2018 May

THE TRADERS’ MAGAZINE SINCE 1982
www.traders.com MAY 2018
Rocket RSI
A solid propellant for your
rocket science trading 8
The V-Trade
Part 3: Fibonacci projections
and daily pivots 14
Support &
Resistance IN FX
Identifying strong levels 24
The Four Market

Dimensions
Price, time, momentum,
and sentiment 30
INTERVIEW
Building trading systems
with Cesar Alvarez 34
TRADING CHECKLIST
What should it include? 60
MAY 2018
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CONTENTS MAY 2018, Volume 36 Number 6
FEATURE ARTICLE
8 RocketRSI—A Solid TIPS 29 Futures For You
Propellant For Your by Carley Garner
Rocket Science Trading Here’s how the futures market
by John F. Ehlers really works. 42 Retail ETFs Are A Mixed Bag
by Leslie N. Masonson
Wouldn’t it be great to know that
there’s a strong chance a cyclic 30 The Four Market Dimensions Interested in learning more about
reversal will take place? How many by Mark Rivest using exchange traded funds (ETFs)
indicators can identify this event? in your trading?
Improve your trading by combining
The RSI is a favorite indicator the dimensions of price, time,
among technical analysts. Make it momentum, and sentiment. 60 Get More Value Using
a tad bit more flexible and it may A Trading Checklist
help you find those high-probability
INTERVIEW by Thomas Bulkowski
reversal points.
What is a trading plan or checklist
34 Building Trading Systems and how can it help?
14 The V-Trade, Part 3: With Cesar Alvarez
Technical Analysis— by Jayanthi Gopalakrishnan
Fibonacci Projections And With a bachelor of science in
Daily Pivots electrical engineering and computer DEPARTMENTS
by Sylvain Vervoort science, and a master of science in 6 Opening Position
In this third part of a multipart computer science, it’s no surprise 7 Letters To S&C
series, we look at passive support that Cesar Alvarez found an affinity
for developing trading systems. He 41 Trade News & Products
& resistance with Fibonacci 46 Traders’ Tips
projections and daily pivots. has been at the forefront of stock
market research and has developed 57 Advertisers’ Index
a number of trading systems based 57 Editorial Resource Index
22 Explore Your Options on his findings. He’s got strategies
by Jay Kaeppel for daytrading, swing trading, 58 Futures Liquidity
Got a question about options? long-term trading … you name 59 Classified Advertising
it, he’s likely got it. Alvarez has 59 Traders’ Resource
also coauthored several books on
24 Trading Support & Resistance systems trading. We spoke with
Levels In FX him to find out more about what
by Solomon Chuama goes into the different types of
The forex markets typically move trading systems he develops.
in a zigzag fashion, and that
makes entry and exit decisions 38 Moving Average Hammer
challenging. Here we look at a few Pivots
tried and true methods to identify
strong support & resistance levels by Ken Calhoun
in the forex markets. Combine a Japanese hammer
candle with a moving average line
to confirm a pivot and generate a
trading signal.
This article is the basis for n Cover: Inga Poslitur

TIPS Traders’ Tips this month.
n Cover concept: Christine Morrison
Copyright © 2018 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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4 • May 2018 • Technical Analysis of Stocks & Commodities

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May 2018 • Volume 36, Number 6
Opening Position
The Traders’ MagazineTM
T
EDITORIAL
editor@traders.com he tail end of March 2018 reminded
Editor in Chief Jack K. Hutson us just how vulnerable the markets
Editor Jayanthi Gopalakrishnan can be. When the markets rise as much and
Production Manager Karen E. Wasserman
as quickly as they did from 2016 to 2018,
Art Director Christine Morrison
any negative news could make that market
quickly reverse direction. We saw how
Graphic Designer Wayne Shaw
Webmaster Han J. Kim
Contributing Editors John Ehlers,
the Dow Jones Industrial Average (DJIA)
Anthony W. Warren, Ph.D. dropped over 1,400 points in two days. Of
Contributing Writers Thomas Bulkowski, Martin Pring, course, the drop was attributed to a few
Barbara Star, Markos Katsanos
different events that unfolded at around the
same time—the revelation of an apparent
OFFICE OF THE Publisher lack of protection of customer privacy by Facebook, the Trump administration’s
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2018 WINNER
AI TRADING SOFTWARE
The editors of S&C invite readers to submit their opinions and information on subjects
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Build powerful
expressed in this column do not necessarily represent those of the magazine.—Editor trading systems in
MINUTES
TRADING VOLATILITY limits the peak of the VIX move on the
without coding
Editor, chart, as you stated. By allocating to a
I was reading the article VIX buying strategy when the equal-
by Andrew Sachais in weight S&P 500 index breaks down,
the March 2018 S&C, as is defined in the article, the trader is ®
“How To Trade Volatil- better able to profit from rising volatility.

ity.” I am confused by Hope this helps, and please ask if you
the top chart showing have any follow-up questions.
the $SPXEW overlay with $VIX. The
left-hand side of the chart is the $VIX Sector Rotation Strategies
price axis and it appears to have a high Editor,
www.NeuroShell.com
value of 43. I don’t understand this. The I have some questions 301.662.7950
$VIX, I believe, is supposed to represent for author Marisa Yang
the Cboe Volatily Index (VIX) and the regarding her February matching values in the table? Perhaps
highs on that index were a lot more than 2018 S&C article, “Cap- I’m just confused about what MaxDD
43 back in 2008—more like double that. italizing On Sector is, so this would be your opportunity
(See chart in Figure 1.) Rotation Strategies.” to explain it.
Could you ask the author for clarifica- On page 23, Figure 1, I don’t under- Figure 3 appears on page 24. Since
tion on this point? I must be misunder- stand each entry in the table. How did MA10 will take 2.5 years (10 quarters)
standing something here. she arrive at the 3.37 result for the year before you get a valid result, did you start
LA Little 2000 in the “Best momentum strategy” recording the value of each MA in the
column? Is this the average performance third quarter of 2002 or did you prime
Author Andrew Sachais replies: of the four quarters or is this the change the pump by using data from 1997 (that
I used a 10-week moving average to in price for the year? is, 2.5 years before the start of the study
smooth the trend of the VIX. The goal The reason I ask is because MaxDD in 2000)? I’m just asking if you started
was to measure the trend of volatility, shows -54.30, which corresponds to the recording the results at the same time
as opposed to each individual spike. The year 2008. The next column shows the for all MAs.
smoothing effect of moving averages year 2000 having performance that also Also, near the bottom right of that page,
matches the MaxDD line. you disclose the buy rule: “The strategy
But the “Mid-tier momen- is based on initiating a buy order when
tum strategy” column the ranked ETF is above the moving
does not have a match- average.” But you don’t say when you
ing MaxDD nor does sell the position (A). The reason I ask is
the “Equal-weighted” that many traders assume (without test-
column. If MaxDD is ing it) that performance will improve if
based on each quarter, a security is above its moving average
I’d find it surprising that at the time of purchase. In a surprising
it would match the aver- number of cases, that belief is wrong.
age for the year. If each I know this means extra work, but
entry is the annual return do the results for Figure 3 improve or
and MaxDD is based deteriorate when: 1) You buy when the
on this, then why don’t
FIGURE 1: Cboe Volatily Index (VIX) the two columns have Continued on page 40
May 2018 • Technical Analysis of Stocks & Commodities • 7

TRADING SYSTEMS
Look, The Market Is Reversing!
RocketRSI—A Solid Propellant

For Your Rocket Science Trading
Wouldn’t it be great to know that there’s a strong closes down (CD) and the averages drop out if we
chance a cyclic reversal will take place? How many simply independently accumulate the gains and losses.
indicators can identify this event? The RSI is a Therefore, I will simply accumulate CU and CD. I
favorite indicator among technical analysts. Make it can then write the equation for RSI as:
a tad bit more flexible and it may help you find those
high-probability reversal points. RSI = 1 – 1 / (1 + CU / CD)
J.
Welles Wilder’s original description of the Using a little algebra to put everything on the right-
relative strength index (RSI) in his 1978 hand side of the equation over a common denominator,
book New Concepts In Technical Trading the indicator equation becomes:
Systems specified a calculation length of
14 days. That requirement started me on a 40-year RSI = CU / (CU + CD)
quest to find the correct length of data for the compu-
tation of indicators and trading strategy rules. Many In this formulation, RSI has a value of zero if the
technicians have addressed the RSI and described its accumulation of CU is zero and has a value of 1 if the
applications. In this article I will derive a formulation accumulation of CD is zero. If you reduce the price
that has more flexibility and ease of interpretation. I movement to its primitive as a sine wave, then it is
will also extrapolate the algorithm to accurately address easy to see that this RSI has only CU going from the
a statistical approach to technical analysis. valley to the peak and only has CD going from peak to
valley. This RSI traces out the shape of the sine wave
Start with the RSI between these two limits. However, a sine wave swings
Here is the original definition of the RSI indicator: between -1 and +1 rather than between 0 and + 1. We
can cause the RSI to also have the same swing limits
RSI = 100 - 100 / (1 + RS) as the sine wave if we multiply the equation above by
2 and then subtract 1 from the product as:
where RS = Average gain of up periods
during the specified timeframe / Average RSI = 2*CU / (CU + CD) – 1
loss of down periods during the specified
timeframe Again, using a little algebra to put the right-hand
side of the equation over a common denominator, the
My first observation is that the factor of 100 is equation evolves to:
irrelevant. Second, the averages are not required
because we are taking the ratio of closes up (CU) to MyRSI = (CU – CD) / (CU + CD)
INGA POSLITUR
by John F. Ehlers
full swing between -1 and +1. Smoothing the
output waveform averages the output that,
itself, can never exceed +1 or -1. Therefore,
the smoothed signal seldom makes the full
swing. This difference of achieving full
swing is important when we examine the
statistical nature of the indicator.
The EasyLanguage code shown in the
sidebar “My RSI Indicator EasyLanguage
Code” uses my SuperSmoother filter for
smoothing. I have separated the choice of
tradestation
smoothing from the length of the MyRSI

calculation so you can control the degree
FIGURE 1: NO LAG. When using the correct parameter length, MyRSI indicator traces input data with no lag. of lag the smoothing introduces. The input
SmoothLength can be as small as 3. There
probably is no benefit in setting Smooth-
Apply it Length to be larger than the RSILength input.
If we apply MyRSI to prices having a 20-bar That the MyRSI indicator swings between -1 and +1 intro-
sine wave shape, we see that it traces out the duces the exciting possibility of applying the Fisher transform
price shape with no lag and full amplitude to obtain a statistical picture of price activity. The Fisher
if we use a calculation period that is half transform converts the probability distribution of virtually any
the 20-bar period of the waveform. In other words, the correct waveform to have a nearly Gaussian probability distribution
calculation period to use to compute MyRSI is exactly half the of the original waveform if it is bounded between -1 and +1.
dominant cycle in the price data. Doing this, the MyRSI indica- The vertical waveform scale is transformed to be expressed in
tor will have zero lag, as shown in Figure 1. Eureka! This is the standard deviations from the mean.
correct length of data to be used to calculate the RSI. The problem with the MyRSI indicator is that it does not
However, the basic MyRSI indicator is too “nervous” for the have a zero mean. In fact, there is a substantial bias in trend-
taste of most technicians when using real-world noisy data, ing markets. This problem can be mitigated by removing the
and therefore calls for some smoothing. There is an option to trend component using the momentum of closes over half the
smooth the waveform of the indicator output or to smooth the dominant cycle period rather than just the closing prices. This
data that is input to the indicator. Since MyRSI is a nonlinear is really simple because the best RSILength input is also half
process, the two different smoothing approaches result in dif- the dominant cycle period. The momentum change and addition
ferent indicator shapes, but the zero crossings remain the same of the Fisher transform are incorporated into the RocketRSI
for equivalent smoothing. I prefer to smooth the data input to the indicator. The code can be seen in the sidebar “RocketRSI
indicator because that allows the indicator output to make the Indicator EasyLanguage Code.”
MyRSI indicator EasyLanguage code

{ a1 = expvalue(-1.414*3.14159 / (SmoothLength));
MyRSI Indicator b1 = 2*a1*Cosine(1.414*180 / (SmoothLength));
(C) 2005-2018 John F. Ehlers c2 = b1;
} c3 = -a1*a1;
c1 = 1 - c2 - c3;
Inputs: End;
SmoothLength(8),
RSILength(10); //SuperSmoother Filter
Filt = c1*(Close + Close[1]) / 2 + c2*Filt[1] + c3*Filt[2];
Vars:
a1(0), //Accumulate "Closes Up" and "Closes Down"
b1(0), CU = 0;
c1(0), CD = 0;
c2(0), For count = 0 to RSILength -1 Begin
c3(0), If Filt[count] - Filt[count + 1] > 0 Then CU = CU + Filt[count] -
Filt(0), Filt[count + 1];
count(0), If Filt[count] - Filt[count + 1] < 0 Then CD = CD + Filt[count + 1] -
CU(0), Filt[count];
CD(0), End;
MyRSI(0); If CU + CD <> 0 Then MyRSI = (CU - CD) / (CU + CD);
//Compute Super Smoother coefficients once Plot1(MyRSI);

If CurrentBar = 1 Then Begin Plot2(0);

RocketRSI indicator EasyLanguage code
{
RocketRSI Indicator //Create half dominant cycle Momentum
(C) 2005-2018 John F. Ehlers Mom = Close - Close[RSILength - 1];
}
//SuperSmoother Filter
Inputs: Filt = c1*(Mom + Mom[1]) / 2 + c2*Filt[1] + c3*Filt[2];
SmoothLength(8),
RSILength(10); //Accumulate "Closes Up" and "Closes Down"
CU = 0;
Vars: CD = 0;
a1(0), For count = 0 to RSILength -1 Begin
b1(0), If Filt[count] - Filt[count + 1] > 0 Then CU = CU + Filt[count] -
c1(0), Filt[count + 1];
c2(0), If Filt[count] - Filt[count + 1] < 0 Then CD = CD + Filt[count + 1] -
c3(0), Filt[count];
Filt(0), End;
Mom(0), If CU + CD <> 0 Then MyRSI = (CU - CD) / (CU + CD);
count(0),
CU(0), //Limit RocketRSI output to +/- 3 Standard Deviations
CD(0), IF MyRSI > .999 Then MyRSI = .999;
MyRSI(0), If MyRSI < -.999 Then MyRSI = -.999;
RocketRSI(0);
//Apply Fisher Transform to establish Gaussian Probability Distribu-
//Compute Super Smoother coefficients once tion
If CurrentBar = 1 Then Begin RocketRSI = .5*Log((1 + MyRSI) / (1 - MyRSI));
a1 = expvalue(-1.414*3.14159 / (SmoothLength));
b1 = 2*a1*Cosine(1.414*180 / (SmoothLength)); Plot1(RocketRSI);
c2 = b1; Plot2(0);
c3 = -a1*a1;
c1 = 1 - c2 - c3;
End;
SINCE
THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RE-
SULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN
MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REP-
RESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER
CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

Again, the vertical scale of the Rock-
etRSI indicator is in standard deviations.
For example, -2 means two standard devia-
tions below the mean. Since exceeding two
standard deviations in a Gaussian probability
distribution happens only about 2.4% of
the time, and since we have employed the
momentum of the dominant cycle period,
the spike where the indicator falls below -2
provides a surgically precise timing signal
to enter a long position. Similarly, exceeding
the +2 standard deviation level is a timing
signal to exit a long position or to reverse
to a short position. Therefore, using the FIGURE 2: IDENTIFICATION OF CYCLICAL TURNING POINTS. Here you see that the RocketRSI precisely
RocketRSI indicator is relatively intuitive. indicates cyclic turning points as statistical events.
The only concerns are whether a dominant
cycle exists in the data, that the indicator is
tuned to half the dominant cycle period, and that smoothing
introduces lag.
In Figure 2 you see an example of how the RocketRSI indi-
cator can be applied. I have used an RSILength of 10 because
The negative spikes in the
there is commonly a more or less monthly (approximately 20 indicator correspond to
bars) cycle present in most stocks and stock indexes. A casual excellent buying opportunities
examination of Figure 2 shows that the negative spikes in the and the positive spikes
indicator correspond to excellent buying opportunities and the
positive spikes correspond to excellent selling opportunities.
correspond to excellent selling
Exceeding +/- 2 on the indicator scale signifies that a cyclic opportunities.
reversal is a high probability event.
Making it flexible
Although this article revisits a solid, favorite Stocks & Commodities Contributing Editor John Ehlers is
indicator to technical traders, several new for- a pioneer in the use of cycles and DSP technical analysis. He
mulations have been introduced that increase is president of MESA Software and cofounder of StockSpotter.
the interpretation of and the usability of the com. MESASoftware.com offers the MESA Phasor and MESA
good ol’ RSI. These are: intraday futures strategies.
• The RSI can be computed by using simple accumulations
of closes up and closes down rather than averages. The code given in this article is available in the Article Code section
of our website, Traders.com.
• The correct data length to use in the computation of the
RSI is half the dominant cycle period. See our Traders’ Tips section beginning on page 46 for commentary
• An equation has been derived using dilation and transla- and implementation of John Ehlers’ technique in various technical
tion that displays the RSI as swinging between -1 and +1. analysis programs. Accompanying program code can be found in the
This is a natural display of an oscillator-type indicator Traders’ Tips area at Traders.com.
for swing trading.
• Smoothing can be introduced either before or after the
Further reading
Ehlers, John [2013]. Cycle Analytics For Traders, Wiley.
RSI computation. Placement of the smoothing alters the
Wilder, J. Welles [1978]. New Concepts In Technical Trading
RSI waveshape because of the nonlinear operation of
Systems.
the RSI process. Smoothing before computing the RSI
‡TradeStation
is preferred.
‡See Editorial Resource Index
• Using the half dominant cycle period momentum rather †See Traders’ Glossary for definition
than prices alone establishes a zero mean.
• Applying the Fisher transform creates statistically sig-
nificant spikes that indicate cyclic turning points with
precision.

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Pivotal Concerns
The V-Trade
Part 3: Technical Analysis—Fibonacci Projections And Daily Pivots
In this third part of a multipart series, we look at passive Hindu-Arabic numerals. Liber Abaci also presented a problem
support & resistance with Fibonacci projections and daily involving the growth of a hypothetical population of rabbits,
pivots. based on idealized assumptions. The solution was a number
sequence that became known as Fibonacci numbers.
T
by Sylvain Vervoort The number sequence was known to Indian mathematicians
as early as the sixth century, but it was Fibonacci’s Liber
he objective of this series on the V-Trade is to ex- Abaci that introduced it to the West. Fibonacci numbers have
plain the techniques I apply to make manual and the following sequence: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144,
automatic buy & sell decisions, or a combination 233, and so on. Each number is the sum of the two previous
of both. Last month in part 2, I discussed passive numbers. The higher up in the sequence, two consecutive
support & resistance levels. I will continue that numbers divided by each other approach the so-called golden
discussion of technical analysis here with a focus on Fibonacci ratio (approximately 1:1.618, or 0.618:1).
projections and daily pivots. I will also include an indicator
ART: OPTURADESIGN/SHUTTERSTOCK
that displays pivot levels on a chart. Fibonacci levels

To chart Fibonacci levels, draw an imaginary vertical line
Passive support & resistance, continued between two turning points (1 and 2 in Figure 1). Next, draw
Leonardo Pisano Fibonacci was an Italian mathematician born horizontal lines through vertical levels at 100% of the size
in 1170. In Liber Abaci, he introduced the so-called modus between 1 and 2, 61.8% (100*0.618), 50% (not a Fibonacci
Indorum (method of the Indians), which today is known as number), 38.2% (61.8*0.618), and 0%. These horizontal lines are
TRADING SYSTEMS
called Fibonacci retracement levels and you’ll find

that price tends to find support at these levels.
Next, draw horizontal lines at three or more
Fibonacci targets at 161.8% (100*1.618), 261.8%
(161.8*1.618), and 423.6% (261.8*1.618). These
horizontal lines are called Fibonacci target levels.
Price tends to move to and finds resistance at these
target levels.
Most technical analysis platforms offer a tool to
draw Fibonacci levels. Once price turns at point 2
(Figure 1), you can draw Fibonacci retracements
and projections from turning points 1 (0% level)
and 2 (100% level). You can now see retracement
support levels at 61.8%, 38.2%, and the 50% levels
metatrader
and target price resistance levels at 161.8% and
261.8%.
Figure 1 shows how price reacts around these FIGURE 1: FIBONACCI RETRACEMENT AND TARGET LEVELS. Here you see how price reacts
Fibonacci retracement and destination levels. At 3 around these Fibonacci retracement and destination levels.
and 4, price retraces to the 38.2% price level. The
up move after these support levels finds resistance
at the 100% level, of course also a passive price
resistance level from the previous top at 2. When
price breaks the 100% level, it moves up to 5, the
161.8% Fibonacci level. Here, there is some resis-
tance and after a smaller pullback, price moves up
to 6 with a retrace back to point 7, a support from
previous top 5 and close to the 161.8% Fibonacci
support. Finally, price moves up and reaches the
top at point 8 at the 261.8% Fibonacci level.
You may use any turning points, shorter and
longer term, to create Fibonacci projections.
Fibonacci levels are an important tool to predict
support and target price levels.
Often, and based on the idea that resistance be-
comes support and vice versa, you can successfully
use price retraces for the creation of Fibonacci
projections. Let me show some examples.
Figure 2: FIBONACCI UP TARGET LEVELS. From the last low point, you can determine the
Fibonacci projection levels.
Fibonacci up target levels
In Figure 2, price has been in a down move until
14:45 on October 13. There is good reason to
believe this may be the end of the current down
move. After two to three bars you could assume
there is an upward turning point. You do not
have to wait for a turning point in the up move
to create a Fibonacci up projection. It is okay to
use the last wave down to make this projection.
In Figure 2, this is the red colored projection, 0 is
the last low point, and 100 the high point of the
last move down.
The 161.8% projection is at passive resistance
of price tops in the previous down move. The
261.8% target is reached and forms support for the
first pullback in the uptrend. Finally, price moves
up to the 423.6% target. So from the beginning FIGURE 3: FIBONACCI RETRACEMENT AND DOWN TARGET LEVELS. Here you see how all
of the up reversal, we know where price may go projected targets were reached with a couple of retracements on the way down.

Notice of Class Action Settlement
If you transacted in Euroyen-Based Derivatives1 from January 1, 2006 through June 30, 2011, inclusive,
then your rights will be affected and you may be entitled to a benefit. This Notice is only a summary of
the Settlement and is subject to the terms of the Settlement Agreement2 and other relevant documents
(available as set forth below).
The purpose of this Notice is to inform you of your rights in financially benefit their Euroyen-Based Derivatives positions.
connection with a proposed settlement with Settling Defendants The Contributor Bank Defendants also allegedly requested that other
Bank of Tokyo-Mitsubishi, UFJ, Ltd. (“BTMU”) and Mitsubishi UFJ Contributor Bank Defendants make false Yen LIBOR and Euroyen
Trust and Banking Corporation (“MUTB”) in the actions titled Laydon TIBOR submissions on their behalf to benefit their Euroyen-Based
v. Mizuho Bank Ltd., et al., 12-cv-3419 (GBD) (S.D.N.Y.) and Sonterra Derivatives positions.
Capital Master Fund, Ltd., et al. v. UBS AG, et al., 15-cv-5844 (GBD)
Plaintiffs further allege that inter-dealer brokers, intermediaries
(S.D.N.Y.). The settlement with BTMU and MUTB (“Settlement”) is
between buyers and sellers in the money markets and derivatives
not a settlement with any other Defendant and thus is not dispositive of
markets (the “Broker Defendants”), had knowledge of, and
any of Plaintiffs’ claims against the remaining Defendants.
provided substantial assistance to, the Contributor Bank
The Settlement has been proposed in two class action lawsuits Defendants’ foregoing alleged manipulations of Euroyen-Based
concerning the alleged manipulation of the London Interbank Derivatives in violation of Section 22(a)(1) of the Commodity
Offered Rate for Japanese Yen (“Yen LIBOR”) and the Euroyen Exchange Act, 7 U.S.C. § 25(a)(1). For example, Contributor Bank
Tokyo Interbank Offered Rate (“Euroyen TIBOR”) from Defendants allegedly used the Broker Defendants to manipulate
January 1, 2006 through June 30, 2011, inclusive. The Settlement Yen LIBOR, Euroyen TIBOR, and the prices of Euroyen-Based
will provide $30 million to pay claims from persons who transacted in Derivatives by disseminating false “Suggested LIBORs,”
Euroyen-Based Derivatives from January 1, 2006 through June 30, 2011, publishing false market rates on broker screens, and publishing
inclusive. If you qualify, you may send in a Proof of Claim and false bids and offers into the market.
Release form to potentially get benefits, or you can exclude
Plaintiffs have asserted legal claims under various theories,
yourself from the Settlement, or object to it.
including federal antitrust law, the Commodity Exchange Act, the
The United States District Court for the Southern District of New Racketeering Influenced and Corrupt Organizations Act, and
York (500 Pearl St., New York, NY 10007-1312) authorized this common law.
Notice. Before any money is paid, the Court will hold a Fairness
BTMU and MUTB have consistently and vigorously denied
Hearing to decide whether to approve the Settlement.
Plaintiffs’ allegations. BTMU and MUTB entered into a Settlement
Who Is Included? Agreement with Plaintiffs, despite each believing that it is not liable
You are a member of the “Settlement Class” if you purchased, sold, for the claims asserted against it, to avoid the further expense,
held, traded, or otherwise had any interest in Euroyen-Based inconvenience, and distraction of burdensome and protracted
Derivatives at any time from January 1, 2006 through June 30, 2011, litigation, thereby putting this controversy to rest and avoiding the
inclusive. Excluded from the Settlement Class are (i) the Defendants risks inherent in complex litigation.
and any parent, subsidiary, affiliate or agent of any Defendant or any What Does the Settlement Provide?
co-conspirator whether or not named as a defendant; and (ii) the United
Under the Settlement, BTMU and MUTB agreed to pay
States Government.
$30 million into a Settlement Fund. If the Court approves the
Contact your brokerage firm to see if you purchased, sold, held, Settlement, potential members of the Settlement Class who qualify
traded, or otherwise had any interest in Euroyen-Based Derivatives. and send in valid Proof of Claim and Release forms may receive a
If you are not sure you are included, you can get more information, share of the Settlement Fund after they are reduced by the payment
including the Settlement Agreement, Mailed Notice, Plan of of certain expenses. The Settlement Agreement, available at the
Allocation, Proof of Claim and Release, and other important Settlement Website, describes all of the details about the proposed
documents, at www.EuroyenSettlement.com (“Settlement Settlement. The exact amount each qualifying Settling Class
Website”) or by calling toll free 1-866-217-4453. Member will receive from the Settlement Fund cannot be
calculated until (1) the Court approves the Settlement; (2) certain
What Is This Litigation About?
amounts identified in the full Settlement Agreement are deducted
Plaintiffs allege that each Defendant, from January 1, 2006 through from the Settlement Fund; and (3) the number of participating Class
June 30, 2011, inclusive, manipulated or aided and abetted the Members and the amount of their claims are determined. In
manipulation of Yen LIBOR, Euroyen TIBOR, and the prices of addition, each Settling Class Member’s share of the Settlement
Euroyen-Based Derivatives. Defendants allegedly did so by using Fund will vary depending on the information the Settling Class
several means of manipulation. For example, panel banks that made the Member provides on their Proof of Claim and Release form.
daily Yen LIBOR and/or Euroyen TIBOR submissions to the British
Bankers’ Association and Japanese Bankers Association respectively The number of claimants who send in claims varies widely from
(collectively, “Contributor Bank Defendants”), such as BTMU and case to case. If less than 100% of the Settlement Class sends in a
MUTB, allegedly falsely reported their cost of borrowing in order to Proof of Claim and Release form, you could get more money.
1
“Euroyen-Based Derivatives” means (i) a Euroyen TIBOR futures contract on the Chicago Mercantile Exchange (“CME”); (ii) a Euroyen TIBOR futures contract
on the Tokyo Financial Exchange, Inc. (“TFX”), Singapore Exchange (“SGX”), or London International Financial Futures and Options Exchange (“LIFFE”) entered
into by a U.S. Person, or by a Person from or through a location within the U.S.; (iii) a Japanese Yen currency futures contract on the CME; (iv) a Yen LIBOR- and/or
Euroyen TIBOR-based interest rate swap entered into by a U.S. Person, or by a Person from or through a location within the U.S.; (v) an option on a Yen LIBOR
and/or Euroyen TIBOR-based interest rate swap (“swaption”) entered into by a U.S. Person, or by a Person from or through a location within the U.S.; (vi) a
Japanese Yen currency forward agreement entered into by a U.S. Person, or by a Person from or through a location within the U.S.; and/or (vii) a Yen LIBOR- and/or
Euroyen TIBOR-based forward rate agreement entered into by a U.S. Person, or by a Person from or through a location within the U.S.
2
The “Settlement Agreement” means the Stipulation and Agreement of Settlement with The Bank of Tokyo- Mitsubishi, UFJ, Ltd. (“BTMU”) and Mitsubishi UFJ
Trust and Banking Corporation (“MUTB”) entered into on January 23, 2018.
(continued from previous page)
How Do You Ask For a Payment?
If you are a member of the Settlement Class, you may
seek to participate in the Settlement by submitting a Proof up to: the 100%, 161.8%, 261.8%, and 423.6% level. And of
of Claim and Release to the Settlement Administrator at course, we have to keep in mind we should expect resistance
the address provided on the Settlement Website at these levels.
postmarked no later than September 25, 2018. You may Once the first pullback in the up move completes with a
obtain a Proof of Claim and Release on the Settlement Website reaction back to the 261.8% level, you can create a projection
or by calling the toll-free number referenced above. If you are
over this pullback. Note how this green Fibonacci projection
a member of the Settlement Class but do not timely file a Proof
of Claim and Release, you will still be bound by the releases at 261.8% confirms the same target as the red projection at
set forth in the Settlement Agreement if the Court enters an 423.6%. Finally, the last possible projection is projected (blue)
order approving the Settlement Agreement. over the last small pullback in the last part of the up move.
Once more, the top of October 23 is confirmed by this blue
If you timely submitted a Proof of Claim and Release
projection at 261.8%. This is powerful when applied with
pursuant to the class notice dated June 22, 2016 (“2016
Notice”) related to the $58 million settlements with other technical analysis tools.
Defendants R.P. Martin Holdings Limited, Martin Brokers
(UK) Ltd., Citigroup Inc., Citibank, N.A., Citibank Japan Ltd., Fibonacci retracements and down target levels
Citigroup Global Markets Japan Inc., HSBC Holdings plc, and In Figure 3, I present an example of Fibonacci retracements
HSBC Bank plc or pursuant to the August 3, 2017 Notice, and targets in a down move. From a top in November 2017,
amended September 14, 2017 (the “2017 Notice”) related to the USDJPY makes a first correction wave down. By drawing
the $148 million settlements with Defendants Deutsche Bank the blue Fibonacci retracement over this wave—from zero
AG, DB Group Services (UK) Ltd., JPMorgan Chase & Co., at the top to 100% at the bottom of this first wave—you can
JPMorgan Chase Bank, National Association, and J.P. Morgan
see retracement levels at 50% and 61.8%. Retracing 50% is a
Securities plc, you do not have to submit a new Proof of Claim
and Release to participate in this Settlement with BTMU and common reaction to a correction wave. Retracing 61.8% from
MUTB. Any member of the Settlement Class who previously the 100% move is about the maximum retrace to expect for a
submitted a Proof of Claim and Release in connection with the pullback over a correction wave. If the pullback goes beyond
2016 Notice or 2017 Notice will be subject to and bound by the 61.8% retracement, it is most probably not just a pullback
the releases set forth in the Settlement Agreement with BTMU anymore. Either the previous uptrend is resumed or, possibly,
and MUTB, unless such member submits a timely and valid this is a wave 2 for an impulse wave down because a wave
request for exclusion, explained below. 2 can retrace up to 100%. I will talk more about waves in a
What Are Your Other Options? future article in this series.
All requests to be excluded from the Settlement must be In Figure 3, the first pullback moves up to a common 50%
made in accordance with the instructions set forth in the retracement level. This might have been the end of the correction.
Settlement Notice and must be postmarked to the Settlement However, the up correction was only finished after a zigzag up.
Administrator no later than June 7, 2018. The Settlement Notice, After the 50% pullback you see a 61.8% down reaction over
available at the Settlement Website, explains how to exclude the 50% up correction. At that point, the third wave of the up-
yourself or object. All requests for exclusion must comply with moving zigzag resumes the up move, ending the correction by
the requirements set forth in the Settlement Notice to be retracing 61.8% (blue) from the first correction down.
honored. If you exclude yourself from the Settlement Class, you Once this reversing point is confirmed, you can draw a
will not be bound by the Settlement Agreement and can
downward red Fibonacci projection with zero at the top of
independently pursue claims at your own expense. However, if
you exclude yourself, you will not be eligible to share in the Net the zigzag retracement and the bottom at the low of the first
Settlement Fund or otherwise participate in the Settlement. wave (100% retracement), the start of the zigzag correction.
You now have price targets at 100%, 161.8%, and 261.8%.
The Court will hold a Fairness Hearing in these cases on And as you can see, all projected targets were reached with
July 12, 2018, to consider whether to approve the Settlement
a couple of retracements on the way down.
and a request by the lawyers representing all members of the
Settlement Class (Lowey Dannenberg, P.C.) for an award of In the last large leg down, note the small pullback near the
attorneys’ fees of no more than twenty-three percent (23%) of beginning of the large move. Drawing the green Fibonacci
the Settlement Fund for investigating the facts, litigating the target over this pullback confirms the red 261.8% target with
case, and negotiating the settlement, and for replenishment of the green 423.6% target. Another thing worth noting is an
the litigation fund created to reimburse their costs and estimated 61.8% retracement after the second wave down,
expenses in the amount of no more than $500,000. The just before the last large leg down.
lawyers for the Settlement Class may also seek additional
reimbursement of fees, costs, and expenses in connection with Daily pivots
services provided after the Fairness Hearing. These payments
Daily pivot levels calculated on the pre-
will also be deducted from the Settlement Fund before any
distributions are made to the Settlement Class. vious day’s high, low, and close provide
important intraday static support &
You may ask to appear at the Fairness Hearing, but you do resistance levels. Here’s how the various
not have to. For more information, call toll free 1-866-217-4453 levels are calculated:
or visit the website www.EuroyenSettlement.com.

PP: Pivot point = (Previous day’s high + Previous day’s
low + Previous day’s close)/3
R1: Resistance 1 = PP*2 - Previous day’s low
S1: Support 1 = PP*2 - Previous day’s high
R2: Resistance 2 = PP + (Previous day’s high - Previous
day’s low)
S2: Support 2 = PP - (Previous day’s high - Previous day’s
low)
R3: Resistance 3 = PP*2 + (Previous day’s high - Previ-
ous day’s low*2)
FIGURE 4: INDICATOR VISUALIZATION. You can customize the look and feel of S3: Support 3 = PP*2 - (Previous day’s high*2 - Previous
the SvePivots indicator on MT4. day’s low)
After many years of viewing charts, I noticed that values

halfway or in between usually represent temporary support
or resistance levels but can be a reversal point too, especially
if they are supported by other signals. Furthermore, the previ-
ous day’s low and high levels are another usable support or
resistance level, which is why I created an indicator that shows
the basic pivot levels, the in-between levels and the low and
high level of the previous day. Here is the calculation for the
in-between levels:
Resistance Mean value 1 = (R1-PP)/2 + PP

Support Mean value 1 = (PP-S1)/2 + S1
Resistance Mean Value 2 = (R2-R1)/2 + R1
Support Mean Value 2 = (S1-S2)/2 + S2
FIGURE 5: DEFAULT COLOR, WIDTH, AND STYLE. You can change colors, line Resistance Mean Value 3 = (R3-R2)/2 + R2
width, and style to your own liking. Here, each pivot is linked to a specific color. Support Mean Value 3 = (S2-S3)/2 + S3
Previous day’s low
Previous day’s high
I called the indicator SvePivots, which should only be used

on a fixed time–related chart. If you use it on a non-fixed
time–related chart such as the modified renko chart, the pivots
calculation won’t be correct because the start and end times of
renko bars have a varying time relation. Note the indicator is
calculated based on the previous day’s high, low, and closing
FIGURE 6: ADJUSTING LOCAL AND SERVER TIME ZONE DAILY PIVOTS.
price, which is why it is not useful to be displayed on a daily,
weekly, or monthly chart. This is taken care of in the
programming of the indicator. All other timeframes
can be switched on or off. The complete MetaTrader4
source code for this indicator is available in side-
bar “MT4 Code For SvePivots” (see page 54). The
code is also available online at Traders.com/files/
Vervoort-1805.html, as well as in the Article Code
section of Traders.com (subscribers only).
When customizing the look and feel of the Sve-
Pivots indicator on MT4 (Figure 4), you can set all
timeframes on or off except that the daily, weekly,
and monthly will not work. Not tagging the “all
time frames” gives you the flexibility to make your
own choices.
FIGURE 7: PERIOD SEPARATORS ON A GBPUSD 30-MINUTE CHART. Because of the com-
You can also display the values of all pivots in the
plexity brought about by different time zones, if you can display daily server separators on your data window. I suggest you not select this option,
charts, it’s best to take advantage of the feature. merely to gain some processing time.
Noisy indicators
delay your analysis
Pivot points are a meaningful

price support/resistance tool
to look for future price targets.
Jurik algorithms
deliver low lag,
Figure 5 shows all default colors used. You can of course low noise analysis
change colors, line width, and style to your own liking. Each
pivot is linked to a specific color.
In the inputs tab in Figure 6, there is one variable that needs
to be set. You have to enter the difference in hours between
your local PC time, visible at the bottom right of the Windows See Jurik Tools on NinjaTrader
screen, and the time used by your broker’s server. This is the https://tinyurl.com/jurik-ninja
time you see at the bottom of your chart.
Why is it necessary to do this? For underlying instruments
trading 24 hours such as forex currency pairs, it is necessary
to define where a new trading day starts. If each trader used Jurik Research
his local time zone or a different server time, then every time
zone would have different pivot support & resistance levels.
That would result in a useless indicator. 2010 -- 2011 -- 2012 -- 2013
The commonly used reference for the start of a new day Add-In software
is CET, Central European Time. This is GMT/UTC plus one

hour. Another complication is the use of Daylight Savings jurikres.com • 800-810-3646 • 719-686-0074
Time (DST) by a number of countries. In winter, there is no
shift and CET is the reference, but in summer the reference
is CEST, Central European Summer Time with a plus two day and the S1 pivot support target. Some three hours later,
hours GMT/UTC difference. price drops fast to the S2 pivot support target.
In the common tab of the MT4 chart properties window, Next you see a recovery of about four hours, finding resis-
you can tag “show period separators.” These are vertical tance at the pivot support S1M, which is in the neighborhood
dashed lines indicating the start of a day as in the 30-minute of previous price support levels and on the order of a 50%
GBPUSD chart in Figure 7. The day starts at 00:00 and trades pullback of the down correction wave between the previous
24 hours, but note the market closes on Friday at 23:00 and day’s top and current day’s bottom. This first usable pivots day
reopens Sunday at 23:00 starting Monday 00:00 after just ends with price moving down to the pivot support S1.
one hour. Sunday is a trading day for all forex currencies and I mentioned earlier that the pivot calculation has to start at
other instruments aren’t usually trading at that time. I will go 00:00 CET. Make sure you enter the correct value for local PC
into this a little later on. Because of 24-hour trading, there time minus server time and verify that the pivot day changes
are almost no gaps. If there are any, they
usually appear between Friday’s close and
Sunday night’s open.
Let’s look closer at how the pivot levels
appear in the chart in Figure 8. The begin-
ning of the chart will be an incomplete
day. Next, a new day starts and pivot levels
are calculated based on the highest high,
lowest low, and close of the incomplete
day. This means pivot levels shown in the
first complete day have no real value. It’s
only on the third day the calculated values
are correct. They are based on a complete
previous day.
At the October 20th open, price remains
close to the PP pivot level for about six FIGURE 8: DAILY PIVOTS STARTED ON A 30-MINUTE CHART OF GBPUSD. Pivot levels are calculated
hours. Price starts dropping, finding sup- based on the highest high, lowest low and close of the incomplete day. So it’s only on the third day that the
port at the low price target of the previous calculated values are correct, since they are based on a complete previous day.
correspond exactly with the period separators
as shown in Figure 9. Let’s analyze this chart to
find out if pivot points help to identify support
and target levels.
November 1 starts with a move down to the PP
support level. The up move that follows brings
the GBPUSD up to the pivot resistance R1, fol-
lowed by a move back down once more to the PP
support. The small up move near the end of the
day finds resistance at the previous day’s high.
Taken together, price moves on November 1 were
limited.
On the following day, November 2, price con-
tinues the small move down to the support of the
S1M pivot level. From this point there is a move up
to the R3 pivot resistance passing, PP, R1, and R2.
Note how around these pivots there is resistance
FIGURE 9: LOCAL PC TIME MINUS SERVER TIME CORRESPONDING WITH PERIOD SEPARA-
TORS. Once you’ve got your server time corresponding with the period separators, you can see and support from the different levels. A correc-
how price moves from pivot points to the various resistance levels. tion follows and price moves back down to the R1
resistance, which is now support.
On November 3, the pivots price spread is much
larger than in November 2 because there was a
larger move on November 2. But look how the
GBPUSD moves up from PP to R1 and after a
reaction, moves further up to R2.
Are you convinced that pivot points are a
meaningful support & resistance tool to look
for future price targets? I would like to conclude
that when combined with other passive and active
support & resistance tools, pivot points can play
an important role.
We still have to look at forex trading starting on
a Sunday at 11 pm. Should you consider this one
hour of trading as part of the previous week or the
start of the new week? Logically, it is not useful
to consider Sunday as a trading day. Calculating
FIGURE 10: Forex trading on Sundays—the start of a new week. All price moves pivots on just one hour of trading will not give
match up with the pivot levels nicely. This suggests that most market participants start the week
usable support & resistance levels.
on Sunday.
What seems most logical is to consider it as
the start of a new week because trading ended at
11 pm on Friday and starts at 11 pm on Sunday.
The result is that there is often a gap at the open,
possibly followed by a larger move. Assume you
consider trading on a Sunday “true.” In that case,
Sunday will be the start of the new trading week
and pivots are calculated based on the previous
week ending on Friday. The result of this can be
seen in Figure 10. The new week starts on Sun-
day night, not Monday, considering Sunday and
Monday as one single day since, as I mentioned
earlier, creating pivots on just one hour of trading
on Sunday doesn’t make much sense.
In Figure 10 you see price dropping on Monday
to support level 1 with a zigzag down move and
FIGURE 11: Forex trading on Sunday as part of the past week. Notice how price levels from there moving up to resistance level R1M and
don’t line up with the pivot levels as well as in Figure 10, where the week starts on Sunday. the high price of the previous day. Note that the
pullback in the down zigzag moves nicely back
up to the PP pivot level. All moves are perfectly
fitting between pivot levels. It looks like starting
the week on Sunday is what most market partici-
pants are applying.
What happens if we start the new week on Mon-
day? In that case, Sunday would be considered as
part of the previous week. Of course, this means
that pivots are calculated by including Sunday with
the previous Friday. Sunday by itself is ignored as
a separate trading day.
In Figure 11 you see the same chart and period as
in Figure 10. The only difference is that the week
starts on Monday instead of Sunday, which in this
case is considered part of the previous week. You
can see that price fitting between pivot levels is
much less accurate. FIGURE 12: Pivots on a 30-minUTE chart of the German DAX index CFD. Pivot points
Let’s look at a non-forex chart. In Figure 12 you can work in other markets besides forex.
see an example based on the 30-minute chart of
CFD GER30 (German DAX index). Trading happens from about protective stops before moving on to discuss active
Monday till Friday starting at 8 am EST and ending at 10 pm support & resistance.
EST. Since there are 10 hours every day between the close
and a new open, you can expect more gaps. Sylvain Vervoort is a retired electronics engineer who has
On March 27, the index opens below the previous day’s been studying and using technical analysis for more than
low price with a larger gap. Price falls further down, twice 40 years. Currently, he experiments with trading forex and
to the S3 support level but from that level, starts an up move, CFDs with rule-based systems. His book Capturing Profit With
reaching pivot resistance S1 after struggling a bit to beat the Technical Analysis received a bronze medal from the 2010
previous day’s low. Axiom Business Book Awards in the category of investing.
On March 28, price opens with a gap up, spending about His Band Break System Expert is available on DVD. More
half the trading day to pass the R1 resistance. The up move information about the V-Trade System will become available
has no problem crossing the R2 resistance, ending the day at on his blog under construction at http://blog.stocata.org.
the R3 resistance. Vervoort may be reached at sve.vervoort@scarlet.be or via
By now, you should be convinced that pivot points are a his website at http://stocata.org.
meaningful price support & resistance tool to look for future
price targets. It can be applied to forex markets, indexes, and The code given in this article (see page 54) can be found online at
other tradables. Traders.com/files/Vervoort-1805.html, and also in the Article Code
Note that creating the pivots indicator starting the week on section of Traders.com (subscribers only).
a Sunday evening at 23:00 hours poses little problem handling
complete weeks. However, handling the weeks that include Further reading
nontrading days on December 25 and January 1 are difficult Vervoort, Sylvain [2018]. “The V-Trade, Part 1: Five Basic
unless these cases are handled specially for that specific week. Trading Rules,” Technical Analysis of Stocks & Com-
Assuming that nobody trades December 26 and January 2, I modities, Volume 36: March.
did not spend the time to incorporate this in the programming. Vervoort, Sylvain [2018]. “The V-Trade, Part 2: Technical
So the pivot levels calculation for those times has a starting Analysis,” Technical Analysis of Stocks & Commodities,
point on the day after. Volume 36: April.
‡MetaTrader 4 (MetaQuotes Software Corp.)
Next time… ‡See Editorial Resource Index
†See Traders’ Glossary for definition
In part 4 of this series on the V-Trade, I will write about
passive support & resistance of the Andrews’ pitchfork and Continued on page 54

Explore Your Options
of the potential advantages of selling
Got a question about options? Jay Kaeppel has over three decades of experi- a credit spread is to sell an out-of-the-
ence in the options markets. He was a head trader for a CTA firm, an options money option that is comprised 100%
trading software developer, and is a portfolio manager for an investment of time premium in the hopes that time
management firm. He also spent several years writing a weekly column titled decay will work in your favor.
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http://
jayonthemarkets.com). He is the author of several books, including The Four Expiration month—Here is where
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability, trader judgment is required. Long-term
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques- options offer more premium. However,
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected you have to wait longer for them to
questions will appear in a future issue of S&C. lose time value, as time decay typi-
cally only accelerates in the last month
of an option’s life. On the other hand,
short-term options may not offer enough
Credit Spreads credit than you would if IV (and there- time premium to justify the risk. A very
I’ve heard that selling a credit spread fore time premium) is lower. That being broad rule of thumb (but by no means a
can allow me to make money even if the said, if you are confident the underlying hard-and-fast rule) might be to consider
underlying security remains unchanged security will not move against you, you options with 21 to 45 days left until ex-
or slightly moves against me. What can consider selling a credit spread even piration. Also, in a perfect world there
exactly is a credit spread and what are if IV is not excessively high. would not be an earnings announcement
the keys to trading them? scheduled between the time you enter
A bull put vertical spread involves Strike prices—Out-of-the-money is the trade and expiration.
selling a put option with a higher strike preferable.
price and buying another put option There is no rule that says that you can’t Position management—In most cases,
with a lower strike price. The maximum sell an in-the-money option as part of the maximum risk for a credit spread
profit is the difference between the two a credit spread. However, typically one will be some multiple of the maximum
options’ prices. Maximum risk typically profit potential. As a result, it is impor-
exceeds maximum profit potential by a tant to formulate some sort of plan to
significant amount so some sort of risk Ideally, a credit spread mitigate risk. Let’s use some simple
protection/stop-loss is a must. will be entered when numbers to illustrate this key point. Say
As with any options strategy, there is you routinely enter credit spreads with a
no “one best way” to identify a quality
the implied volatility maximum profit potential of $500 and a
credit spread, but there are several key (IV) for the options on maximum risk of $1,500. If a trade goes
factors to consider that could help. the underlying security against you and you take no action and
is on the high end of lose $1,500 then it will require three
Implied volatility—If high, it makes consecutive winning trades just to get
sense to sell premium.
the historical range. back to breakeven. Generally speaking,
Because the maximum profit potential that is not a recipe for success.
on a credit spread is limited to the
credit taken in when the trade is
entered, it is essential to take in
as much as reasonably possible,
and/or to enter the trade when
you think the odds are greatest Support level at
that the underlying security will $100.68
not move significantly in price
against your position. Ideally,
a credit spread will be entered
when the implied volatility (IV)
for the options on the underlying
security is on the high end of the
www.OptionsAnalysis.com
historical range. High IV tells you Breakeven price of $99.45

that there is a lot of time premium
is BELOW support
built into the price of the options,
so selling premium when IV is
high allows you to take in a larger Figure 1 – IBB Bull Put Credit Spread
Explore Your Options
?DON’T
? ?
?
??GAMBLE
?
? ? ?
?? ?? ?
So typically, a credit spread trader will
? On? Your?Next
have to determine a point at which they
will consider cutting a loss or adjusting
the trade in some manner.
So here is a simple rule of thumb: You
?
?Investment
?
do not want to get stopped out by market
“noise.” If selling a bull put credit spread,
?
there should be an obvious support level
?? ??
above the price of the underlying secu-
??? ?
rity. If selling a bull put credit spread
there should be an obvious support
level below the price of the underlying
?
security. Your “uncle” point for the trade
you are considering should be beyond
the obvious support or resistance level
that appears on the price chart. Why?
? ?
Because any drop to the obvious support
?ANALYZE? ?ANY
level (or rise to the obvious resistance
level) that does not break out beyond
that point is nothing more than “noise.”
In fact, it could even serve to strengthen
the support (or resistance) level if price
retests and then holds above support (or
below resistance).
Consider the hypothetical bull put
credit spread that appears in Figure 1,
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which involves:
• Selling 6 IBB March 100 puts

@ $1.10
• Buying 6 IBB March 95 puts
@ $0.55
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Let’s assume we decide to use the
breakeven price of $99.45 as our “uncle”
point. In the left-hand pane we see an
obvious natural support level at the
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recent low of $100.68 a share. So the
“uncle” price of $99.45 is beyond the The True Value of a Stock
support level of $100.68, which is what
we want to see. As long as IBB remains The Stock’s Overall Safety
above the key support level of $100.68
the trade is not impacted. Whether to Buy, Sell or Hold
Credit spreads offer a great variety
of opportunities to traders. However, a
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credit spread is not a “set it and forget
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any adverse movements after the trade
is entered, the greater your likelihood
of long-term success.

A Zig Here, A Zag There
Trading Support & Resistance

Levels In FX
The forex markets typically move in a zigzag fashion, and that marking these key levels, and initiating trades to buy or sell
makes entry and exit decisions challenging. Here we look at at these key levels of support & resistance. In this article, I’ll
a few tried and true methods to identify strong support & discuss the concept of support & resistance, which forms the
resistance levels in the forex markets. basis of forex technical analysis, and I’ll look at how to use
these levels to trade.
by Solomon Chuama
T
Concept of support & resistance
ART: VECTOR STUDIO/SHUTTERSTOCK
echnical analysis or chart analysis is the study of The forex market moves in a zigzag pattern. When the market
historical price movement to determine where price moves up, reaches a high point, and pulls back, that high is
will go. As you look at the chart you identify trends called resistance. The lowest point it reached before continuing
and patterns that will give you trading opportuni- its upward movement is called support (Figure 1).
ties. At the beginning of each trading week, most Resistance is the price level (ceiling) where selling is
forex traders first identify the market’s direction, strong to interrupt or reverse an uptrend. It also implies that
Forex Focus
Resistance
Resistance
A forex trader should first
Resistance
identify trend direction and
Support
then choose to buy at support
in an uptrend and sell at a
resistance in a downtrend.
Support
FIGURE 1: SUPPORT AND RESISTANCE LEVELS. When the

market moves up, reaches a high point, and pulls back, that high
is called resistance. The lowest point it reached before continuing
its upward movement is called support.
Identify key market levels
price will “bounce” off this level rather than break through Every trader has her own opinion or explanation of the state
it. If price breaks through this level, it will continue rising of the market—bullish or bearish. It is human nature to think
until it finds another resistance level. However, the broken in terms of round numbers. The most common psychological
resistance level becomes a future support for future market level where you can find these key zones is when there are
moves. A resistance level is formed by the highs of two or two zeros at the end. And when price ends with three zeros, it
more candlesticks bars that appear on a horizontal line with is even more powerful. And the most powerful psychological
no higher highs between them. When a candlestick bar closes level is when price ends with four zeros as shown here:
above resistance, it signals a long position. A stop-loss is set
above the resistance level, or, for a short position, at the high Price levels ending with two zeros: 0.71700 or 102.00
of the previous candlestick. Price levels ending with three zeros: 1.43000 or 120.000
Support is the price level (floor) where buying is strong Price levels ending with four zeros: 0.70000 or 110.000
enough to interrupt or reverse a downtrend. The price tends
to find support as it is going down and is more likely to The EURGBP chart in Figure 2 shows six psychological
“bounce” off this level rather than break through it. However, levels with the 0.70000 price level as the most powerful sup-
if it does break through the support level, it becomes a future port level.
resistance level. A support level is formed by the lows of two
or more candlesticks that appear on a horizontal line with no Identify key market levels with the Fibonacci retracement
lower lows between them. When a candlestick closes below tool
the support level, it signals a short position. A stop-loss is set You can use the Fibonacci retracement tool to find support &
below the support level, or, for a long position, at the previous resistance levels in forex pairs/crosses but you should apply
candlestick’s low. Support & resistance are levels where price this tool only in a trending market. First identify the swing low
will potentially stall and sometimes even reverse. and swing high. Second, in a downtrend, click the swing high
and drag the cursor to the most recent swing low. Similarly,
Identifying support & resistance levels in an uptrend, click on the swing low and drag the cursor to
I will now examine how to identify these key zones in the the recent swing high.
market. One way is to look at prices with round numbers. As a trader, you can take a long position close to areas of
FIGURE 2: KEY MARKET LEVELS. Here you see six psychological levels with 0.70000 price level as the most powerful support level.

significant levels of potential support in an uptrend and take Identify key market levels with pure price action
profits at the next resistance. Similarly, you can short near As you look at the chart, price action will tell you where the
areas of significant levels of potential resistance in a downtrend key levels are. There are support & resistance zones. Zones
and take profits at the next support. In the daily chart of the are areas where price reverses and may be extreme highs
USDCHF in Figure 3 you see a downtrend. In a downtrend it or lows on the chart. For example, in the four-hour chart of
is expected that if prices retrace from the recent low, resistance CHFJPY in Figure 5 you will find resistance zones form-
levels would be created, which will give traders the opportunity ing at a price of 114.900. At the extreme highs, the market
to short. As you can see in Figure 3, price movement held a turns at a psychological price level of 114.900. Second, price
key market level at the 50.00 Fibonacci level, which is a vital tested the resistance level three times and reversed each time.
resistance level. You can take a short position here. However, at the extreme low, the market tested support twice.
In the daily chart of the AUDUSD in Figure 4, you see The second touch was a strong price rejection pin bar. When
an uptrend. In an uptrend, it is expected that if the currency a pin bar appears at a key level, it is a strong signal to take
pair retraces from the recent high, it will find support at one a position. It’s best to take positions when price stops at key
of the Fibonacci levels, which is where traders would want levels at least twice.
to go long as price pulls back. In Figure 4, traders can go
long at the 38.2 Fibonacci levels, which is a vital support How to trade support & resistance
level that held. • First, one simple way to trade support & resistance is
In a nutshell, a forex trader should first identify trend direc- to identify the key levels and price action setups. This
tion and then choose to buy at support in an uptrend and sell combination gives the trader a high-probability trade
at a resistance in a downtrend. that could provide an edge in the ever-changing forex
market conditions. If you spot a reversal candlestick
FIGURE 3: FIBONACCI RETRACEMENT LEVELS IN A DOWNTREND. Price movement held a key market level at the 50.00 Fibonacci level, which is a vital resistance
level.
FIGURE 4: FIBONACCI RETRACEMENT LEVELS IN AN UPTREND. Traders can go long at the 38.2 Fibonacci levels, which is a vital support level that AUDUSD
held.

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Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
risk capital should be used for trading and only those with sufficient risk capital should consider trading.
at the key levels, it may mean that level will hold. You candlestick for all long positions and at the high
should consider placing a short order at the resistance of the previous candlestick for all short positions.
or a long order at the support levels. Your take-profit can be set relative to the stop-loss
• In a trending market, you can trade support & resistance or you can trail-stop your profits.
levels as the market makes new highs and lows; this will
result in “swing points” in the market. In an uptrend,
Who drives the market?
On Sundays as the market opens, I have
a recent swing high will act as support, whereas in a
made it a point to identify these key zones of
downtrend, a recent swing low will act as resistance.
the market before trading begins because I
As usual, you take a long position at the support level
believe history always repeats itself. Support
while you short at the resistance level.
& resistance levels are the fundamentals
• Similarly, in a ranging market, you can trade support & of technical analysis. In technical trading,
resistance if the market is not choppy, as long as there always base your analysis results on higher
is a good distance between support & resistance levels timeframes rather than on lower ones. Higher timeframe
and trading currency crosses, that is, those not paired analysis tends to be more significant than the highs and lows
with the USD. In a range-bound market you can use of the lower timeframe. These levels represent the levels where
the relative strength index (RSI) oscillator to determine traders who are trading live drive the market when the market
when the market is oversold or overbought. You can do retests these levels.
this in the following ways:
Solomon Chuama has been working in the financial industry
{{
First, when the market is overbought, do not im-
for 16 years. He is a training seminar organizer and instructor
mediately take a short position, since you don’t
who tries to pass along to students his passion and knowledge
know whether price will continue to rally. Instead,
of forex trading.
take a short position as soon as the RSI falls below
the 70 level. This will give you a high-probability
Further reading
trade. When the market is oversold, take a long
Chuama, Solomon [2018]. “A Range-Bound Strategy,” Tech-
position if RSI crosses upward of the 30 level.
nical Analysis of Stocks & Commodities, Volume 36:
{{
Second, waiting for the market to make a false April.
break of a trading range. In any trading range
there will be at least one false breakout. A false
breakout is when price breaks beyond the estab-
lished range and moves back to the range. Initiate
a short position if price moves into and closes in
the resistance zone; initiate a long position if price
closes in the support zone.
{{
Finally, a stop-loss is set at the low of the previous
FIGURE 5: PURE PRICE ACTION. On the four-hour chart of CHFJPY you will find resistance zones forming at a price of 114.900. The market turns at a psychological
price level of 114.900. Price tested the resistance level three times and reversed each time. At the extreme low, the market tested support twice.

FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner, where she also works as a
broker. She has written four books on futures and options trading, with the latest
being a new edition of her book A Trader’s First Book On Commodities (third
edition, October 2017) as well as Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free subscrip-
tion, visit www.DeCarleyTrading.com. To submit a question, email her at info@
carleygarnertrading.com or via www.DeCarleyTrading.com. Selected questions Carley Garner
will appear in a future issue of S&C.
Daytrading Emini S&P Options for a short position, a trader could buy a (the price paid to purchase the option)
(Part 1 of 2) weekly put option instead. Similarly, a without giving up lasting power as an
Now that the CME offers Monday, buy signal can be met with the purchase opportunity cost. Specifically, emini
Wednesday, and Friday weekly options, of a weekly call option. Preferably, the S&P 500 futures traders often manage
is daytrading emini S&P 500 options a options used for daytrading should expire their risk per trade using stop-loss orders.
viable strategy? in roughly two to three days. However, stop-loss orders are highly
A few years ago, the idea of daytrad- The trader can choose the level of ag- prone to premature election, leaving trad-
ing options in the emini S&P was more gression and risk aversion by choosing ers to watch the market run away in the
of a pipe dream than a reality. Traders an appropriate strike price. For instance, anticipated direction without them.
wishing to do so were forced to trade a trader wishing to trade conservatively In addition, the use of stop-loss orders
options with monthly expirations (the would purchase an out-of-the-money generally leads to nearly guaranteed
third Friday of each month) or end-of- (OTM) option for little premium, but a small trading losses, as opposed to pro-
month options, which expire on the last more aggressive trader might be will- tecting capital while leaving potential
trading day of the month. Aside from ing to pay a higher price for an at-the- for gains. In short, stop orders tend to
the week prior to expiration, option day- money (ATM) option (this means the do more harm than good because they
traders would have been forced to buy strike price is identical, or similar, to often lock in losses at the worst time.
calls and puts with relatively substantial The use of long option trades, on the
time to expiration. This translated into other hand, translates into positions that
high premiums (high option prices), less Slower-moving option are always “in it to win it.” Of course, it
responsive option prices to the underly- positions in which the is possible to buy a weekly option and
ing futures price, and thus overall higher maximum loss is known see the premium quickly erode to noth-
risks and lower rewards. ing; yet even a nearly worthless option
Now that the CME offers options
are far less likely to keeps the trader in the game and things
expiring on every other day of the week trigger the emotional can change quickly. Losing long option
(Monday, Wednesday, and Friday), option meltdown that outright positions can always get better, but a
daytraders can focus their speculation on futures trading might. futures trade stopped out at a loss can
hours, not days or weeks. Further, it is never improve.
possible to profit from accurate intraday Another primary benefit of using
speculation in the ES in increments of a the current underlying futures price). long weekly options as opposed to long
few points of futures market movement, Obviously, options with strike prices or short futures contracts is the mental
not dozens of points. In short, options that are either ATM or near-the-money stability that comes with low and limited
traders can now utilize long puts and will be more responsive to changes in risk. Slower-moving option positions in
long calls to wager on short-term day the futures price; thus, not only are these which the maximum loss is known are
trades or swing trades. options more expensive to purchase, they far less likely to trigger the emotional
Except for scalping, futures traders also come with more risk than an OTM meltdown that outright futures trading
wishing to make the move to options as strike–priced option would. might. Thus, it is a highly conceivable
a means of mitigating risk and account If you find yourself wondering why notion that daytrading options promotes
balance volatility can do so without a trader would use options, which are rational decision-making by mitigating
changing their overall game plan. In less efficient than futures, to speculate emotional mayhem.
other words, the same technical indica- on intraday price moves, the answer is Some other benefits of this style of
tors and timeframes can be used for simple: to mitigate risk while maintain- daytrading are a lack of margin concern.
option daytrading as is used for futures ing leverage. More importantly, risk of a
daytrading. If a daytrading strategy calls long option is limited to a defined amount Continued on page 56
Expand Your Horizon
The Four Market Dimensions

Improve your trading by combining the dimensions of price, you use, determining support/resistance is universal. Fibonacci
time, momentum, and sentiment. analysis is the most accurate in determining market turning
points. It is a main part of Elliott wave theory but can be used
T
by Mark Rivest with any pattern methodology.
Shortly after developing the wave theory that now bears his
raders often find themselves stuck in a world of two name, R.N. Elliott was introduced to the concept of Fibonacci
or sometimes only one dimension. They could be numbers and ratios. Fibonacci ratios can be used to discover
CHALKBOARD: FREDERIC MULLER/BULL, BEAR: GENE BLIELE/SEASONS: ANDREII SPY_K/
utilizing the dimensions of price and momentum market turning points by way of retracements or projections.
NAUTILUS SHELL:LORNA ROBERTS/SHUTTERSTOCK/COLLAGE: CHRISTINE MORRISON
while ignoring factors from the dimensions of Some of the main Fibonacci ratios are 0.236, 0.382, 0.50, 0.618,
time and sentiment. The reality is markets operate 1.00, 1.382 and 1.618. The ratios can be used on any time scale
simultaneously in all four dimensions and each from a one-minute chart to a chart spanning several decades.
must be analyzed to maximize profits. Fibonacci ratios are like magnets/resistors. They draw market
prices to them and then repel prices away. The most common
Price dimension retracement/projection ratio is 1.00, which represents equality.
All traders, regardless of which market they are trading, use Traders who use intraday charts are probably familiar with this
price dimension. Sadly, many traders focus only on price, giv- phenomenon. A bottom is made, prices rise, then fall back to
ing them a myopic view of the total picture. Price dimension the bottom, and then rally again. The decline is equal to the
encompasses two broad areas—chart pattern and support/ rally, a ratio of 1/1. The next most common ratio retracement/
resistance. The tools to discover support/resistance are Fibo- projection is 0.618, which is called the golden ratio.
nacci analysis, moving averages, and trendlines. Please refer to the daily S&P 500 (SPX) chart (2011–2013)
Two types of chart patterns are Elliott waves and standard in Figure 1. From 2011 to 2013 there were three instances
technical patterns such as head & shoulders. Whatever pattern when price retraced to the 0.618 Fibonacci level. The first,
TRADING TECHNIQUES
bracketed in red, was from October to November

2011. The rally high 1292.66–1074.77 low was a
217.89-point range, and when multiplied by 0.618
equals 134.65. When you subtract 134.65 from
1292.66, the SPX target equals 1158.01. The actual
bottom was 1156.66. Note this is close but not an
exact hit. Always allow for small leeway above
and below the target value.
The target for the range bracketed in green was
SPX 1259.41. The actual bottom was 1266.74. The
target for the range bracketed in blue was SPX
1346.11 and the actual bottom was 1343.35.
Tools from the momentum dimension can be
used to aid in determining if a Fibonacci point is
effective. Note that the slow stochastic reached the
stockcharts.com
oversold zone of 0–15% at each of the Fibonacci
turning points.
Time dimension FIGURE 1: PRICE DIMENSION. From 2011 to 2013 there were three instances when price retraced
to the 0.618 Fibonacci level. Although price did not hit the exact levels, it came pretty close to the
There are several methodologies used to study the target levels.
time dimension. Nearly every market has a broad
seasonal pattern. For example, crude oil is usually
bullish from February to May. Another technique
measures periodic market bottoms. This method
can be used on any time scale from intraday to
decades. For example, you could discover the
existence of a market bottom every four weeks.
Unfortunately, there’s usually wide leeway between
cycles, and eventually, at some point, a cycle fades
away. Some studies have found astronomical events
such as full/new moons and solar/lunar eclipses
can sometimes coincide with market turns.
A fascinating way to find market turns is Fi-
bonacci time analysis. R.N. Elliott discovered
that markets can have moves measured by the
Fibonacci sequence. The sequence is 1, 1, 2, 3,
5, 8, 13, 21, 34, 55, 89, 144, 233, to infinity. For
example, he found that the 1929 to 1932 bear
market was 34 months and the 1932 to 1937 was FIGURE 2: TIME DIMENSION. In mid-2016, the SPX had an incredible web of Fibonacci time
five years. The method can be used on any time sequence turns. The best part about using the Fibonacci time sequence method is accuracy. If
scale from minutes to decades and can be applied you forecast a bottom in 21 trading days and the market is still declining on the 22nd trading day,
to any market. There’s also another technique us- the forecast is invalid.
ing Fibonacci time ratios. In this article, I’ll focus
on the Fibonacci time sequence. trading days to the January 20th bottom also targeted August
Please see the daily SPX chart (12/24/15 to 9/30/16) shown 15! As spectacular as it was, there was more evidence from
in Figure 2. In mid-2016, the SPX had an incredible web of the price dimension that strongly suggested a top.
Fibonacci time sequence turns. If you add 21 trading days Using a Fibonacci ratio projection of the rally from Febru-
from the SPX top on April 20, the target is May 19, which ary 11, 2016 to June 8, 2016 was 310.45 SPX points, when
was an SPX bottom. If you add 13 trading days to the May multiplied by 0.618 equals 191.86. Adding 191.86 to the June
19th bottom, the target is June 8 as an SPX top. If you add 13 27th bottom at 1991.68 targets SPX 2183.54. The actual top
trading days to the June 8th top, it targets June 27, which was on August 15 was 2193.81.
an SPX bottom. I forecasted this turn in my June 24, 2016 Even more evidence of a potential SPX peak came from the
article at Traders.com, “The Brexit Factor.” momentum dimension. There was a RSI bearish divergence
The next turn was the most spectacular of all, as it involved on August 15 versus the reading made on July 22. The mid-
not one but two Fibonacci time sequences. Adding 34 trading August peak was followed by a correction that lasted until
days from June 27 targeted August 15. In addition, adding 144 early November.
ish divergences. For the MACD the histogram portion of this
oscillator is particularly good at signaling divergences. MACD
Stochastics is usually the line crossovers give confirmation of a turn, sometimes shortly
most sensitive oscillator and after the bottom/top.
can frequently give the first One other tool from the price dimension that can be used
to discover turns are large breaks of the Bollinger Bands.
signs of approaching tops/ Keep in mind that this technique must be used in conjunc-
bottoms. tion with momentum oscillators. Frequently large breaks of
the upper/lower band could come in the middle of a strong
move up or down.
The best part about using the Fibonacci time sequence Sentiment dimension
method is accuracy. There is no leeway or fudge factor. The The sentiment dimension becomes a factor at intermediate
market must turn on a Fibonacci sequence number. If you and major market turns. Sentiment extremes usually indicate
forecast a bottom in 21 trading days and the market is still a market is ripe for a turn. However, R. Earl Hadady noted
declining on the 22nd trading day, the forecast is invalid. in his classic book “Contrary Opinion” that effective signals
can be made on sentiment divergences.
Momentum dimension Sentiment tools come in three forms; sentiment surveys,
Perhaps the first method to determine a market’s momentum anecdotal evidence, and put/call ratios.
comes from the Dow Theory developed in the early 20th cen- Sentiment surveys come from companies such as Market
tury. An examination of the Dow Jones Industrial Average Vane Corporation that compile their bullish consensus num-
and what was then called the Dow Jones Railroad Average, ber by tracking the buy and sell recommendations of leading
now called the Dow Jones Transportation Average,
revealed a top/bottom could be forming when the
two diverged. The same concept can be applied
to other markets and stock indexes.
In the precious metals market, a divergence
between gold and silver could indicate a coming
market turn. The same technique can be used with
crude oil and heating oil. With stocks, the major
U.S. stock indexes could be compared to stock in-
dexes of other nations. Focusing just on U.S. stocks,
divergences can be found between the main stock
market indexes and various market sectors.
Another way to determine momentum comes
from what are sometimes referred to as internal
indicators. The daily 52-week list of stocks mak-
ing new highs/lows can be of tremendous help to
discovering a potential stock market top/bottom.
A third methodology to measure market mo-
mentum comes in the form of oscillators. Three
of the most widely used are stochastic, MACD,
and RSI.
On the daily chart of SPX from 3/2/2015 to
3/1/2016 in Figure 3, the first piece of evidence
comes from the price dimension, with two of the
downside breaks in momentum oscillators in the
neutral zone indicating potentially more downside
action. The break in January 2016 had the oscilla-
tors near or at oversold levels, hinting the decline
could be finished relatively quickly.
Stochastics is usually the most sensitive oscil-
lator and can frequently give the first signs of ap- FIGURE 3: MOMENTUM DIMENSION. Three of the most widely used oscillators to measure
market momentum are stochastic, MACD, and RSI. The first piece of evidence comes from the price
proaching tops/bottoms. It will occasionally have dimension, with two of the downside breaks in momentum oscillators in the neutral zone indicating
bullish/bearish divergences. The RSI and MACD potentially more downside action. The break in January 2016 had the oscillators near or at oversold
give their best signals of a turn with bullish/bear- levels, hinting the decline could be finished relatively quickly.
market advisers and commodity
trading advisers. High percentage
readings indicate a market near-
ing a peak and low percentage
readings hint at approaching
market bottoms.
Anecdotal evidence can come
from various media sources,
especially non-financial media.
If you hear or see news about
a market after an extended up
or down multi month move and
from a media source that usu-
ally doesn’t comment about that
FIGURE 4: SENTIMENT DIMENSION. Put/call ratios can be effective in discovering turns in sentiment. Here you see the
market, a significant turn could be best signals come from sentiment divergences in the CBOE weekly put/call ratio.
approaching. Be aware that this
type of evidence is not precise
in catching a turn, and it must be used in conjunction with As of this writing, the SPX rallied 58% in nearly two years.
other sentiment tools. All markets are giant puzzles, and you cannot solve the
Put/call ratios can be effective in discovering a turn within puzzle unless you have all of the pieces. Studying the four
a few trading days and sometimes on the day of the turn. On market dimensions could greatly increase your chances of
the CBOE weekly put/call ratio chart in Figure 4, you will finding those pieces.
see that the best signals come from sentiment divergences.
Note the bullish divergence at the August and October 2011 Mark Rivest is an independent investment advisor, trader,
US stock market bottoms. Even more significant was the and writer. He has written articles for Technical Analysis
double bullish divergence made at the double bottom for US of Stocks & Commodities, Traders.com Advantage, and
stocks in early 2016. When the final bottom came in Febru- Finance Magnates. He may be reached at markrivest@
ary 2016 there was relatively little money being allocated to gmail.com.
puts. Another interesting aspect on the chart was the increase
in put buying from early January 2015 to July 2015. During Further reading
this period the SPX went up. Perhaps some big money players Frost, A.J., and Robert Prechter [1985]. Elliott Wave Principle,
were loading up with put protection. New Classics Library.
Prechter, Robert Jr. [2003]. Beautiful Pictures, New Classics
Look beyond price Library.
Whatever market you trade, it’s imperative that you think Hadady, R. Earl [1983] Contrary Opinion, Key Books.
outside the one-dimension box. No trading system is perfect, Rivest Mark [2015]. “The Golden Section,” Traders.com
and losses will always occur, but they will occur far less and Advantage, www.traders.com, June 8.
in smaller amounts in relation to your market knowledge. If [2015] “Battle Line,” Traders.com Advantage, July
you are trading exclusively in the price dimension, learn as 17.
much as you can about the dimensions of time, momentum, and [2016] “Bullish Divergences Abound,” Traders.com
sentiment. This article is merely the tip of an iceberg. There’s Advantage, February 25.
a lot more information you can download into your brain. [2016]. “The Brexit Factor,” Traders.com Advantage,
Sometimes the signals from the four dimensions will be June 24.
weak or moderate. Occasionally, once or twice a year, power- [2016] “S&P 500 Near a Ceiling,” Traders.com Ad-
ful signals will emanate from all four dimensions. The SPX vantage, August 17.
bottom in February 2016 was one of those times. ‡www.stockcharts.com
• Momentum: Three oscillators with bullish diver-
gences.
• Sentiment: Double bullish divergence from put/call
ratio.
• Time: Seasonally bullish for US stocks February–
May.
• Price: Large break below the lower Bollinger Band.
Signals of this magnitude usually trigger multi-month moves.
INTERVIEW
Different Markets, Different Systems
Building Trading Systems

With Cesar Alvarez
With a bachelor of science in electrical engineering and computer science, and
a master of science in computer science, it’s no surprise that Cesar Alvarez
found an affinity for developing trading systems. He has been at the forefront
of stock market research and has developed a number of trading systems based
on his findings. He’s got strategies for daytrading, swing trading, long-term
trading … you name it, he’s likely got it. Alvarez has also coauthored several
books on systems trading.
To find out more about what goes into the different types of trading systems
he develops, Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke
with Cesar Alvarez via phone on March 12, 2018.
Cesar, tell us about your- That is also when I started becoming

self and how you got a mean-reversion trader.
interested in the financial During that time, and even now,
markets. most of my trading is focused on stocks
I was originally a computer program- and exchange traded funds (ETFs),
mer. I spent six years at Microsoft, work- US stocks, and ETFs on a short-term
ing on Excel as a programmer. This was timeframe. Most of the strategies I I think people discount
back in the days when Excel was called trade are mean reversions. how important it is to find
Excel 3, 4, and 5, before they started I left TradingMarkets.com about
adding years to the versions. four years ago and started my own strategies that mesh with
During the time I was at Microsoft, I blog. I wanted to write about general your personality. This
got interested in the stock market. A lot things and my own ideas. I also wanted is extremely important,
of people were into the fundamentals to do some consulting—consult to especially at the
and people were slowly starting to get other traders, write code, and test
into the technicals. I was fortunate to be trading ideas. And that’s what I’ve beginning.
trading in the late 1990s, when everybody been doing for the last four or five
thought they were geniuses—until the years now.
markets crashed, that is. Then everybody
realized they were riding on the coattails Does your interest in developing Considering you’re a mean-reversion
of a massively big bull market. And that’s trading systems have anything to do trader and that you design trading
about the time I started really looking with your background in computer systems, if someone wanted to start
into the quantitative side of trading. I programming? developing a trading strategy from
discovered AmiBroker analysis software I think it does have a little bit to do scratch, what would be a good starting
at that time, and I started testing a lot with my background in computer pro- point for them?
of the ideas that I would come across. gramming. I also think it has a lot to The starting point is to figure out which
There are a lot of ideas out there, some do with being part of a bull market at a general camp you fall into. There are
of which don’t hold up very well when time when everybody was talking about two general camps—breakout trading
you test them. stocks, because most likely, they were and mean-reversion trading. And both of
I met Larry Connors when he was working at a company whose stock was these are psychologically different types
running TradingMarkets.com and took rising quickly. So all those things kind of of trading. You need to try trading both
Phongphan/SHUTTERSTOCK
a couple of his classes. He eventually pushed me toward getting excited about types to understand which of the two
hired me to do some projects and that the stock market. camps you’re more likely to fall into.
led to me becoming director of research I’ve always viewed the stock market as I do have some breakout strategies I
for his company. I spent nine years there an interesting puzzle to try to solve, and trade, but they’re more difficult for me to
learning about quantitative research. even to this day, I still view it that way. trade than my mean-reversion strategies.
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That’s true, except a lot of if I kept making the stop-loss bigger. I
people read about an idea and kept making it bigger and eventually
There are two general jump into trading it without found that the best result was without
camps—breakout trading testing the idea first. Why is any stop-loss. And that was one of those
and mean-reversion trading. testing so important? great little moments when you discover
Discretionary traders can something—finding out that having a
And both of these are make money. I’m not going 10%, 15%, 20% stop-loss always made
psychologically different to say they can’t because there our results worse.
types of trading. are plenty of people who make For my short mean-reversion strategy,
money from discretionary I achieve the best results if I have no
trading. But again, it’s more stops. But what I found from trading
about finding the type of trad- this strategy in the past is that once I
Because I’m more of a mean-reversion ing that fits your personality. For me, get to more than a 50% loss on a stock,
trader, which could be because I’ve as a computer programmer, numbers I just need to get out of it. It becomes
worked with Larry for so long, to me, make more sense and I make sure that too disheartening and difficult to keep
taking mean-reversion trades tends to the idea works conceptually and works following the strategy once I get past
be much easier than trying to take on well on a backtest. Does that guarantee that 50% point.
breakout trades. it’s going to work well in the future? I don’t add that stop to make the strat-
I think people discount how important No, unfortunately. I’d be a billionaire if egy better but to make it more likely that
it is to find strategies that mesh with your I could figure that one out. I’ll continue to keep trading the strategy.
personality. This is extremely important, I’ve often come across ideas that make I think rules like that are underappreci-
especially at the beginning. I think that’s so much sense that they seem like they ated. Even though the results are worse,
the critical first step and most people should make money or make a strategy adding that stop-loss kicks me out of
miss out on it because they pick the better, but they turn out to do the reverse, these psychologically difficult trades,
strategy that happens to fall in their lap that is, make your strategy worse or make and I can keep trading the strategy.
first, even though it may or may not fit you lose money. And sometimes the re- Often, what fails is not the strategy but
their personality. verse will happen with ideas that I think the person trading the strategy.
can’t possibly work, but they do. Another concept is time-based stops.
How do you go about getting trading So I think testing is good in that re- If I don’t get an exit within 10 or 15 days,
ideas? spect, as it can save you money. Maybe depending on a strategy, I get out of it.
It’s so much easier now to get trading you saw a couple of examples where an This type of stop does not necessarily
ideas. There’re so many great blogs with idea worked well, but once you extrapo- improve the result, but it gets me out of
lots of ideas, such as my blog, Alvarez late it out to more data, you find it doesn’t trades that are psychologically difficult,
Quant Trading. Quantocracy is another work so well. So that’s why I think it’s where you see your account slowly drip
one with a great aggregator site. There important to test your ideas because even day after day.
are so many out there that a lack of ideas ideas that seem like they should work or So these types of stops are not there to
is not the problem. It’s a matter of read- are “market truth” may not necessarily improve your results but to improve your
ing those blogs. But blogs don’t usually work for your strategy. chances of continuing to trade. Stops are
give you trading rules that you can ap- The typical example I give is stop- important to consider and I think they
ply to your trading. On my blog, I give losses. Adding stop-losses to a mean- are underappreciated.
readers a starting point so they can take reversion strategy is a great way to make
the ideas or concepts and mold them to the strategy perform much worse than I can see how that might be the case
what would work for them. Maybe the without using stop-losses. for a mean-reversion strategy, but what
idea you read is about trading S&P 500 I remember when I first tested this out about breakout strategies?
stocks, but you’re willing to take more for Larry. When I started working with For breakout strategies, it’s a different
risk, and you decide you want to take this him, he always had stop-losses. One story. For them, I do use stop-losses, but
idea and try it on Russell 3000 stocks, or day, I was testing a strategy and I kept as I said, it all depends on the strategy.
on foreign stock markets if you happen going, trying to see what would happen I guess breakouts tend to have more
to live outside the US and have access fakeouts or false breakouts.
to a different market.
My list of ideas to research is always Backtesting may be ideal, but it doesn’t
growing faster than I can shrink it! It’s necessarily mean your strategy will
a matter of picking a couple of sites, work even if you have good backtesting
following them, and always generating results. Are there other things that
those ideas. might generate false results, such as
over-optimization?
Yeah. There are so many ways to go people usually don’t want
wrong on backtesting. One way, as you to have a drawdown that
said, is over-optimization. Let’s say your is more than 10% or 20%. I’ve always viewed the
optimization has 100 different runs in What I’ve discovered over stock market as an
it—it’s picking the best one. That, to me, the years is that no matter interesting puzzle to try to
is where you get into over-optimization what number a person
or where a small change in one of your chooses, when they hit
solve, and even to this day,
parameters has a big change in results. about half that number, I still view it that way.
That is over-optimization. Many people they start to panic. So if
may disagree with me on this, but you they said they could handle
can run an optimization with 10 million a 20% drawdown, at around
runs in it, and pick one out of those 10 a 10% drawdown they start thinking their their own trading system using a
million runs, and you may not be over- strategy is broken or they’re willing to systematic trading approach tend to
optimized. It depends on how sensitive start making changes. lose the discipline and make decisions
your strategy is to small changes in your I want my strategies to have between on their own?
parameters. a 25% and 30% drawdown. I don’t want Yes, this is very common. I even found
Another area where people run into them to have smaller drawdowns than myself doing it for the longest time. It’s
problems with backtesting is in having that for a couple of reasons. One, I think easy to get caught up in thinking that you
too many rules or making things too if it has a small drawdown, I may be went through a bad spell or there were a
complex. I often find that with my clients. picking an over-optimized variation of couple of bad trades that hurt you. You
They will have 10 to 15 rules, which is the strategy or it may just be luck with can’t help but think what you could have
way too many. I will often suggest that the strategy avoiding some bad trades. done or what kind of rules you could add
they slowly remove the rules. Often what That gives me an unrealistic expectation to the trading system. One thing I used
you find is you don’t need all those rules going forward. to do when I started was ask myself what
and if you remove the rules, the results Most people aren’t looking for strate- rules I could add to avoid these trades.
don’t change much. gies that have large drawdowns, so most That was the wrong thing to do. Eventu-
An even more fundamental part of people won’t be trading the strategies ally I changed that and told myself that I
backtesting is to make sure you have I’m trading. If I find a strategy that has, had to wait two or three months before I
good data. If you have bad data coming say, an 8% drawdown, chances are ev- could implement that new rule.
in, you’re going to have bad results go- erybody else is trying to find that same
ing out. The most common error I see kind of strategy. The odds of somebody Why wait two or three months?
is that people will test with the data as stumbling onto the same strategy is What I noticed is after two or three
it is today. So, for example, they’ll test much higher. months, I had either forgotten I wanted
the current Nasdaq 100 stocks, but not as I think your worst drawdown is always to add that rule or realized I was trying
the index existed in the past. Individual a future drawdown. It’s not the drawdown to overfit to these last two trades. Adding
stocks that make up an index change over in your backtest, but the drawdown the rule would have been detrimental
time, so the list of Nasdaq 100 stocks that will be in the future. So if I know to my strategy. I have now gotten to the
may be different today than it was 10 psychologically that I’m getting up to a point where I don’t even think about
years ago. So people will run a 10-year 35% drawdown, well, yes, it sucks. But adding a new rule. I’ve come to accept
backtest starting with the current day and I know it’s more realistic and likely that that when something bad happens, it’s
not as the index was eight, nine, or 10 I can keep trading. I don’t believe most par for the course.
years ago. That can produce a dramatic strategies fail. I believe that the people But if there’s some fundamental
change in the results that could show trading them fail because they stop trad- change in the market, I may change my
unrealistic results. It all depends on ing the strategy because of a drawdown strategy. That’s a different story.
your strategy. or because it hasn’t made new equity
You need to be sure you don’t have any highs in a long time. On your blog you have an article, “Do
survivorship bias or pre-inclusion bias You Have A Plan For Your Screw-ups?”
in your results before a stock is added Do you find that traders who create I thought that article was a good one
to the index. There are many possible for driving home the point that traders
missteps there. will inevitably make some mistakes.
What prompted you to write it?
You mentioned stop-losses, but what Traders will make mistakes. Things
about other forms of risk management? could happen in our trading platform
How much of a drawdown can someone that puts us in a trade we may not expect
tolerate?
When we develop a strategy, most Continued on page 39
TRADING ON MOMENTUM
Confirming A Pivot
Moving Average
Hammer Pivots
Combine a Japanese hammer candle with a moving average long swing trading entries.
line to confirm a pivot and generate a trading signal. You can see this pattern illustrated in the chart of BLDRS
Emerging Markets 50 ADR Index Fund (ADRE) in Figure 1.
O
by Ken Calhoun The low of the hammer is just above the 200-period simple
moving average (SMA) line. An entry following this ham-
ne of my favorite swing trading pivot patterns is mer continued up for two points. An alternative version of
to combine a classic hammer candlestick with a this pattern occurs when the hammer body is resting on the
major moving average support line. By combining a 200-period SMA line, after which you can enter if price
Japanese hammer candle with a Western technical continues upwards.
moving average line, you can capitalize on trading
technical signals generated by both approaches. Step-by-step action plan
As usual, the smartest technical trading approach is one in Here’s how you can start using hammers at 200-period SMA
which you use at least two signals to confirm an entry, which lines to confirm pivots when swing trading:
this month’s strategy provides. When using this technique, it
is easiest to see the signal using a 90-day daily candlestick Step 1: Look for charts in which a hammer occurs follow-
chart. You can use this pattern to initiate new long positions ing a downtrend that is resting on a 200 SMA line, as seen
on the day following the hammer, or to cover shorts. in Figure 1.
Swing Trading Pivot Signals Step 2: Set your buy stop order to enter $0.50 above the
A common problem when trading pivots is to erroneously high of the hammer (in this example, that would be $43.50
trade a weak bounce that does not continue upward much + $0.50 = $44). You do not enter on the day the hammer is
after entering a long position. That is why my primary trading being formed, but rather on a day following the hammer (up
style is to trade breakouts in preexisting uptrends. However, to three days after the hammer is seen).
when you see a hammer appear slightly above or at a major
moving average line, this particular pivot often works out for Step 3: Your exit target is the prior high on a 90-day candle
chart; in this example, that would
be $49.
Insights: Why this

technique works
Candlestick reversal patterns often
work out fine on their own. Moving
average pivots are not as consistent,
however. By combining both pat-
terns, you can confirm your trade
entries by getting the best of both
approaches.
A third technical confirmation
signal seen in Figure 1 is the large
volume accompanying the daily
hammer that provided our pivot
signal. The more technical signals
you see in support of the trade de-
cision, the higher your confidence
level should be in the trade. Japanese
candles were first introduced to the
esignal
Figure 1: Swing Trading Pivots with 200-period Simple Moving Average. A pivot long signal was Western trading world by my long-
generated after the hammer confirmed support at a major moving average line. time colleague Steve Nison.
TRADING ON MOMENTUM
Trade management tips

One benefit in trading pivots is that the price that proves the By combining both patterns, you can
trade wrong is simply the pivot low, in this case $42. This confirm your trade entries by getting
removes the ambiguity surrounding where to set your stop-loss. the best of both approaches.
As usual for swing trading stocks and ETFs, use a $2 initial
stop and trailing stop, and add to a winning trade every $2
in an uptrend. As with all the professional trading strategies
you learn about in this column each month, be sure to use it Ken Calhoun is a producer of trading courses, a live trading
with charts that have many points of trading range, in order room, and video-based training systems for active traders. He
to capitalize on volatility. You will note that this chart has is the founder of TradeMastery.com, an educational resource
a ($49 - $42 = $7) or seven-point total trading range (14%), site for active traders, and is a UCLA alumnus.
which is fine. Use this pattern with charts that have a minimum ‡eSignal
10% range on a 90-day candle chart. Anything less than that ‡See Editorial Resource Index
is not acceptable from a risk–reward standpoint. Pivots need
to be used with charts that have very wide trading ranges, so
that you can potentially profit from volatility when the pivot
trade works out in your favor.
inTerview I use AmiBroker to run scans every at a time helps to smooth your overall
Continued from page 37 night. I have a semi-automated system equity curve. You also don’t know when
that runs on AmiBroker and identifies one of your strategies is going to break,
to be in. So it’s good to have a plan to the trades I will be getting out of, the and this way you don’t have all your
understand what to do if something like trades I should be in, and the trades I’ll money on that one strategy if it breaks.
that happens. be getting into the next day. AmiBroker Trading conceptually different strate-
Here’s an example of something that is a powerful product. I always suggest it gies helps to smooth your equity curve
happened to me recently. Most of my to people if they’re looking for a back- and keep it less volatile. That’s why I love
trades are automatically—or nearly testing platform. trading on the short side. It’s psychologi-
automatically—placed every night, and cally difficult for most traders but it does
for some reason, a couple of my trades What do you mostly trade? present opportunities.
did not get executed. The trade never hap- I mostly trade US stocks. I focus on I would encourage traders who are
pened or the order never got placed. the Russell 3000 stocks. The rest would starting out to try just two strategies.
So I had to go through the exercise of be exchange traded funds (ETFs). When you find your first strategy, trade
what my plan is when I’m not in a trade only half your capital using that strategy.
that I’m supposed to be in. For trades Do you have multiple strategies that you Keep the other half in cash. Maybe you
that I miss, my plan says to get into them use concurrently in your portfolio? can figure out a second strategy that’s
as soon as possible with a market order Yes, I think it’s important to trade mul- not highly correlated to your first one.
during market hours. This is not the time tiple strategies. For example, I am trading And if you can come up with four or five
to play daytrader. That’s my general rule. an S&P 100 mean-reversion strategy, a strategies, that’s a good number.
But these types of mistakes are out of Russell 3000 mean-reversion strategy, a I know people who trade 20, 30, 40, or
your control and you need to know what Russell 3000 breakout strategy, a Russell 100 strategies, but you need to have quite
you’re going to do. Trying to make it up 3000 short mean-reversion strategy, an a bit of money to be trading that many
on the fly is usually when you’ll make ETF short strategy, ETF mean-reversion strategies. For the average person, trading
a bad decision or do something wrong. strategy, a trend-following ETF strategy, three to four strategies is reasonable.
That was my personal experience and and a trend-following volatility strategy.
also from watching a couple of other I think I’m trading about eight strategies Thank you for speaking with us.
traders who tried to make it up on the right now.
fly. They usually ended up making a bad Further reading
situation even worse. Why is it important to trade multiple Alvarez Quant Trading, http://alvar-
strategies? ezquanttrading.com/blog
So preparing for any situation reduces Part of it depends on your capital or
the possibility of making erratic how much time you’ve got. You never
decisions. How do you pick stocks know when one strategy is not going to
to trade? work well. So having multiple strategies
Continued from page 7 changes, for example, from questions arise. Thank you for taking
rank 4 to rank 1 (and if it’s the the time to read my article, and wishing
ETF is below the moving average (and fourth-best momentum strategy you all the best.
sell, presumably, using the rule opposite being pursued), sell.
A (see above), 2) You buy and sell on b. MA position change: If price Editor: Thomas Bulkowski is a Contrib-
crossovers. That is, buy when the prior is below its MA, it’s a signal uting Writer to Stocks & Commodities
quarter is below the MA and this quarter to sell. and the author of several books on tech-
is above the MA, and sell on the transi- nical analysis and pattern recognition.
4. As for the results for Figure 3, thank
tion from above to below, or 3) Test the Readers will find his article “Get More
you for your suggestion. I have the
reverse—buy on a crossover from above Value Using A Trading Checklist” in
data and will organize it and send
to below and sell on the cross from below this issue.
you the results as they become
to above.
available.
Finally, on page 25, upper-left column, ARTICLE CODE AT TRADERS.COM
5. As far as “moving average strate-
you write for Figure 3 that “The results Editor,
gies” versus “momentum strate-
show that using a simple moving average I have not logged in to Traders.com for
gies,” here, I specifically meant
as a filter can potentially reduce volatility a while but have the need to do so now.
momentum strategies. Figure 3
and MaxDD for most of the momentum Where would I locate the NinjaTrader
contains the fourth-ranked momen-
strategies” [my italics]. However, Figure code downloads, which are mentioned
tum strategy specifically in order to
3 pertains to only one momentum strat- in some of the articles?
illustrate how performing a moving
egy (rank4). Perhaps you meant “moving Ken
average filter could refine results and
average strategies” instead of “momen-
lower volatility. Figure 4 illustrates
tum strategies.” Please clarify. Article code is located in one of two
how a moving average filter overall
Let me finish by writing that I enjoyed places:
reduces volatility with regard to
your article and analysis. Thanks for
an average of all nine momentum 1. The Article Code section of our
sharing. I hope to read more from you
strategies, hence arriving at the ob- Subscribers’ Area:
in the future.
servation you have pointed out. This http://technical.traders.com/sub/
Tom Bulkowski
has also been corroborated in the codeYearList.asp
data calculation when I compared 2. The Traders’ Tips section of each
Author Marisa Yang replies:
performance before and after MA for issue, most easily accessed from the
Thank you for your questions regarding
each momentum strategy; I have not back-issue archive here:
my article. My answers to each question
included this data because it strays http://technical.traders.com/con-
follow, numbered 1 to 5.
from the focus of the article, which tent/backissuearchive.asp
1. Concerning MaxDD, you have asked is momentum strategies.
If you are looking for a particular code
a really good question here; thank
I hope my clarifications leave you set and cannot find it, please let us know
you for giving me the opportunity
with more answers than questions! and we will help you locate it.
to clarify. In Figure 1 in my article,
However, please let me know if more
theoretically, we should take the
lowest closing price of each quarter
to calculate MaxDD. However, for
simplification of computation, we
took the lowest annual return or
sum of consecutive loss of returns
to calculate MaxDD. Sneak preview... Coming soon!
2. Regarding Figure 3, it stems from
data unavailability. Since the
earliest available data starts from A Technical Method For Rating Stocks & resistance, this time with price trend, trend
December 1998, strictly speaking, by Markos Katsanos channels, Andrews pitchfork, and applying a
Is it possible to create a stock-rating system stop-loss.
the first MA10 data should be March
using multiple indicators or other technical
2001. Thus, for quarters in 2000, I Five Big Dan Zanger Money-Making
criteria? If so, how does it compare with
took advantage of the available data analyst ratings? Patterns
in the calculations. by Matt Blackman
3. Regarding a sell rule: You sell the The V-Trade, Part 4 Chart patterns and volume—that’s all well-
position if BOTH of the following by Sylvain Vervoort known stock trader Dan Zanger uses. Here
conditions are satisfied: In this fourth part of a multi-part series, we are five chart patterns he uses to recognize
continue the discussion of passive support potential home runs.
a. Ranking change: If the ranking
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Retail ETFs Are A Mixed Bag
Are you interested in learning more about using exchange retailers against their store competitors and aggressive Internet
traded funds (ETFs) in your trading? Leslie N. Masonson, players. Retailers that still appear to be doing well include
an active ETF trader, is president of Cash Management Walmart, Tiffany, Home Depot, Lowe’s, Tractor Supply and
Resources, a financial consulting firm that focuses on ETF TJX, among others.
strategies. He is the author of Buy—Don’t Hold: Investing With
ETFs Using Relative Strength To Increase Returns With Less Consumer buying migrates to online
Risk; and All About Market Timing, as well as Day Trading Over the last decade the retail space has had a major transfor-
On The Edge. His website is www.buydonthold.com, where mation. Many malls have closed and several popular stores
he writes a weekly blog. To submit topics for future columns, have faced bankruptcies. Approximately 12,000 stores are
reach him at lesmasonson@yahoo.com. expected to close in 2018 compared to 9,000 that closed down
As
in 2017. In 2017, more than 50 store chains filed for Chapter 11
by Leslie N. Masonson bankruptcy protection including Toys “R” Us, The Limited,
Sports Authority, Wet Seal, Radio Shack, Payless Shoes, Gander
investors and shoppers, we’re familiar Mountain, and Gymboree, among others. Unfortunately, 2018
with the world of retailing. Of course, may be another record year for store closings.
department stores, specialty retailers, The major impetus to the demise of the retail store has been
ART: VESTORPIXELSTAR/SHUTTERSTOCK
and malls were the rage in the 1970s to the change in consumer tastes for different merchandise, avail-
early 2000s. In those earlier years, names ability of multiple methods of delivering the goods, and the
like Great Atlantic & Pacific Tea Company, F.W. Woolworth demise of foot traffic in decaying malls. This decline was in no
Company, Montgomery Ward, Bradlees, Caldor, Inc., and small part due to the phenomenal success of Internet shopping
Jamesway were familiar stores in the Northeast that are no with mighty Amazon.com Inc. (AMZN) taking center stage
longer around. Currently, a few retail stores are still competing along with other well-run online retailers. Surviving retailers
but the question is how long they will last as brick-and-mortar need to make sure that their Internet presence is substantial
WHY TRADE ETFS?
or face possible future liquidation. were 41% large- ETF Ticker

Another negative factor for brick-and-mortar stores is the cap and 35%
SPDR S&P Retail ETF XRT
billions of dollars of annual holiday returns that are marked small-cap, con-
down by the retailers by 68% to 93% either at their stores or taining 100% Amplify Online Retail ETF IBUY
off-loaded to third-party retailers who resell the goods. US companies. VanEck Vectors Retail ETF RTH
For investors and traders looking to put some money to work Its top three Direxion Daily Retail Bull 3X Shares RETL
in the retail space investing in ETFs rather than individual holdings were PowerShares Dynamic Retail PMR
equities, their choices are limited to a handful of diverse BBY (5.95% First Trust NASDAQ Retail ETF FTXD
retail ETFs. Retail is considered a subset of the consumer of assets), KR
Consumer Discretionary Select Sector SPDR ETF XLY
discretionary (a.k.a. consumer cyclicals) sector. This sector (5.70 %) a n d
FIGURE 1: RETAIL ETFs. The ETFs reviewed in this
focuses on industries such as retailing, automobiles, apparel, COST (5.09%). article are listed here with their tickers. Note that RETL
leisure, restaurants, and media. Typical companies include This ETF has is a 3X leverage bull.
AMZN, Walt Disney (DIS), Home Depot (HD), and Comcast the lowest XTF
(CMCSA). rating of 0.7 (10 is the highest) of the group, which is based
The other consumer sector is called consumer staples or on a number of components explained on the xtf.com website.
noncyclicals. This sector encompasses companies that develop It also had the third-highest expense ratio of 0.63%, and the
and produce consumer goods and services, including food, next-to-lowest AUM at $11 million with minimal daily trad-
drugs, beverages, and tobacco products. Typical compa- ing volume of 2,054 shares. PMR, a custom-weighted ETF,
nies include Procter & Gamble, Coca-Cola, Philip Morris, had the second-worst performance over three and five years,
Walmart, Costco Wholesale, CVS Health Corporation, and of -3.17% and 50.6%, respectively. PMR uses an enhanced
Colgate-Palmolive. strategy that evaluates price and earnings momentum, quality,
Using xtf.com, I researched retail ETFs and compared their management action, and value.
key characteristics. I found a great many differences in the Overall, this ETF has not accumulated a large asset base,
ETF composition (top holdings), focus, performance, yield, which is surprising as it was the first one in its category, and
trading volume, and AUM. I reviewed six ETFs (Figure 1) its performance has also been lacking. The large-cap focus
and compared them against the well-known XLY (Consumer or their custom weighting may be the reasons for the less
Discretionary Select Sector SPDR fund). None of these ETFs than stellar performance.
exactly matches XLY in composition, but that is the closest
I could come to a similar universe. XLY is 99.6% correlated SPDR S&P Retail ETF (XRT)
to other similar sector funds such as Vanguard’s Consumer XRT’s inception was mid-2006. This equally weighted ETF
Discretionary ETF (VCR), and 98.1% correlated to Fidelity’s garnered $541 million in AUM, which is the highest among
MSCI Consumer Discretionary ETF (FDIS). the six retail ETFs evaluated. XRT is composed of 88%
As Figure 2 indicates, XLY was introduced in 1998, as consumer cyclicals, and 12% consumer noncyclicals. And
one of the original nine SPDR Select funds. And its market the two largest categories of stocks were specialty retail-
cap of $13 billion makes it the behemoth of the consumer ing, which accounted for 55% of its assets, and Internet and
discretionary space. Its top three holdings are AMZN direct marketing, accounting for 19%. The two largest-cap
(19.54%), HD (7.36%), and CMCSA (6.26%). Almost 88% of components were 30% small-cap and 29% micro-cap, with
its holdings are large-cap names with 27% in the Internet and 99% US companies. Its top three holdings were SFLY (1.91%
direct marketing space, and 17% in specialty retailers. XLY of assets), OSTK (1.75%), and NFLX (1.74%).
has the lowest expense ratio at 0.14%
compared to the six ETFs reviewed, Category XRT IBUY RTH PMR RETL FTXD XLY
and the highest xtf.com rating of the XTF Rating 9.5 5.9 9.3 0.7 2.9 2.4 9.8
group at 9.8.
Expense Ratio 0.35% 0.65% 0.35% 0.63% 1.05% 0.60% 0.14%
PowerShares Dynamic Retail Market Cap $541M $216M $75M $11M $30M $1M $13B
(PMR) Avg. Daily Volume 5,324,264 65,529 14,213 2,054 79,899 1,079 5,169,295
The first retail ETF introduced was Annual Yield 1.48% 1.46% 1.09% 0.01% 1.58% 1.13%
PowerShares Dynamic Retail (PMR), Inception Date 06/19/2006 04/20/2016 12/20/2011 10/26/2005 07/14/2010 09/21/2016 12/16/1998
not XRT, which most investors would Avg. # of Components 89 40 26 30 60 49 84
have guessed. This ETF is composed of
51% consumer cyclicals and 36% con- Investment Metric rank 82% 76% 95% 34% 96% 92% 89%
sumer noncyclicals. And the two larg- Performance - 1 Year 6.12% 55.95% 25.10% 7.19% 2.89% 14.11% 0.26%
est categories of stocks were specialty Performance - 3 Years -1.50% 36.52% -3.17% 24.69% 22.94%
retailing, which accounted for 36% of its Performance - 5 Years 45.21% 127.02% 50.06% 290.68% 122.10%
assets, and hypermarkets accounting for FIGURE 2: COMPARISON OF RETAIL ETFs. These ETFs vary widely in their focus, number of holdings, per-
12%. The two largest-cap components formance data, and xtf.com rating.

nies. Its top three holdings were EBAY (9.28% of assets),
Retail stock performance going WMT (7.95%), and HD (7.71%). Two of its top 10 holdings are
forward will be rocky as the Internet-related, totaling 13.96% of the portfolio value.
Overall, this is a tiny ETF with almost no trading volume
landscape is changing quickly, (for example, 1,079 shares/day). Much more time is needed
and there will be a handful of to see how it progresses going forward. At the present time
winners and many more losers. there are better choices in the retail category.
Amplify Online Retail ETF (IBUY)

XRT has the highest XTF rating of 9.5 of those evaluated. IBUY, an equally weighted ETF, was introduced in April 2016.
However, on a performance basis, this ETF was also a laggard Its main focus is on Internet-related equities, as evidenced by
in one, three, and five years. Its expense ratio of 0.35% was the fact that its top eight holdings are invested in companies
in the lower half of its competitors, which is a positive. As in the Internet and direct marketing space, accounting for
far as daily trading volume, XRT outshined with 5.3 million 32.55% of its 40-stock portfolio. About 71% of the funds are
shares a day, even more than XLY. All the other ETFs had invested in consumer cyclicals, and 25% in technology issues.
trading volume below 80,000 shares a day, with three ETFs Internet and direct marketing concentration accounts for 68%;
below 15,000 shares. and Internet and mobile apps 22%. Mid-caps account for 35%
Overall, this ETF has succeeded in gathering a decent of the portfolio with 25% devoted to large-caps.
amount of AUM, has high trading volume, but has underper- About 77% of the holdings are US based, with the remain-
formed its peers and XLY over three and five years. ing investments spread among nine other countries, giving
IBUY a more global focus. The top three holdings are SFLY
VanEck Vectors Retail ETF (RTH) (4.99%), LE (4.42%), and CVNA (4.39%). Also, there is no
RTH, a cap-weighted ETF, has the least number of stocks current yield provided to shareholders. This ETF has the
in its portfolio at 26, and one of the lowest expense ratios at second-highest expense ratio at 0.65%, and the top one-year
0.35%. AUM are $75 million, with low daily trading volume performance of 55.95%.
of 14,213 shares. It has the second-highest xtf.com rating at Overall, this may turn out to be the most rewarding retail
9.3 and the best one-, three-, and five-year performance at ETF going forward, assuming online retailing continues its
25.1%, 36.5%, and 127.0%, respectively. This ETF is 93.6% explosive trend. However, this concentrated bet may have
correlated to XLY. high downward volatility along the way. Its short lifespan is
RTH is composed of 31% specialty retailers, and 25% In- not necessarily an indication of future performance, so be
ternet and direct marketing. The two largest-cap components careful before putting money at risk.
were 95% large-cap and 5% mid-cap, with 97% US companies.
Its top three holdings were AMZN (22.8% of assets), HD Direxion Daily Retail Bull 3X (RETL)
(7.28%), and WMT (6.82%). No other Internet stocks were RETL is a triple-leveraged ETF, meaning that it tracks its
in the top 10 holdings other than AMZN. benchmark (S&P Retail Select Industry Index) with a 300%
Overall, RTH’s concentration in 26 names and the over- change on a daily basis. If the benchmark moves up 1% in
weight of AMZN really goosed performance. Investors need one day, then this ETF will be up 3%, and vice versa. This
to understand that in a bear market, highly concentrated bets leveraged ETF resets its price each day after the close, thus,
could backfire and result in substantial losses. If AMZN falters, the cumulative performance may not be exactly three times
and remains in the portfolio at such a large percentage, then its benchmark’s value. Leveraged ETFs are considered short-
losses could be significant. Of course, the reverse is also pos- term trading vehicles that are popular with daytraders. It is
sible, and most likely probable in the years
ahead. But there are no guarantees.
First Trust NASDAQ Retail ETF (FTXD) Resistance

FTXD, a custom-weighted (factors) multi- Support
sector ETF, was introduced in September
2016, so it has a short track record. Its xtf.com Consolidation Period
rating of 2.4 is next to lowest. Its expense ratio
is about average for the group. It offers the
highest annual yield of 1.58% and a decent
one-year performance of 14.11%.
stockcharts.com
FTXD is composed of 35% specialty re-

tailers, and 20% department stores. The two
largest-cap components were 62% large-cap FIGURE 3: CHART OF RETL SINCE INCEPTION IN 2010. This triple leveraged ETF has made major
and 22% small-cap, with 100% US compa- moves over its seven-year history. Note the increased volume since July 2018.

FIGURE 4: COMPARISON OF OLDEST ETFs. XLY and RTH more than doubled the performance of XRT and PMR during the period from December 21, 2011 through
February 22, 2018.
best used for trades comprising minutes, hours, or a day or amount. EMTY has AUM of $14.28 million with a 0.65%
two, at most. expense ratio.
Interestingly, its performance over one year and three years, ProShares Long Online/Short Stores ETF (CLIX) provides a
2.89% and 22.69%, respectively, were weak and reasonable 100% long position in online and non-store channel companies,
compared to the nonleveraged ETFs; however, the five-year along with a 50% short position on physical store retailers. CLIX
performance of 291% was significantly better than any of the has AUM of $14.72 million with a 0.65% expense ratio.
other ETFs, including XLY by a factor of 2.3 to 1. However,
the volatility over that period was quite high, resulting in a Conclusion
roller-coaster ride. Its Sharpe ratio was 50.57% over three Buying retail ETFs provides an opportunity to make a bet on
years. This compares to 13.63% for XLY and 18.61% for XRT. a subsector of consumer discretionary companies. Retail stock
Figure 3 illustrates its performance since inception and wild performance going forward will be rocky as the landscape is
swings since 2015. changing quickly, and there will be a handful of winners and
Overall, investors/traders should not be holding this ETF many more losers. After reviewing the critical evaluation fac-
for years, as its performance can deteriorate very quickly in tors covered here, I have concluded that for most investors, the
a down-trending market due to the price reset. This ETF is plain-vanilla XLY sector fund is the ETF of choice. Moreover,
most suited for short-term traders, not investors. If you are XLY has a 22.66% position in AMZN with a 9.8 xtf.com rating
considering trading this ETF, then make sure to read the and significant AUM and trading volume. Other ETFs with
detailed information on the Direxion website, especially the more than 15% in AMZN include RTH, IYC, CNDF, FDIS and
explanation of compounding and daily reset, so you don’t get VCR. Check them out on xtf.com or if any are of interest.
involved in something you may not fully understand. For more speculative investors, RTH also has a concentrated
portfolio (25 issues) with a high stake in AMZN, but better
Figure 4 provides a comparison of the price performance performance than XLY over the three time periods reviewed.
of the four oldest retail ETFs (XLY, XRT, PMR, and RTH) For millennials and more aggressive investors with interest in
for the earliest common period of December 21, 2011 through the Internet, IBUY can be considered a big bet in the online
February 22, 2018. The chart clearly shows the exceptional retail area, which may turn out to be a tremendous opportunity
outperformance of XLY (195.21%) and RTH (186.61%) by a to cash in on the growth in Internet commerce. However, expect
factor of at least two. Although RETL (triple-leveraged) was a wild ride, especially if a bear market or major correction
not shown on this chart (because there was insufficient vertical occurs. That means that an exit strategy is needed to prevent
space), its performance during this same period was 670.23%, big losses. Whatever you decide to do, please make sure you
more than three times that of the two best performers. Of can afford the risk involved, understand exactly what you are
course, RETL exhibited huge volatility, as it was up by over investing in, and have a specific plan for exiting if the market
920% in early 2017, then dropped to only 400% in August heads south. Always check the website of the issuers of any
2018, then rising 890% by January 2018. It’s certainly not an ETF you are considering and obtain as much information as
ETF for other than the most aggressive traders. possible to make an objective decision.
Two new retail focused ETFs Further reading

ProShares introduced two unique ETFs in November 2017 that Masonson, Leslie N. [2017]. “All-Inclusive ETF Websites,”
offer investors the ability to short the brick-and-mortar retail- Technical Analysis of STOCKS & COMMODITIES,
ers, as well as to have a long/short position, respectively. Their Volume 35: September.
track record is too short to provide an analysis here. www.amplifyetfs.com • www.direxioninvestments.com •
ProShares Decline Of The Retail Store ETF (EMTY) www.etf.com • www.invesco.com • www.proshares.com •
provides a -1X short exposure, for a single day, to traditional spdrs.com • www.vaneck.com/etfs • xtf.com
retail stores. Because of compounding of daily returns, the
performance over longer periods will differ from the targeted
For this month’s Traders’ Tips, the
focus is John Ehlers’ article in this
issue, “RocketRSI—A Solid Propel-
lant For Your Rocket Science Trad-
ing.” Here, we present the May 2018
Traders’ Tips code with possible im-
plementations in various software.
The code for the following Traders’ Tips selections is
posted here:
• Traders.com  Home–S&C Magazine 
Traders’ Tips
At Traders.com you can also right-click on any chart to
open it in a new tab or window and view the chart at a
much larger size. Figure 1: TRADESTATION. Here is an example daily chart of SPY with the Rock-
The Traders’ Tips section is provided to help readers etRSI indicator and strategy applied.
implement a selected technique from an article in this is-
sue or another recent issue. The entries here are contrib-
//Compute Super Smoother coefficients once
uted by software developers or programmers for software if CurrentBar = 1 then
that is capable of customization. begin
a1 = expvalue( -1.414 * 3.14159
/ ( SmoothLength ) ) ;
b1 = 2 * a1 * Cosine( 1.414 * 180
c2 = b1 ;
c3 = -a1 * a1 ;
c1 = 1 - c2 - c3 ;
F TRADESTATION: MAY 2018 TRADERS’ TIPS CODE end ;
In “RocketRSI—A Solid Propellant For Your Rocket Science
Trading” in this issue, author John Ehlers introduces a new take //Create half dominant cycle Momentum
Mom = Close - Close[RSILength - 1] ;
on the classic RSI indicator originally developed by J. Welles
Wilder. Ehlers begins by introducing a new version of the RSI //SuperSmoother Filter
based on a simple accumulation of up and down closes rather Filt = c1 * ( Mom + Mom[1] )
/ 2 + c2 * Filt[1] + c3 * Filt[2] ;
than averages. To this he applies a Fisher transform. He tells
us that the resultant output is statistically significant spikes //Accumulate "Closes Up" and "Closes Down"
that indicate cyclic turning points with precision. CU = 0 ;
CD = 0 ;
Here, we are providing the TradeStation EasyLanguage for count = 0 to RSILength -1
code for an indicator and a strategy based on the author’s begin
work. if Filt[count] - Filt[count + 1] > 0 then
CU = CU + Filt[count] - Filt[count + 1] ;
Indicator: RocketRSI if Filt[count] - Filt[count + 1] < 0 then
CD = CD + Filt[count + 1] - Filt[count] ;
// RocketRSI Indicator end ;
// (C) 2005-2018 John F. Ehlers
// TASC May 2018 if CU + CD <> 0 then
MyRSI = ( CU - CD ) / ( CU + CD ) ;
inputs:
SmoothLength( 10 ),
RSILength( 10 ), //Limit RocketRSI output to
OBOSLevel( 2 ) ; //+/- 3 Standard Deviations
variables: iF MyRSI > .999 then
a1( 0 ), MyRSI = .999 ;
b1( 0 ), if MyRSI < -.999 then
c1( 0 ), MyRSI = -.999 ;
c2( 0 ),
c3( 0 ),
Filt( 0 ), //Apply Fisher Transform to establish
Mom( 0 ), //Gaussian Probability Distribution
count( 0 ), RocketRSI = .5 * Log( ( 1 + MyRSI )
CU( 0 ), / ( 1 - MyRSI ) ) ;
CD( 0 ),
MyRSI( 0 ), Plot1( RocketRSI, "RocketRSI" ) ;
RocketRSI( 0 ), Plot2( 0, "Zero Line" ) ;
DollarsPerTrade( 0 ), Plot3( OBOSLevel, "OB Level" ) ;
PositionSize( 0 ) ; Plot4( -OBOSLevel, "OS Level" ) ;


Strategy: RocketRSI // Calculate Position Size
DollarsPerTrade = ( InitialCapital + NetProfit
// RocketRSI Strategy + OpenPositionProfit ) * Leverage ;
// (C) 2005-2018 John F. Ehlers PositionSize = DollarsPerTrade / Close ;
// TASC May 2018
inputs: if RocketRSI crosses below -OBOSLevel then

SmoothLength( 10 ), Buy PositionSize shares next bar at Market
RSILength( 10 ), else if RocketRSI crosses above OBOSLevel then
OBOSLevel( 2 ), SellShort PositionSize shares next bar at Market ;
InitialCapital( 100000 ),
Leverage( 2 ), // Apply a Stop Loss
SLAmount( 2 ) ; SetStopShare ;
variables: SetStopLoss( SLAmount )
a1( 0 ),
b1( 0 ),
c1( 0 ), To download the EasyLanguage code, please visit our
c2( 0 ), TradeStation and EasyLanguage support forum. The files
c3( 0 ), for this article can be found here: https://community.trades-
Filt( 0 ),
Mom( 0 ), tation.com/Discussions/Topic.aspx?Topic_ID=142776. The
count( 0 ), filename is “TASC_MAY2018.ZIP.”
CU( 0 ), For more information about EasyLanguage in general,
CD( 0 ),
MyRSI( 0 ), please see http://developer.tradestation.com/easylanguage.
RocketRSI( 0 ), A sample chart is shown in Figure 1.
DollarsPerTrade( 0 ), This article is for informational purposes. No type of trading
PositionSize( 0 ) ; or investment recommendation, advice, or strategy is being made,

//Compute Super Smoother coefficients once given, or in any manner provided by TradeStation Securities or
if CurrentBar = 1 then its affiliates.
begin —Doug McCrary
a1 = expvalue( -1.414 * 3.14159 TradeStation Securities, Inc.
/ ( SmoothLength ) ) ; www.TradeStation.com
b1 = 2 * a1 * Cosine( 1.414 * 180
c2 = b1 ;
c3 = -a1 * a1 ;
c1 = 1 - c2 - c3 ;
end ;
//Create half dominant cycle Momentum F METASTOCK: MAY 2018 TRADERS’ TIPS CODE
Mom = Close - Close[RSILength - 1] ; John Ehlers’ article in this issue, “RocketRSI—A Solid Propel-
//SuperSmoother Filter
lant For Your Rocket Science Trading,” presents two varia-
Filt = c1 * ( Mom + Mom[1] ) tions on the standard RSI calculation. Here are the MetaStock
/ 2 + c2 * Filt[1] + c3 * Filt[2] ; formulas for these indicators:
//Accumulate "Closes Up" and "Closes Down"
MYRSI:
CU = 0 ;
CD = 0 ;
sml:= 8; {smooth length}
for count = 0 to RSILength -1
rsil:= 10; {RSI length}
begin
if Filt[count] - Filt[count + 1] > 0 then
{super smoother}
CU = CU + Filt[count] - Filt[count + 1] ;
a1:= Exp(-1.414 * 3.14159 / sml);
if Filt[count] - Filt[count + 1] < 0 then
b1:= 2*a1 * Cos(1.414*180 / sml);
CD = CD + Filt[count + 1] - Filt[count] ;
c2:= b1;
end ;
c3:= -a1 * a1;
c1:= 1 - c2 - c3;
if CU + CD <> 0 then
filt:= c1 * (C + Ref(C, -1))/2 + c2*PREV + c3*Ref(PREV,-1);
MyRSI = ( CU - CD ) / ( CU + CD ) ;
{RSI}
//Limit RocketRSI output to
change:= ROC(filt, 1, $);
//+/- 3 Standard Deviations
CU:= Sum(If(change > 0, change, 0), rsil);
iF MyRSI > .999 then
CD:= Sum(If(change < 0, Abs(change), 0), rsil);
MyRSI = .999 ;
denom:= If(CU+CD = 0, -1, CU+CD);
if MyRSI < -.999 then
If(denom=-1, 0, (CU-CD)/denom)
MyRSI = -.999 ;
//Apply Fisher Transform to establish

RocketRSI:
//Gaussian Probability Distribution
RocketRSI = .5 * Log( ( 1 + MyRSI )
sml:= 8; {smooth length}
/ ( 1 - MyRSI ) ) ;
rsil:= 10; {RSI length}

of our website at https://www.esignal.com/members/com-
munity or visit our KnowledgeBase at http://kb.esignal.com.
The eSignal formula script (EFS) is also available for copy-
ing & pasting from the Stocks & Commodities website at
Traders.com in the Traders’ Tips section.
—Eric Lippert
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
F WEALTH-LAB: MAY 2018 TRADERS’ TIPS CODE

In good tradition, in this issue we’re pleased to find two new
indicators introduced by John Ehlers in his article, “Rock-
Figure 2: eSIGNAL. Here is an example of the study plotted on a daily chart of
SPY. etRSI—A Solid Propellant For Your Rocket Science Trading.”
Is RocketRSI the new dawn for the RSI? Let’s take a look.
From our brief encounter with this new indicator, it seems
{super smoother} that its applicability greatly depends on finding the dominant
a1:= Exp(-1.414 * 3.14159 / sml);
b1:= 2*a1 * Cos(1.414*180 / sml); cycle period. The “$64,000 question” is whether this cycle
c2:= b1; actually exists in the data, and how stable it is over time.
c3:= -a1 * a1; We created a barebones system to put to test the idea that
c1:= 1 - c2 - c3;
a spike below -2 provides a long entry timing signal (we’ll
rmom:= C-Ref(C, -(rsil-1)); skip the opposite signal this time). Figure 3 illustrates some
filt:= c1 * (rmom + Ref(rmom, -1))/2 + c2*PREV + typical entries. Its only exit rule is to “exit after fixed bars”
c3*Ref(PREV,-1);
(where fixed bars is a parameter). Looking ahead, this pa-
{RSI} rameter had the biggest impact on the system’s net profit (as
change:= ROC(filt, 1, $); shown in Figure 4). Then we ran a portfolio simulation on
CU:= Sum(If(change > 0, change, 0), rsil);
CD:= Sum(If(change < 0, Abs(change), 0), rsil); 10 years of daily data for the 30 DJIA stocks allocating 10%
denom:= If(CU+CD = 0, -1, CU+CD); equity to each signal.
myRSI:= If(denom=-1, 50, (CU-CD)/denom);
limit:= If(myRSI>0.999, 0.999, If(myRSI<-0.999, -0.999, myRSI));

.5*Log((1+limit) / (1-limit))
—William Golson
MetaStock Technical Support
www.metastock.com
Figure 3: WEALTH-LAB. This shows some typical long entries following spikes
below -2 standard deviations on a daily chart of Apple (AAPL).
F eSIGNAL: MAY 2018 TRADERS’ TIPS CODE
For this month’s Traders’ Tip, we’ve provided the study Rock-
etRSI.efs based on the article by John Ehlers in this issue,
“RocketRSI—A Solid Propellant For Your Rocket Science
Trading.” The study is designed to assist you in identifying
cyclic reversal points.
The study contains formula parameters that may be con-
figured through the edit chart window (right-click on the
chart and select “edit chart”). A sample chart is shown in
Figure 2.
To discuss this study or download a complete copy of the
Figure 4: WEALTH-LAB. Increasing the bars to hold parameter had the most vis-
formula code, please visit the members community section ible effect on the system’s net profit.

{
var rr = RocketRSI.Series(Close,slider1.ValueInt,slider2.
ValueInt);
var fixedBars = paramExitDays.ValueInt;

for(int bar = GetTradingLoopStartBar(1); bar < Bars.
Count; bar++)
{
if (IsLastPositionActive)
{
Position p = LastPosition;
if ( bar+1 - p.EntryBar >= fixedBars )
SellAtMarket( bar+1, p, "Exit after N bars" );
}
else
{
Figure 5: WEALTH-LAB. This 3D optimization graph plots the system’s net profit if( rr[bar] <= -2.0 )
on axis Y, the RSI length on axis x, and fixed bars parameters on axis Z. BuyAtMarket(bar+1);
}
}
On a 3D optimization graph we plotted the system’s net
var ls = LineStyle.Solid;
profit on axis Y, and the RSI length and fixed bars param- ChartPane paneRocketRSI = CreatePane(40,true,true);
eters on axes X and Z, respectively (Figure 5). PlotSeries(paneRocketRSI,rr,Color.Black,ls,2);
The best net profit amount came from the eight-period DrawHorzLine(paneRocketRSI,0,Color.Violet,ls,2);
DrawHorzLine(paneRocketRSI,2,Color.Red,ls,1);
RSI length, which suggests that there may be a 16-bar cycle DrawHorzLine(paneRocketRSI,-2,Color.Blue,ls,1);
period in the 30 DJIA stocks. However, the 3D graph in- }
dicates there’s a sharp peak around this value. The smooth }
}
area of the curve nearby suggests a stable and profitable
zone with multiple adjacent parameter values, which leads —Gene Geren & Robert Sucher
to more consistent results. Hence, we’d rather pick the half- Wealth-Lab (MS123, LLC)
cycle period from this area in the 10 to 14 ballpark—which www.wealth-lab.com
is close to the author’s suggestion.
To give the RocketRSI the more thorough testing that it
deserves and to start building your own systems, install or
update our TASCIndicators library to its latest version and
restart Wealth-Lab. This makes it instantly applicable to any
building blocks called rules. By simply combining and re- F AMIBROKER: MAY 2018 TRADERS’ TIPS CODE
ordering them, the user can come up with fairly elaborate In “RocketRSI—A Solid Propellant For Your Rocket Science
strategies. The test system’s code follows: Trading” in this issue, author John Ehlers presents a new
Wealth-Lab strategy code (C#): variation of the RSI indicator. The AmiBroker code listing
shown here provides a ready-to-use formula. To adjust pa-
using System; rameters, right-click on the chart and select parameters from
using System.Collections.Generic;
using System.Text; the context menu.
using System.Drawing;
using WealthLab; AmiBroker code
using WealthLab.Indicators;
using TASCIndicators; // RocketRSI Indicator
// based on TS code by John F. Ehlers, S&C May 2018
namespace WealthLab.Strategies
{ SmoothLength = Param("SmoothLength", 10, 2, 50 );
public class MyStrategy : WealthScript RSILength = Param("RSILength", 10, 2, 50 );
{
StrategyParameter slider1; // Compute Super Smoother coefficients once
StrategyParameter slider2;
StrategyParameter paramExitDays; PI = 3.1415926;
public MyStrategy() a1 = exp( -1.414 * PI / SmoothLength );

{ b1 = 2 * a1 * Cos( 1.414 * PI / SmoothLength );
slider1 = CreateParameter("Smoothing Length", 8, 2, c2 = b1;
20, 2); c3 = -a1 * a1;
slider2 = CreateParameter("RSI Length", 10, 2, 20, 2); c1 = 1 - c2 - c3;
paramExitDays = CreateParameter("Exit after", 10, 5,
30, 5); // Create half dominant cycle Momentum
} Mom = Close - Ref( Close, RSILength - 1 );
protected override void Execute() // SuperSmoother Filter

Figure 7: NEUROSHELL TRADER. This sample NeuroShell Trader chart shows
the RocketRSI on a chart of SPY.
Figure 6: AMIBROKER. Here is a daily chart of the SPY (upper pane) with the
RocketRSI (lower pane), replicating a chart from Ehlers’ article in this issue. After moving the code given in the article to your pre-
ferred compiler and creating a DLL, you can insert the re-
Filt = IIR( Mom, 0.5 * c1, c2, 0.5 * c1, c3 ); sulting indicator as follows:
// Accumulate "Closes Up" and "Closes Down" 1. Select new indicator from the insert menu.
Diff = Ref( Filt, -1 ) - Filt;
2. Choose the External Program & Library Calls category.
Up = Max( Diff, 0 ); 3. Select the appropriate external DLL call indicator.
Dn = Max( -Diff, 0 ); 4. Set up the parameters to match your DLL.
CU = Sum( Up, RSILength ); 5. Select the finished button.
CD = Sum( Dn, RSILength );
Users of NeuroShell Trader can go to the Stocks & Com-
MyRSI = ( CU - CD ) / ( CU + CD );
modities section of the NeuroShell Trader free technical
MyRSI = Ref( MyRSI, - RSILength + 1 ); support website to download a copy of this or any previous
Traders’ Tips.
// Limit RocketRSI output to +/- 3 Standard Deviations
A sample chart is shown in Figure 7.
MyRSI = Min( 0.999, MyRSI ); —Marge Sherald, Ward Systems Group, Inc.
MyRSI = Max( -0.999, MyRSI ); 301 662-7950, sales@wardsystems.com
www.neuroshell.com
// Apply Fisher Transform to establish Gaussian Probability
Distribution
RocketRSI = .5 * Log( ( 1 + MyRSI ) / ( 1 - MyRSI ) );
Plot( RocketRSI, "RocketRSI" + _PARAM_VALUES(), colorRed, F TRADERSSTUDIO: MAY 2018 TRADERS’

styleThick ); TIPS CODE
Plot( 0, "", colorBlue, styleNoLabel ); The TradersStudio code based on John Ehlers’
article in this issue, “RocketRSI—A Solid Propellant For
A sample chart is shown in Figure 6. Your Rocket Science Trading,” is provided at www.Trader-
—Tomasz Janeczko, AmiBroker.com sEdgeSystems.com/traderstips.htm as well as at the Stocks
www.amibroker.com & Commodities website at www.traders.com in the Traders’
Tips section.
Figure 8 shows the RocketRSI indicator (yellow line) on a
F NEUROSHELL TRADER: MAY 2018 TRADERS’ chart of S&P 500 futures contract (SP) during part of 2006
TIPS CODE and 2007.
The RocketRSI indicator presented by John Ehlers The code is shown here:
in his article in this issue, “RocketRSI—A Solid Propellant 'RocketRSI
For Your Rocket Science Trading,” can be easily implemented 'Author: John Ehlers, TASC May 2018
in NeuroShell Trader using NeuroShell Trader’s ability to call 'Coded by: Richard Denning, 3/12/18
'www.TradersEdgeSystems.com
external dynamic linked libraries. Dynamic linked libraries
can be written in C, C++ and Power Basic. Function RocketRSI(SmoothLength, RSILength)

Figure 8: TRADERSSTUDIO. This shows the RocketRSI indicator (yellow line) on
a chart of S&P 500 futures (SP) during part of 2006 and 2007.
Figure 9: quantacula. This sample chart shows the TASC Extensions indica-
tors and the RocketRSI dragged onto a chart in Quantacula Studio.
Dim a1
Dim b1
Dim c1
Dim c2
Dim c3
Dim Filt As BarArray
Dim count
Dim CU
Dim CD
Dim myRSI
'SmoothLength = 8
'RSILength = 10
If CurrentBar - 1 Then
a1 = Exp(-1.414*3.14159 / (SmoothLength))
b1 = 2*a1*Cos(DegToRad(1.414*180 / (SmoothLength)))
c2 = b1
c3 = -a1*a1
c1 = 1 - c2 - c3
End If
Filt = c1*(Close + Close[1]) / 2 + c2*Filt[1] + c3*Filt[2]
CU = 0 Figure 10: quantacula. Here, the RocketRSI model is applied to Intel Corpora-
CD = 0 tion historical data.
For count = 0 To RSILength -1
If Filt[count] - Filt[count + 1] > 0 Then
CU = CU + Filt[count] - Filt[count + 1]
End If
If Filt[count] - Filt[count + 1] < 0 Then
CD = CD + Filt[count + 1] - Filt[count] F Quantacula Studio: MAY 2018 TRADERS’ TIPS CODE
End If
Next We added John Ehlers’ RocketRSI indicator (described in
If CU + CD <> 0 Then his article in this issue, “RocketRSI—A Solid Propellant For
myRSI = (CU - CD) / (CU + CD) Your Rocket Science Trading”) to our free TASC Extensions
End If
If myRSI > 0.999 Then myRSI = 0.999 package for Quantacula that you can obtain by clicking our
If myRSI < -0.999 Then myRSI = -0.999 marketplace link at www.quantacula.com.
RocketRSI = 0.5*Log((1+myRSI) / (1 - myRSI)) Once the extension is installed, you will see the RocketRSI
End Function
'--------------------------------------------------------------- among the other indicators adapted from previous Traders’
Sub Ehlers_RocketRSI_IND(SmoothLength, RSILength) Tips the next time you launch Quantacula Studio.
Dim MyRSI You can now use RocketRSI anywhere in the product that
MyRSI = RocketRSI(SmoothLength,RSILength)
plot1(MyRSI) accepts an indicator input, for example, the building block
plot2(0) model builder. We built a simple model by dragging and
End Sub dropping the following building blocks:
'----------------------------------------------------------------
—Richard Denning • Entry: Buy at market open

info@TradersEdgeSystems.com • Condition: Indicator crosses value (RocketRSI crosses
for TradersStudio below -2.00)
• Exit: Sell at market open

• Condition: Indicator crosses value (RocketRSI crosses source code in NinjaTrader 7 by selecting the menu Tools →
below 2.00) Edit NinjaScript → Indicator from within the control center
window and selecting the RocketRSI and MyRSI files.
Note we used “crosses below 2.00” for the exit condition, NinjaScript uses compiled DLLs that run native, not in-
rather than “crosses above 2.00.” This lets the winning posi- terpreted, which provides you with the highest performance
tions ride further, and resulted in a better overall return in possible.
our backtesting. A sample chart implementing the strategy is shown in
Figure 10 shows the model applied to a chart of Intel Cor- Figure 11.
poration daily historical data, illustrating how it can pinpoint —Raymond Deux & Jim Dooms
entry and exit points with surgical precision. A suggested NinjaTrader, LLC
next step would be to perform some portfolio backtesting on www.ninjatrader.com
a universe of data you’re interested in trading.
—Dion Kurczek, Quantacula LLC
info@quantacula.com
F TRADE NAVIGATOR: MAY 2018
www.quantacula.com
TRADERS’ TIPS CODE
The RocketRSI indicator presented
by John Ehlers in his article in this issue, “RocketRSI—A
Solid Propellant For Your Rocket Science Trading,” has now
been recreated in Trade Navigator software for your use. If
you have an older version of the software, you can get the
F NINJATRADER: MAY 2018 TRADERS’ TIPS CODE indicator by downloading the upgrade special file. When
The RocketRSI and MyRSI indicators, as discussed in John prompted to upgrade, click the yes button. If prompted to
Ehlers’ article in this issue, “RocketRSI—A Solid Propellant close all software, click on the continue button. It should
For Your Rocket Science Trading,” is available for download automatically re-import and verify the libraries. Once the
at the following links for NinjaTrader 8 and NinjaTrader 7: program restarts, you will then be able to hit the “A” key on
your keyboard and then select the RocketRSI indicator from
NinjaTrader 8: www.ninjatrader.com/SC/May2018SCNT8.zip
the list under the indicators tab.
NinjaTrader 7: www.ninjatrader.com/SC/May2018SCNT7.zip
If you would like to recreate the indicator manually, the
TradeSense language for it is as follows:
Once the file is downloaded, you can import the indicator
in NinjaTader 8 from within the control center by selecting &Mom := Expression - (Expression).(RsiLength - 1)
Tools → Import → NinjaScript Add-On and then selecting &Filt := Ehlers SuperSmoother (&Mom , SmoothLength)
the downloaded file for NinjaTrader 8. To import in Ninja- &CU := MovingSum (&Filt - (&Filt).1 , RsiLength , 1)
&CD := MovingSum ((&Filt).1 - &Filt , RsiLength , 1)
Trader 7, from within the control center window, select the &MyRSI := (&CU - &CD) / (&CU + &CD)
menu File → Utilities→ Import NinjaScript and select the &LimitRSI := IFF (&MyRSI > 0.999 , 0.999 , IFF (&MyRSI <
downloaded file. -0.999 , -0.999 , &MyRSI))
0.5 * Log ((1 + &LimitRSI) / (1 - &LimitRSI))
You can review the indicators’ source code in NinjaTrader
8 by selecting the menu New → NinjaScript Editor → Indica-
Creating a function
tors from within the control Center window and selecting the
To create this indicator manually, click on the edit dropdown
RocketRSI and MyRSI files. You can review the indicators’
menu and open the trader’s toolbox (or use CTRL + T) and
Figure 11: NINJATRADER. Here, the RocketRSI and MyRSI indicators are shown
on a daily SPY chart. FIGURE 12: TRADE NAVIGATOR. This shows the RocketRSI indicator on LULU.

click on the functions tab. Now click on the new button, and For Your Rocket Science Trading,” John Ehlers provides us
a new function dialog window will open. Type the code for with two variants on the RSI calculation.
the indicator into the text box. Please ensure there are no extra For the first variation, MyRSI, Ehlers uses his Super-
spaces at the end of each line. When completed, click on the Smoother filter on bar-by-bar closing price deltas and calcu-
verify button. You may be presented with an add inputs popup lates MyRSI using these filtered values (Figure 13).
message if there are variables in the code. If so, click the For the second variation, RocketRSI, Ehlers uses his Su-
yes button, then enter the values in the default value column perSmoother filter on a momentum value that is the differ-
(close, 8, and 10 are the default values in this case). If all is ence between the current close and the close from RSI length
well, when you click on the function tab, the code you entered bars previous. Then he computes an RSI using the filtered
will convert to italic font. Now click on the save button, and momentum values and applies a Fisher transform to this RSI
type a name for the indicator. value to arrive at the value of the RocketRSI (Figure 14).
If you have any difficulty creating the indicators or would The spreadsheet file for this Traders’ Tip can be down-
like help recreating the chart shown here, our technical sup- loaded from www.traders.com in the Traders’ Tips area. To
port staff would be happy to help. Call 719 884-0245 or click successfully download it, follow these steps:
on the live chat tool located under Trade Navigator’s help
menu or at the top of our homepage. Our support hours are • Right-click on the Excel file link, then
M-F 6am-6pm US Mountain Time. Happy trading! • Select “save target as” to place a copy of the spreadsheet
—Genesis Financial Technologies file on your hard drive.
Tech support 719 884-0245
www.TradeNavigator.com —Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com
F MICROSOFT EXCEL: MAY 2018 TRADERS’ TIPS CODE
In his article in this issue, “RocketRSI—A Solid Propellant
FIGURE 13: EXCEL, MyRSI
FIGURE 14: EXCEL, Rocket RSI

VERVOORT/THE V-TRADE
Continued from page 21
SIDEBAR: MT4 Code For SvePivots #property indicator_style4 STYLE_DASH

#property indicator_style5 STYLE_DASH // Buffer parameters
//+--------------------------------------------------+ #property indicator_style6 STYLE_DASH SetIndexStyle(0, DRAW_LINE, STYLE_
//| SvePivots.mq4 Version 3.3 | #property indicator_style7 STYLE_DASH DOT);
//| Copyright © 2008-2017, Sylvain vervoort | #property indicator_style8 STYLE_SOLID SetIndexStyle(1, DRAW_LINE, STYLE_
//| http://stocata.org/ | #property indicator_style9 STYLE_DASH DOT);
//+--------------------------------------------------+ #property indicator_style10 STYLE_DASH SetIndexStyle(2, DRAW_LINE, STYLE_
#property copyright "©2008-2018, Sylvain #property indicator_style11 STYLE_DASH DOT);
vervoort" #property indicator_style12 STYLE_DASH SetIndexStyle(3, DRAW_LINE, STYLE_
#property link "http://stocata.org/" #property indicator_style13 STYLE_DASH DOT);
#property description "Pivot points calculated #property indicator_style14 STYLE_DASH SetIndexStyle(4, DRAW_LINE, STYLE_
on previous day with Lowest low" #property indicator_style15 STYLE_SOLID DOT);
#property description "and Highest high price SetIndexStyle(5, DRAW_LINE, STYLE_
indication. Not shown on daily," //---- input parameters DOT);
#property description "weekly or monthly extern int DiffLocMinServTme = 0; // SetIndexStyle(6, DRAW_LINE, STYLE_
chart! 2018 V3.3" Difference Local Time Minus Server Time DOT);
#property description " " SetIndexStyle(7, DRAW_LINE, STYLE_
#property description "Make sure you have a //---- buffers and other Definitions SOLID);
clean correct database!" double PPBuffer[]; // Pivot Point
#property strict double S1Buffer[]; // Support 1 SetIndexStyle(8, DRAW_LINE, STYLE_
double R1Buffer[]; // Resistance 1 DOT);
#property indicator_chart_window double S2Buffer[]; // Support 1 SetIndexStyle(9, DRAW_LINE, STYLE_
#property indicator_buffers 15 double R2Buffer[]; // Resistance 2 DOT);
double S3Buffer[]; // Support 1 SetIndexStyle(10, DRAW_LINE, STYLE_
#property indicator_color1 Blue double R3Buffer[]; // Resistance 3 DOT);
#property indicator_color2 Red double PLBuffer[]; // Previous day low SetIndexStyle(11, DRAW_LINE, STYLE_
#property indicator_color3 SkyBlue double S1MBuffer[]; // Support 1 mean value DOT);
#property indicator_color4 Coral double R1MBuffer[]; // Resistance 1 mean SetIndexStyle(12, DRAW_LINE, STYLE_
#property indicator_color5 Aqua value DOT);
#property indicator_color6 Pink double S2MBuffer[]; // Support 2 mean value SetIndexStyle(13, DRAW_LINE, STYLE_
#property indicator_color7 LightBlue double R2MBuffer[]; // Resistance 2 mean DOT);
#property indicator_color8 Magenta value SetIndexStyle(14, DRAW_LINE, STYLE_
#property indicator_color9 LightGray double S3MBuffer[]; // Support 3 mean value SOLID);
#property indicator_color10 LightGray double R3MBuffer[]; // Resistance 3 mean
#property indicator_color11 LightGray value SetIndexBuffer(0, PPBuffer);
#property indicator_color12 LightGray double PHBuffer[]; // Previous day High SetIndexBuffer(1, S1Buffer);
#property indicator_color13 LightGray double PP, S1, S2, S3, R1, R2, R3, PL, SetIndexBuffer(2, R1Buffer);
#property indicator_color14 LightGray LastHigh, LastLow; SetIndexBuffer(3, S2Buffer);
#property indicator_color15 LightGreen double S1M, S2M, S3M, R1M, R2M, R3M, PH; SetIndexBuffer(4, R2Buffer);
int GMTDiff = 0, DstTime, DstCorrection, SetIndexBuffer(5, S3Buffer);
#property indicator_width1 1 DifLocMinServ; SetIndexBuffer(6, R3Buffer);
#property indicator_width2 1 int ThisDay, PrevDay; SetIndexBuffer(7, PLBuffer);
#property indicator_width3 1 bool SundayTrade = false;
#property indicator_width4 1 //+--------------------------------------------------+ SetIndexBuffer(8, S1MBuffer);
#property indicator_width5 1 //| SvePivots indicator initialisation function | SetIndexBuffer(9, R1MBuffer);
#property indicator_width6 1 //+--------------------------------------------------+ SetIndexBuffer(10, S2MBuffer);
#property indicator_width7 1 int OnInit() SetIndexBuffer(11, R2MBuffer);
#property indicator_width8 1 { SetIndexBuffer(12, S3MBuffer);
#property indicator_width9 1 // Check validity of the input: Local minus SetIndexBuffer(13, R3MBuffer);
#property indicator_width10 1 Server time SetIndexBuffer(14, PHBuffer);
#property indicator_width11 1 DifLocMinServ = DiffLocMinServTme;
#property indicator_width12 1 if( MathAbs(DifLocMinServ) > 12 ) // Daylight saving Time correction
#property indicator_width13 1 { DstTime = TimeDaylightSavings();
#property indicator_width14 1 DifLocMinServ = 0; // wintertime DstTime == 0
#property indicator_width15 1 Alert("Enter a valid difference for Local // summertime DstTime == daylight saving
minus Server time!"); time difference in seconds (+3600 seconds)
#property indicator_style1 STYLE_DASH Alert("Invalid! Difference should be +-12, 0 if (DstTime==0) DstCorrection = 3600; else
#property indicator_style2 STYLE_DASH used instead!"); DstCorrection = 0;
#property indicator_style3 STYLE_DASH }

// Indicator name reached during the current day // Function, store current pivot values for this
string DiffLocServTime = if(high[i+1] > LastHigh) LastHigh = new bar |
IntegerToString(DifLocMinServ); high[i+1]; // +--------------------------------------------+
IndicatorShortName("SvePivots("+DiffLocS if(low[i+1] < LastLow) LastLow = low[i+1];
ervTime+")"); int FunctionWriteCurrPivot(int a)
// What day of the week are we? {
// GMT/UTC Difference Local minus Server ThisDay = TimeDayOfWeek(Time[i] PPBuffer[a] = PP;
time +GMTDiff*3600+DstCorrection); S1Buffer[a] = S1;
GMTDiff = TimeHour(TimeGMT()) - PrevDay = TimeDayOfWeek(Time[i+1]+GM R1Buffer[a] = R1;
TimeHour(TimeLocal()) + DifLocMinServ; TDiff*3600+DstCorrection); S2Buffer[a] = S2;
R2Buffer[a] = R2;
SundayTrade = false; // Is there data available starting on a S3Buffer[a] = S3;
Sunday (forex)? R3Buffer[a] = R3;
//---- // If yes, set SundayTrade TRUE. PLBuffer[a] = PL;
return(INIT_SUCCEEDED); if(ThisDay == 0) SundayTrade = true;
} S1MBuffer[a] = S1M;
// If current bar and previous bar are within R1MBuffer[a] = R1M;
//+------------------------------------------------+ the same day, S2MBuffer[a] = S2M;
//| SvePivots Indicator calculation function | // or current bar is a Saterday, just extend R2MBuffer[a] = R2M;
//+------------------------------------------------+ the current pivot level S3MBuffer[a] = S3M;
int OnCalculate (const int rates_total, if(ThisDay - PrevDay == 0 || ThisDay == 6) R3MBuffer[a] = R3M;
const int prev_calculated, FunctionWriteCurrPivot(i); PHBuffer [a] = PH;
const datetime& time[], return(a);
const double& open[], // If current and previous day are different }
const double& high[], AND not a Saterday or
const double& low[], // not a Sunday trade then calculate and // +-------------------------------------------+
const double& close[], draw new pivots // Function calculate new pivott values for this
const long& tick_volume[], else if(ThisDay != PrevDay && new bar |
const long& volume[], !SundayTrade && ThisDay != 6) // +-------------------------------------------+
const int& spread[]) {
{ double PriceClose = close[i+1]; int FunctionCalcNewPivots(int a, double
// Do not show daily Pivots on Day, Week or double PriceOpen = open [i]; PrClose, double PrOpen)
Monthly charts FunctionCalcNewPivots {
if(Period() == PERIOD_D1) return(rates_ (i,PriceClose,PriceOpen); PP = (LastHigh + LastLow + PrClose)
total); FunctionWriteCurrPivot(i); / 3;
if(Period() == PERIOD_W1) return(rates_ } R1 = (2*PP) - LastLow;
total); // If there are Sunday Trading hours and this S1 = (2*PP) - LastHigh;
if(Period() == PERIOD_MN1) return(rates_ is a Monday,the new week is R2 = PP + (LastHigh - LastLow);
total); // already started on the Sunday, we just S2 = PP - (LastHigh - LastLow);
extend the Sunday values R3 = (2*PP) + (LastHigh -
// How many bars in this chart? else if(SundayTrade && ThisDay == 1) (2*LastLow));
int counted_bars = prev_calculated; // FunctionWriteCurrPivot(i); S3 = (2*PP) - ((2* LastHigh) - LastLow);
How may bars in the chart? // If we have a day change AND trading on PL = LastLow;
if (counted_bars < 0) return(-1); // No Sunday true, we handle it here
bars return error. // calculating the new pivots and draw them R1M = (R1-PP)/2 + PP;
if (counted_bars > 0) counted_bars--; // -1 on the chart S1M = (PP-S1)/2 + S1;
to start count from index 0. else if(ThisDay != PrevDay && R2M = (R2-R1)/2 + R1;
int limit=(MathMin(rates_total-counted_ SundayTrade) S2M = (S1-S2)/2 + S2;
bars,rates_total-1)); { R3M = (R3-R2)/2 + R2;
double PriceClose = close[i+1]; S3M = (S2-S3)/2 + S3;
for(int i=limit; i>=0 && !_StopFlag; i--) double PriceOpen = open [i]; PH = LastHigh;
{ FunctionCalcNewPivots
// Handle the output for the first history bar (i,PriceClose,PriceOpen); LastLow = PrOpen;
if(i == limit) FunctionWriteCurrPivot(i); LastHigh = PrOpen;
{ } PrevDay = ThisDay;
LastLow = open[i]; } return(a);
LastHigh = open[i]; }
i--; //---- // ----------------------------------------------
} return(rates_total); // END OF PROGRAM
}
// Keep track of the highest and lowest price // +-------------------------------------------+

FUTURES FOR YOU
Garner scrambling to cover positions in the last tages of trading weekly options on the
Continued from page 29 hour of trade. emini S&P 500, I will use next month’s
An options trader could avoid getting column to discuss the practicality of it.
Many daytraders are utilizing exces- caught in the herd and allow trading For instance, I will discuss the cost and
sive leverage. They are basing their signals to play out beyond the close of risk of this type of trading, choosing
position sizing on discounted intraday the day session. Remember, the market a strike price, and will walk through
margin rates, and simply don’t have doesn’t care if you must be flat by 4:00 an example of how reactive the option
the money to hold positions beyond the pm Central. Trading signals are produced prices are to underlying moves in the
close of trade (which triggers a much and carried out on the market’s time, not futures market.
higher margin requirement). As a result, the trader’s time.
overleveraged daytraders are typically Now that I have discussed the advan-
Continued from page 41 Forex & Money EXPO 2018

The Forex & Money Expo organized
a post-conference cruise to Alaska. by FINEXPO will take place on Octo-
Speakers at the online conference ber 25–26, 2018 at Suntec Singapore
will include Chip Anderson, Grayson Convention & Exhibition Centre in
Roze, Greg Schnell, Alex Elder, Bruce Singapore. The Forex & Money EXPO
Fraser, Tom McClellan, Erin Swenlin, exposition and forum covers the financial
Tushar Chande, and Arthur Hill. Topics and foreign exchange (forex) trading
will include minimizing and reducing industry. The expo is offered to help at-
risk and drawdowns; using Wyckoff tendees build business connections and
methods for entry & stop placement; the widen industrial knowledge.
DecisionPoint analysis approach; using The expo is expected to have more
the Chande Trend Meter; and spotting than 50 speakers this year. The expo will
trouble in the markets in advance. Market Wizards,” parts 1–3) offering key host exhibitor booths, lounges, a speaker
In other news, StockCharts.com is lessons culled from those interviews. He hall, and workshop rooms with panel
launching a 24/7 streaming video chan- will also speak on performance measure- discussions. The two-day event will also
nel devoted to financial charting and ment and analysis. offer some entertainment diversions and
market analysis by technical experts, ex- Brandt is an analyst, trader, and money an awards and gala night party.
panding on its existing MarketWatchers manager with four decades of experi- Represented at the expo will be trad-
LIVE! feature. With technical charting- ence, and writes the trading blog “The ing experts, trading companies, banks,
focused content, including both live and Factor.” He will speak about trading as and money brokers. Presentations and
prerecorded video, StockCharts TV a business; managing emotions; risk workshops will cover current issues
seeks to offer material that is educational, management and probability theory; and relating to stocks, futures, options, and
insightful, and entertaining. The channel other trading topics. forex markets, including retail forex,
will be accessible from any web-enabled Klopfenstein is chief investment strate- regulation, cryptocurrencies, global
device as well as via the StockCharts gist for FundSeeder Investments and was macro trading, trading in the age of fake
TV app for iOS. previously head of research and chief news, and more. Registered users receive
stockcharts.com investment officer of currency manage- free access to the expo.
ment for Mesirow Financial, a Chicago- https://forexexpo.com
FundSeeder Trader Boot Camp based financial services firm. He will
Jack Schwager, along with Peter Brandt speak about what capital allocators are
and Gary Klopfenstein, will host a Fund- looking for and how to raise capital.
Seeder Trader Boot Camp on May A Q&A with the three presenters will
2–4, 2018, in the FAU Trading Room at allow questions from participants. Ad-
the FAU College of Business at Florida ditional speakers will cover additional
Atlantic University near Miami, FL. related topics. Cost is $1,495.
Schwager, well known for his Market The Fundseeder site offers free analyt-
Wizards book series which is based on ics for traders.
interviews with successful traders, will www.summit.fundseeder.com
present three sessions (“Lessons from the
56 • May 2018 • Technical Analysis of Stocks commodities
tockS & C ommoditieS
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FUTURES LIQUIDITY
T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown being 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.
Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
S&P 500 E-Mini (Jun ’18) GBLX 4.9 15.6 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>
10-Year T-Note (Jun ’18) CBOT 0.9 7.8 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Jun ’18) CBOT 0.5 7.3 8 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra T-Bond (Jun ’18) CBOT 2.3 10.3 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Jun ’18) GBLX 3 7.9 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Jun ’18) CBOT 1.9 8.6 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (May ’18) NYMEX 3.6 6 2 ••••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Jun ’18) CBOT 0.2 5.2 9 ••••••••••••••••••••••••••••••••
Euro FX (Jun ’18) CME 1.5 8.7 2 •••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Jun ’18) GBLX 4.9 11.8 1 ••••••••••••••••••••••••••••••
Eurodollar (Dec ’18) CME 0.1 3 12 •••••••••••••••••••••••••••
Ultra 10-Year T-Note (Jun ’18) CBOT 1 7.1 3 •••••••••••••••••••••••
Sugar #11 (May ’18) ICEUS 7.5 8.2 5 ••••••••••••••••••••••
Gasoline RBOB (May ’18) NYMEX 3.6 6.5 1 •••••••••••••••••
ULSD NY Harbor (May ’18) NYMEX 3.6 6.3 1 ••••••••••••••
Live Cattle (Jun ’18) CME 3.9 7 3 ••••••••••••
S&P Midcap E-Mini (Jun ’18) GBLX 4.4 12.7 1 ••••••••••••
Natural Gas (May ’18) NYMEX 5.4 12.3 5 •••••••••••
Dow Indu 30 E-Mini (Jun ’18) CBOTM 4.9 13.5 2 ••••••••••
High Grade Copper (May ’18) COMEX 4.6 12.9 2 •••••••••
Coffee (May ’18) ICEUS 5.2 10.8 3 ••••••••
Japanese Yen (Jun ’18) CME 1.8 11.1 3 ••••••••
Silver (May ’18) COMEX 4.8 17.3 3 ••••••••
Soybeans (May ’18) CBOT 3.3 18.1 7 ••••••••
Gold (Apr ’18) COMEX 2.5 11.4 2 •••••••
British Pound (Jun ’18) CME 2.2 14.3 5 ••••••
Corn (May ’18) CBOT 3.5 18 18 ••••••
30-Day Fed Funds (Apr ’18) CBOT 0 2.7 10 •••••
Soybean Meal (May ’18) CBOT 4.4 14.2 6 •••••
Cotton #2 (May ’18) ICEUS 5.4 16.7 5 ••••
Wheat (May ’18) CBOT 6.1 16.6 8 ••••
Canadian Dollar (Jun ’18) CME 1.6 12.5 7 •••
Cocoa (May ’18) ICEUS 6.5 19 7 ••• CBOT Chicago Board of Trade, Division of CME
Lean Hogs (Jun ’18) CME 4.5 9.9 5 ••• CFE CBOE Futures Exchange
Mexican Peso (Jun ’18) CME 3.7 14.4 9 ••• CME Chicago Mercantile Exchange
Palladium (Jun ’18) NYMEX 9.7 18.1 1 ••• COMEX Commodity Exchange, Inc. CME Group
Australian Dollar (Jun ’18) CME 1.8 15.6 7 •• GBLX Chicago Mercantile Exchange - Globex
Feeder Cattle (May ’18) CME 4.5 6.7 1 ••
ICE-EU Intercontinental Exchange-Futures - Europe
Hard Red Wheat (May ’18) KCBT 6.4 19.3 8 ••
Platinum (Jul ’18) NYMEX 3.9 15.1 5 •• ICE-US Intercontinental Exchange-Futures - US
S&P GSCI (Apr ’18) CME 3.9 9.6 1 •• KCBT Kansas City Board of Trade
Soybean Oil (May ’18) CBOT 3.5 16.8 17 •• MGEX Minneapolis Grain Exchange
New Zealand Dollar (Jun ’18) CME 2 13.4 6 • NYMEX New York Mercantile Exchange
Spring Wheat (May ’18) MGEX 5 13.5 6 •
Swiss Franc (Jun ’18) CME 2.3 25.6 5 •
U.S. Dollar Index (Jun ’18) ICEUS 2.1 12.4 4 •
Bitcoin Cboe Futures (Apr ’18) CFE 48.7 29.8 5 1805
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

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LINKS
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One key factor is whether the outfit you’re 1. John Murphy’s Market Message StockCharts.com, Inc.
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Our listing may include other types of products that are 10. The European Short Term Update Elliott Wave International
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Tick It!
Get More Value Using

A Trading Checklist
What is a trading plan or checklist and how can it help? He had the utility locater service come out and spray graffiti
on his lawn, marking the location of that cable and others.
T
by Thomas Bulkowski Then he rented a tiller to chew up weeds, work nutrients into
the soil, and shred my cable.
here are 10 types of people in the world: those who Yes, it ticked me off. I lost my Internet connection while I
understand binary and those who don’t. So goes the waited over a day for the phone company to drape a temporary
joke. In the trading world, there are two types of cable across three properties.
traders: those of us who use trading plans and those What did my neighbor say about all of this? That it wasn’t
who wonder why they can’t make money trading. his fault. And he’s a preacher, too. I expected honesty from
Perhaps that is an unfair assessment, and it’s not accurate him, not excuses. He said it was the phone company’s fault
anyway. But let’s talk about trading plans or checklists and because they didn’t bury the line deep enough. Since the line
how they can help you make money. You do want to make location was marked, that excuse didn’t work.
money, don’t you? Imagine that I was daytrading a short-side position at the
ART: IBREAKSTOCK/SHUTTERSTOCK
A trading plan is a document that outlines contingency plans time. The downed connection would have caused me a bundle
for each trade. Let me give you an example. My neighbor of stress and perhaps a chunk of money.
wanted to put down sod on his front lawn. I spoke to him about Think this is an isolated incident? It’s not. I heard of it hap-
this when he started and warned of a fiber optic telephone pening to a prominent money manager. A good trading plan
cable from my house that ran through his lawn to a junction should address these kind of situations.
box down the street.
charting
Trading checklist
A good trading plan covers all contingencies of what might
happen during a trade. I approach my trading differently. I use A good trading plan covers all
a checklist. I programmed my computer to spit out a template
that I fill in. Yes, I will want to cover all contingencies so I’m contingencies of what might
not sucking my thumb while watching a trade go south. I’ll happen during a trade.
know what action to take if automated tools (such as stop-loss
orders) are not in place.
I have found the following items useful over my nearly 40
years of terrorizing the markets.
If other stocks in the same industry are struggling, and
• What are the market conditions? I use the S&P 500
I plan to sell a weak stock, I’ve noticed that some tend to
index and check the close-to-close price change over the
peak about six weeks before the earnings report (midway
prior one, two, and six months. A simple up or down
through the quarter). I haven’t tested this theory to see if
reading tells me what the various length trends are. Once
it’s really true, so be cautious using the information.
you have enough trades, you can sort the three spread-
sheet columns and determine what market conditions • What is happening on the longer time scale? Most of
work best for your trading style. my trades use the daily charts. So I’ll switch to the weekly
For example, if all three periods are down, are you or even the monthly chart to check the stock. Where is
making a bottom-fishing trade with the expectation support and resistance? That will help me determine
that the market trend will change, or do you like losing when to sell at a target, or buy more if it gets cheap. If
money? the stock tumbles, it will help me gauge how big the loss
could get. That’s important to know ahead of the event,
• What are the industry conditions? I want to know
when you’re not under pressure of a falling stock.
how other stocks in the same industry are doing, so I
always check as many as I can find. How many stocks • Did the stock recently dead-cat bounce? A dead-cat
are trending up or falling? Does it look like their trends bounce occurs when the stock drops at least 15% in one
will continue or have they reached pronounced support session, often dropping between 25% and 40%. The stock
or resistance? will bottom in a few days before bouncing up and then
For the industry trend, I count the number of stocks collapsing again. The stock will eventually bottom 15%
higher or lower over the last one, two, and six months. The to 30% below the pre-bounce low.
results suggest how strong the trend is and improves my Here’s the kicker. A second dead-cat bounce will
confidence that the trend will continue. If you compare occur 26% of the time within three months of the first
the percentage your trades make over the three periods one, and 38% of the time within six months. My rule is
and compare that to the percentage made using market to avoid buying a stock showing a dead-cat bounce for
conditions, you’ll be able to tell if industry or market at least six months unless I can justify it (and then only
conditions are more important to your wallet or purse. taking a tiny position).
Once you know the answer, wait for those same condi-
• Log the trade details. Date, time executed, time scale
tions to appear the next time and trade like crazy.
used (one- or five-minute scale, daily chart, and so on).
• Is the stock trending? I look for support and resistance For daytraders, you may find that trading in the morning
levels. I check the price trend over the prior one, two, gives better results than the afternoon (or the reverse),
and six months (using the same close-to-close price which is why having this information is valuable. Are
change benchmark). Again, sort performance by the you a better trader using the one-, two-, or five-minute
three periods to determine what conditions work best scales?
for your trading style. Longer-term traders may find that using market-on-
open or close orders gives better fills than trying to
• When is the next earnings announcement? I refrain
daytrade the entry or exit.
from buying a stock within three weeks of the an-
You will also want to log and track these two de-
nouncement. That means I’m on the sidelines during
tails:
any earnings announcements or pre-announcements.
Experience taught me this lesson. {{ Trade type. Is this a daytrade, a swing trade, posi-
Yes, I’ll keep a long-term holding during an earnings tion trade, or buy & hold investment? Sort your
announcement. It doesn’t make much sense to sell just spreadsheet trades by this field and see where you
because company earnings may or may not disappoint are most profitable. You will discover where your
that quarter. If it disappoints, I may use the dip to add strengths are and where you need to spend more
more to a position in a quality stock, because I know time developing your skills. You may find that the
most stocks will eventually recover. fewer trades you place, the more you make. That is,
do you make more money daytrading or investing performance, or highlight that you need to improve
(buy & hold), or something in between? your stock-picking.
You may wish to track the hold time, too. If the • Buy reason. I’ll write a paragraph outlining my reasons
stock doesn’t move within x days/weeks/months, for the trade and what I think the stock will do after I buy.
then look for a better opportunity. You may wish to For longer-term holdings, I’ll jot down how frequently
jot down when the stock peaked during the trade (by insiders are buying or selling the stock, what analysts
looking back, after the trade ends). That informa- think of the company and industry trends, as well as
tion will allow you to determine the optimum hold some fundamental factors, like capital expenditures
time. After making enough trades, you may see a (cap-ex: decreasing is best for year-ahead performance),
trend you can capitalize on. Paired with market, debt level (some is good, too much is bad), and payout
industry, and stock trends already discussed, you ratio (for utility stocks to cover the dividend).
may be able to tell when a trade will work and how
long it’ll likely take before it peaks.
{{ Position size. Are you over-sizing the trade and Closing position
getting nervous about it? That happened to me with By building a spreadsheet contain-
a short-sale daytrade on Intel (INTC). After the ing many of the items discussed in
market closed, I planned the next day’s trade and this article, you can use it to help
decided to short 2,000 shares. Later that night, I tune your performance and make
became nervous. Something was bugging me about the big bucks. Then maybe, just
it. So I cut the size back to 1,000 shares and traded maybe, you can retire from your
it the next day. Turned out I lost money on the trade, day job as I did at 36.
so it was good that I cut my position size.
My computer tells me the correct position size, Stocks & Commodities Contributing Writer Thomas
so I don’t have to crunch the numbers myself. It Bulkowski (who may be reached via email at tbul@hotmail.
scales the trade according to my portfolio size, com) is a private investor and trader with almost 40 years of
market and stock volatility. You can perform the market experience and considered by many to be a leading
same function with a spreadsheet. Just plug in the expert on chart patterns. He is the author of several books
formula that works best for you. including Chart Patterns: After The Buy; Getting Started In
Chart Patterns; and the Evolution Of A Trader trilogy. His
• Scaling in and out. Will you add more shares to the trade? website and blog, www.thepatternsite.com, have more than
Will you sell portions of it? At what price or under what 700 articles of free information dedicated to price pattern
conditions will you take action? I know a daytrader who research.
sells a portion of his shares as soon as the first trade of
the day becomes profitable. Why? Because it helps his Further reading
mental outlook for the remainder of the day. I wonder Bulkowski, Thomas [2016]. Chart Patterns: After The Buy,
what happens if his first trade is a loss. Hmm. Wiley.
• Stop-loss price and target. For short-term trades, you’ll [2005]. Encyclopedia Of Chart Patterns, 2d. ed.,
want to know when to get out both if the trade performs Wiley.
as expected (exit price) and if it doesn’t (stop-loss price). [2014]. Getting Started In Chart Patterns, 2d. ed.,
It’s okay to use a mental stop for daytrades when the Wiley.
action is too quick to place a formal stop-loss order
with your broker. Just be sure to adhere to the mental
stop price.
You should know the stop-loss price and target exit
for all daytrades before placing them.
For longer-term trades, concentrate on where price is
likely to stall at overhead resistance or find underlying
support. If the trade moves in the adverse direction, how
far will it move? To put it another way, at what price will
the market be saying you have made a mistake?
• Relative strength. Is the price performance of the stock
climbing at a rate faster than the general market? I use
that tool to help beat the annual market performance
with my stock picks. Pruning your holdings after a pe-
riodic review (monthly? quarterly? yearly?) can boost

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THE TRADERS’ MAGAZINE SINCE 1982

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