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CONTENTS MARCH 2015, Volume 33 Number 3
AT THE CLOSE
62 Play The Markets
And Keep Your Day Job
by Azeez Mustapha
Not ready to be a full-time trader? This article is the basis for
Here’s a high-probability, part-time TIPS
Traders’ Tips this month.
trading strategy that will help you
master the markets before you n Cover: Wlliam L. Brown
commit to it full time.
n Cover concept: Christine Morrison
Copyright © 2015 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
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03-IB15-877CH855
O PENING P
Opening Position
OSITION
March 2006 • Volume 24, Number 3
March 2015 • Volume 33, Number 3
T
EDITORIAL
O
Editor in Chief Jack K. Hutson
editor@traders.com
Editor Jayanthi Gopalakrishnan
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Staff D. Peterson
Staff Writers Dennis D. Peterson, Bruce Faber
Webmaster Han J. Kim world. disappointing earnings numbers
Webmaster Han J. Kim
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If you purchased, sold or held NYMEX Light Sweet Crude Oil, NYMEX New York Harbor Heating Oil or NYMEX New York Harbor
Gasoline futures contracts at any time from March 2, 2007 through March 26, 2007, inclusive, then your rights will be affected and
you may be entitled to a benefit.
A Settlement has been proposed in a class action lawsuit concerning the allegedly improper trading of three futures contracts on the
New York Mercantile Exchange (“NYMEX”) from March 2, 2007 through March 26, 2007, inclusive. The Settlement will provide $16.75 million
to pay claims from Persons who bought, sold, or held the referenced futures contracts at any time from March 2-26, 2007. If you qualify, you
may send in a Proof of Claim form to potentially get benefits, or you can exclude yourself from the Settlement, or object to it.
The United States District Court for the Southern District of New York (500 Pearl St., New York, NY 10007-1312) authorized this notice.
Before any money is paid, the Court will hold a Fairness Hearing to decide whether to approve the Settlement.
Who’s Included?
You are a “Settlement Class Member” if you purchased, sold or held NYMEX Light Sweet Crude Oil futures contracts, NYMEX New York
Harbor Heating Oil futures contracts or NYMEX New York Harbor Gasoline futures contracts at any time from March 2, 2007 through March 26, 2007,
inclusive. Excluded from the Settlement Class are (i) members of the judiciary assigned to this case, including their immediate family members;
(ii) Class Counsel and their employees; (iii) Defendants and any parent, subsidiary, affiliate, employee or agent of any Defendant, including
Defendants’ counsel; and (iv) Opt Outs.
Contact your futures broker or futures commission merchant to see if you purchased, sold or held the referenced contracts. If you’re not sure
you are included, you can get more information, including the Settlement Agreement, Mailed Notice, Plan of Allocation, Proof of Claim and
other important documents, at www.nymextassettlement.com (“Settlement Website”) or by calling toll free 1-866-778-9470.
What’s This About?
The lawsuit claims that Defendants Optiver US LLC, Optiver Holding B.V., Optiver VOF, Christopher Dowson, Bastiaan van Kempen, and
Randal Meijer (“Defendants”) caused and aided and abetted the causation of artificial prices of certain futures contracts on the New York
Mercantile Exchange from March 2-26, 2007, inclusive, by amassing dominant NYMEX trading at settlement (“TAS”) contract positions and
offsetting such positions through NYMEX futures contracts transactions in the opposite direction of the TAS positions during the closing period
for the futures contracts at the end of the day. Defendants deny any wrongdoing that Plaintiffs allege in the lawsuit and maintain that they have
complied with their legal obligations.
The Court did not decide which side is right. But both sides agreed to the Settlement to resolve the case and get benefits to potentially affected
market participants. The two sides disagree on how much money could have been won if the Plaintiffs had prevailed at trial.
What Does the Settlement Provide?
Under the Settlement, Defendant Optiver US agreed to pay $16.75 million into a Settlement Fund. If the Court approves the Settlement,
potential Settlement Class Members who qualify and send in valid Proof of Claim forms will receive a share of the Settlement Fund, after it is
reduced by the payment of certain expenses. The Settlement Agreement, available at the Settlement Website, describes all of the details about the
proposed Settlement.
The exact amount each qualifying Settlement Class Member will receive from the Settlement Fund cannot be calculated until
(1) the Court approves the Settlement; (2) certain amounts identified in the full Settlement Agreement are deducted from the Settlement Fund;
and (3) the number of participating Class Members and the amount of their Allowed Claims are determined. In addition, each Settlement Class
Member’s share of the Settlement Fund will vary depending on the information the Settlement Class Member provides on their Proof of Claim
form. Generally, however, if you bought, sold or held more contracts, you will get more money. And if you bought, sold or held fewer contracts,
you will get less money.
The number of claimants who send in claims varies widely from case to case. If less than 100% of the Settlement Class sends in a Proof of
Claim form, you could get more money.
How Do You Ask For a Payment?
If you are a Settlement Class Member, you may seek to participate in the Settlement by submitting a Proof of Claim to the Settlement
Administrator at the address below postmarked no later than August 3, 2015. You may obtain a Proof of Claim on the Settlement Website or by
calling the toll free number referenced above. If you are a Settlement Class Member but do not file a Proof of Claim, you will still be bound by
the releases set forth in the Settlement Agreement if the Court enters an order approving the Settlement Agreement.
What Are Your Other Options?
If you don’t want to be legally bound by the Settlement, you must exclude yourself by April 14, 2015, or you won’t be able to sue, or continue
to sue, Defendants about the legal claims in this case. If you exclude yourself, you can’t get money from this Settlement. If you stay in the
Settlement, you may object to it by April 27, 2015. All objections to or requests to be excluded from the Settlement must be made in accordance
with the instructions set forth in the formal Mailed Notice. The Mailed Notice available at www.nymextassettlement.com explains how to
exclude yourself or object.
The Court will hold a Fairness Hearing in this case (In re: Optiver Commodities Litigation, Case No. 1:08-cv-06842-LAP) on May 19, 2015,
at 1:00 p.m. in Courtroom 12A, United States Courthouse, 500 Pearl Street, New York, NY 10007, to consider whether to approve
the Settlement and a request by the lawyers representing all Settlement Class Members (Lovell Stewart Halebian Jacobson LLP,
Lowey Dannenberg Cohen & Hart, P.C., and Robins Kaplan Miller & Ciresi L.L.P.) for an award of attorneys’ fees of no more than one-third
(i.e., 33 1/3%) of the Settlement Fund for investigating the facts, litigating the case, and negotiating the Settlement, and for reimbursement of
their costs and expenses in the amount of no more than approximately $275,000. The lawyers for the Settlement Class may also seek additional
reimbursement of fees, costs and expenses in connection with services provided after the Fairness Hearing. These payments will also be deducted
from the Settlement Fund before any distributions are made to the Settlement Class.
You may ask to appear at the Fairness Hearing, but you don’t have to. For more information, call toll free 1-866-778-9470, visit the
Website www.nymextassettlement.com, or write to IN RE OPTIVER COMMODITIES LITIGATION SETTLEMENT, c/o A.B. DATA, LTD.,
PO BOX 170500, MILWAUKEE, WI 53217-8091.
The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communica-
tion with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers,
this magazine would not exist.
Email your correspondence to Editor@Traders.com or address your correspondence
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letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verification. Letters may be edited for length or clarity. The opinions
zero frequency. However, if I additionally
expressed in this column do not necessarily represent those of the magazine.—Editor
multiply the input by K, then I simply give
the EMA a gain of K at zero frequency.
SUPERSMOOTHER OSCILLATOR angles for the cosine. To code it using In a nutshell, that is what I did in the
AND EXCEL SPREADSHEET radians, for example, in Excel, the cell article. I just changed the terminology
Editor, pseudocode for the tunable constant b1 to make the philosophical point, and the
I really enjoyed John would look like this: scale factor is irrelevant.
Ehlers’ article “Whiter Is My shift in terminology produced a
Brighter” in your January b1 = one-bar difference as the expression
2015 issue. He has a way 2*a1*COS(RADIANS for the white spectrum. But a one-bar
of translating unfamiliar (1.414*3.14159/BandEdge)) difference produces a 6 dB increase in
concepts into something useful to us. the high-pass filter gain at the Nyquist
And the results and final equation prove Also, Ron McAllister’s spreadsheet frequency. I then added a zero of trans-
that out. that he presented in the Traders’ Tips mission to the one-bar difference filter
The article’s pseudocode of b1 in the section of that same issue contains a at the Nyquist frequency to mitigate the
calculation for the SuperSmoother uses small error in it: In cell A21, where he filter gain (in effect, noise gain) at that
computes the tunable constant a1, he spectral point.
gives: =EXP(-1.414*3/A19), where I think the really important part of my
the 3 should instead be pi (3.14159). I article is that the “pink noise” shape of
noticed this when my tunable constants the market data spectrum must be leveled
for BandEdge=20 did not exactly agree if analysts are to make reasonable filters
with his. and indicators.
® For those readers wanting to know
the exact values of the SuperSmooth- Editor: Ron McAllister’s revised spread-
er tunable constants when Band- sheet that adds the pi function is avail-
Edge=20, so that they can check out able at our website, www.traders.com,
their own formulations, they are: in the Traders’Tips area for our January
a1=0.8008, c2=b1=1.5623, c3=-0.6413 2015 issue.
NeuroShell Trader and c1=0.0790. Note that c1+c2+c3 = To reach the Traders’ Tips area at our
1.0000. website, choose the Traders’ Tips menu
Now Works with FXCM Don Kraska item from the Home–S&C button on our
Data and Brokerage homepage at www.traders.com.
Author John Ehlers replies:
I am glad you enjoyed my article “Whiter SUGGESTIONS
Is Brighter” in the January 2015 is- Editor,
sue and that you appreciate my efforts Please try to publish one or two recom-
to bring a little science to this art of mendations on stocks, commodities,
trading. forex, and indexes in every issue, if
It is my custom to write an exponential possible.
moving average (EMA) in the form: The best way to do so would be to ask
the author of an article to recommend a
Output = a*Input + (1-a)*Output[1]; security or two at the end of his or her
Winner 12 years in a row! article using the same method or trading
Written this way, you can check by setup he or she is writing about. This would
www.NeuroShell.com inspection that the two coefficients of the quickly filter out real traders with life ex-
301.662.7950 equation sum to unity. This means the perience versus writers with no practical
EMA is guaranteed to have unity gain at “war-zone” experiences, per se.
8 • March 2015 • Technical Analysis of Stocks & Commodities
LETTERS
Please ask the articles’ authors to
provide some backtesting and verifiable
results on their recommended trade setup
as well. This would cement the deal for the
writers’ own reputations and personas.
A few but solid actionable recommen-
dations each month from your contribut-
ing writers would make your magazine
much more appealing to the financial
junta than the typical financial magazine
that offers only repetitive, boring articles
on topics like MACD, SMA, EMA and
any other trading setups.
This would also help writers to work
hard and write something compelling
that back their observations, theories,
and data, not just plain old dry articles
without much meat. Thank you.
Jack Mirza
Fundamentals have
their place
Because of the nature of the un-
derlying mechanics, fundamental
analysis is geared more for longer-
term trading. Technical analysis
tends to be more appropriate for
short-term trading. However, it
is possible to combine aspects of
both. For example, fundamentals
might indicate the future course a
currency is likely to take; the only
question would be the exact timing
of the move. Technical indicators
can provide the signals to show
when that movement is beginning.
In some cases, collective trader
psychology might mean following
the technical indicators even when
the underlying fundamentals don’t
justify the price movement.
As an example, billionaire hedge
fund mogul George Soros—who is
MAGHEN BROWN
famous for, among other things,
making fantastically profitable
trades on the Thai baht and the
British pound, earning a $1 billion
Necessary & Useful
Trading Forex:
profit on a $10 billion trade on the
latter currency—bet billions on
gold in 2010. Even though he knew
Fundamental Analysis
that the fundamentals pointed to a
bubble in gold prices, the techni-
cal indicators showed that traders
were nevertheless flocking to buy,
Part 5
and he made money buying the
upward trend.
Forex traders need to keep an eye on fundamental data such as interest rates, central
bank policies, and economic data. In part 5 of this six-part series, we’ll take an in-depth Central banks
look at these fundamental variables. and interest rates
One important factor that distin-
by Imran Mukati guishes forex from equities is the
10 • March 2015 • Technical Analysis of Stocks & Commodities
FOREX FOCUS
existence of central banks. While companies Interest Rate Demand (Borrowers) Supply (Lenders) (Shortfall)/Surplus
take actions intended to affect the price of their 1% $1,000 $50 ($950)
stock, in most cases they have little power to 2% $600 $100 ($500)
3% $500 $200 ($300)
affect it substantially; the market makes those 4% $400 $400 $0
decisions. A currency, however, is not just 5% $200 $500 $300
something to be traded in the marketplace; it 6% $100 $600 $500
is the economic lifeblood of a country. Valu- Figure 1: different levels of demand for borrowing at different interest rates.
Here you see hypothetical numbers to show you how much borrowers are willing to borrow and how much
ations that are too strong or weak have real commercial banks have available to lend at different interest rate levels.
and important impacts on the economy, so
each central bank is charged with governing
its currency. (if they can get one at all) since they are a higher risk.
First, I’ll talk about who the players are. Just about every There are varying levels of demand for money (loans) at
country has a central bank, but you won’t be trading every different interest rates. If you want to borrow money to buy
currency. The central banks that govern the majors are: a boat, remodel your house, or expand your business, and the
bank tells you the interest rate will be 18%, you will probably
n US Federal Reserve
decide that borrowing simply isn’t worth the cost. Instead,
n European Central Bank you’ll save up the money (and savings rates, by the way, will
probably be quite generous) or just forgo whatever it is you
n Bank of Japan
were going to purchase with the loan.
n Bank of England But what if the bank is lending at 0.5%? If you can get a loan
at that rate, you’ll probably sign up right away. After all, that’s
n Reserve Bank of Australia
nearly free money! So what we find is that there are different
n Swiss National Bank. levels of demand for borrowing at different interest rates.
Look at the table in Figure 1 for some hypothetical num-
Don’t assume that central banks are focused solely on currency bers. Here you see how much borrowers are willing to borrow
values—their responsibilities are much more complex than (demand) and how much commercial banks have available to
that. The US Federal Reserve (the “Fed”) has by law a dual lend (supply) at each interest rate level. Remember that banks
mandate: to maximize employment while controlling infla- are taking deposits from savers and using that money to make
tion. (The Fed’s standard for controlled inflation, by the way, loans. However, a bank can’t loan out everything it has. Cen-
is 2% to 3%.) At the end of the day, any central bank wants its tral banks establish reserve requirements, which dictate what
nation’s economy to grow as fast as possible while minimizing proportion of its deposits a commercial bank has to have on
negative economic effects like bubbles (consider the effects hand as cash or other liquid assets, like securities.
of the popping of the US housing bubble in 2008); recessions If a bank has $1 billion in deposits and the reserve re-
or depressions; and inflation or deflation. Basically, they are quirement is 10%, the bank can’t loan out more than $900
looking for the Goldilocks standard in their economy—not million; it must keep at least $100 million. This, by the way,
too hot, not too cold, but just right. is another tool in the central banker’s toolbox. Adjusting re-
There is one major tool that central banks use to pursue serve requirements up or down can free up more money for
these goals, which is normally labeled monetary policy. loans or reduce what’s available, causing money to flow into
Informally you may hear it called setting interest rates, but or out of the economy. It’s also part of what caused the 2008
this is misleading in that the central bank doesn’t simply say, financial crisis. Some of the liquid assets commercial banks
“This is the new rate,” despite the impression you might get were holding as part of their reserves were mortgage-backed
from the news media in the wake of, for example, a meeting securities (MBSs). When it became clear that no one really
of the Federal Reserve Open Market Committee (FOMC). knew how many bad mortgages were rolled into those MBSs
The reality is more complex. and therefore what they were worth, the banks no longer knew
Understand that an interest rate is basically the price of what they had in reserves. Their response was to hold onto
money—specifically, the price to borrow it. In simple terms, their cash by basically stopping all lending.
if you are a saver, you give your money to a bank. The bank, Going back to the table, 4% is the hypothetical equilibrium
which will be using your funds to make loans, pays you a cer- rate—the rate at which commercial banks have as much money
tain interest rate. If you are a borrower, the bank will charge to lend as people and companies want to borrow. While banks
you a certain interest rate as well. That rate is, needless to might love to make even more loans at 1%, 2%, or 3%, since
say, quite a bit higher than what the saver is receiving. Part their profit margins are basically the same at each rate, they
of the difference is what the bank uses to cover its expenses don’t have the reserves to do so.
and make a profit; another part is a risk premium—an amount Enter the central bank, which, among other things, acts as a
paid to cover the risk that some borrowers will fail to repay bank for banks. Central banks charge interest to commercial
their loans by making up those losses. That’s why a person or banks for loans as well. If they are loaning at 1%, commercial
a company that is a poor credit risk will pay more for a loan banks might need to charge 3% or 4% to be profitable. But
March 2015 • Technical Analysis of Stocks & Commodities • 11
Fundamentals in the news
Fundamental analysis relies heavily on
You should make it a habit to the news. Governments, central banks,
know the central bank targets and independent entities like the Confer-
ence Board, which produces the monthly
for GDP growth and inflation in US Consumer Confidence Index, are
each country whose currency constantly announcing economic data.
you plan to trade. Central bankers also announce policy
decisions; in the US, analysts who follow the Federal Reserve
and parse its announcements are nicknamed Fed watchers.
Because the US dollar is so important in the forex markets, US
economic data is king. The top five information groups, ranked
if the central bank cuts the rate it charges banks to 0.5% or beginning with the highest significance to forex trading, are:
0.25%, suddenly the commercial banks can loan money at
1% or 2% and still be profitable. In essence, the central bank n Nonfarm payroll report
makes up the shortfall in the available lending pool, which n Retail sales
pumps money into the system and drives rates down. Increas-
ing rates works in just the opposite manner. n International trade reports
Why don’t central banks just leave rates low all the time, n Federal Reserve policy decisions
encouraging borrowing and therefore causing the economy
to expand constantly? Well, there’s a little matter of inflation. n Consumer Price Index.
When more money enters the system, it means people and
companies can make more purchases, which means there Just as analysts do with corporate earnings announcements
are more dollars competing for basically the same amount of in the equity markets, observers will anticipate specific eco-
goods. It also means expanding companies need to hire more nomic numbers prior to the release of the data. This provides
workers, and with more competition for basically the same an opportunity to play the news based on how the actual
number of workers, wages start rising. This drives inflation, numbers compare to the expectations. If the numbers come
which, if it gets out of control, is very hard to rein in and can out as expected, the currency is likely to be flat—any buying
destroy an economy. However, a certain amount of inflation or selling attributable to the data has already been done. This
is a necessary evil, because it comes along with a growing is known as pricing the data into the market. If, however, the
economy. You might have wondered earlier why the Fed has numbers are better or worse than expected, you can expect
an inflation target of 2% to 3%. Wouldn’t zero inflation be to see buying or selling (respectively) as traders adjust their
better? It might seem like a great thing, but it would mean a positions accordingly—and sometimes, frantically.
stagnant economy. Inflation tends to be low or nonexistent—or Naturally, there are two ways to play economic data an-
even turns negative into deflation—during recessions. nouncements and other news: proactive or reactive. Proactive
That leads us to the concept of real and nominal interest trading means placing your trades beforehand, in expectation
rates. The nominal rate is the official or declared rate. Let’s of what will happen once the news is released. This is most
say that it’s 5%. However, if you are lucky enough to earn 5% useful when you have reason to believe the actual numbers will
on your money, that won’t be your actual growth in terms of not match the expectation (usually called the consensus); you
purchasing power. That’s because inflation eats away at the can be in position to profit when the currency price comes to
value of your dollar (or your euro, or your pound, or your franc) you in reaction to the news. While this is the more profitable
each year, reducing how much it can buy. So if the inflation approach, it is also much more difficult and will produce some
rate is 3% while the interest rate is 5%, the real interest rate losses on those occasions when you are inevitably wrong. Reac-
or the actual increase in purchasing power is only 2%. tive trading merely follows the news and trades based on what
Clearly, what matters in trading is the real rate. A currency was released. In this case, you can use limit orders above and
with a nominal rate of 6% might look great until you find out below the current trading range so that you can take a long
that the inflation rate is 5%, at which point the one with a 4% position should the news be positive and the currency rise, or
nominal rate but only 1.5% inflation looks a lot better. Because a short position should it be negative and the currency fall.
interest rate and inflation conditions are likely to differ from Be aware that because trading volume picks up substantially
country to country, there is trading value in the differences. If just before and after such announcements, a phenomenon
the real rate on the yen is 1% while the Swiss franc has a real known as slippage will occur. This is a condition in which
rate of 2%, holding the franc will be more profitable thanks prices change so quickly that it becomes difficult to enter a
to the 1% differential. In other words, it becomes practical to trade at exactly the price you intended. In order to reduce trad-
borrow yen to buy the franc. Since the franc is more attrac- ing volume and mitigate slippage, brokers tend to increase the
tive, traders will tend to flock to it over the yen, which means spreads on trades around the time of significant announcements.
the price will rise. By raising the price of forex trades temporarily, brokers try
12 • March 2015 • Technical Analysis of Stocks & Commodities
to keep casual traders out of the market and limit activity to
those who are serious about trading the news.
Economic fundamentals
for forex trading
As we said in the introduction, fundamental analysis usually
takes a longer view of trading. That is because many of the
economic factors that affect currency valuations are slower-
moving. The first factor is economic growth. Determining
whether an economy is growing (or contracting) and how
quickly means measuring its size, and the size of an economy
is measured by its gross domestic product (GDP). GDP is
composed of four elements: PivotHunter.com®
Consumption
n
Where Order Flow
Investment
n
Meets Price Velocity
n Government spending
n International trade balance.
Watch the Cops and Kings chase down
Consumption is essentially consumer spending, which as the elusive Convict
we’ve heard over and over is the largest component of the US Live Charting Room
economy—about 70%. Investment is not the type of investment Free to First 100
represented by buying stocks and bonds (or currency pairs); every week.
rather, it is capital investment—the purchase of assets, like
factories and machinery, by companies. Government spend-
ing is self-explanatory, and the international trade balance to spur economic growth. All of this is done with one eye on
is simply the value of exports minus the value of imports. the inflation rate to make sure it doesn’t get out of hand.
(The trade balance can either add to or subtract from GDP. You should make it a habit to know the central bank targets for
The US has run a trade deficit for many years, meaning we GDP growth and inflation in each country whose currency you
import more than we export; major exporters like China run plan to trade. Some very important economic data announce-
a trade surplus.) ments won’t mean nearly so much to you if you don’t.
Once we measure the size of an economy, it becomes pos- The international trade balance is important as well. In
sible to measure it each year and determine the net change. discussing the basics of forex, one of the reasons for cur-
An expanding economy is a great thing, but obviously that rency trading I mentioned was the exchange of currencies
doesn’t happen every year. If the economy contracts for two by multinational companies. To recap, a US company that
(or more) consecutive quarters, it is said to be in a recession. manufactures in China and sells in Europe has to trade dollars
Growth rates of 2% to 4% have been typical for the US, which for yuan to pay workers and suppliers in China (a transaction
is a mature economy, but younger expanding economies like that pushes down the value of the dollar) and trade euros for
that of China may grow from 7% to 9% or even more each dollars to bring profits home (which pushes up the value of
year. Remember, an economy that is hot and growing fast will the dollar). All of these many transactions each day have a
produce a good bit of inflation, and for that reason, central real collective impact on the prices of currencies, so it can be
banks in emerging nations are often quite comfortable with expected that a country with a large trade deficit will tend to
6% and 7% inflation rates. have a weaker currency.
Speaking of inflation, just as there are nominal and real The existence of a trade deficit isn’t necessarily a bad thing in
interest rates, there is nominal and real GDP growth. Just and of itself. Successful and strong economies—the US topping
because the economy grew at a rate of 5% last year doesn’t the list—routinely run such deficits. This is in part because
mean 5% more goods and services were produced. If inflation profits from transactions taking place in foreign countries
was 3%, those goods and services increased in price 3%, but aren’t included in the balance-of-trade calculation. However,
the same quantity was produced. Real GDP growth would be the period-to-period change in trade deficits will still tend to
only 2% in this case. affect currency values simply because of the unavoidable need
GDP growth and interest rates have an inverse relationship. to exchange one for another, as outlined earlier.
That means that as interest rates rise, GDP growth will fall. Central banks manage the relative strength of their currency
Less money being borrowed means less expansion of compa- against others because overly strong and weak currencies have
nies and fewer new companies, and therefore less economic negative economic effects. International trade is one of the
activity. Conversely, central banks lower interest rates in order main arenas where this is the case. A strong currency makes
March 2015 • Technical Analysis of Stocks & Commodities • 13
FOREX FOCUS
a nation’s exports more expensive in its customer nations. bond markets that resulted from the strength of their wealthier
When talking about Germany selling Mercedes cars in the northern neighbors, like Germany and France. That strength
US, a vehicle that costs 20,000 euros (wholesale, of course!) was based on assumptions that stronger EU nations would
costs $26,000 when the euro is worth $1.30 but $32,000 when bail out weaker ones should the need ever arise, which it did.
the euro is worth $1.60. That bailout is taking place now—up to a point. The danger
The reduced buying power of the dollar against the euro is that if larger but still-troubled economies like Spain or
means US consumers can’t afford as many euro-denominated Italy run into crisis, the bailout costs will be so high as to
goods, and European exports to the US will fall. That’s not probably be unsustainable. That would severely damage the
good for European companies that are exporters! This is why euro or end it altogether.
China goes to great lengths to keep its currency value low.
Its economy relies on exports, so it wants its products to be The US dollar
cheap in every country to which it sells its goods. Of course, still reigns
a currency can’t be allowed to get too weak, or that nation’s So it was that even after the credit
consumers won’t be able to afford things that are imported— rating of US sovereign debt was
and every country imports something. In the US, a big one is downgraded in 2011, and even after
oil, which can get more expensive the weaker the dollar gets. the Fed repeatedly printed money
Since American consumers (who are also voters) get up in to dump into the economy, rates on
arms about high gasoline prices, the Fed has to keep the dollar US Treasury notes fell to historic
strong enough to keep oil prices at least somewhat in check. lows of under 2%. Despite all the
Clearly, then, central bank policies are an important compo- hand-wringing over the years about
nent of currency values over the short and long terms, and bear the US dollar, when push came
a close watch. Capital flows or movement of money between to shove, the flight to quality still
countries also bear watching. These flows can take a few dif- landed on US shores. While no one
ferent forms. The obvious one is what takes place in the various can guarantee the future, let this
financial markets—stocks, bonds, and forex. But money can serve as an important lesson that the
also flow into a country via direct investment such as when a chorus of “experts” you hear on a
foreign company builds a factory, mine, or distribution center daily basis won’t always be right.
there, and by acquisitions of domestic companies by foreign
buyers. The flow of capital into a country will generally cause Imran Mukati is the Managing Director of fixed income
its economy to expand and its currency to appreciate. securities at Fairbridge Capital Markets, Inc. He may be
Finally, it is important to consider political stability. This reached via http://www.linkedin.com/imranmukati or via
can mean many things, from orderly government transitions— email at imukati@fairbridge.com.
that is, via fair and open elections rather than coups or rigged
elections—and consistent government policies to the lack of Further reading
conflict internally or with neighbors. Investors like predictabil- Mukati, Imran [2014]. “Trading Forex: Understanding The
ity, so countries that have a reputation of arbitrary actions—like Basics (Part 1),” Technical Analysis of Stocks & Com-
the nationalization of industries or government confiscation modities, Volume 32: November.
of foreign assets—will suffer. Investors either won’t do busi- [2014]. “Trading Forex: Markets & Trading (Part 2),”
ness there at all, or if they do, they will demand a heavy risk Technical Analysis of Stocks & Commodities, Volume
premium. This reduced demand for the currency in question 32: December.
will drive its value down. [2015]. “Trading Forex: Charting Your Way (Part 3),”
Speaking of political stability, on that note I’ll close with Technical Analysis of Stocks & Commodities, Volume
the mention of the US dollar and its resilience as a reserve 33: January.
currency. Many pundits have long made noise about how the [2015]. “Trading Forex: More On Charting (Part 4),”
dollar would gradually disappear as the world’s primary reserve Technical Analysis of Stocks & Commodities, Volume
currency—one of the factors that makes it so dominant in the 33: February.
forex markets. First it was forecast to be replaced by the yen until
the Japanese economy hit the doldrums in the early 1990s—a
result of demographics, specifically its aging population. As its
population gets even older, Japan’s economic woes will grow,
not fade away, so the yen is no longer a candidate.
Next it was the euro, the currency of the collective of Euro-
pean Union countries. But the 2008 financial crisis revealed
the cracks in the euro’s foundation, namely that weaker
economies in the European periphery (think Ireland, Greece,
and Portugal as examples) were enjoying interest rates in the
14 • March 2015 • Technical Analysis of Stocks & Commodities
Q&A
Note to readers Before you do the exercise of checking 2. Bullish, but not wildly bullish. Total
I want to thank Rob Friesen (president and reality against predictions, let me say that return: 6%–10%. Not bad.
COO of Bright Trading) for his help with professional traders of my acquaintance 3. Total return: 8%—a decent amount
this column for the last couple of months. do read and even pass along many of of upside from here.
His contributions are always appreciated. these thoughts—if it fits their own biased 4. Total return: somewhere between
I was dealing with some health issues—I agenda. Much like our current political -5% and 5%.
had a second heart valve replacement climate, many traders, too, only get their 5. Great returns, less stable condi-
in November 2014. The procedure ap- information from sources they tend to tions.
pears to be a success. I want to thank agree with. But let me tell you this: Trad- 6. The S&P could gain 10% with a
our readers for their emails of support. ers who make a good living (with a few 2% dividend that will give a total
I’m looking forward to a much healthier exceptions) will digest the information return of 12%.
2015. A sincere thanks to all. and then do their own homework to come 7. Last year I predicted a stock melt-
Now, digging into some recent ques- up with something simple—that is, by de- up—growth would return and up
tions, here is one paraphrased from two veloping their own analysis tools from an we’d go. That prediction was off
similar questions from readers: objective viewpoint. This sounds simple, by one year. The market will be a
but similar to the way people tend to feel surprise in 2015, going higher before
MAKING SENSE OF THE “right” in their political views, many leveling off in the third quarter.
PROGNOSTICATIONS traders tend to give a result from some 8. I expect more of the same—interest
Mr. Bright, at the start of every year I prejudice. Bulls and bears, obviously, rates dragging the bottom, average-
just shake my head in disbelief when I tend to only see good or bad. to-poor job creation with part-time
suffer through stock market predictions jobs leading the way, more good
from a variety of “experts.” I see com- Many traders only get stock performance, but with unpre-
plete 180-degree comments from many their information from dictable and unexplainable panic
pundits, sometimes within the same selloffs and volatility.
organization. Do you or any of your sources they tend to 9. US stocks will be down 5% for the
traders use any of these prognostications agree with. year.
with any benefit? 10. A more negative outlook for the
Traders, news organizations, and the I like the idea of jotting down alterna- year, including a prediction of global
ever-increasing list of forums, chat rooms tive narratives and then creating some deflation. The Fed will return to
or similar services—some free while simple if–then statements to help deter- quantitative easing.
some not even worth that, and some mine the possible results from whichever 11. The market has been long for so
who get away with charging sometimes side you see as the most likely to occur. long. I think we’ll have our first
exorbitant monthly or annual fees—never At the same time, calculate the then result correction in 2015.
cease to crack me up (while they laugh if things go badly.
all the way to the bank). I have to laugh, I am going to paraphrase some market Pick the predictions you like from
or else my sympathy or empathy for their forecasts from various sources, purposely above—not really!—and see how that
audience will cause tears. without credit or labels. My idea is not goes, or do the research, prepare your own
I am writing this column in early to see who might be right or wrong but if–then statements, and have a success-
January 2015, which you’ll be reading simply to make a point about the vast ful 2015. As for me and my team, we’ll
sometime in March. I thought, What the disparity in thinking. Here are the nar- continue to play offense and defense by
heck! Rather than reviewing predictions ratives I’m going to track: responding to the what is vs. the what
from last year, which you can easily do, might be.
why not toss a few out for 2015 that you 1. Total return: 10%–12%, or even a
can check against what really happens. little higher.
March 2015 • Technical Analysis of Stocks & Commodities • 15
16 • March 2015 • Technical Analysis of Stocks & Commodities
TRADING TECHNIQUES
Moving Averages:
Some Finer Properties
What is the difference between the 10-period of a of indicators and products of numbers with indicators.
five-period moving average and a 15-period mov- Here’s a more precise look at the properties.
ing average? Does the sum of moving averages
equal the moving average of the sum? How does First property
the smoothing of a ratio differ from the ratio of If P and Q are indicators and t is a constant number,
smoothing? How can you algorithmically calculate then:
the weights of a smoothing procedure? Find the an-
swers to such technical questions here. SMAn (t • P + Q) = t • SMAn(P) + SMAn(Q)
and
A
ll technical analysts eventually engage in cre-
ating their own indicators and methods. And EMAn (t • P + Q) = t • EMAn(P) + EMAn(Q)
they all eventually use some kind of smoothing
method to filter out noise. Various moving average This property can easily be proved with basic math-
methods can be used to smooth a series of values. In ematics.
this article, I will discuss four interesting properties
of simple and exponential moving averages (here- Example
after referred to as SMAs and EMAs, respectively). Say you want to smooth the typical price (TP) us-
These two averaging methods are the most popular ing a five-period EMA. The TP has the following
in the technical analysis world, and their weighting formula:
scheme is simple, so they have clear and nice prop-
erties. Those who aspire to create indicators should
find the concepts discussed here useful.
I will denote the n-period simple and exponential where H, L, and C represent the high, low, and close
moving averages of an indicator P as of a bar, respectively. It doesn’t make a difference
whether you take the five-period EMA of TP or sum
SMAn(P), and the five-period EMAs of H, L, and C and then divide
the sum by three. That is,
EMAn(P), respectively.
The first property of SMAs and EMAs worth remem- using either an SMA or an EMA (or both) can change
bering has to do with the way they treat the addition the order of averages without affecting the outcome.
Example
If you want to smooth the closing price (C) three suc-
cessive times using a five-period EMA, a 10-period
SMA, and a 15-period SMA, then you can do it in
whatever order you want, since all orders will have
the same result. For example, taking the 5-EMA of
the 10-SMA of the 15-SMA of C is exactly the same
as taking the 15-SMA of the 10-SMA of the 5-EMA
of C. That is,
EMA5(SMA10(SMA15(C))) =
SMA15(SMA10(EMA5(C)))
It’s simple.
Weighting effect in
successive smoothing
What is the effect of successive smoothing of an in-
dicator? The most logical answer would be that you
would end up with an extremely smooth version of the
indicator. Well, that’s true, but how does successive
smoothing differ from, say, increasing the period of
single smoothing? For example, what is the difference
between EMA5(EMA10(P)) and EMA15(P)?
Let me cut to the chase and give you the answer in
simple terms.
Third property
Successive application of MAs in an indicator creates a
smoothed version of the indicator, where the percentage
weighting scheme as a function of age of data resembles
the shape of a bell. The more MAs applied and the
higher their period, the smoother the indicator you get
and the more widespread, symmetric, short, and chubby
the bell-shaped weighting scheme becomes.
In Figures 1 & 2, you see examples of the weighting
schemes of successive smoothing five repeated times
Figure 2: weighting schemes of successive Sma smoothings. Similarly here, this chart
using 15-period EMAs and five-period SMAs, respec-
illustrates the percentage weighting scheme of five successive five-period SMAs as a function of age. tively. The weights are expressed as percentages of their
For comparison purposes, the weighting scheme of the 25-period SMA is also shown. total sum, which is 100%. In Figure 1, the EMA(15)
18 • March 2015 • Technical Analysis of Stocks & Commodities
Noisy indicators
delay your analysis
is the weighting scheme of EMA15(P), the EMA(15,15) is the
weighting scheme of EMA15(EMA15(P)), the EMA(15,15,15)
is the weighting scheme of EMA15(EMA15(EMA15(P))), and so
on. The weights are sorted in ascending order of age from right
to left so that the weight corresponding to age zero (which is
the weight put to the most recent value of the indicator P) is the
rightmost one. Similar notation is used for the case of SMAs in Jurik algorithms
Figure 2. For comparison purposes, there is also the weighting deliver low lag,
scheme of SMA25(P) in Figure 2 [denoted as SMA(25)]. This low noise analysis
general rule of bell-shaped weighting scheme also holds for suc-
cessive smoothing using combinations of SMAs and EMAs.
What does the change in shape of the weighting scheme show Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader,
as new smoothings are applied? Does the change in shape make eSignal, NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader,
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more EMAs or SMAs you apply on top of one another, the
more the older values appear in the calculations (thus getting
comparably bigger weights) and the newer data gets comparably
smaller weights. Jurik Research
This has the effect of a bell shape in the weighting (as a
function of their age), which moves like a wave to the left as
new EMAs or SMAs are applied. Moreover, as the span of ages 2010 -- 2011 -- 2012 -- 2013
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are applied—the bell becomes wider, relatively chubbier, and
its maximum height becomes shorter.
ous example) that you can create stable charts like those of
Calculating the weights Figures 1 & 2. If you create a smoothing procedure that can
In the cases you have seen so far, the weights depend only on the be eventually formulated in a weighting scheme like the one
time instances in terms of age (and not on other factors like the of equation 1, where the weights depend only on the age of
values of some indicator or the volume of shares). For example, data, you can use a spreadsheet program like Excel to calculate
let P0, P1, P2… be the values of indicator P where the subscript and visualize the weights via charts no matter how complex
denotes the age of its values (P0 is its most recent value, P1 is your procedure is. To accomplish this, you create an artificial
its value one bar ago, P2 is its value two bars ago, and so on). indicator P such that all its values are zero, and you write the
Let’s consider the EMA3(EMA3(P)), which is the three-period formulas that dynamically calculate your smoothing function
EMA of the three-period EMA of the indicator P. It is profound from P’s values. If you now change the value of P0 to 1, then
that the value of EMA3(EMA3(P)) for the latest bar (that is, for the last value of your smoothing function will be equal to w0.
the bar of age zero) eventually equals a sum of type: That’s because, as you can see in equation 1, when P0 equals
1 and all other older values of P equal zero, then the last value
w0P0 + w1P1 + w2P2 + … (Equation 1) of the smoothing function equals w0. So you copy this w0 and
paste it somewhere else in your spreadsheet. You then again
set P0=0 and proceed to set P1 equal to 1. This will make the
where the weights w0, w1, w2… are constant numbers independent last value of your smoothing function equal to w1. You copy w1
of the values of P. These weights are not greater than 1; their total and paste it below w0. By setting P1 back to zero and setting P2
sum is 1, and they represent the contribution of the respective P’s equal to 1, you can get the value of w2 and put it below w1. If
value to the creation of EMA3(EMA3(P)). For example, you can you continue this way, you will be able to get all the weights
see that w0 = 0.25 or 25%, w1 = 0.25 (or 25%), and w2 = 0.1875 of your smoothing procedure and chart them as a function of
(or 18.75%), so 25% of the latest value of EMA3(EMA3(P)) is their age. In fact, this is the way the charts of Figures 1 & 2
attributed to the most recent value of P (which is P0), another were constructed. Using this technique, you can also verify
25% of the latest value of EMA3(EMA3(P)) is attributed to the the first and second properties stated earlier.
value of P one bar ago (which is P1) and another 18.75% of the Unfortunately, since this approach requires repeated sub-
latest value of EMA3(EMA3(P)) is attributed to the value of P stitution of values and copying & pasting, you will need to
two bars ago (which is P2). use macros in Excel if you want to calculate a large number
It is when the weights of a smoothing procedure depend of weights for various cases of successive smoothing. For
on only the time instances in terms of age (like in the previ- educational purposes, the file “succ_EMA_weights.xlsm,”
March 2015 • Technical Analysis of Stocks & Commodities • 19
sidebar Figure 1: the four sections of the spreadsheet. The Excel spreadsheet is divided into four sections and has a button labeled calc weights to call
the macro, which will calculate the weights for all ages.
that the 88th value (the one that has an age of 88) is the oldest
Using Excel To Calculate The SMOOTHING Weights
and the 0th value is the newest. All values of the indicator are
Excel is a simple and quick solution for the calculation and initially set to zero. When only the 0th value (in terms of age)
visualization of the distribution of weights in a smoothing of the indicator becomes 1, then the 0th values (in terms of age)
method. In Sidebar Figure 1 you see a screenshot of the of EMAs—that is, the newest values of EMAs—will become
spreadsheet used to create the chart in the article’s Figure equal to the EMAs’ weights for age zero (namely, w0). Similarly,
1. The spreadsheet is divided into four sections and offers a when only the first value of the indicator becomes 1, then the
button to call a macro. 0th values of EMAs will become equal to the EMAs’ weights
Section 1 is where you enter the desired periods for the five for age 1 (namely, w1) and, generally, when only the kth value
successive EMAs in the green cells. The respective alphas for of the indicator becomes 1, then the 0th values of EMAs will
the periods are automatically calculated below the periods ac- become equal to the EMAs’ weights for age k (namely, wk).
cording to the standard formula: alpha =2/(period+1). Section 3 offers a quick way to calculate the weights of
Section 2 contains the functions that calculate the succes- EMAs for an age. When you enter the age directly into the cell
sive EMAs’ values in descending order of age for an indica- labeled age, the value of the indicator for that age in section
tor whose values are in the indicator values column. The 2 becomes 1 automatically, and the second row of section 3
spreadsheet assumes 88 historical values for the indicator so labeled weight is populated with the weights of the EMAs (in
alignment with section 1) for that age, which
are exactly those in the last row of the table
of section 2.
Section 4 and button: When you click the
button labeled calc weights, a macro runs
in the background that repeatedly changes
the age in section 3 starting from zero and
increasing by 1 until it gets to 88. For every
change in age, the macro copies the weight
row of section 3 and pastes it in the table of
section 4, populating it from the top cell and
down. The table of section 4 is linked to a chart
that offers a visualization of the weights like
the one in Sidebar Figure 2. The labels of the
chart are automatically updated according to
the periods of section 1 as soon as the but-
ton is clicked. In Sidebar Figure 2, you can
see the chart that corresponds to the data in
Sidebar Figure 1.
The Excel spreadsheet discussed here can be
downloaded from the Subscriber Area at our
sidebar Figure 2: charting the weights. As soon as you click the calc weights button, both the sec- website, www.traders.com, in the Article Code
tion 4 and its linked chart are updated. The chart shown here is based on the inputs and calculated weights area, as well as from http://traders.com/files/
of Sidebar Figure 1. succ_EMA_weights.xlsm.zip.
Smoothing ratios
of indicators where more weight is given to the values of P/Q, where Q is
Ratios of indicators are widely used in larger. Similarly,
technical analysis, mostly as a way to
produce normalized percentage values.
George Lane’s stochastics oscillator is
such an example. I will now introduce
the fourth property of MAs (which deals results in a modification of
with smoothing indicator ratios) using a
hypothetical example. Suppose you want to divide indicator
P by the positive indicator Q so that you get a new indicator
P/Q. This new indicator has proved to be erratic and you want
a smoothed version of it using, say, a three-period SMA. You where, again, more weight is given to the values of P/Q,
have two options: where Q is larger.
The mathematically inclined might want to try and see that
Option 1 the underlying reason for this property is the same one that
Calculate the three-period SMAs of P and Q separately and makes the harmonic mean give less significance to high-value
then divide them: outliers. If you don’t understand this peculiar connection, don’t
get discouraged. Here is how you can get an idea of why the
fourth property holds in this hypothetical example: If P0, P1,
P2 are the three most recent values of P, and Q0, Q1, Q2 are the
three most recent values of Q (where, as usual, the subscripts
Option 2 denote the age of the values), then the SMA3 assigns equal
Simply take the three-period SMA of P/Q; that is: weights to the three most recent values. More precisely, the
latest values of SMA3 for P and Q are:
and
Technical analysts would consider the first option as a real-
istic solution, since it allows for occasional and isolated zero SMA3(Q) = 1/3 Q0 + 1/3 Q1 + 1/3 Q2
values for Q (it is more difficult for SMA3(Q) to be zero than
for Q to be zero) but if Q is always nonzero, then either of the
Using simple algebra, you can see that:
two options could be chosen. So what is the difference between
these two smoothing options and how can you determine which
one better suits your preferences? The answer lies in the fourth
property for MAs:
(Equation 3)
results in a modification of
for i = 0, 1, 2.
OPPOSITES ATTRACT oil, he is essentially selling dollars, that 2014 quickly succumbed to pressure,
Some are blaming the 2014 crude oil is, exchanging dollars for crude. If this forcing prices under $3.00. Although
collapse on the strength of the US dollar; were pairs trading, it might be identified the relationship between grains and the
what are your thoughts? as a symbol such as USD/CL. You’ve currency market isn’t as absolute as that
The hideous decline in crude oil dur- probably concluded that a trader who between crude oil and the dollar, it is
ing the latter half of 2014 was the result sells oil is buying the USD. difficult to argue the correlation doesn’t
of several factors at work; however, I Keep in mind that it is only possible exist. Once again, grain buyers are also
believe the biggest role player was the to value one asset if you have an asset dollar sellers.
currency market. At the time of this writ- to compare it with. This concept is true Of course, there are additional factors
ing, the correlation between crude oil and in our daily lives; when we buy a gallon that weighed on pricing. For starters, the
the greenback was hovering near 91%. of milk at the grocery store, we are, in US Energy Information Administration
In other words, in roughly nine out of essence, selling our dollars. (EIA) consistently reported increases
10 occasions, the price of crude oil had It is interesting to note that the value in crude oil stocks, creating what some
moved in the opposite direction as the of crude oil priced in gold, rather than referred to as a supply glut. On the
dollar (during a 180-day dataset). Thus, the US dollar, has been relatively stable demand side of the equation, slower
any significant repricing in the dollar vs. for decades. In 2014, the price of crude growth in China and economic weakness
other major currencies has a profound oil per ounce of gold changed very little. in European nations resulted in a change
impact on crude oil. Accordingly, it appears as though the of heart in the energy sector.
A quick look at the chart in Figure 1 price of the dollar is precisely why crude In my opinion, the second predominate
tells a profound story of the relationship oil has fallen. influence of crude oil in 2014 was simply
between crude oil and the US dollar. In This theory is corroborated by weak- trader emotion and margin call issues.
July of 2014, the greenback found footing ness in other commodity markets such as Specifically, crude oil speculators began
and forged a sharp rally; crude oil simul- the grains, metals, and natural gas. Agri- the year with near-record bullish posi-
taneously peaked and fell precipitously. cultural products such as corn and wheat tions. As these formerly bullish traders
It is difficult to argue that each market is underwent historical bear markets as the were being forced to exit their holdings
moving independently of the other. greenback marched higher. Similarly, the
Some believe crude oil prices react to high-flying natural gas market in early Continued on page 43
the dollar simply because oil is priced
globally in terms of the greenback. Thus,
as the dollar strengthens, crude oil feels
more expensive to foreign buyers driving
the demand and value lower. Further, a
higher greenback means it takes fewer
dollars to buy the same amount of under-
lying crude oil, thus lowering the asking
price for the commodity.
Another way to look at it is similar to
trading the forex markets, that is, trading
assets as pairs. If a trader buys the US
QST Desktop
MACD-Suitable Stocks
Trading signals generated by the crossover of Gerald Appel’s stocks met the following selection criteria:
moving average convergence/divergence and signal lines are
1. Are common stock
popular and simple to use. Do they work for all stocks in all
market conditions? Find out here. 2. Trading at $2.00 or higher
by Kevin Luo 3. Had continuous historical daily data (date, open, high, low,
and close) from January 1, 2005 to August 31, 2014
The
moving average convergence/divergence (MACD) 4. Had no data errors, such as unadjusted price data from
signal line crossover is a popular technical indicator stock splits.
used by many traders and investors. The MACD
was developed by Gerald Appel in the 1960s and is readily My objective in backtesting using this process was to
found in trading platforms of all types. It generates trading produce test summary statistics from the simulated trades
signals upon crossovers of its MACD and signal lines. The (long trades only) of a portfolio of stocks. The scale of the
method is considered simple to use; however, many have doubts backtesting is sufficient to make a reasonable conclusion about
ARROWS: Zmiter/COLLAGE: JOAN BARRETT
about how effective the method is. To find out whether the the effectiveness of MACD. The parameter setting used is the
technique works, I conducted a backtest on a large portfolio default at 12/26/9 (12-day EMA, 26-day EMA for MACD
of stocks traded on the major exchanges. The results of the line, and nine-day EMA of MACD for the signal line). This
backtest will help determine the level of effectiveness of the study employs the MACD signal line crossover method as the
MACD method. trading rules for the backtesting.
A buy takes place when an upward crossover occurs. A sell
Here’s what I found takes place when a downward crossover occurs. For calcula-
In the study, I selected approximately one third or 1,816 stocks tion consistency and standardization, the close prices on the
traded on the NYSE and NASDAQ for the backtest. These crossover days are used as the buy or sell price. For example,
24 • March 2015 • Technical Analysis of Stocks & Commodities
Intrendstocks.com
Figure 1: MACD Signal line crossover. The up arrow points to an upward crossover while the down arrow points to a downward crossover.
in Figure 1, the up arrow points to an upward crossover, while it is unlikely to make a profit over time on a portfolio of
the down arrow points to a downward crossover, which is randomly selected stocks using only the MACD signal line
the crossover immediately after the upward crossover. The crossover strategy.
buy happens on the up arrow day and the sell occurs on the Why was the MACD signal line crossover method inef-
down arrow day. The close prices on these days are recorded fective in the backtest? The methodology should not take the
as the entry and exit price, respectively. The difference be- entire blame, because markets are not static. In fact, no study
tween the exit price and the entry price is the simulated result has proved that a technical method works on all stocks all the
computed in percentage terms. Using a custom-built stock time. Trading a group of randomly selected stocks using the
analysis system, I ran the backtest and analyzed all trades in MACD or any other simple technique is unlikely to generate
the 1,816 stocks.
The summary of the backtesting re-
sults for the portfolio can be seen in the
table in Figure 2. The value displayed
in the fourth column of the table shows
that from January 1, 2005 to August Figure 2: backtesting summary statistics for selected stocks. The annualized profit/loss for the
31, 2014, for the 1,816 stocks, the an- MACD from January 1, 2005 to August 31, 2014 was only 1.45%.
nualized profit/loss was only 1.45%. I
calculated this profit/loss figure based
on an equal-weighted approach, that is,
the same weight was assigned to each
of the stocks in the portfolio regardless
of stock prices. I used the following FIGURE 3: PRICE STATISTICS ON SIGNAL DAYS. The crossovers for signal days are the ones with the larger price
equation: movements.
In Figure 4 you see the isolated trends for Alcoa Inc. (AA). It works
The software, which was used in the backtesting, is capable A given technical indicator is popular for a reason: It works
of isolating the stock trends. After the trends of 1,816 stocks when it is properly used. By understanding of basics of the
were isolated, the trend range traits can be summarized. The MACD signal line crossover method, I have established,
software outputs and exhibits the statistics of trend range and through this study, that there is a positive relationship be-
number of uptrends for the period that is being studied (see the tween the method and traits of a stock trend, trend range,
table in Figure 5). The number of uptrends statistic (column and number of uptrends. The successful confirmation of the
3) is considered as important as trend range. It refers to the relationship in turn helps to find suitable stocks that can be
trend count for a specific stock. If the trend ranges of a stock used for MACD backtesting. This approach translates to a
are suitable for MACD trading, then the higher values for significant improvement in the effectiveness of the crossover
the number of uptrends produce the greater profit. Therefore, method. More important, it is easy to implement.
stocks with greater trend range and number of uptrends are
considered suitable for MACD trading and could be sought for Kevin Luo is an independent technical analysis researcher
further analysis. In order to pick out stocks fitting that descrip- who focuses on automated price trend–related analysis and
tion from the 1,816 stocks, each stock was ranked according generation of trading strategies. He and his project partners
to uptrend range and number of uptrends. The higher rank is have developed an automated trend analysis and backtest-
given to the stocks with the greater trend range and number of ing system for high- and low-frequency trading. He may be
uptrends combination (column 4). The rank number is merely reached via email at kxluopub@gmail.com.
for sorting stocks.
I used three groups of stocks. Group 1 contains the top-25 Further reading
ranked stocks. Group 2 holds 25 stocks ranked from 26 to 50. Appel, Gerald [1979]. The Moving Average Convergence/
Group 3 includes 25 stocks ranked from 51 to 75. The stocks Divergence Method, Traders Press.
are mutually exclusive but are considered to be the more suit- Pankhania, Ajay [2013]. “Muscle Up Those Averages,” Tech-
able stocks for the MACD signal line crossover method. The nical Analysis of Stocks & Commodities, Volume 31:
expectation is that group 1 outperforms group 2, and group 2 September.
outperforms group 3 in the backtesting because of the rank Star, Barbara [1994]. “The MACD Momentum Oscillator,”
levels. After the software implemented the tasks of reorga- Technical Analysis of Stocks & Commodities, Volume
nizing and summarizing the backtesting results according 12: February.
to the three groups, it resulted in the statistics you see in the ‡Intrendstocks.com
table in Figure 6. ‡See Editorial Resource Index
Comparing these results with the initial backtesting results,
it is clear that the selected stock groups show significant im-
provements in profitability (column 5) over the 1.45% profit
generated from the random portfolio of 1,818 stocks (Figure
2). If you look at the average profit & loss per trade in column
6, you’ll see that group 1 has the highest return, followed by
group 2, then group 3. This indicates a positive relationship
between the ranking and MACD profit. There was only one
unprofitable stock in group 2. All other stocks generated profits
in the backtests (columns 7–8).
Sneak preview …
Coming soon!
Dissecting Warren Buffett’s Spatial Pattern-Recognition Skills 2015 Readers’ Choice Awards
Macro Buy–Sell Indicator by Martha Stokes Stocks & Commodities
by Matt Blackman There’s more to chart patterns than merely presents the 2015 Readers’
When it comes to investing, the Oracle of identifying them. Find out how you can see Choice Awards for products
Omaha usually plays his cards close to his relationships between candlestick bars and services that our sub-
chest. But here is one favorite indicator and patterns to better asses what price is scribers find useful, in more
that he has been willing to share. likely to do. than 20 categories.
M
any trading systems begin with indicators, and because last four closes have been consecutively lower and the high
of that, the question you should be asking is, “What do 27 days ago is higher than the current high by at least the
Peshkova, SHUTTERSTOCK/adaptation: NIKKI MORR
indicators indicate?” The correct answer is that most of square root of 1.618.” Clearly, such a setup is heuristic and
the time, they don’t indicate much. Indicators are just may or may not be true for future prices. Candlestick pat-
specialized filters. terns and chart patterns also fall into the broad category of
setups. The trick here, again, is to determine whether these
Visible sieves setups have predictive power regarding future prices.
Some indicators, like the commodity channel index (CCI), Still other trading systems attempt to predict the direction
relative strength index (RSI), and stochastic, are basically of future prices by correlation with other leading indicators.
first-order high-pass filters that remove the longer wave For example, every trader has heard that volume leads price.
components of the prices and display them as oscillators. Such correlations would be nice if they were correct for long
Other indicators, like moving averages, are basically smooth- enough to make a trading system profitable.
ing filters that remove the high-frequency components and The process of trading system design is very much like quan-
28 • March 2015 • Technical Analysis of Stocks & Commodities
tum mechanics, in that an entity is described by a probability
EasyLanguage Code To Test
density, and a future state can only be estimated statistically. In
The Predictability Of An Event
this article, we will show you how to start with some basics to
see if an identifiable event has the statistical edge in predicting Vars:
future prices before you even start to build a trading system. Event(false),
FuturePrice(0),
Once you identify a predictive event, then it is a simple mat-
I(0),
ter to move on to designing a robust trading system. We will CG(0),
illustrate the entire process with an example. Denom(0);
If Stoc[9] Crosses Under 0.2 Then Event = true Else Event = false;
//<<<<<<<<<<<< End Event Code Once you identify a predictive
If Event Then Begin event, then it is a simple
FuturePrice = 100*(Close - Close[9]) / Close[9]; //Future is ref-
erenced to 10 bars back
matter to move on to designing
If FuturePrice < -10 Then FuturePrice = -10; //Limits lower price a robust trading system.
to -10%
If FuturePrice > 10 Then FuturePrice = 10; //Limits higher price
to +10%
FuturePrice = 5*(FuturePrice + 10); //scale -10% to +10% occurs when the stochastic crosses under a threshold of 0.2,
to be 0 - 100
End; because crossing this threshold anticipates the price turning
//Place the FuturePrices into one of 100 bins up. The complete code for the example is shown in the sidebar
If FuturePrice <> FuturePrice[1] Then Begin “Predictability Test Of A Stochastic Trading System.”
For I = 1 to 100 Begin The basic stochastic indicator is just the current closing price
If FuturePrice > I - 1 and FuturePrice <= I Then PredictBin[I] =
PredictBin[I] + 1; less the lowest closing price over the length of the indicator,
End; normalized to the difference between the highest closing price
End; and the lowest closing price over the length of the indicator.
//Measure Center of Gravity as a quick estimate The event occurs when the stochastic 10 bars ago crosses
CG = 0;
Denom = 0; under the 0.2 threshold.
For I = 1 to 100 Begin When we applied this indicator to 10 years of the S&P
CG = CG + I*PredictBin[I]; futures continuous contract using a 10-bar long stochastic
Denom = Denom + PredictBin[I]; indicator, we found that the CG plotted to be 1.09% at the
End;
CG = (CG/Denom-50)/5; end of the 10-year period. This relatively high 10-year aver-
age profit leads us to examine the probability distribution
Plot1(CG); of predicted prices. This probability distribution function is
shown in Figure 1.
If LastBarOnChart Then Begin
For I = 0 to 100 Begin Since the event of the stochastic crossing under a threshold
Print(File(“C:\PDFTest\PDF.CSV”), .2*I - 10, “,”, PredictBin[I]); is shown to be substantially predictive, we can now proceed to
End; write a trading system that trims the performance by adjusting
End; the length of the stochastic and the precise threshold level that
works best, and by limiting losing trades with a stop-loss.
be the kernel of a successful trading system if the turning Example trading system
points were anticipated rather than waiting for confirmation. In the sidebar “A Simple Stochastic Trading System” you will
We will reinforce that assertion in our example. find the complete EasyLanguage code for our example stochas-
Our example will create an event when the simple stochastic tic trading system. When we optimize performance over 10
swings between zero and one. The turning point for a long entry years of the S&P futures continuous contract, we find that the
30 • March 2015 • Technical Analysis of Stocks & Commodities
best stochastic length is
eight rather than 10. The
threshold to be crossed is
0.3 rather than 0.2. The
best length of trade is 14
rather than the 10 bars
into the future used in
Occurrences
the prediction test. We
have also limited losing
trades to be no more
than 3.8%.
The equity growth over
10 years of our stochas-
www.StockSpotter.com
tic system is shown in
Figure 2. Pretty impres-
sive for a really simple Percent price gain after event
system! And we dare
say it’s superior to most Figure 1: probability distribution function. A stochastic indicator crossing under a 0.2 threshold is highly predictive of
commercially available future prices.
trading systems.
Testing, testing
We have outlined a procedure for the
successful development of trading
systems using a statistical approach.
We have developed a code testbed
that can assess whether the prices
Equity ($)
News Sentiment
News data, which has long been the province of institutional have the resources to spend on research & development in
VICTOR MARCHAND KERLOW
traders, is now making its way into the hands of retail traders. this specialized area. However, as with most advanced tech-
Here’s a look at how you can incorporate this data into your nological developments, there comes a time when it becomes
trading strategies. more widely available. The use of news analytics and news
sentiment has reached this point, and more and more traders
by Stephen Massel are now gaining an edge by using news data.
We
all know that news moves the markets, but what is Quantifying news
less easy to determine is exactly how the market The development of trading strategies based on traditional
will react immediately after the news event as technical analysis using price action, volume, fundamental
well as later, once market participants have had a chance to economic data, and derived indicators relies on backtesting for
digest and analyze the news in more detail. The algorithmic performance evaluation. The backtesting is based on historical
interpretation of these news events and more detailed news data that, of course, has all the news known to the market at
stories has long been the province of the hedge funds, which the time backed in. This is all well and good, but would it not
32 • March 2015 • Technical Analysis of Stocks & Commodities
be better if news could be quantized and decoupled from the
history? This would allow an additional dimension of detail Traders can now access
(in the same way as trade volume is separate) affecting price
action. This would also allow the strategy to react and adapt
news data and incorporate it
to real-world market events, rather than rely on a purely sta- into their trading strategies.
tistical representation of backed-in news events.
In this article I will detail how traders can now access this
news data and incorporate it into their trading strategies. The
focus will not be on the high-speed receipt of news, as the
advantage there lies with the high-frequency trading firms n News flow (a zero or positive value, representing the
operating in time frames of micro and nano seconds, with number of news events or stories interpreted)
whom the average trader cannot compete.
n Z-score (a negative, zero, or positive value, representing
statistical relevance of the sentiment value above or below
What is news sentiment?
the average)
The amount of news stories that are broadcast or published
by multiple media outlets on the economy as a whole, on n A news link (a URL link to the underlying news story).
individual companies, and on global geopolitical events
continues to rise. Making sense of all this data—filtering out The key to success, of course, is the way the algorithm in-
what’s relevant and important, and to what extent—used to terprets the news text together with a strategy for managing
be the job of large investment houses’ research departments. duplication. The good news is that you do not need to create
However, with the advent of digitization of news content, these algorithms yourself; the resultant news sentiment data
advanced computing, and language interpretation techniques, is now becoming more widely available, and ultimately the
this data can now be effectively and quickly analyzed. The best way to test its efficacy will be to create a strategy and
programs that analyze this data are often referred to as news analyze its effectiveness.
sentiment algorithms. They use advanced natural language
heuristics and statistical techniques to quantize the news Applying it to your trading
from various sources. This is a multistep process running News sentiment data can be of great assistance in various ways.
in real time that involves: A discretionary trader can use it as an additional indicator, the
portfolio manager or investor can use it to keep track of news
n Inputting news from single or multiple sources (for
events affecting his holdings, and as I mentioned earlier, it can
example, broadcast TV channels, market data vendors’
be incorporated into an automated strategy for backtesting.
newsfeeds, RSS web feeds, Internet blogs, etc.). These
I’ll review each of these areas in some more detail.
feeds can provide purely news headline and content
(text) or additionally include metadata tags (for example,
topic, company name, sentiment score, etc.)
Portfolio management
Any portfolio manager or investor will be interested in specific
n Digitizing and formatting the data for processing news pertaining to their holdings. Keeping up with all the
news, especially for large portfolios, can be an overwhelm-
n Parsing the data—looking for specific keywords, sen- ing task. News sentiment can be of great benefit here, where
tences, phrases, and so on a news sentiment feed can alert the manager to news events,
on a per-company or industry basis. This can be achieved by
n Applying weightings to the parsed data based on con- simply having two or three additional metrics associated with
text, uniqueness, occurrences, extremeness of language, each holding, namely news sentiment, flow, and z-score. The
and so on, and generating a positive or negative value manager can then quickly get a high-level view of the news
based on market impact, relevance, etc. (this step and affecting his holdings, and can be alerted to any elevated
the previous step are really the secret sauce, where the activity. He can then dig down into the specific news articles
algorithm really earns its salt) from various sources to more fully understand the potential
n Consolidating all values and providing a news senti- impact on his holdings. This automated method of highlighting
ment value for the specific news event. Results can be relevant news saves a huge amount of time in manually scan-
categorized as required (for example, macroeconomic, ning various news media, and it’s suitable to mobile devices
company/country/industry-specific, and so forth). for a manager on the move.
This sentiment data is provided throughout the day in close Strategy development
to real time, and often with additional metrics, such as: There are two main applications of sentiment data in
strategy development. You can either use it as the primary
n News sentiment (a negative, zero, or positive value rep- driver and create a strategy around it directly, or use it as a
resenting news on a scale of bad to good) filter for an existing strategy. In either case, when using this
March 2015 • Technical Analysis of Stocks & Commodities • 33
With the advent
of digitization of
news content, this
data can now be
effectively and
quickly analyzed.
StockNewsSentiment.com
Discretionary trading
As in strategy development, senti-
ment data can be effective as a de-
cision support tool in discretionary
trading. Like with any other indicator,
there is no silver bullet, but any addi-
Figure 2: channel support. The price is approaching a channel support line with decreasing volume at the same
time that the news sentiment trend reaches extreme negative levels. tional evidence to support a trade can
sometimes prove very helpful. Here
are some examples of its use.
data, one of the first considerations is to ensure the volume
of data matches your expectations. Example 1: Below the Advanced Micro Devices Inc. (AMD)
News sentiment typically provides a single value per news chart in Figure 1 is a plot of AMD daily news sentiment (white
story; this may be of great interest in itself, depending on the line) and the five-day moving average (bar chart). The stock
magnitude of the value. However, for a trading strategy you will finds itself at trendline support the same time as the short-term
want to make sure there is sufficient data for your time frame news sentiment trend turns positive. Here, news sentiment was
and style of trading. For example, when daytrading, if your useful in assisting the decision with regard to whether there
news sentiment value starts the day off at zero and cumulatively might be a bounce at support.
builds during the day, you may not have sufficient data in the
morning session to make a valid trade decision. Smaller stocks, Example 2: In the chart in Figure 2, the stock price of Exxon
including some within the S&P 500, will not have news every Mobil Corporation (XOM) is approaching a channel support
day, whereas macroeconomic or broader categories of news line with decreasing volume the same time as the news senti-
sentiment will have much greater flow. For strategy development ment trend reaches extreme negative levels.
and backtesting, you will also want to ensure there is sufficient
34 • March 2015 • Technical Analysis of Stocks & Commodities
Example 3: In the chart of Coach
Inc. (COH) in Figure 3 you see sev-
eral examples of price approaching
support & resistance levels at the
same time that the short-term news
trend changes direction.
Sources of news
sentiment data
News sentiment data in various
forms is available from several FIGURE 3: SUPPORT & RESISTANCE LEVELS. Price approaches support & resistance levels at the same time that the
short-term news trend changes direction.
sources, and of course at various
prices. Here are some specialist news
sentiment data providers:
n Dragonfish (StockNewsSenti-
ment.com, dragonfishgroup.
com)
n Opfine (opfine.com)
n FinSents (finsents.com)
n Ravenpack (sentimentnews.
com)
n Dow Jones (http://new.
dowjones.com/products/dj-
news/news-machine-analysis/)
n Thomson Reuters (http://
www.machinereadablenews.
com/p-sentiment-indices.php)
n Bloomberg (bloomberg.com/
professional/news-research/
news/) FIGURE 4: TURNING POINTS. Extreme positive news sentiment highlights significant turning points in the stock price.
Trading by news
With the increase of news sentiment data availability, the op- and trading strategy development/testing company. He can
portunities now exist for individual traders to utilize this data be reached via his website at www.dragonfishgroup.com.
in their strategies and trading decisions and for investors to be
quickly alerted to important news events affecting their hold- Further reading
ings. Furthermore, this sentiment data can now be obtained Cameron, John [2013]. “Market Mobs,” Technical Analysis
at a fraction of the cost of paying for an expensive newsfeed of Stocks & Commodities, Volume 31: August.
from the traditional big vendors. This is one more example of ‡StockNewsSentiment.com (Dragonfish LLC)
technology that was once only available to the large trading
‡See Editorial Resource Index
firms, but is now becoming available to individuals to bring
their trading up to a more sophisticated level.
Les, why don’t you start by tell- I expected to get into the investment
ing us a little bit about yourself management business after receiving
and how you got interested in my master’s degree in January 1970, but Buying & holding is
the financial markets. none of the brokerage houses or banks hazardous to your wealth
I’ve been interested in the stock mar- were hiring. So I ended up working
kets since 1957 when my grandmother for Irving Trust Company as a quality
because you have to sit
gave me a few shares of PanAm Airways control analyst. I then managed a num- through the bear markets,
for my 13th birthday. From that point on ber of operational departments before which can be emotionally
I started reading about the markets, even departing to become a cash management and financially draining.
though there were only a few books in my consultant at the Bank of America. I then
local library. I also traveled to Manhattan joined Citibank for seven years, where
to visit the NYSE and AMEX visitor’s I focused on providing fee-based cash concerned. Why the buy-don’t-hold
galleries during my summer breaks from management consulting services to the approach?
junior high school. I opened a brokerage banks’ large corporate clients. Thereaf- After spending thousands of hours
account for minors and I also attended a ter, I started my own cash management researching the markets over decades,
few stockholder annual meetings in the consulting firm and worked in that I’ve come to the conclusion that buy-
NYC area for companies that I owned. specialty for 17 years. ing & holding individual stocks is too
WORLD MAP: PILart/NYSE STOCK EXCHNAGE: LUCIANO MORTULO/SHUTTERSTOCK
Those were both interesting learning After that I decided to put my invest- dangerous and too risky a strategy for
experiences. After high school, I received ment knowledge into practice by becom- investors. First of all, you have to be smart
my college degrees—a BBA in Finance ing a financial advisor for six years. After or lucky enough to buy a portfolio of the
and Investments from the City College conferring with hundreds of people right stocks or your performance will not
of New York and an MBA in Operations who were looking for financial advice, be good. Just look at what happened to
Research from Bernard M. Baruch Col- I learned that the vast majority of them the popular “nifty fifty” growth stocks
lege. My master’s thesis title was “Statisti- had a very limited knowledge of the stock such as Eastman Kodak, IBM, Polaroid,
cal Evaluation of the Relative Strength market and financial matters. and Xerox of the 1960s and ’70s. Their
Concept of Common Stock Selection.” prices exploded until they ran into the
After performing the research for my You’re a big believer in the buy-don’t- crushing 1973–74 bear market.
thesis, I was convinced that using a rela- hold strategy, which is contrary to what Buying & holding is hazardous to your
tive strength momentum strategy would most advisors tell their clients to do, as wealth because you have to sit through the
be a viable investing approach. far as long-term stock investments are bear markets, which can be emotionally
36 • March 2015 • Technical Analysis of Stocks & Commodities
for investing in a portfolio of ETFs that that you may go bankrupt. The major-
takes the emotion out of the equation. I ity of the risk tolerance questionnaires
also have a website, www.buydonthold. used by financial advisors typically ask
com, that supports the book and provides five to 10 questions that tend to be very
a weekly report on the strategy free of weak in determining an investor’s true
charge. I’m also a big user of charting risk level. I found that the website www.
and technical analysis. riskprofiling.com, which uses a question-
Because of these reasons, I feel that the naire that people can fill out (at no cost,
most viable investing method is to use a to determine their own risk) is one good
mechanical, nonemotional approach. By source. It’s a psychometric test that is
using a specific time-tested strategy (as closer to reality in determining risk than
delineated in my books or one developed those tests used by most advisory, bank,
by the investor) with a handful of techni- and brokerage firms.
cal indicators, investors can limit their In addition to taking this test, one good
risk and protect their principal. The key way to determine your risk parameter is
to successful long-term investing is to to look back at your actions and feelings
and financially draining. We experienced protect your principal from devastating during the last big market decline that
this in the 2000–02 bear market when bear markets. That can be accomplished you experienced. After carefully as-
the S&P was down 49.1%, and then again using any number of simple strategies. sessing how you reacted to this market
during the 2007–09 crash when the S&P Whether I use market timing or relative meltdown, you should have a pretty good
was down 56.7%. So we’ve had two strength analysis, I know that it will idea of your personal loss percentage that
devastating bear markets in a 10-year definitely not do as well as the market will be acceptable in the future, allowing
time frame, and we’ll have more down averages during bull markets because you to sleep at night. It could be a 10%
the road, just based on history. These the strategy may have premature exits or 20% decline, for example. If investors
bear markets will continue to crush and late entries. The goal is to capture say to themselves that they don’t want
people’s portfolios and they won’t be the majority of the uptrends and miss to risk more than 10 or 15%, that is fine,
happy about it, and they may sell at the most of the downtrends. Over the long but they better use stop-loss or stop-limit
bottom, which is what many investors haul and during down markets, these orders, if at all possible, to take them
usually do. Many investors, especially strategies will save your nest egg. So out of the market and not second-guess
those over 55, cannot afford to lose so that’s why I don’t believe in buying & it or change those percentages as the
much money when they most need it. If holding in individual stocks. It’s just market declines further. Unfortunately,
you have a 50- to 80-year time horizon, too risky. People don’t understand that you can’t put stop-loss orders on mutual
then perhaps buy & hold will work for buying & holding is not a strategy at funds. You can place them on stocks and
you. But that is not realistic for most all; it’s just hoping for the best. If they ETFs. So if you own mutual funds, then
people. Defensive investing is the way have individual securities and use buy you or your advisor will have to watch
to avoid the big bear markets. & hold, I wish them luck. them carefully. The minute the price hits
Second, the typical investor does not your mental stop, sell it, because you’ll
have the financial training or skill to You mentioned that you use a con- be surprised and unhappy if you don’t.
evaluate the stock he/she is considering. trolled and systematic strategy for your Think of what would happen if the market
Even CFPs, CFAs, and CPAs are not trading. You follow a specific plan. One crashes and you failed to act according
experts at assessing the risk and value of of the keys to that plan is to first de- to your own plan.
companies they cover. That is why over termine your true risk tolerance. How Whether someone is a trader or in-
their careers they make costly mistakes does somebody go about doing that and vestor, it is critical that an exit strategy
or errors of judgment and recommend does it affect how they trade? always be in place to protect principal.
stocks they should not have. So how is Determining your level of risk is criti- Most of the top traders use stop orders
the average person without the training cal to your investing and trading success. since they know a high percentage of
going to do better? Without developing specific parameters their trades may go against them. The key
Third, I believe that using market to protect your principal, the odds are is to take small losses, which should be
timing or relative strength analysis with counteracted by large gains in positions
ETFs is a solid, risk-averse way to invest going their way.
and trade. I’ve written a book on each of
these subjects with complete informa- What indicators do you use to deter-
tion, aimed at self-directed investors who mine when the market is in a trend?
can consider the strategies I recommend. The indicators I use are laid out in
In my lastest book, Buy DON’T Hold, Buy—Don’t Hold (BDH) and at my
I provide a strategy with specific rules website www.buydonthold.com. My goal
38 • March 2015 • Technical Analysis of Stocks & Commodities
is to be in tune with the trend. I use four positive MACD crossover. They must 7.5%. And during 2014, the Dashboard
indicators to determine when to be in or confirm each other to be considered a was out of the market for 178 days or
out of the market, which I refer to as the signal change. 48.8% of the year, greatly reducing
BDH Dashboard. When three or more On December 8, 2014, there was a market risk. The beauty of my system
of them are on buy signals, I go long the sell signal on the Dashboard. So I went is that the Dashboard can be out of the
market using the five top-ranked ETFs into 2015 with a 100% cash position. In market between 25–50% of the time
based on their six-month relative strength 2014 the BDH strategy earned 13.63% during the year and still post decent
out of universe of 52 predetermined while the Nasdaq Composite gained risk-adjusted performance. Remember,
ETFs. When one or none of the indica- 13.4%, the S&P 500 gained 11.4%, and if you’re not in the market you have no
tors are on buy signals, then I sell all five the Dow Jones Industrial Average gained risk at that time. But that means you
ETFs. It’s as simple as that.
First of all, I use the daily Nasdaq
Composite index to determine the market
trend. That’s the most volatile of the big
three indexes and the one that usually
leads the market in both directions. The
first indicator used on this index is the
100-day simple moving average (SMA). ninjatrader.com
When the index’s price moves above the
SMA, it triggers a buy signal and vice
versa. As a second indicator, I use that Simple Rates.
index with the moving average conver-
gence/divergence (MACD). When there
is a positive crossover on the MACD,
Clear Savings.
that is considered a buy signal on that
indicator. But if the crossover is negative, Deep Discount Commissions
it is a sell signal.
My third indicator is the American As- as low as $.53 per contract.
sociation of Individual Investor (AAII)
weekly investor sentiment survey. I use
the sentiment index and look for the
extremes—more than 50% bulls or less View Commissions at ninjatrader.com/Commissions
than 25% bulls. A sell signal on this
indicator occurs when it reaches a level You Know our Award-Winning Platform.
of 50% or more bullish reading and then
drops below that level in a subsequent Get to Know our Next Generation Brokerage.
week. A buy signal occurs when it falls
below 25% and then rises above that
level in a subsequent week. NinjaTrader Brokerage™
My last indicator is the Nasdaq Sum- equips traders with
mation Index (NASI). I overlay a five-day
exponential moving average (EMA) on unmatched benefits
the daily price chart of the index and plot including exclusive
the MACD indicator. A buy signal on advanced platform
this indicator is generated when there
is a positive daily crossover of the five- features and single
day EMA by the index coupled with a source support.
Further reading
Masonson, Leslie N. [2010]. Buy, DON’T
Hold—Investing with ETFs Using
Relative Strength To Increase Returns
With Less Risk, FT Press.
_____ [2011]. All About MARKET
TIMING: The Easy Way To Get
Started, 2d ed., McGraw-Hill.
_____ [2011]. Profiting From ETF
Rotation Strategies In Turbulent
Markets (Kindle edition only), FT
Press.
_____ [2014]. “StockCharts University,”
Quick-Scan, Technical Analysis of
Stocks & Commodities, Volume
32: April.
• www.buydonthold.com, lesmasonson@
yahoo.com
PROTECTING YOUR SMALLER STOCK (GOOG), SPDR Gold Shares (GLD), and simultaneously sell one mini
PORTFOLIO and SPDR S&P 500 ETF (SPY). These option contract with one month to
How do I hedge 10 shares of Google? mini options, like the standardized ones, expiration on GOOG at $500, and
Years ago, my answer would have been, offer various strike prices and the same collect premium for the sale, which
“Get 90 more shares, then we can talk.” expiration dates. In this regard, they at the time of this writing, was $30.
But as of last year, that all changed with are similar to their bigger brother, but She now has $30 of protection for
the introduction of mini options. It has smaller. So right off the top of my head, her GOOG shares, and even if the
now been a year since this product was who is the trader or investor that’s best stock were to stay at $500, she keeps
introduced, and I typically wait a year suited to benefit from mini options? The the amount of money collected at
before trading anything new. Let’s visit odd-lot investor! expiration. Bad news is that she has
this “small” section of options to see This is the person like my mother- capped the reward to the amount of
if it might be a good fit for the smaller in-law (let’s call her MIL) who buys 10 premium collected, so if at earnings,
trader. shares of GOOG, because that’s all she GOOG jumps to $600 a share, she
In March 2014, the CBOE launched wants to buy in her portfolio. She likes is obligated to sell the stock at $500.
a new product for the smaller investor to buy and hold GOOG a month before Keep in mind that the chart in Figure
looking to hedge odd-lot securities called earnings and then sell after earnings. 1 shows 100 shares of GOOG and one
mini options. What are they, how have At today’s price, 10
they performed during the past year, and shares of GOOG
who is most likely to benefit from using is valued at more
these options? than $5,000. That
Each regular-sized equity option con- might not be much
tract gives the buyer the right, but not to you, but to her it
the obligation, to buy 100 shares of the represents a lot of
underlying asset at a set price for a set money. With mini
time. Regular options have many strike options, she now has
prices above and below the stock price. several strategies to
Regular options could have as little as hedge this particu-
one week to expiration, or as long as a lar position if she
few years. A mini option represents 1/10th intends on keeping
of the value of a regular-sized option. it longer than a few
Thus, a mini option contract is good for days. These would
10 shares of stock and is in many ways include:
similar to the standardized options.
Before you go out and analyze your • Covered call
odd-lot portfolio on every stock that options—MIL
you might own, mini options have most could purchase
of their volume in Apple Inc. (AAPL), her 10 shares of
Amazon.com Inc. (AMZN), Google Inc. GOOG at $500
Figure 1: Covered Call Options. This strategy gives you the protection but caps the reward to the amount of premium collected.
OptionStrategist.com
Part 2
by S&C Staff
H
ere in the second part of this two-
part review, we’ll discuss The
Option Strategist newsletter and
other products and services of-
fered by OptionStrategist.com.
Option strategist
newsletter
The newsletter comes out biweekly and
has an update called the hotline in between
those weeks. It is typically 12 pages long
and contains a wealth of information. It
starts out with educational material such as
an explanation of a specific strategy. There
will often be examples to help explain the
item under discussion.
The newsletter has specific areas it
covers in every publication. Following the
educational/informative feature article is a
table of follow-up actions as required for
each open position. Next is a section titled
sentiment indicators in which a stock market
outlook is given based on various technical
indicators, followed by sections on index
options & volatility skewing, extremes in
sentiment, and put–call ratios (Figure 1).
Specific trading recommendations may or
may not be given. Various relevant charts
are included, followed by a discussion of the
current state of the volatility in derivatives
markets.
Software products
OptionStrategist.com offers five different
software packages. We’ll look at two of
them. The first one is The Expected Return
Calculator. What it attempts to do is tell you,
44 • March 2015 • Technical Analysis of Stocks & Commodities
put–call ratio charts
Figure 1: put–call ratio charts. When new buy signals are generated from the put–call ratio extremes, a chart is provided in OptionStrtegist.com.
over a large number of trades, what your put–call ratio charts; volatility charts; a similar to what you see in Figure 2 that
expected profit or loss might be for an op- probability calculator; and back issues allows you to make inputs. Under the
tion position. The key statement here is of McMillan’s newsletters. The best label securities are a couple of lines—
a large number of trades. Any one trade thing is that all of this is in the Strategy one for the underlying and one for the
might be a profit or a loss. It is only after a Zone that goes for $195/year if you option. The volatility on the line for
number of trades that you can reasonably sign up for a yearly subscription with the underlying is historical volatility.
talk about average profit or loss. There autorenewal. The next line below is for the option,
are three inputs to the calculation. The The expected return calculator has and the volatility needed here is the
first, and arguably the most important, been set up to require manual inputs, and implied volatility. The option line lets
is the historical volatility of the underly- there are several sources of data that are you specify a series of options so you
ing. Volatility is free on a weekly basis free and readily available. There is no can see what would happen with spreads.
from OptionStrategist.com. Follow the datafeed service you need to purchase. In this example, a -1 has been input for
path Products→Analysis Tools→Free When you open the expected return cal- the quantity of options to identify sell-
Analysis Tools→Data or go to http:// culator, you are presented with a screen ing the option. A dropdown menu lets
www.optionstrategist.com/calculators/
free-volatility-data. What is impressive
about the data is that the table includes
futures, indexes, and stocks.
The use of percentage in conjunction
with the composite implied volatility is
the type of sophisticated approach typical
of OptionStrategist.com because you
want to know where implied volatility is
relative to prior calculations of implied
volatility.
If you don’t want to wait a week for
volatility calculations, you can subscribe
to the Strategy Zone, which supplies the
data on a daily basis, but it also includes
much more, such as trading candidates
for covered writes; naked put sales;
straddle buys; and calendar spreads.
Figure 2: Expected Return Calculator. Here you see the editor tab. This screen is used to provide inputs for
A wide array of volatility data is also the option position you want evaluated. At the top are the points in time you want to determine your potential profit/loss.
included, along with a daily midday Below that is the securities information. You can input either put or call and add several more options so you can evaluate
market commentary; more than 200 spreads. Historical volatility is used for the underlying line, and implied volatility is used for the option line.
}
Figure 3: WEALTH-LAB. This chart shows the US market bubble of the 2010s on else
a monthly chart of the S&P 500 index (^GSPC). {
if( CrossOver( bar, Stoc, Threshold ) )
BuyAtMarket( bar+1 );
}
}
}
}
F WEALTH-LAB: MARCH 2015 TRADERS’ TIPS CODE }
In their article in this issue, “Trading System Design: A Sta-
—Eugene, Wealth-Lab team
tistical Approach,” authors John Ehlers & Ric Way outline a MS123, LLC
statistically valid procedure for the successful development of www.wealth-lab.com
trading systems, providing a testbed for assessing whether the
price will increase or decrease over n bars after an event.
From our point of view, it might be optimal to prove the
conclusion regarding the robustness of the example system F NEUROSHELL TRADER:
by using a different subset of data that includes a bear mar- MARCH 2015 TRADERS’ TIPS CODE
ket, given that the in-sample period of 10 years used to opti- The simple stochastic trading system described by
mize the system on was a strong bull market (Figure 3). John Ehlers & Ric Way in their article in this issue, “Trading
The code for Wealth-Lab based on Ehlers & Way's code System Design: A Statistical Approach,” can be easily imple-
follows: mented with a few of NeuroShell Trader’s 800+ indicators.
Simply select “New Trading Strategy” from the insert menu
Wealth-Lab 6 strategy code (C#) and enter the following in the appropriate locations of the
using System;
Trading Strategy Wizard:
using System.Collections.Generic;
using System.Text; BUY LONG CONDITIONS: CrossBelow(Stoch%K(High,Low,
using System.Drawing; Close,5),30)
using WealthLab;
using WealthLab.Indicators; LONG TRAILING STOP: PriceFloor%(Trading Strategy,3.8)
SELL LONG CONDITIONS: BarsSinceFill>=X(Trading Strat-
namespace WealthLab.Strategies egy,14)
{
public class EhlersMar2015 : WealthScript
{ If you have NeuroShell Trader Professional, you can also
private StrategyParameter paramStoc; choose whether the parameters should be optimized. After
private StrategyParameter paramThresh;
private StrategyParameter paramLength; backtesting the trading strategy, use the detailed analysis but-
private StrategyParameter paramLoss; ton to view the backtest and trade-by-trade statistics for the
public EhlersMar2015() strategy.
{ You can also create another trading strategy using the cen-
paramStoc = CreateParameter(“StocLength”, 8, 1, 100, 1); ter of gravity indicator referenced in the article along with a
paramThresh = CreateParameter(“Threshold”, 0.3, 0.1, 0.9, 0.1);
paramLength = CreateParameter(“TradeLength”, 14, 1, 50, 1); one-period lag of the same indicator called the trigger. Both
paramLoss = CreateParameter(“PctLoss”, 3.8, 0.5, 15.0, 0.5); indicators are part of Ehlers’ Cybernetic Analysis add-on
}
for NeuroShell Trader.
protected override void Execute()
{ BUY LONG CONDITIONS: Center of Gravity > Center of Grav-
int StocLength = paramStoc.ValueInt, TradeLength = ity Trigger
paramStoc.ValueInt;
double Threshold = paramThresh.Value, PctLoss = SELL LONG CONDITIONS: Center of Gravity < Center of Grav-
paramLoss.Value; ity Trigger
Users of NeuroShell Trader can go to the Stocks & Com- Figure 5 shows the EDS backtest summary for trading the
modities section of the NeuroShell Trader free technical NASDAQ 100 list of stocks using the authors’ stochastic sys-
support website to download a copy of this or any previous tem over the period 2009 through 1/13/2015.
Traders’ Tips. —Richard Denning
A sample chart is shown in Figure 4. info@TradersEdgeSystems.com
for AIQ Systems
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F TRADERSSTUDIO: MARCH 2015
TRADERS’ TIPS CODE
The TradersStudio code for John Ehlers & Ric
F AIQ: MARCH 2015 TRADERS’ TIPS CODE Way’s article in this issue, “Trading System Design: A Statisti-
The AIQ code based on John Ehlers & Ric Way’s article cal Approach” can be found at:
in this issue, “Trading System Design: A Statistical
Approach,” is provided at: • www.TradersEdgeSystems.com/traderstips.htm
• www.TradersStudio.com → Traders Resources → Traders Tips
• www.TradersEdgeSystems.com/traderstips.htm
The following code file is provided in the download:
!TRADING SYSTEM DESIGN: A STATISTICAL APPROACH
!Author: John Ehlers, TASC March 2015 • System: EHLERS_SYSTEMS: A long-only system that uses
!Coded by: Richard Denning 1/12/2015
!www.TradersEdgeSystems.com daily data and the stochastic indicator for entries.
!STOCHASTIC TRADING SYSTEM FROM ARTICLE: Figure 6 shows an equity curve for this stochastic system
!INPUTS: trading one contract per trade of the S&P 500 full-sized fu-
StocLength is 8. tures contract from 1982 to 2014 using data from Pinnacle
Threshold is 0.3. Data Corp. Slippage & commission of $100 per round-turn
TradeLength is 14.
PctLoss is 3.8. trade were subtracted from each trade.
F MICROSOFT EXCEL: more positive the CG value, the better your event is likely to
MARCH 2015 TRADERS’ TIPS CODE be for trading long positions.
In their article in this issue, “Trading System Design: A Sta- Figure 10 shows the specification for one such stochas-
tistical Approach,” authors John Ehlers & Ric Way show us a tic event definition on the left under the heading “predictive
statistical approach to determine if an event we can define to event testing controls.” The corresponding “event count by
a computer has any value as a future price predictor. price gains” chart with a marker for the calculated center of
Once we have determined the size and shape of such an gravity is shown under the price chart.
event, we can build trading rules around the event and con- Controls specifying a slightly different size and shape of
struct a system to follow those rules. our event to be used in the simplified trading system appear
In the article, the authors use a simple stochastic crossun- under the heading “trading system controls.” A summary of
der as the event and look ahead a number of bars to determine the trading results for this control set can be found in the
a percentage change after the event. lower-left corner.
Run this logic against 10 or more years of historical data, Calculations for predictive event testing and center of grav-
accumulate the events you find as well as the percent change ity determination can be found in the columns to the right of
values associated with the events, and you can then use a the price chart, as shown in Figure 11.
center of gravity (weighted average) calculation to assess the Figure 12 shows the calculations for the trading system.
predictive power of the event. The premise here is that the These are located in columns yet farther to the right of those
FIGURE 11: EXCEL, Predictive Event Computations. Calculations for predictive event testing and center of gravity determination can be found in the columns to
the right of the price chart.
FIGURE 15: EXCEL, Trade Details. Trading results for a given scenario can be seen on the transaction summary tab.
PRODuCT REvIEW /
OPTIONSTRATEGIST.COM
Continued from page 46
FURTHER READiNg
Gopalakrishnan, Jayanthi [2002].
“Options Volatility With Lawrence
McMillan,” interview, Technical
Analysis of StockS & commoditieS,
Volume 20: February.
S&C Staff [2015]. “OptionStrategist.
com (Part 1),” product review, Techni-
cal Analysis of StockS & commodi-
tieS, Volume 33: February.
‡OptionStrategist (McMillan Analysis
Corp.)
‡See Editorial Resource Index
FIGURE 4: OPTION CALCULATOR 2.0. Inputs are made to the top two lines, with the result being a matrix of premium
prices for put & call strike prices and stock price combinations. If you click on any one cell of the matrix, the greeks shown
below will change. The implied window (seen as the window overlaying the lower two thirds of this screen capture) is
used to calculate implied volatilities. A series of six input rectangles are there for you to input premium prices for various
strikes depending on whether you have chosen the call or put radial in the upper left. After making the inputs, the matrix
is populated with implied volatilities and the greeks.
TradingAlchemy.com
collection of strategies
Bloodhound Investment Research states
its goal is to give users the tools to turn them PivotHunter.com
into their own “hedge fund manager” by
March 2015 • Technical Analysis of Stocks & Commodities • 55
FUTURES LIQUIDITY
T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.
www.metaquotes.net
a strategic entry point that is in line with this type of
price movement.
Once you are confident of the direction of the FIGURE 1: GOING SHORT. A bearish candle opened above but closed below the SMA(30). The following
market, you need to employ the proper entry tactic day, a short entry was made.
to play the market. For part-time traders, it’s good
to move to a higher time frame chart even though
the higher time frame chart may generate fewer
trading signals.
Details of the strategy Stop-loss: When going long, put a stop at the low of the trigger
candle. Conversely, when going short, put a stop at the high of
Strategy type: Trend-following Interpretation of formation the trigger candle.
Suitability: Part-time traders of indicators: A bull market is
Time horizon: Daily charts identified when the 30-period Take profit: Set an initial target for each trade. If you’re trading
Indicator 1: 30-period SMA SMA is above the 90-period forex, then set it at 300 pips. Since this is not a short-term trading
Indicator 2: 90-period SMA SMA. The logic is reversed system, you would not need to go for small profits. In some cases,
for a bear market. some moves may be significant enough, giving you a nice gain. It
is best to leave an open position until an exit condition is met.
Long entry: In a bull market, when the price has gone below the
30-period SMA, you would need to wait for price. (I use candle- Exit rule: Make use of optimal breakeven and trailing stops.
stick charts, so I wait for a candle to close above the SMA before This exit rule takes you out of an unfavorable position. You
going long.) This candle must be of considerable length, but not can also adapt it to make you stay in a risk-free profitable trade
too long. I look for a bullish engulfing candle without shadows, while you run your gains.
commonly referred to as marubozu. If it opens below the SMA
(30) and closes above it, I’ll ignore the signal. But when a bullish Some recent trades
candle with shadows opens below the shorter SMA and closes To help you better understand this trading method, I
above it, I’ll pay attention to the signal. have provided some examples. The SMA(30) is the
blue line and the SMA(90) is the green line. I have
Short entry: In a bear market, when the price has moved above identified the supply & demand zones with the two
the SMA(30), you would need to wait for a candle to close below horizontal lines. The red vertical line on the left shows where
the SMA(30) before going short. Again, this candle must be of I took a signal, which is placed on the candle that serves as a
considerable length. For example, when a bearish marubozu candle trigger. The red vertical line on the right shows where I made an
opens above the shorter SMA and closes below it, I’ll ignore the exit. I didn’t consider spreads in any of these examples.
60 • March 2015 • Technical Analysis of Stocks & Commodities
AT THE CLOSE
Example 1
On November 14, 2011, a bearish candle opened
above but closed below the SMA(30) on the daily
chart of the EURUSD (Figure 1). The following day,
a short entry was made. The supply zone is marked
above this candle by two parallel horizontal red lines.
Some candles which preceded this trigger candle had
repeatedly tested this area.
Instrument: EURUSD Take profit: 1.3300
FIGURE 3. CAPITALIZING ON THE BEARISH EURAUD. In early November 2011, the SMA(30) crossed
Order: Sell Exit date: 11/25/2011
below the SMA(90). About 10 days later, a bearish candle triggered a short signal and the EURAUD was
Entry date: 11/15/2011 Exit price: 1.3300 sold short on the following day.
Entry price: 1.3600 Status: Closed
Stop-loss: 1.3792 Profit/loss: 300 pips
Trailing stop: 1.3450
Example 2
On September 19, 2011, on the daily chart of the US-
DCAD, a trigger candle opened below the SMA(30)
and later closed above it (Figure 2). On the following
day, I opened a long position. I identified a demand
zone below the entry point. The target was hit on
the third day.
Instrument: USDCAD Take profit: 1.0200
Order: Buy Exit date: 9/22/2011
Entry date: 9/20/2011 Exit price: 1.0200
Entry price: 0.9900 Status: Closed
Stop-loss: 0.9805 Profit/loss: 300 pips FIGURE 4: TAKING A LOSS ON THE NZDUSD. A trigger candle was formed on May 20, 2011 and a long
Trailing stop: 1.0050
trade was opened on the following day. The market reversed and hit the stop-loss before it went in the
Example 3 expected direction.
In early November 2011, the SMA(30) crossed be-
low the SMA(90) on the daily chart of the EURAUD (Figure Conclusion
3). More than 10 days later, a bearish candle triggered a short Trading involves making swift decisions. The minute
signal and I sold short the EURAUD on the following day. The you start hesitating, you overanalyze and are unable
supply zone is well above the entry point, and that suggested to place your trades at the right time. The sooner
a strong short signal. you see a good signal on your chart, the sooner you
Instrument: EURAUD Take profit: 1.2950 should be able to react and open a position. The more
Order: Sell Exit date: 12/21/2011 complicated you make a trading signal, the more analysis you
Entry date: 11/30/2011 Exit price: 1.0200 would need to do before you can open a position.
Entry price: 1.3250 Status: Closed To emerge as a consistently surviving trader, you need to put
Stop-loss: 1.3469 Profit/loss: 300 pips
your investments to good use. You need to constantly assess
Trailing stop: 1.3100
data, analyze it, and do something sensible out of that. In the
Example 4 end, you are responsible for your decisions, and the more time
There are times when this strategy may not work, in which you spend doing this, the more competent you will become. The
case you’ll have to honor the stop-loss and never run the loss strategy I have described here is simple and worth trying.
beyond your initial stop. A trigger candle was formed on May
20, 2011 on the daily chart of NZDUSD (Figure 4), and I opened Azeez Mustapha is a professional forex trader, an analyst at
a long trade the following day. The market reversed and hit the instaforex, a blogger at ADVFN.com, and a freelance author.
stop-loss before it went in the expected direction. If the stop His articles have been published at itulglobalforex.blogspot.
was wider I may not have been stopped out and instead would com, and in TRADERS’ magazine. He can be reached via email
have profited handsomely. But as a matter of discipline, never at atazeez.mustapha@analytics.instaforex.com.
widen your stop, because a reversal can be the beginning of a
long-term move in the opposite direction. Instead, take your Further reading
loss and look forward to the next trade. Mustapha, Azeez [2014]. “Beating The Currency Markets,”
Instrument: NZDUSD Take profit: 0.8230 Technical Analysis of Stocks & Commodities, Volume
Order: Buy Exit date: 5/23/2011 31: September.
Entry date: 5/23/2011 Exit price: 0.7904 [2014]. “Recovering Your Fortune,” Technical Analysis
Entry price: 0.7930 Status: Closed of Stocks & Commodities, Volume 32: June.
Stop loss: 0.7904 Profit/loss: -26 pips ‡Metaquotes.net
Trailing stop: N/A
To
necessary for you to be confident about
be a winning trader, you need to master a discrete edge. But how do you gain that the general direction of price moves.
edge, especially if you are a part-time trader? Whenever you analyze the markets Of course, not all positions would go
objectively, each trade you make will be of some benefit. Some of the most compe- in the forecasted direction, but having
tent analysts are able to pinpoint winning signals constantly and control risk. Your a system that requires you to spend
ability to sight winning conditions is what will make a world of difference. a short period of time analyzing and
making decisions is something well
Can you trade and keep your day job? suited for the part-time trader.
Some traders — maybe you’re one of them — keep their jobs while using trading systems
WELDER: PHOTOSTOCK10/PLAN POLE: WELF AARON/COLLAGE: nikki morr
that allow them to trade on a part-time basis. Such traders would not use short-term strategies, Chaotic hullabaloo
since that would require that they stay glued to their screen most of the day. The trading The simple moving average (SMA)
systems that are well suited to part-time traders are usually longer term in nature. sometimes gets distorted because of er-
Even those who have transitioned to trading full time have realized that they do not ratic data. This would normally indicate
necessarily have to spend more time trading than when they were trading part time. True, that the sellers are dominant, but that
there are part-time traders who make as much money as full-time traders; in fact, some could quickly change. You need to be
even make more than full-time traders. In addition, some traders’ mindsets prohibit them aware of such erratic movements in data
from watching their computer screen all day long since they may go livid watching their so as not to be caught unaware.
fortunes contract and expand. The SMA is useful in gauging the
8999
1 year...................
$
2 years.............. 149
$ 99
3 years.............. 199
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