swing-high. First this stop value is computed and then I look for my nearest target. In futures, I must have at least a 1:1.5 stop/target ratio for me to enter the trade (scalp/short-term) trades as opposed to a 1:2 to 1:3 stop/target ratio for swing trades. I also use scaled exits and scaled entries as part of my trading plan. One of my rules of adding to my current position is that I should know prior to entering my

The daily chart of the BRCM stock reveals a quadrangle channel pattern. After a constant fall from June 2008 to October 2008 BRCM displayed an ABC pattern formation outside and inside the Fib. bands respectively. From January 2009 to March 2009 the stock was quoted at between $15.50 and $19 in a quadrangular chart pattern, which touched both the top and the bottom several times. At the end of March 2009 the breakout channel was finally released when the price closed above the channel high. The stop was placed in the middle of the channel below the entry.
Quelle: www.tradestation.com

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TRADERSPEOPLE

first trade that I will be adding at multiple levels as part of my scale-in and scale-out plan.

TRADERS: Which role does money management play in your trading, and why?
Dudella: I think most successful traders agree that money management is the key element to their success besides trading knowledge, skill and discipline. Unfortunately, most novices overlook the money management concept, specially in futures markets. In futures markets, the leverage is very high and without using proper money management techniques, the sudden moves will result in catastrophic losses wiping out traders accounts. Money management helps traders to avoid large losses and implement trading size logic along with logical stops/targets.

It serves the purpose of keeping track of my trading progress, ideas and serves as an outlet to showcase my book/ products. I have been running my website since 2006.

TRADERS: Which tips do you have for traders? Novices and professionals?
Dudella: Novices must carefully evaluate trading as a career/profession before they venture into it. Trading is the most difficult profession and success could be elusive for a very long time. But for determined and disciplined traders, it offers great rewards. Excellent trading knowledge, hard work, education, discipline and money management are keys to any traders success. Traders should be prepared to be adaptive to any market condition and continue to learn from the markets. I have also found that being humble and honest helps trading significantly.

TRADERS: You are a systematic trader, arent you? When does the discretionary component come into play and how important is it for your trading?
Dudella: I trade both system and discretionary trades. My discretionary trading is also a key component of my trading plan especially in scalp/intraday trading. There may be certain components (like multiple pattern scans/timeframes or events/news-driven setups) that are very difficult to implement successfully in system trading. Also, there is some element of intuition in all potential setups and it may change from setup to setup, hence discretionary trading is used.

TRADERS: What do you think about the future of the markets? Which markets will be the winners and which ones will be the losers?
Dudella: Regardless of trend direction, markets will continue to evolve and prosper. Any one venturing into the markets with a proper skills set and discipline will have a bright future. I do think the newer ETFs (2X, 3X), Emini Futures and Forex trading instruments will have a great future in the trading business.

TRADERS: You are opening up all your trades to other viewers. Do you have any concerns about them copying you?
Dudella: Yes, I do post and discuss my trades/setups on my website in real-time and end-of-day. I post these setups and my trades/research ideas primarily to keep a journal of my own trading. I have introduced some of the best techniques that I follow in my book and are also shown in my indicators. In addition, I have openly discussed some of these concepts/methods in my presentations and interviews (including this interview). Many traders wonder why I am not too concerned about revealing all this information. In my view, my trading style is unique and I work quite hard to find better and new methods to trade. I think just revealing a technique does not harm my trading at all, besides I do have plenty more ideas to share. I truly believe success in trading results from trading knowledge, hard work, risk-taking, excellent trade/money management techniques and solid discipline. So if other traders are willing to learn my methods and implement them to their advantage, I will be honoured rather than worried.

TRADERS: What are your personal plans for the future?


Dudella: I am quite lucky to have found an area where I can use my passion for mathematics, logic, computers and money to build my career in trading. I will continue to trade and build new concepts/trading methodologies. I have the ambition of managing money in the near future but I am currently enjoying my private trading career.

Trade Chart Patterns Like The Pros Specific Trading Techniques In his book Trade Chart Patterns Like The Pros, Suri Duddella describes a total of 65 chart patterns, including charts, entry and exit pointsas well as stops and targets. To provide the reader with a clearer structure and a better overall view the patterns are classified in 12 groups (bars, pivots, Fibonacci, harmonic patterns, geometric patterns, channels, bands, ZigZag, Price Action, Tops and Bottoms, exotic patterns and event patterns). All the patterns are based on the authors own practical experience whose work is aimed at the broad spectrum of traders from novice to professional. This way the reader learns how to recognise a pattern and apply the appropriate techniques to open, manage and again close a trade. Each of the 65 patterns includes a short and easy-to-understand summary as well as a chart illustrating the concept. For each pattern the setup and the entry and exit strategies are explained first before the price targets for the profitable trades and the stop strategies for loss control are introduced. All the chart patterns, strategies and techniques are taken from outstanding books on market theories, market geometries and pattern trading. Those Suri Duddella has been trading and archiving for many years and has documented the results since 1998. Trade Chart Patterns Like The Pros now is the result of his years of work. It shows the specific and practical techniques as well as the way Dudddella trades them. Many techniques are his own methods that are based on his observations.

TRADERS: Please tell us about your website. When did you found it? What is it? What does it provide? Which purpose do you want to achieve?
Dudella: My website http://www.surinotes.com is a researchbased website which showcases my trading research/ concepts, my book/products , and my trading blog (soon Ill be adding videos).

March 2010 | www.traders-mag.com

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Emilio Tomasini is a full time professional trader. He trades both stocks discretionally and futures in a systematic way (commodities, stock and bond futures). He advises institutional players on quantitative trading. For more info www.emiliotomasini.com His email is tomasini@emiliotomasini.com.

Market Rap

The Old New Frontier of Portfolio Trading

o One of the most murky aspects of trading is portfolio

trading. There is no literature, no articles, no shared experience. Portfolio trading is something that goes beyond the wanna get rich quickly attitude that many retail traders have. Since the majority of traders do not approach trading with a portfolio mindset they simply focus on what the Dax did yesterday portfolio trading is the missing link in the current landscape of trading. Questions about portfolio trading are easy to grasp but very difficult if not almost impossible to answer, since there is not a wide offering of commercial software that works in such an environment with the praiseworthy exception of Rina Portfolio Maestro. For example, the current view of portfolio trading is that the stop loss on single systems which comprise the portfolio should be placed in a way such that if all the single systems were stopped out, the total loss on the whole portfolio is still affordable. Example: If the maximum loss on a single system is 1%, you trade 10 systems and the ruin that is, the point where you definitely stop trading, is 10%, then we can calculate that the risk of ruin is that all systems will be stopped out together. Put another way, what the trader follows and what makes the difference, are not the single equity lines but the portfolio equity line. You will go bust or you will make a fortune, just on the portfolio equity line, regardless if you make a million on one hand on a single system and you lose 2 million on the other hand. What matters is the final result, which is the portfolio equity line. Single trades do not exist because they melt down together creating different portfolio trades. What is the difference between a situation where an individual system loses 10,000 dollars and another situation where 10 systems lose 1000 dollars? There is no difference. If you apply the current view and apply a stop loss on the single systems it will happen that you will not be stopped out on certain trades but on the contrary will be stopped out if you apply the portfolio logic with a portfolio stop loss.

This simple rule can furthermore be extended to the profit exits: what is the difference between 10 systems making a profit of 1000 dollars each and a single system making 10,000 dollar profit ? If you are watching the world sitting with the portfolio attitude, these two situations are the same. But if you are trading with a single system-single profit approach then everything is different. My intention is not to offer an ultimate reply to questions that have been hovering around the trading arena for decades but simply to put readers on guard for the single system approach, which is not a wrong approach but rather an approach among other approaches. If you take the portfolio approach, what you are considering trading is really just the portfolio equity line. Another tip would be to create an ADX indicator, for example just on the portfolio equity line and to trade the portfolio when the ADX rises above 25 or indicates a growth trend for 15 consecutive days. You can even filter out the trades with a moving average of the portfolio equity line: If the equity line crosses above the moving average of the equity line then you place all the trades which the systems are producing. Vice versa, no trade is placed. This feature has already been implemented into almost all portfolio software available such as Market System Analyzer by Mike Bryant (www.adaptrade.com) or Rina Money Manager (www.rinafinancial.com). Results have been mixed and vary depending on which systems you include in the portfolio. In conclusion: Stop trading only one system over one market and consider a multimarket, multisystem approach which will avoid getting you trapped in a trendless market situation and which will instead, always leave you on top of the trend. To do that though, you will need to work and carefully research the portfolio equity line and not just single equity lines. As a personal recommendation I would tell you that every effort in this direction is worthwhile. n

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