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September 2011
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Some people who have come a long way in their careers, at prematurely into the market action with too large an account, behaviour so well that they will manage to be modest about
some point hit upon the idea of wanting to make big money which carries significant financial risks and above all an their own ego and “skill” – but probably one of the most
in the stock market. Regardless of whether they have been enormous psychological burden. The fact is that people make important requirements for long-term success in this “mother
given a hot tip from friends or have become aware of stocks the most (and in particular, avoidable) errors in the beginning of all games”.
themselves – once you have got your teeth into all this, your and that no professionalisation can start until some time However, there is one sentence that I can recommend
interest in such an “easy” way of making money will soon has lapsed. Everybody must be ready to serve this kind of heartily to each novice trader – regardless of their previous
refuse to go away. However, the whole thing usually has two “apprenticeship” – regardless of their personal success to career and experience: “You’d better lower your expectations
basic snags which considerably affect any chance of success. date. Anyone who sees this as an unnecessary obstacle – when approaching trading, do so with expected returns
First, successful people have too much money. Yes, you resembles, as it were, a blind swimmer and his wallet in a that are realistic (i.e. low).” Admit to yourself that you are
read that right: too much. No matter how successful you shark tank. not a trading god, and let yourself be guided by the goal of
have been in other jobs, the stock market has its own rules Secondly, successful people who have come to trading permanently keeping risks to a minimum. That is half the battle
– and every independent trader must learn them either the after making a career change find it difficult to admit in profitable trading.
easy or the hard way. The easy route is to trade small and mistakes and to be a good loser. In “normal” business life
survive the learning curve with what are in absolute terms they may be able to use wise planning and execution to avoid
small stakes (and losses). The hard way is what people who many mistakes, but in the stock market these mistakes will Good Trading
have been successful so far would much rather do: try to happen and losses are bound to be incurred – that I can
be one of the big players from the very beginning. Based guarantee you. It is therefore necessary to always be aware
on what they have learned in their previous careers and of your fallibility and not take any resultant losing trades
found to have worked there, these people sometimes rush personally. It is not for everyone to reflect on their own Lothar Albert
09/2011 www.tradersonline-mag.com
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08IB11-388
4
TRADERS´ CONTENT
09/2011 September
COVERSTORY STRATEGIES
TOOLS
An Introduction to the
Foreign Currency Market
New Products The Subtle Differences
You Must Know
Bookmark
PEOPLE
Software Review
Robert Rethfeld
The Stock Market Is
65 PEOPLE
Robert Rethfeld 21 INSIGHTS
Odds Enhancers 57 BASICS
A Tool Winners Use Web Review a Huge Jigsaw Puzzle
09/2011 www.tradersonline-mag.com
5
TRADERS´ INFO
traders in Europe and around the world. Current information about technical, mathematical and
psychological aspects of the markets is discussed in professional articles and interviews. Articles Bert Antonik, Mustapha Azeez, Clem Chambers,
Jessica Furseth, Faik Giese, Ralf Kraemer,
Each issue contains articles about trading strategies (for basic, intermediate, and Scott McCormick, Donald McKenzie, Adedoyin
advanced traders), risk management, technology for traders, business issues for Sorounmu, Thomas Stridsman, Brandon Tristan,
Rick Wright
traders, book and website reviews, and much more!
Still today, the trader-elite are interested in professional and current Pictures www.photocase.de, www.fotolia.com
trading knowledge and experience. Dedicated traders have no need for
Price data • www.captimizer.de
buy and sell recommendations. Trading pros make their decisions with • www.esignal.com
self-confidence and are self-sufficient. These people know that trading can • www.metaquotes.net
• www.tradesignalonline.com
be profitable in both bull and bear markets. The question is: what are the • www.tradestation.com
markets,tools and strategies that lead to success? TRADERS´ magazine
addresses this question every month in multiple languages. ISSN 1612-9415
09/2011 www.tradersonline-mag.com
TRADERS´ COVERSTORY
6
Let us directly begin with what as it is called – was primarily an track the S&P 500 stock-market
happened on 6 May 2010, the “internal” crisis of the financial index, and each contract was
day of the Flash Crash. The markets, not a response to equivalent to shares worth a total
overall prices of US shares, and external events. For five months, of around $55,000. The volume
of the index futures contracts large teams from the Securities participation algorithm calculated
that are bets on those prices, fell and Exchange Commission the number of index futures
by about 6 per cent in around (SEC) and Commodity Futures contracts that had been traded
five minutes, a fall of almost Trading Commission (CFTC) over the previous minute, sold
unprecedented rapidity. Overall researched what had gone wrong 9 per cent of that volume, and
Part 2: Algorithmic Trading prices then recovered almost in great detail, ploughing through kept going until the full 75,000
as quickly, but gigantic price terabytes of data. While some had been sold. The total sell
09/2011 www.tradersonline-mag.com
TRADERS´ COVERSTORY
7
exploit discrepancies between only around 200 contracts. By
the price of index futures and the 2.45 and 27 seconds, the price
price of the underlying shares. of index futures had declined
A large sell order in the index by more than five per cent from
futures market will often create its level four and a half minutes
just such a discrepancy, which earlier. The market had entered
can be profited from by buying a potentially catastrophic self-
index futures and selling the feeding downward spiral.
underlying shares.) Algorithmic
trading was still in the benign Five Seconds to Turn It Around
zone that it occupies most of the Fortunately, though, the
time: electronic market makers electronic trading platform on
and arbitrageurs were “providing which these index futures were
liquidity”, as market participants being bought and sold – the
put it, making it possible for the Chicago Mercantile Exchange´s
volume participation algorithm Globex system – is programmed
to do its intended large-scale to detect just such a spiral. Its
selling. “Stop Logic Functionality” is
However, high-frequency designed to interrupt self-feeding
traders usually program their crashes and upward price
algorithms to be “market neutral”, spikes. A “stop” is an order that
in other words to insulate their is triggered automatically when
trading positions from fluctuations prices reach a preset adverse
in overall market levels. From level. Buyers of index futures,
around 2.41 p.m., therefore, those for example, will sometimes F1) S&P 500
algorithms started to sell index try to protect themselves from
futures to counterbalance their catastrophic losses by placing
purchases, and the electronic stop orders that will sell those
Donald MacKenzie index futures market entered a futures if their prices fall below
spasm. One algorithm would a given level. However, these
Donald MacKenzie is a sell futures to another algorithm, sales can potentially begin a
professor of sociology at which in its turn would try to sell cascade, causing further price
Edinburgh University. His them again, in a pattern that the falls which in turn trigger further
books include “An Engine, SEC/CFTC investigators call “hot stop orders. The goal of the Stop
Not a Camera: How Financial potato” trading. In the 14-second Logic Functionality is to halt this
Models Shape Markets” period following 2.45 and 13 process by giving human traders
and “Material Markets: seconds, more than 27,000 time to assess what is happening,
How Economic Agents Are futures contracts were bought step in and pick up bargains. A medium-term chart of the S&P from March to September 2010. The
Flash Crash was followed by a rallye which in turn was sold off to new
Constructed”. and sold by high-frequency At 2.45 and 28 seconds, the lows in late May and June/July.
algorithms, but their aggregate price falls triggered Globex´s Source: www.tradesignalonline.com
net purchases amounted to Stop Logic Functionality, and it
09/2011 www.tradersonline-mag.com
TRADERS´ COVERSTORY
8
imposed a five-second pause simply to have worried that there Abolafia documented in Making
in trading. It worked. As Alison was a technical fault, such as Markets (1997), in general such
Crosthwait of Instinet (one of the corruption of the incoming data opportunism was held in check,
oldest electronic trading venues) feeds that carry price information. not just by the formal rules but by
told the readers of an internet Orders were cancelled on the presence of informal norms
discussion forum hosted by the a massive scale and no among people who interacted
TABB Group, the five-second replacements posted. In the case with each other face to face day
pause “provided ample time for of some corporations´ shares, the in, day out, year after year.
market participants to consider market effectively ceased to exist. These delicate social
their positions and return to the ecosystems have not survived
market or not, depending on Behind the Scenes the transition to fully electronic
the conclusions they reached … The world of human trading that trading. Market makers´ privileges
[It] allowed market participants algorithmic trading has largely have largely vanished: for
to regain confidence.” Their replaced had at its heart a subtle instance, you do not now need
purchases stopped the compromise. To be a market to be a market maker to get fast
downward spiral of the price maker on the steps of Chicago´s access to the New York Stock
of index futures when trading raucous open-outcry trading Exchange´s “book”, you need
restarted five seconds later. pits or in the marble-walled main only pay for what is called “level
But the crisis was not yet trading room of the New York two” access and to rent a few
over. Index arbitrage and other Stock Exchange conferred certain racks at Mahwah to ensure that
mechanisms tie the index privileges. Unlike other market the data arrive with minimal
futures market intimately to the participants, a New York Stock delay. Their obligations have
underlying stock market, and by Exchange “specialist” (as the been reduced commensurately,
2.45 p.m. the latter was largely exchange´s official market makers though some traces still linger: for
paralysed. High-frequency trading were called) could see the “book” example, official market makers F2) Accenture
systems are often programmed of buy and sell orders that had are still obliged to quote a price
to cease operating if unusually not yet been executed. In return at which they would buy and a
large price movements occur, and for this considerable advantage, price at which they would sell the
other systems are monitored by specialists were required to keep shares in which they are making a
human beings who have what is trading going, even in the event market.
in effect a large red stop button of a considerable imbalance
on their screens. Throughout between buy and sell orders, $0.01 and $99,999.99 –
the United States the automated by using their own capital to fill How Come?
systems stopped and the red the gap, all the while adjusting Pushing the red button on an
buttons were pushed. Some prices until the imbalance official market maker´s system,
market participants told the SEC/ disappeared. Market makers therefore, did not entirely remove
CFTC investigators they had been in both Chicago and New York the bids to buy and offers to
scared that the price falls meant sometimes overstepped the line, sell, but reduced the bids to Accenture went straight down to 0.01 during the Flash Crash. The
most extreme trades were cancelled afterwards.
some catastrophe had occurred, opportunistically exploiting their the lowest possible price that
but that somehow they had not privileged positions. However, could be entered into electronic Source: www.tradesignalonline.com
heard about it. Others seem as the sociologist Mitchel trading systems (one cent),
09/2011 www.tradersonline-mag.com
TRADERS´ COVERSTORY
9
and increased the offers to financial damage limited. It is computer systems recalibrating
the maximum possible price not even likely that Waddell & themselves: we do not ordinarily
($99,999.99). These “stub quotes” Reed – if indeed it was their talk of computers “considering”
allow market makers to fulfill their volume participation algorithm things and “regaining confidence´.
formal obligations, while being that sparked the flash crash – This is a situation that in the
so hopelessly unattractive that lost overwhelming amounts. terminology of the organisational F3) Sotheby‘s
under normal circumstances The algorithm simply kept going sociologist Charles Perrow is one
no one would ever want to take through the turmoil – algorithms, of “tight coupling”: there is very
a market maker up on them. after all, do not panic – and finally little “slack”, “give” or “buffer”,
In the case of several stocks, completed its 75,000 sales at and decisions need to be taken
however, the evaporation of the 2.51 p.m. By then, futures prices in what is, on any ordinary human
market by around 2.45 p.m. was were already well on the way scale, a very limited period of time.
so complete that stub quotes back up, thus limiting the losses It takes me five seconds to blow
were the only ones left. In caused by the algorithm selling at my nose.
consequence, “market orders” temporarily very low price levels. With the rise of electronic
(orders simply to buy or to sell Despite the modesty of the trading, the stock market
at the best available price) were losses incurred, many market (especially in the US) has become
executed against stub quotes, participants and regulators a system, and it is one of at
hence Accenture´s price of a cent found the flash crash deeply least moderate complexity. True, Sotheby‘s went to 99,999 but those trades were cancelled.
and Sotheby´s of $99,999.99. unnerving, and they were right there is nothing too dreadfully Source: www.tradesignalonline.com
to do so. What troubles us complicated about trading
The Way Back Up most about the episode is not on any one exchange. The
The recovery was gradual, something that happened, nor programs controlling Globex
although largely complete by even something that was said, were, in consequence, perfectly F4) Daily Lows for Individual Stocks on 06 May 2010
3 p.m. It seems to have been but something that was not said. able to detect a dangerous
led by futures prices on Globex Alison Crosthwait´s posting elicited condition and pause trading
stabilising and then rebounding only five comments from other accordingly. However, while the
after the five-second pause. TABB forum members, and none Chicago Mercantile Exchange
Traders began to spot what disagreed with her judgment that has a dominant position in the
appeared to be extraordinary five seconds was “ample time for trading of “derivatives” such
opportunities, although they were market participants to consider as index futures, the traditional
later often to be disappointed their positions”. She was certainly stock exchanges such as those
when exchanges cancelled right to identify the triggering of in New York and London have
sales at a cent and purchases at the Stop Logic Functionality as the been losing business rapidly
$99,999.99 on the grounds that turning point, and the stabilisation to other electronic trading
they were “clearly erroneous”. of futures prices after the five- venues. There are now some
In fact what had happened second pause shows that she was 50 such venues on which US
was largely that trading had correct: five seconds was enough shares are traded, and they do Many stocks dropped by more than 99 per cent to a few cents. Such
extreme movement can be explained by algorithmic trading only.
effectively stopped, so the time. But bear in mind that she not operate in isolation. They
sums of money lost (and made) was talking about human beings are tied together by algorithms Source: CFTC, SEC, Thomson Financial Datastream, NYSE
were only modest, and wider coming to decisions and not exploiting discrepancies in
09/2011 www.tradersonline-mag.com
TRADERS´ COVERSTORY
10
prices circulating among them, can predict what will happen it takes time to work out what heads at both ends that wanted recovering, but governments have
and also by the rules imposed when something new is added to has happened and to act to go in both directions at once)”. not dealt with the systemic flaws
by the Securities and Exchange it, no matter how much vetting is appropriately. Tight coupling Perrow´s theory is just that, a that led to the crisis, such as the
Commission, which for decades done.” If Wunsch is correct, there means that one does not have theory. It has never been tested combination of banks that are
has been trying to fuse the is a risk that attempts to make the that time. Moreover, he suggests, very systematically, and certainly too big to be allowed to fail and
diverse exchanges of the US into system safer – by trying to find a tightly coupled system needs never proved conclusively, “shadow banks” (institutions that
a National Market System. The mechanisms that would prevent a centralised management, but a but it points us in a necessary perform bank-like functions but
SEC requires, for example, that repetition of last May´s events, for highly complex system cannot direction. When thinking about are not banks) that are regulated
brokers do not simply execute example – may have unforeseen be managed effectively in a automated trading, it is easy to too weakly. Share trading is
their customers´ orders at their and unintended consequences. centralised way because we focus too narrowly, either pointing another such system: it is less
preferred venue, but look for simply do not understand it well complacently to its undoubted tightly interconnected in Europe
the most favourable prices (the The Complexity Issue enough; therefore its organisation benefits or invoking a sometimes than in the United States, but it
“national best bid and offer”, as Systems that are both tightly must be decentralised. Systems exaggerated fear of out of control is drifting in that direction here
those prices are called). As Steve coupled and highly complex, that combine tight coupling computers. Instead, we have to as well. There has been no full-
Wunsch, one of the pioneers of Perrow argues in Normal with high complexity are an think about financial systems as blown stock-market crisis since
electronic exchanges, put it in Accidents (1984), are inherently organisational contradiction, a whole, desperately hard though October 1987: last May´s events
another TABB forum discussion, dangerous. Crudely put, high Perrow argues: they are “a kind of that kind of thinking may be. were not on that scale. But as yet
US share trading “is now so complexity in a system means Pushmepullyou out of the Doctor The credit system that failed so we have done little to ensure that
complex as a system that no one that if something goes wrong Dolittle stories (a beast with spectacularly in 2007-8 is slowly there will not be another.
09/2011 www.tradersonline-mag.com
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12
TRADERS´ NEWS
09/2011 www.tradersonline-mag.com
13
TRADERS´ NEWS
Why Indian Banks Are in Weak Form Citadel Ends Plan to Be Market Maker in Treasuries
The Reserve Bank of India (RBI) hiked short-term lending and borrowing rates sharply by 50 basis points for the third time Hedge fund Citadel‘s securities arm appears to have abandoned plans to
in three months to tame high inflation, a move that would make all personal and corporate loans more expensive. The repo become a market maker in treasuries, prompting the company to eliminate
rate has been hiked by 0.50 per cent to eight per cent and the reverse repo rate has been hiked by 0.50 per cent to seven several jobs, two people familiar with the matter said. The Chicago-based firm‘s
per cent. The CRR remained unchanged at six per cent. The hike is likely to further dampen the demands for home and car Citadel Securities unit already acts as a market maker for stocks and options, and
loans which are already the lowest in recent months. The RBI has also revised its fiscal-end inflation projection to seven had been mulling plans to branch
per cent from six per cent earlier. Despite good monsoon and price moderation, risk to food inflation still remains. This is out into treasuries for several months
the 11th time since March, 2010, that the RBI has raised the interest rate to check inflation, which is currently ruling at over but recently decided to redirect
nine per cent. The Marginal Standing Facility rate, determined with a spread of 100 basis points above the repo rate, stands its resources. A small number of
recalibrated at nine per cent with immediate effect. Due to increase in key interest rates for controlling inflation, Indian employees were working on the
Banks are more weaken and not to enter situation for investors. project in the firm‘s New York office
Source: www.ibnlive.in.com and the people departed in the last
weeks, a person familiar with the
matter said. A spokeswoman for Citadel declined to comment. The decision to
shelve the plans further illustrates the difficulties the unit has faced in the last
years as smaller sized brokerage firms are being squeezed on prices and market
It Is Official: Computerised Trading Agents Do Beat Humans in Foreign Exchange Markets conditions remain uncertain. Eager to capitalise off its powerhouse position
where the fund oversaw more than $20 billion at its peak before the financial
Robot trading agents, which already dominate the foreign exchange markets, have now been definitively shown crisis, founder Kenneth Griffin had long hoped to build an investment bank to
to beat human traders at the same game. Results presented at a conference July 22 showed beyond doubt that rival East Coast heavyweights Goldman Sachs and Morgan Stanley and went on
computerised trading agents, using the Adaptive Aggressiveness (AA) a hiring spree. But turnover has always been high at Citadel‘s various units and
strategy developed at the University of Southampton in 2008, can many people initially hired for the unit are no longer there.
beat both human traders and robot traders using any other strategy. Source: www.reuters.com (Reporting by Svea Herbst-Bayliss, editing by Bernard Orr)
The new results were obtained after a re-run of the well-known IBM
experiment (2001) where human traders competed against state-of-the-art
computerised trading agents – and lost. Ten years on, experiments carried
out by Marco De Lucas and Professor Dave Cliff of the University of Chinese Economic Growth Remains
Bristol have shown that AA is now the leading strategy, able to beat both Faster than That of Western Nations
robot traders and humans. The academics presented their findings at the
International Joint Conference on Artificial Intelligence (IJCAI 2011), held in China‘s trade surplus continued to grow in June, even as the export powerhouse‘s
Barcelona. Dr Krishnan Vytelingum, who designed the AA strategy along manufacturing sector slowed slightly. China recorded a $22.3 billion surplus in
with Professor Dave Cliff and Professor Nick Jennings at the University of June, up from a $13.05 billion surplus in May. A trade surplus occurs when a
Southampton in 2008, commented: “Robot traders can analyse far larger country‘s exports outnumber its imports. China is the world‘s second largest
datasets than human traders. They crunch the data faster and more efficiently and act on it faster. Robot trading is economy and the second largest trading partner of the United States, after Canada.
becoming more and more prominent in financial markets and currently dominates the foreign exchange market with But as China‘s economic growth has far outpaced sluggish growth in the U.S.,
70 per cent of trade going through robot traders.” Professor Jennings, Head of Agents, Complexity and Interaction it has tried to encourage more domestic consumption and place less emphasis
research at the University of Southampton, commented: “AA was designed initially to outperform other automated on exports. Export growth in China has been surging, but recently it has slowed
trading strategies so it is very pleasing to see that it also outperforms human traders. We are now working on slightly. In June, exports totaled $162 billion, up 17.9 per cent year-over-year. China
developing this strategy further.” offers better long-term investment opportunity for investors.
Source: http://www.sciencedaily.com Source: www.money.cnn.com
09/2011 www.tradersonline-mag.com
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TRADERS´ INSIGHTS
Where Smart Traders Find an Edge who have to deal with trading in
and out of vast positions without
looking like a fat whale to be torn
A clear example of this occurred
in public glare when SG had
to close rogue trader Jérôme
to pieces by trading charts. Kerviel’s huge positions. They
The hardest thing to do in trading is to trade the very short term. Instead, jumping on a trend is the favoured trading Imagine you are a pension are on record as saying they sold
mechanism because it is a longer term trading technique. In addition it can appear successful for as long as the fund, with several billion in out his positions at ten per cent
trend runs and the counterbalancing comeuppance generally manifests itself as a savage drawdown at the end of equities, which needs to sell a of the market’s volume that day.
a long period of success. This allows proprietary trading outfits to take periodic cuts of the trend following profits. little of one of its big positions. As such, ten per cent was the
The almost inevitable bad news for their clients comes in one nasty hit at the end of the exercise, after the income Say that is £100m. That lump maximum extra selling pressure
to the trader has been extracted along the length of the trend. Trend following therefore often masks the true cannot be sold in one go, not in they felt they could exert without
probabilities of risk/reward. an hour, not in a day, perhaps crushing the market.
not even in a week. If the If a selling robot was to run wild
position is big enough, and let us it would crash the price. Crashing
say the company whose shares the price is easy. The flash crash
are being sold is not a giant, it is an example of how a rogue
might take a month or two. Of trading robot nearly wiped out
course you could unload in a the whole US equity market
hurry, but that would hurt the with ‘allegedly’ only $4 billion
price. Clearly the seller does not of trading volume. A few billion
want to do that. dollars of trade, in moments,
So the broker will sell a certain wiped out literally trillions of
percentage of the on-going dollars of value. However,
volume of the daily market flows efficient market hypothesis tells
and chip away at the block of us the price will snap back and
stock until it is gone. Depending it did; but for a moment there, a
on market conditions, the broker small amount of capital had a big
is trying to be as invisible as negative effect for a short window
possible to all the other players. of time.
Giving away the scale of a large
order invites other traders to sell Fixing Market
and sit back and watch the price Inefficiencies for a Profit
drop away. Getting spotted as a This is what “market structure”
big seller opens the door for other is all about. Market structure is
traders to legally “front run” that where smart traders look for their
15
TRADERS´´ INSIGHTS
TRADERS
09/2011 www.tradersonline-mag.com
17
TRADERS´ INSIGHTS
Trading Success hordes of people with seemingly long as you do your best in doing
Is only by Choice easy money during bubbles and what is right while trading, you can
Trading success is not made by other mad rushes – only to take be confident that your long-term
dreams that you dream but by it back from them again. If you survival is sure.
the choices that you make. Some are really desperate to be a great We would examine further
people take years to discover trader, then you would need to trading myths in this article,
just a portion of what I constantly approach the markets with the including the ones that have to
reveal in my articles. Longevity same amount of seriousness and do with people’s attitude towards
and safety of trading accounts are persistence with which you would trading systems.
far more important than overnight approach any high level of human
profits. The market does not endeavour. You cannot afford to Myth #2:
owe anybody immense wealth. fail to bring yourself in harmony Trading is gambling, and therefore
It would intermittently entice with trading ideas that work. As I am going to quit trading.
09/2011 www.tradersonline-mag.com
18
TRADERS
TRADERS´
TRADERS´
TRADERSSTRATEGIES
TRADERS
´ STRATEGIES
´ INSIGHTS
09/2011 www.tradersonline-mag.com
19
TRADERS´ INSIGHTS
good trading foundation for He always gives impression those who have made millions things’ to do, it is more likely that mean that every other person is
yourself will go a long way in that he knows very much about (even billions) of dollars from they would end up with average failing. If some had been led to
making you successful. trading, and the best thing is that trading. They have been surviving or mediocre results in whatever their downfall, it does not mean
Experienced traders go for people should stay away from it. on the markets for many years. fields they choose. Please think that there are not those who are
small and consistent profits, There are many people like this These experts once faced of any professions or areas of being led to victory. If you do
whereas gamblers use dangerous around, whose mission is to warn challenges in trading, but they business, some would try them not know those who succeed in
position sizing, dreaming of people against trading. They like went ahead and overcame the and fail; some would try them trading, I will tell you confidently
making it big or striking it rich in to discourage people because challenges. and succeed. Such is life. Many that they exist. Some people
one easy stroke. This gamblers’ they have done it and failed or Therefore, the easiest way to desire extraordinary success, failed and they decided to quit
fallacy usually leads to margin because they know someone identify a trading ignoramus or a but are unwilling or too lousy to trading forever. Others failed and
calls or huge drawdowns who did it and failed. The feel novice is that the person would make the necessary commitment, decided to move on; learning
whenever the markets go against they know about trading. They try to discourage you from trading sacrifices and exercise enough from their mistakes. Misinformed
them. Imagine that someone are never going to do it and they and ask you to find better things perseverance to attain their opinion has no effect on the
who was not adequately trained are telling others the reason why to do. A novice discourages goals. Without spending enough financial markets.
(especially in effective risk they should not do it. others because she/he does not time, energy and resources,
management) loses his hard- There are some who do not know the secret to successful dreams will only be dreams, not Myth #3:
earned money. And since then, even know how to set up a trading and she/he has given up. achievements. It takes some rare The markets are predictable.
whenever he hears anyone trading platform, yet they have Normally certain people would secrets to be a master of any Another similar myth: Trading
mentioning anything about strong opinions against trading. not come to trading if they had walk of life. systems and advanced analyses
trading, he warns the person On the other hand, successful another means of attaining If any person threatens to predict the market accurately.
never to try it. He likes to tell trading experts will not tell you financial freedom. In fact, in most quit trading, it has no effect on Fact: Effective trading beliefs are
others that he had done trading this. Successful trading experts cases, you have more to lose anybody. As far as the trading based on long-term observations
before and he lost his investment. will never berate trading. I know by not doing anything. To be a world is concerned, no-one of the markets. Serious
professional in anything – in any is indispensable. The trading endeavour has also been made
walk of life whatsoever, you have world will continue to grow to study the trading strategies of
How Do You React to Your Trading Results? to be in the top 10%. No matter bigger and bigger, in geometrical successful traders, and what a
what your field is, all the money progression. For one person that majority of them have in common.
is being made in the top 10% of quits trading, ten persons are Most of their timeless principles
Do you have a realistic trading goal? What do you want out of trading? Do you have reasonable
expectations or do you fantasise about things that may be beyond your ability and trading
that field. That is why the top 5 ready to start trading. For one have been mentioned tirelessly.
realities? Wise traders do not pursue unrealistic goals. They, therefore, try to be content with to 10% of the world makes more person that leaves the United On of them is “cut your losses
whatever profit they have. As long as their trading portfolios are safe, they are satisfied with money than the rest of the 90 to States, a hundred people want to short and let your profits run”
any increment they have on it. In a letter to his son Eduard, Albert Einstein gave his advice: 95% combined. enter. The financial markets are (a golden rule). Traders keep
“Life is like riding a bicycle. To keep your balance you must keep moving.” If you test a good All the money is in the top. If like China; it does not know that on looking for magical trading
trading system and see that you are still ahead after several months of practice, no matter you tried to avoid realities by someone is leaving. systems that can make them right
how small the profit is, why cannot you then go live? Your strategy is most likely to work as
avoiding trading, the realities Furthermore, the fact that most of the time.
it did in the past. This does not mean you would not have losses; but it simply means you
would be able to preserve your trading capital. Therefore you need to work seriously on would eventually face you somebody or any group known Your success has nothing to
your trading mindset rather than blaming your trustworthy system. The problem lies with somewhere else. So some are failed in trading does not mean do with your knowledge of what
the trader, not the trading system. In spite of alternating losing and winning streaks, a skilled misguided when they think there that trading does not work. It is happening in India or Ghana;
trader remains effective because he patiently handles every situation, faithfully keeping at his are better things to do. Given works for those who know and neither does it have anything to
trading rules in the face of occasional and transitory disappointments. the challenges and competition apply effective trading principles. do with any forms of technical
they would face in those ‘better Somebody’s failure does not analyses whatsoever. The
09/2011 www.tradersonline-mag.com
20
TRADERS´ INSIGHTS
only purpose for possessing a of those who lose money by trading signals and the first two
trading system or doing market trying to predict the markets, signals lose, they become mad.
analyses is simply to have the notion that the markets can But what if I display my losing
reasons for entering a trade; be predicted is intellectually trades and winning trades, plus
it has nothing to do with your unsatisfactory. how I still survive? Then if people
survival. Unguarded strength is In addition, thinking that the ask me for signals, they would
double weakness. No trading markets are predictable is even not get furious after two or three
methodology or system on earth more dangerous to your trading losses because they have seen
can survive without effective mindset because you would how I display losses with profits
risk management, plus our long- not want to get out of a trade if and they know our profits would
term success has nothing to do you are wrong, since you may soon outgrow those losses.
with the accuracy of our entries, feel that the market may soon The purpose for trading is not
it lies in our exits. reverse; which may not happen. to avoid losses, but to make
Let me remind you that Dr. You do not need to predict the more money than is lost. You do
Van K. Tharp forecasts that a markets before you can make not need a complicated strategy
sequence of six trades with a hit consistent profits. We trading to achieve this; a simple and
rate of 17% remain profitable, analysts are only humans, only straightforward trading idea may
provided the five losses are that we use complicated trading be fine. However, vendors would
limited to 5 x (-1R) = -5R, and the jargon to impress. One thing that always be pushing complicated
winning trade amounts to 10R. is abject (and which would no strategies to traders as the
Conversely, I would say that a doubt, continue) is the fact that solution.
sequence of six trades with a most professional analysts like to
hit rate of 83% remains a losing create impression that they know Conclusion
strategy if the five profits are what the markets would do in the There will be challenges in your
limited to 5 x (+1R) = +5R, and future. It does not matter whether trading life that will separate you F2) The Markets Are Predictable...
the losing trade amounts to -10R. the person is talking on the most from your trading goals only
This golden rule makes perfect respected trading news program if you allow them to. Trading
judicious and logical sense but on earth. How many of us can success is not the birthright of a
our wrong mental biases always mention with certainty when we privileged few. Trading success
make us go against it, doing its are going to die, where we would is for me, trading success is for
exact opposite. This basic truth is die and what would be the cause you. Trading success is for those
not attractive to most traders who of our death? who need it, and for those who
feel that right entries are what We predict the market and are currently losing. It is for those
are needed for survival on the continue predicting, but we may who have given up trading, and
markets. Yes, experience is the not show our personal trading for those who are yet to start
best teacher. results. Novices are angrily forlorn trading.
Most people would not because they think gurus do not The message is clear: Trading
learn their lessons until they lose. If I say I make 300 pips last success is for everyone. The next “The Markets are predictable” is another popular trading myth. But the
truth is: Effective trading beliefs are based on long-term observations
have learned through harsh month, some trading rookies may article in this would expatiate on of the markets.
personal experiences. Given say: ‘Hey, that is the geek who the right attitude towards trading Source: www.fotolia.com
the significant percentage does not lose!” If they ask me for strategies.
09/2011 www.tradersonline-mag.com
21
TRADERS´ INSIGHTS
09/2011 www.tradersonline-mag.com
22
TRADERS
TRADERS´
TRADERS
TRADERS´
TRADERSSTRATEGIES
´ STRATEGIES
´ INSIGHTS
In this issue we will look at the loss and move on! Basically
using the Stochastic Indicator it is sound advice and it is good
to help you determine where advice. It is the right thing to do
opportunities exist to enter or when you have done everything
scale into a position. But be a properly educated trader would
forewarned, if you have been do. The catch is the difference
using a stochastic indicator between theory and practical
according to a market theory application.
approach, the following very Properly educated traders
simple practical application may understand market structure on a
shock you. chart and listen to what the chart
To begin you must first is saying. They are the traders
abandon the idea of overbought who are or at least trade like
and oversold. As a matter of professionals. They do not blindly
practical application, if your apply theory. They consistently
trading platform allows it, rank in the top five to ten percent
remove all default horizontal because they know the difference
lines (typically 80 overbought, between theory and practical
20 oversold and maybe 50 mid) application.
from the indicator display pane. Compare the difference and F1) Stochastic(5,3,5) Indicator Applied to Price Chart
Why? Because the market wants see the results for yourself. Most
to make you believe that you any description on how to use the
should sell when an overbought stochastic indicator will tell you to
condition exists and buy when buy or sell based on entering and
an oversold condition exists. Isn’t exiting oversold or overbought
that what all the market theory levels. I do not need to go into the
Bert Antonik books teach? But, don’t you details here.
know for a fact that when the Based on market structure,
Mr Bert Antonik is a retired stochastic indicator on a chart try this practical application
US Navy Commander and shows an overbought condition approach.
senior instructor for Online price often continues to rise?
Trading Academy who brings And, price often continues to fall • When in an uptrend and %K At point “0” price entered a prior established Demand Zone and the
Blue Stochastic % K (faster moving) crossed above the Red % D. At
over three decades of trading when the stochastic indicator crosses above %D look for point “A” the chart confirms a new uptrend based on the change in
rotation of “Impulse & Corrective” moves and reaction to the prior
knowledge and experience to displays an oversold condition. an opportunity to go Long established Demand Zone. “A - 1 through 8” identify alerts to potential
his classroom presentations. How can that be? And, how is it / Buy no matter where the buying opportunities. Look for pull-backs for better entries. Then,
price entered a prior established Supply Zone and the Blue Stochastic
For more information, go to: explained in market theory? cross occurs and ignore %K % K (faster moving) crossed below the Red % D. At point “B” the
http://www.tradingacademy. We all know that no indicator crossing below %D. I can chart confirms a new downtrend based on the change in rotation of
“Impulse & Corrective” moves and reaction to the prior established
com/about-us/instructors/ is perfect. No indicator is “the hear the market screaming Supply Zone. “B - 1 through 4” identify alerts to potential Selling
opportunities. Look for pull-backs for better entries.
Bert-Antonik.aspx one” that works all the time. So at you. Do not buy when the
therefore market theory teaches stochastic indicator is showing Source: www.tradestation.com
the acceptance of failure. Accept overbought!
09/2011 www.tradersonline-mag.com
23
TRADERS´ INSIGHTS
• When in a downtrend and %K In the following example, the “Impulse & Corrective” moves
crosses below %D look for time period and price scale and reaction to the prior
an opportunity to go Short have been purposely removed established Supply Zone.
/ Sell no matter where the because time frame and price do • “B - 1 through 4” identify
cross occurs and ignore %K not matter. This is a guide to help alerts to potential Selling
crossing above %D. Again, I clarify the concept. opportunities. Look for pull-
can hear the market screaming backs for better entries.
at you. Do not sell when the Chart Analysis (See Figure 1):
stochastic indicator is showing • At point “0” price entered a Notes
oversold! prior established Demand 1. The Stochastic(5,3,5)
Zone and the Blue Stochastic parameters are not set in stone!
My question is, why not if % K (faster moving) crossed Readers are encouraged to
the trend is my friend and I above the Red % D. test for best results based on
am also told to always trade • At point “A” the chart confirms the financial instrument being
with the trend until it comes to a new uptrend based on traded.
an end? Shouldn’t we let the the change in rotation of 2. Be aware of Divergence
market confirm the end of the “Impulse & Corrective” moves between the indicator and price
trend before going against it? Or and reaction to the prior movement.
better yet, use Supply & Demand established Demand Zone. 3. When / if scaling in or out
Market Timing to anticipate the • “A - 1 through 8” identify remember to update stops to
change in price direction. alerts to potential buying account for the changes in
opportunities. Look for pull- positions.
• When in a sideways non- backs for better entries. 4. Adjust the stop to create a free
trending market avoid this • Then, price entered a prior trade and protect gains along
approach until a trend is established Supply Zone and the way.
recognised. the Blue Stochastic % K (faster 5. After an alert use a pullback to
• Always use a stop placed at moving) crossed below the re-enter if you got stopped out.
the technical stop level (last Red % D.
significant price pivot) and • At point “B” the chart confirms In the next issue, Odds
enter the trade based on risk a new downtrend based on Enhancers will focus on
tolerance. the change in rotation of identifying the “Hard Numbers”
to improve results. Every
day, in every aspect of our
Info lives, both consciously and
subconsciously, we make
Odds Enhancers are Technical Analysis Techniques used by Market Timing Traders who
decisions based on Hard
focus on the fundamental law of Supply & Demand in order to make High Probability, High Numbers. Why not apply the
Reward and Low Risk trades. (For more information on “Market Timing Trades based on same approach when trading?
Supply & Demand go to OnlineTradingAcademy.com) Be sure to watch for next
months Odds Enhancer to grow
your trading account.
09/2011 www.tradersonline-mag.com
The Future of System Development – Part 3
09/2011 www.tradersonline-mag.com
27
TRADERS´ INSIGHTS
price of the market as it was at line was down, indicating that certain of the direction of the next
any particular point in time, while Crude oil was mostly trading in roll. Naturally, the actual prices
the blue curve shows the back- backwardation. Not until early of the two contracts about to be
adjusted prices. Notice that both 2009 did the Crude oil shift to rolled should also give you a clue F2) Crude Oil Adjusted vs Original
curves end at the same price, a net contango market when several days before the roll will
but that the blue series start at viewed over its entire lifespan. take place.
approximately twice the price of The blue line ends at a value of If you are in a long position
the red series (60 vs 30). This is approximately 30, which is equal over a roll and with the market in
because all the contango and to the starting difference between backwardation you’d be selling
backwardation differences have the red and the blue lines in the old contract high and buying
been removed from all the contract Figure 2 (= 60 - 30). the new contract low. Reverse
rolls for the blue curve. the reasoning for
With the sum of all the short positions and
contango rolls being
larger than the sum of As long as a market contango situations.
Thus, for as long
all the backwardation
rolls, the blue curve is in backwardation as a market is in
backwardation it is Two historical price curves of the Crude oil market. The blue curve is
it is profitable to remain
the back-adjusted data we normally use when building systems. The
has been shifted profitable to remain red curve shows the original prices as they actually appeared at any
particular point in time.
upwards. long over as many
However, even
though the blue curve long over as many rolls as possible, but
short over as few
Source: TradingBlox
09/2011 www.tradersonline-mag.com
28
TRADERS´ INSIGHTS
add additional information to the system code so that you can markets in each group, so that
each data file for even more do correlation studies on the fly, we stay away from the weakest
complexity and advanced dynamically altering the markets markets within each group, only F4) Is the Direction of the Roll Predictable?
systems. At the bottom right of that are the most correlated with trading those that should have
Figure 1 you can see that the the market you are currently the highest success rate given
British Pound belongs to two trading. In this case, the closely the momentum filter. The markets
Groups: the Financial group correlated markets to the British used for this system will belong
and the Currency group. This Pound are the same as those that to the 7x7 Tradables group, which
is information that you type in belong to the Currency group. means we will have seven groups
yourself for all markets, which Figure 5 shows the portfolio with seven markets in each group
then remain constant and editor in Trading Blox. The to test on. The groups are divided
unchangeable by the system checked markets belong to the as: Currencies, Interest Rates,
code. Below the two groups you portfolio “7x7 Tradables” and Equity Indexes, Metals, Energies,
can see the ticker symbols for a two of the columns contain Agriculturals and Miscellaneous.
few other markets within the text information for which two groups We will start by risking 0.2 per
boxes designating markets that each market belongs to. For this cent per trade.
could be regarded as closely and article we will look at a simple To start let us look at the results The relationship between the point value of each roll to the point value
of the previous roll for Crude oil. A serial correlation value of 0.71
loosely correlated to the Pound. breakout system, combined with for the unrestricted breakout indicates that the direction of the next roll is fairly predictable.
You can manipulate this data in a momentum filter applied to the system, which allows all market to Source: TradingBlox
trade at all times. For this system
the annual return comes out to
15.75 per cent, with a Sharpe ratio
TRADERS´ is a premier publisher of trading
magazines for the financial markets. Our vision of 1.04 and a max drawdown of F5) TB Portfolios
is to offer an international platform for industry 20.1 per cent. The equity curve is
professionals and serious traders alike. also fairly straight (not shown). The
Freelance Authors total number of trades was 7828.
Figure 6 and 7 show how
the Sharpe ratio varies with
Your Point Of Entry To Finance and Media Industry the look-back period for the
Please send your application via e-mail to: jobs@traders-mag.com momentum filter and the number
of markets allowed to be traded.
It is apparent that the longer the
Ideally you should be a practical trader and have considerable knowledge of technical analysis filter and the more markets we
and all the related subjects like risk and money management, trading software, trading systems are allowed to trade, the higher
and trading psychology. You will work from home, on your own time-schedule and submit the Sharpe ratio. Unfortunately,
articles at specified deadlines. this indicates that this particular
system and filter combination is
not a good one. However, for the In the Trading Blox’ portfolio editor you can get an overview of which
groups the markets belong to, and create multiple portfolios for testing.
purpose of this article let us come The 7x7 Tradeables group contains seven markets from seven sectors.
www.traders-mag.com up with some reasonable filter Source: TradingBlox
settings to see what they yield.
09/2011 www.tradersonline-mag.com
29
TRADERS´ INSIGHTS
Let us set the look-back filter to the momentum filter could have understand that the expected
ten days and the strength filter to been different or set to operate outcome from each trade is
four markets. at different look-back periods. random, but over a large number
With the filter in place the There are also many more ways of trades the average profit per
annual return comes out to 13.02 the trading could be limited. For trade is likely to be positive. That
per cent, while the Sharpe ratio example, we also could have is, trading futures systematically
lands at 0.98. Both these values exited a trade if the market lost is a game of randomness
are still good but slightly worse its strength relative the other with a positive mathematical
than for the original system. We markets, dropping out of the expectancy. Therefore one is
did however manage to improve highest-strength category. We usually better off not limiting the F6) Sharpe as Long Period (days) Varies
the max drawdown by nudging it even could have built a system number of trades produced by
down to 18.7 per cent. The total based on nothing but relative the actual system, as there is no
number of trades was 6582. strength within the groups, way to know beforehand which
To verify that the results for the getting rid of the breakout entry trade will produce the next big
filtered system indeed are worse and exit rules completely. winner.
than the original, unrestricted The markets could also have
results we can increase the been subdivided into several Conclusion
risk per trade somewhat for the different types of groups or Modern analysis software allows
filtered system until its drawdown divided dynamically based on you to work with more data than
surpasses the original system’s their most recent correlations. the most basic OHLC data most The thin red line in the middle shows the average Sharpe ratio for the
different look-back periods for the filter. The coloured area surrounding
drawdown. If the annual return The Interest rate group could for of us stick to on a daily basis. it indicates the dispersion of all Sharpe ratio values for any given look-
back period. The thinner the coloured area is the more confident you
and Sharpe ratio still are lower example have been subdivided With Excel you can analyse can be of the results.
than for the original system it into short-term rates and long- whether the market is trading Source: TradingBlox
confirms that the filter did not term rates. Likewise, the metals in contango or backwardation
improve the overall strategy. could be divided into industrial and apply your trading strategy
With the risk per trade at metals and precious metals, accordingly, sizing your positions
0.23 per cent the drawdown just to mention a couple of and avoiding unnecessary F7) Sharpe as Long Strength Treshold (0-7) Varies
comes out to 21.3 per cent with other obvious groupings. As and costly rolls. Within a more
the annual return at 14.96 and mentioned one could also use specialised piece of software,
the Sharpe at 0.99. Increasing the code to put together dynamic such as Trading Blox you can
the risk did improve both the groups based on the most recent group and re-group the markets
return and the Sharpe ratio but correlation between one or with the help of the system code
not by enough, which confirms several markets. In that way you and thereby avoid trading the
that this particular system/filter could let the system code change weakest markets or too many
combination makes little sense, the groups maybe on an annual markets that are highly correlated
although the overall strategy still or semi-annual basis. with each other. However, filtering
yields reasonable results. However, there is also a more out trades is seldom a good idea The thin red line in the middle shows the average Sharpe ratio for the
different strength filters. The higher the value on the x-axis, the more
There are several reasons for fundamental reason for the when trading futures unless the trades the filter allows you to place. The higher the Sharpe ratio (on the
y-axis), the higher the return relative the volatility of the equity curve.
why the results did not look too weak results. The correct way signals from the filter itself are the
promising. Maybe the system to trade futures, making profits most important reasons for when Source: TradingBlox
was the wrong one, or maybe using a trading system, is to first to enter and exit.
09/2011 www.tradersonline-mag.com
31
TRADERS´ TOOLS
Interactive Data announced previously available only to Wall partner, optionsXpress. For more brackets, trailing stops, icebergs, performance
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Market Technologies Indexes family are indexes changes to its new “Weeklys”
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benchmark indexes on the metals, precious metals, about seven days. There is a
Toronto Stock Exchange and soft commodities, petroleum link on the CBOE site called
London Stock Exchange and products and agriculture/ “Available Weeklys. But what
has expanded VantagePoint’s livestock. In addition to the about so-called “Occasional
coverage of the US markets eight new subindexes, the Weeklys?” There were three
with the addition of two new DJ-UBSCI series consists stocks with weekly options that
exchange traded funds (ETF) of the Dow Jones-UBS expired on July 30, but won’t
categories that are devoted to Commodity Index comprising be listed for August 6.
currencies and commodities. 19 commodities; the eight As it turns out, these three
The new ETF categories, the metrics, earnings performance, previously existing subindexes. which measure a hypothetical companies announced their
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United Kingdom indexes, volume activity, and distills it into www.djindexes.com the underlying DAX Index. This July 30. Options volume for
extend the international a concise, intuitive display. The portfolio includes an investment some companies are probably
reach of VantagePoint. More Power Gauge rating is updated ApexFutures released two in the DAX Index and the money far more active as earnings
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www.vp.tradertech.com time news sentiment analysis ApexTrader and NinjaTrader with by the Euro Overnight Index some stocks, perhaps the CBOE
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Marc Chaikin has launched linguistics parsing software. a free trading platform offering allocations of the new indices options specifically targeted
Chaikin Power Tools, a free Investors can seamlessly high-speed execution and are shifted daily to maintain around quarterly earnings
iPhone app which gives individual execute stock trades from the quotes, one-click order to the desired risk levels. The releases, while others will be
investors access to sophisticated Chaikin Power Tools iPhone app placement on DOM, advanced DAX Risk Control Indices allow available every week. Source:
investment decision-making tools through their mobile brokerage orders such as OCO, multilegged market participants to track the www.theoptionsinsider.com
09/2011 www.tradersonline-mag.com
32
TRADERS´ TOOLS
BOOKREVIEW
Value in Time BOOKREVIEW
Better Trading through Effective Volume
By Pascal Willain
In his book début, Pascal Willain the spread cost rather high. The ranges, by combining buying
provides breakthrough new difference between placing an and selling both at the bid and
technical analysis tools that have a order at the ask (the best price the ask, which translates into
good chance of revolutionising the offered by sellers) and placing it four combinations. In return they
way we look at financial markets. at the bid (the best price offered provide liquidity to the markets.
This unique guide contains by buyers), was one sixteenth Before decimalisation market
insights that will take your trading or 0.0625 (so for 1000 shares manipulation was quite costly
to the next level as it shows you this cost amounted to 62.50). and easy to spot. Decimalisation,
how to look beneath the surface This high spread cost, hence though, lowered the spread cost,
of financial markets and spot the pushed buyers to place their and therefore freed large players
manipulations they are prone to. orders at the bid and sellers to from disclosing their orders. Title: Value in Time
How, you might ask? place their orders at the ask. Typically, these days, you can Subtitle: Better Trading through Effective
First there is the idea that large Another consequence was that easily push the price by one tick, Volume
players are mainly responsible the price did not change much, at a cost of one cent per share. Author: Pascal Willain
for stock price movements, since it took quite a large volume This is not proving that markets ISBN-13: 9780470118733
because of the large size of their to move the price up or down are constantly manipulated. But Price: $42.37
trades. Therefore, monitoring one tick (the smallest level of if a service suddenly costs six Publisher: Wiley Trading, June 2008
the movements of large players price change possible between times less than it did the day
About the author:
seems to be the best way to the bid and the ask, before before, you can be sure that Pascal Willain is a Belgian trader and
monitor the whole market. To decimalisation 6.25 cents). Large this service will be used more entrepreneur with a background in
mathematics and software engineering. He
do this we need tools to find out funds have the dual advantage often. So decimalisation, which was a featured trader in Dr. Alexander Elder’s
whether and when institutional of size and power, but this also was originally conceptualised to book, Entries & Exits, also published by
Wiley. Dr. Elder also wrote the foreword.
investors are moving in or out of has limitations. Large players reduce spreads and add to the
stocks. Building those tools is cannot put in their big orders transparency of price behaviour
what this book is all about. as one lot if they do not want to to the benefit of the retail public,
Secondly, the decimalisation show their hand to the market. may very well have killed market
of prices, as of April 9 2001, So they need to, can and do, use visibility and encouraged price
changed the markets. Before legitimate price manipulation in manipulation.
that date, prices were quoted order to accumulate or distribute Finally, in an environment
in sixteenths of a dollar, making shares during sideways trading where technical analysis has
09/2011 www.tradersonline-mag.com
33
TRADERS´ TOOLS
become mainstream and swarms instead of transactional data. a significant part of the retail Boundaries, Divergence Analysis math may look complex at first,
of traders watch most classic Transactional data consists of public does not even have and the Supply Analysis tool. In but in the end it all comes down
indicators like hawks, there is every transaction that passed. access to transactional data the first part of the book, all of to nothing more than addition,
still a lot of ‘illusion of control’. It is volume, it is price and it is and a lot of software is not yet them are fully explained, in their subtraction, multiplication and
Most visual chart patterns timestamp, while interval data equipped to define this kind of own chapter, as to their definition, division. In fact you do not need
and indicators are highly merely is the compression of tools. formulas, interpretation, real life the math to use the tools. But
subjective in their definition and/ that transactional data into the The tools the author comes up usage scenario’s and hints drawn it is important though that you
or their interpretation. Most first, last, highest and lowest with, are really next generation from experience. understand what these tools
visual patterns do not have transaction price measured tools. They do not need to be fed The second and third part represent, what they measure,
a mathematical definition at over the interval as well as parameters and are using data at of the book is dedicated to the and how you can take advantage
all, while almost all indicators the accumulated volume of all the atomic transactional level. synergy effect that flows from of what they tell you. After all,
need parameters that have to transactions in the interval. When Pascal Willain’s unique view the combination of this tools and technical analysis is not about
be provided for proper usage, we use the classic open, high, on supply and demand, their their relation to trading strategies, predicting the future. It is about
which is an open invitation for low, close and accumulated equilibrium, accumulation and risk/reward balance, automated measuring the present. Just the
the ‘illusion of control’ and curve volume over a certain interval distribution, what is cheap and trading systems, sector analysis thermometer will not tell you
fitting of a system to the data it (typically a day for many traders), what is expensive, why we have and short selling. tomorrows temperature but it
has been fed. To make things we are leaving out a whole lot trends and how they emerge, You will see that the different remains a useful device. Just as it
worse, most of the existing of information for the sake of all translated into his tools concepts introduced in this book is not the math doing the trading;
indicators are using interval data synthesised analysis. Moreover, named Effective Volume, Active are very simple in nature. The it is the trader.
Chart Junkie
I trade daily, and I always want to have complete control over
my charts. At Tradesignal Online, I can find the international price
information and professional tools that I need for charting.
And it's all done through my browser – free of charge.
09/2011 www.tradersonline-mag.com
34
TRADERS´ TOOLS
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35
TRADERS´ TOOLS
personal data will be displayed, The Individual Modules trading opportunities can be found
at the end of which a generated Once the historical data has been by including the seasonalities.
password will be sent to them. downloaded and brought up to Figure 1 shows the work
Once the user has logged in, date, the software is ready for use. screen of the software with all
the software checks which plug- The basic module is delivered the menu items when all modules
ins have been unlocked, and you with 13 indicators, which are are unlocked. The price graph
will see the start screen. A short part of the standard repertoire of represents the June contract for
time later, all historical data will technical analysis. These include the EUR/USD, along with the
be downloaded. For the historical MACD, Bollinger Bands and seasonality shown below the
data of futures, a download size Stochastic Indicators - to name price performance as well as the
of 200 MB is estimated by the just a few. The basic module two additional seasonal moving
program. The unlocked plug-in allows simple charting-based averages. For options traders
“options simulator” requires an technical analysis. For example, mostly involved in option writer
additional 900 MB of historical trend channels or support and positions, the options database
option closing prices dating back resistance zones can be inserted is recommended. For the entire
to 2002. Finally, the database will with the appropriate tools. Special futures markets, it dates back to
be brought up to date, which is drawing tools like the head-and- 2002 and offers the possibility
completed after a few minutes. shoulders tool make it easier to of using the real option prices
identify cycles and chart patterns. to test the likelihood of trading
Testing Possibilities This can be expanded to include systems. For the seasonal plug-in
Prior to purchasing TNT, the user the “advanced tool” plug-in which the regular price subscription is
has the opportunity to test the brings with it other indicators, enough while you need to take
program extensively for a period such as Fibonacci, Elliott Wave out an additional subscription for
of two weeks – including all and Gann tools for a manual count the options data. F2) EURO Future with COT Plug-in
modules. The installation is carried of the corresponding waves. If an The Commitment of Traders
out only once and once TNT indicator such as the MACD is plug-in provides a graphic
is acquired, the previous chart calculated on the chart displayed, representation of the positioning
evaluations may continue to be buy and sell arrows will appear of market participants and lists
processed by way of unlocking. automatically. additional buy and sell signals
In addition, Track ‘n Trade on the basis of the JBCOT Buy/
Costs stands out mainly through its Sell Indicator developed by Jake
Depending on the module, innovative features, namely the Bernstein. With this module, the
monthly costs will be incurred, seasonal, the options and the user develops a considerable
which are at least $18.32. If COT modules. Based on the advantage, as is shown by the
you are in possession of all the historical-futures database, a example in Figure 2.
modules, the same amount is seasonal module can be used by The most expensive module, The positions of the commercials are listed in red, and those of the
major market participants are listed in blue. The bars below the zero
added to cover the options data the user to calculate a seasonal a black-box trading system, also line indicate short positions, everything above the zero line indicates
long ones. Almost exactly at the top of the uptrend, the commercials
and the Commitment of Traders price performance which always known as “Bulls ‘n Bears” (BNB) went massively short, while the big speculators continued to increase
data. In the case of a two-year uses the same futures contract trading system, uses the colour of their long positions.
contract, prices can be reduced for the calculation. Especially in the candle to show the direction Source: www.trackntrade.com
to a total of $45 a month. the commodities markets, good of the position (Figure 3). Similar
09/2011 www.tradersonline-mag.com
36
TRADERS´ TOOLS
to the parabolic indicator, a the user best acquires the commodity futures that can be
tracking stop-loss is calculated, accounting & simulator plug-in exported, is a useful tool. The
which when touched requires (see top of Figure 1). A virtual option module is especially unique
the respective trend position to video recorder allows you to in this field with its historical
be closed. This system may be perform paper trades on a daily option database – hardly any other
expanded by the ribbon indicator, basis in the already mentioned provider makes anything similar
also known as rainbow lines, as simulator and to test strategies. available. Although histories of all F3) Bulls ‘n Bears Black Box Plug-in
well as by an additional signal, the A system tester is included to kinds of futures are available, there
so-called “advantage lines” Here, find the most important indicator is less of a choice in the case of
too, the chart picture shows the combinations for the buy and sell commodity options.
corresponding trade Gecko Software
signals with buy and also has a version with
sell arrows. the name “TNT High
The last module
uses the number of This system may be Finance” as an EoD
basis for American
futures contracts
offered to create expanded by the ribbon shares as well as
the two intra-day
spread charts. A
spread chart indicates indicator, also known as software programs
TNT Futures Live and The chart shows the trading system used on the Euro future. In the
setting window, a slider and additional buttons can be used to change
the difference
between two futures rainbow lines. TNT Forex Live. Both
live versions together
sensitivity. Also, various candles can be excluded, such as an inside
day candle. Buy and sell arrows visually indicate the direction of the
position.
contracts – in any make it possible for an Source: www.trackntrade.com
combination. For autopilot module to be
example, the user has used to trade signals
the opportunity to simultaneously signals. However, these signals via the connected broker and to
go long with two ES-mini futures can only be traded automatically have range charts created. When F4) E-mini S&P 500 & NASDAQ 100-mini
and go short with five NASDAQ in the intra-day version. acquiring the futures live version,
mini futures. If the NASDAQ which causes extra monthly costs
future turns out to be stronger Conclusion to be incurred, the EoD version
than the ES futures, the trader will In its basic version, the end-of- with the modules is included free
make money. This line chart can day version of Track ‘n Trade of charge.
be combined with all acquired provides an inexpensive program Obviously, it was impossible
modules (except option plug-in). to analyse all types of US futures. for this article to cover all the
This allows the user to What makes this software stand features of TNT. We therefore
calculate the RSI and display the out from other products, however, refer to the TNT website,
corresponding signal arrows on are the modules that can be where you can view a detailed
the chart. In addition, the above- acquired individually, and the instructional video for the relevant
mentioned BNB trading system correspondingly low-rate price versions. When purchasing the The figure shows the spread chart of the two index futures with different
indicators and the BNB trading system. This is based on two ES futures
can be calculated on the spread subscriptions. The historical software, the user receives a 300- long and five NASDAQ futures short. One point equals $100.
or can place a Bollinger band on database that comes with it page manual and several CDs Source: www.trackntrade.com
it. To play out “what if” scenarios, and covers all those American containing relevant videos.
09/2011 www.tradersonline-mag.com
introducing a social network...
for technical analysts
myMTA network.mta.org
Connect with other industry professionals worldwide! myMTA is a private, members-only social network for
technical analysts. Access to myMTA is free for members of the Market Technicians Association and offers the
ability to establish unlimited connections with other members through detailed search criteria, topic-specific
discussion forums, private messaging functionality, and extensive member profiles.
38
TRADERS´ TOOLS
WEBREVIEW
A Professional Screening Tool for Stocks and ETFs
FinViz.com
While in the past, scanning for interesting stocks and ETFs involved relatively high costs and considerable effort, the Internet nowadays provides simple flexible tools that
are often even free. The FinViz.com website, which provides a large variety of tools for investors and traders alike, offers an excellent screening solution for all market
players who are on the lookout for interesting individual stocks – which is a good enough reason to put the website through its paces.
Structure of the Website Thanks to interactive graphic the screening tool. The The user can draw on dozens of
The FinViz website is divided into representation, so-called “heat screener offered here is a criteria here. There is also quite a
several sections with the start maps” offer a quick overview of real powerhouse: Some 5,000 bit on offer for technical analysts.
page making a clear impression the performance or evaluation shares and about 1,200 ETFs For example, the screening can
and one, which, in all likelihood of various industries and stocks listed on NASDAQ, NYSE or be performed according to the
will pique the interest of any worldwide. For stock investors AMEX can be subjected to a following selection criteria: RSI,
stock enthusiast. In addition to who would like to keep their screening process on the basis ATR, gaps, candlestick patterns,
technical signals, general market positions in a virtual portfolio, of descriptive, fundamental and volatility, intersections of various
information and upcoming dates the menu item “portfolio” seems technical criteria. averages or new highs or lows.
regarding macroeconomic data to be a natural choice. This The selection criteria mentioned The filtering of individual stocks
and quarterly reports, insider application is also easy to use first include market capitalisation, on the basis of support and
transactions are shown as and provides a good overview analyst ratings, industry affiliation resistance lines, trend channels
well. Those who want to delve including news. A simple overview and volume. Users who would or specific price patterns can also
deeper into the news world can of the performance of key U.S. like to take only certain index be done with one mouse click.
do so by clicking on the top sectors can be found Again in the values into consideration, are
menu item “News”. Messages “Groups” section with separate always free to limit the stock A Practice Test
from news agencies such as menu items being devoted to universe to the S&P 500 and the Suppose the user wants to
Reuters, Bloomberg and Zacks currencies and futures. Dow Jones. The fundamental search for stocks that would
are presented here as well as selection criteria include a host of qualify as medium to long-term
interesting blogs. Within the rest Extensive Screening well-known indices, whether they oriented investments. He first
of the menu items the “maps” Tool for Stocks and ETFs be P/E ratio, price-book value starts with a coarse filter: Only
section may also be of interest Let us now turn to the actual ratio, earnings or revenue growth, those US stocks should be
to many traders and investors. highlight of the website, return on equity or level of debt: considered which have a market
09/2011 www.tradersonline-mag.com
39
TRADERS´ TOOLS
capitalisation of at least two developed in the past, what ELITE subscription package
billion dollars and belong to the their volatility is and what their are available for a monthly fee
technology sector. Three mouse trading volume looks like. In of $39.50 or an annual fee of
clicks later, the user receives a the “Technical” section we are $299. This gives subscribers
table with a total of 157 shares. given important information access to real-time prices (in F1) Screening
In order to narrow the circle of about RSI, the Average True the free version there is a 15
buy candidates, a fundamental- Range, various moving averages to 20-minute delay), intraday
analytical filter will now be and the annual highs and lows. charts, enhanced instruments
used. In this specific case, only Finally, the results can easily be for technical analysis as well as
companies with revenue growth exported as an Excel file. By back-testing capabilities. There
of more than 25 per cent a year the way, the compilation of the are also e-mail alerts, charts for
and a price-sales ratio of less above screening parameters can various fundamental indices,
than ten are to be filtered out. be saved and will therefore be correlation studies and enhanced
Just a few seconds later a list available for future screenings. portfolio features. The provision
of now 23 shares – from A for For example, several screenings of pre-market prices, which are
Apple to R as in Rackspace – of a technical or fundamental also included in the fee-based
will appear. As a final criterion, type can be set up and then package, rounds off the service. In this example, a screening was performed according to the following
criteria: The objective was to filter out U.S. technology stocks that have
the user wants to filter out only performed again and again. Even a market capitalisation of at least two billion dollars, sales growth of
more than 25 per cent per annum in the last five years, and a price/sales
those stocks whose 50-day line the presentation of the table can Let Us Screen again ratio of less than ten. The final requirement was for stocks to have a 50-
runs above the 200-day line. This be configured individually. FinViz.com is a must for any day line that runs above the 200-day line. This leaves these 16 stocks.
leaves 16 shares – and that is the Yet another equally practical stock or ETF enthusiast. Whether Source: www.finviz.com
end of the screening. way of using the screening tool you are technically or more
How do we go from here? is the direct input of a stock fundamentally oriented, the
At this point, the line below the ticker in the box above on the information provides an excellent
filter box offers various analytical right. Following that, a click on starting point for a wide variety of F2) Snapshot
approaches. For example, a the “snapshot” section is enough trading and investment strategies.
click on the “Valuation” menu is and the user will receive an Without having to go through
enough for the user to benefit informative, clear profile of the complicated menus, the user
from numerous valuation ratios stock. In addition to a chart as directly gets exactly what he is
for all 16 shares. These can easily well as comprehensive indices looking for, namely interesting
be sorted. Example: The stocks of a fundamental type and stocks. The large number of
are sorted by the level of their P/E company-related news, insider selection criteria and the ability to
ratios for the next twelve months, transactions and a company create different portfolios are also
and the user can immediately description will also be displayed. commendable. Novice traders
see that the Apple stock has the are likely to be pleased with the
second lowest P/E ratio among Useful Additional informative help section explaining
the stocks screened. Services at a Fair Price all the functions and selection Users who quickly want to check a stock on its fundamental and
technical qualities, can do so with the so-called “snapshot”. After
Next there is the menu item While the website already offers criteria. The simple navigation and entering the ticker in the yellow shaded box, the user receives all the
relevant information on the stock: valuation indices, important news,
“Performance”. Here the user a wealth of free applications, clear presentation literally invite and a company descriptio
finds in a compact form how some valuable extras that the user to look for “hidden gems” Source: www.finviz.com
the individual stocks have are all included in the Finviz in the stock universe.
09/2011 www.tradersonline-mag.com
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TRADERS´ STRATEGIES
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TRADERS´´ STRATEGIES
TRADERS
day that follows five nights. The appropriate setup can be defined
longer there is a stock correction, for identification.
the greater the average profit-to-
loss trade is and the higher the Definition for the Setup of
average winning trade is. If, for Slight Price Retracements
example, for three consecutive The definition of weak price
days a share develops both a retracements is made against
closing price whose value is the background of the task
below the previous day’s close, that strong shares should be
and a high whose value is below traded in combination with
the previous day‘s high, there the implementation of a trend-
will be an average profit-to-loss following component.
trade of 0.56 per cent and a hit Establishing such rules can
rate of 54.12 per cent for 142,692 take different forms. For example,
trades. How good this result is is technical indicators such as the
revealed by a comparison with Rate of Change (ROC), moving
the values calculated in the first averages or trend strength
article of this series: For a holding indicators such as ADX can be
period of five days, the average used for that. At this point no
profit/loss percentage rate is such technical indicators will be
0.20, while the hit rate is 52.33 made use of, and the trend, as
Faik Giese per cent. well as the price retracement, will
Conversely, this means only be identified on the basis of F1) Lululemon Athletica Inc. (LULU)
Faik Giese is a programmer, that the long entry leads to a pure price, volume and volatility
consultant, and trader. mathematical disadvantage once analysis.
Through his website www. the stock has been performing The minimum criterion for
thewayoftrading.com you can well for several days in a row. defining a sideways movement
download further background This statement applies only to is the determination of the
information about his the holding period of five days maximum and minimum for the
articles. There he offers and the period presumed here length (duration) and depth. While
a comprehensive training as well as to the equity universe. duration is defined in days, the
programme for novices and The fact that only slight price maximum correction low can
an online course for traders retracements and not very strong be specified either in the form
who would like to learn the ones should be traded must not of percentage rates (example:
independent development be lost sight of. The probability the stock must not exceed a Figure 1 shows the daily chart of LULU over the period from July 2010
to early May 2011. During this time, the share was one of the biggest
of trading models on a then that after a 5-day correction ten-percent correction to be winners on the American stock market. In the figure, two points in time
are marked with an arrow and “Entry”, at which the volatility indicator
technical-quantitative basis. the stock has developed a deep a candidate for a weak price VoLaP (called _TWoT.PR-Volatility_ATR) introduced in the first part of
Contact: price retracement is very high. retracement) or as a multiple of the series falls below the mark of 20, even as the share price in each
case reaches a new multi-week or all-time high.
giese@thewayoftrading.com This raises the question of what the volatility of the stock (ATR).
is actually meant by a weak price In Figure 2, the approach Source: www.tradestation.net
retracement and whether an used here is explained on
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42
TRADERS´ STRATEGIES
the basis of the Pharmasset more than 15 days can be traded high H and the low L of the
Inc. (VRUS) stock. The high much more successfully by using correction is less than x per
H immediately preceding the breakout strategies (although cent of the high. So we have:
correction serves as a reference these are not part of this series of x <= 100 * (H - L) / H.
point for measuring the price articles).
retracement. L denotes the low Based on Figure 2, the exact The results of this setup are
of the correction, and D the definition of the two different shown in Figure 3. The value x
minimum duration. The maximum correction setups is as follows : is described as “MaxRetPerc”,
duration of the correction is set which stands for “maximum
at 15 trading days. This figure is • Setup A: Use of percentage retracement in per cent”. On the
not optimised, but conforms to rates for the depth of the price vertical axis the average profit/
the fundamental idea that a stock retracement loss is indicated in per cent. The
that has been consolidating for horizontal axis is divided into
more than three weeks, can no a) The high H represents at four groups with MaxRetPerc
longer be called a dynamically least the highest high of the parameters of six, eight, ten and
rising share – a condition, last 200 days. twelve per cent. Each group
however, that in swing trading b) Consolidation lasts less than shows the evaluations on the
is required to achieve a positive 16 days. basis of a minimum consolidation
performance. Moreover, as has c) Consolidation has been in of three to ten days.
been shown by the author’s progress for at least y days
studies, shares developing a already. Example: If an entry is
slight correction over a period of d) The difference between the made after the stock has been
correcting for at least seven days F2) Pharmasset Stock (VRUS)
and by no more than ten per cent,
T1) Performance after Several Days of Corrections the average profit/loss is 0.46 per
cent for a holding period of five
Duration of Correction C2 & H2 C3 & H3 C4 & H4 C5 & H5 days. If the stock is held for ten
# Trades: 251,531 142,692 64,118 26,682 days, this rate rises to 0.69 per
Avg Profit/Loss %: 0.30% 0.56% 0.82% 0.89% cent. The relevant comparison
Annualised Profit/Loss: 16.30% 32.51% 50.92% 56.30% benchmark rates are 0.20 and
Winners %: 52.51% 54.12% 55.32% 55.10% 12.38 per cent respectively.
Avg Profit %: 4.48% 4.75% 5.08% 5.42% A more flexible approach is
Avg Loss %: -4.33% -4.39% -4.44% -4.67% provided by the definition of a
Using a holding period of five days will show how the results turn out if, after several days of corrections, an
entry is made at the market opening the next day. The multi-day corrections reflected in the table are defined as
price retracement by way of the
follows: Today‘s closing price is below yesterday‘s closing price and today‘s high below yesterday‘s high. If this volatility of the stock (setup B). The This shows the daily chart of VRUS over the period from October 2010
to early May 2011. During this time, the share was one of the biggest
happens twice in a row, it is a “C2 & H2”. The results are listed in the appropriate column. If for three consecutive
days the closing price is less than the previous day’s closing price and the high is less than the previous day‘s points a) to c) correspond here to winners of the American stock market. In the figure, three instances
of consolidation are marked with H, L, and a horizontal line for easy
high, it is a “C3 & H3“, and so on. For easier comparison, the results are such that the average profit/loss (line:
Avg Profit/Loss %) is projected (line: “Annualised Profit/Loss”) onto one year (252 trading days). “Winners %”
the steps a) to c) of setup A. identification. H stands for the high of the consolidation, L for the low.
denotes the hit rate. The last two lines indicate the average profit (Avg Profit %) and the average loss (Avg Loss The correction setup defined in the article uses these points to define
the maximum possible depth of correction (H minus L). By definition,
%) in per cent respectively.
• Setup B: Use of volatilities the maximum length of the consolidation is 15 trading days.
Source: www.thewayoftrading.com for the depth of the price Source: www.tradestation.net
retracement
09/2011 www.tradersonline-mag.com
43
TRADERS´ STRATEGIES
d) At point H, the volatility of vertical axis the average profit/ relevant comparison benchmark
the stock is measured; to do loss is indicated in per cent. The rates are 0.20 and 12.38 per cent
this, the ATR (Average True horizontal axis is divided into respectively. F3) Analysis of the Correction Retracement Percentage
Range) is drawn upon which four groups with MaxATRmul For both setups, the results
is calculated for a period of parameters from one to 2.5 in 0.5 are impressive. Both the hit
ten days. The rate is called increments. rate (not shown here) and the
ATRH, which stands for “ATR Along the lines of Figure 3, average profit/loss rate manage
at high H”. the evaluations of minimum to constantly exceed the
e) The difference between the consolidation for three to ten comparison rates (benchmarks)
high H and the low L of the days are shown for each group. of Part 1 of this series of articles
correction is expressed as Example: If an entry is made after on holding periods of two, five
a multiple of ATRH. This the stock has been correcting and ten days by more than 130 Here are the results of the price retracement setup calculated on a
percentage basis. On the vertical axis, the average profit/loss is
multiple of ATRH is called for at least seven days and no per cent. indicated in percent. The horizontal axis is divided into four groups
with MaxRetPerc parameters of six, eight, ten and twelve per cent.
MaxATRmul. L must not be more than 2.5 times the ATRH, This parameter represents the maximum possible correction of a
deeper than the average profit/loss is 0.47 Summary and Outlook sideways movement. The evaluations of a minimum consolidation of
three to ten days can be seen for each group. The correction must not
H - (MaxATRmul * ATRH). per cent for a holding period In the second part of this series exceed the maximum period of 15 trading days. Example: If an entry is
of five days. If the stock is held of articles, price retracements made after the stock has beeen correcting for at least eight days and
by no more than twelve per cent, the average profit/loss is 0.79 per
The results for this setup are for ten days, this rate will rise were defined. It was shown cent for a holding period of ten days. If the share is held for five days,
this rate will drop to 0.45 per cent.
shown in Figure 4. Again, on the to 0.77 per cent. Here, too, the that they lead to a significant
mathematical advantage Source: www.thewayoftrading.com
for entry, using the simplest
Strategy Snapshot means of pure price and
volatility analysis. In addition, F4) Analysis of Volatility-based Price Retracements
the definition of both versions
Name of Strategy: Swing Trading of weak price retracements on the basis of
price, volume and volatility analysis
of price retracements already
Type of Strategy: Trend-following & indicator-based includes a trend-following
Time Horizon: Daily Chart component: the assumption that
Portfolio/Markets: All US individual stocks listed over the period 2003 to and point H marks at least a 200-day
including 2010 high makes sure that the stock is
Setup: Long only; VoluP and VolaP identify a phase during which in an uptrend.
volume or volatility dries up; new 200-day high, followed by a
This has laid the foundation
consolidation of at least three, at most ten days; at most, the
low of the consolidation may be x per cent (MaxRetPerc) or x
for the next article, which will Here are the results of a volatility (ATR)-based price-retracement setup.
On the vertical axis, the average profit/loss is indicated in per cent. The
times the ATR (MaxATRMul) away from the 200-day high combine the price retracement horizontal axis is divided into four groups with MaxATRmul parameters
from one to 2.5 in 0.5 increments. This parameter is the multiplier, by
Entry: Buy at the opening of the following day once all the setup setup with the improved entry which the ATR(10) calculated at point H is multiplied as a benchmark
criteria are met on the previous day technique presented in the first for the maximum possible correction. The evaluations of a minimum
consolidation of three to ten days can be seen for each group. The
Exit: Sell at next day’s opening after x days as a market order; see part of this article and the VoluP correction most not exceed the maximum period of 15 trading days.
also tables and graphs and VolaP indicators introduced Example: If an entry is made after the stock has been correcting for at
Risk and Money Management: Purchase one position per day least eight days and by no more than 2.5 times the ATR, the average
in the first contribution. The result profit/loss is 0.82 per cent for a holding period of ten days. If the share
Average Number of Signals: See tables and figures is held for five days, this rate falls to 0.42 per cent.
Average Hit Rate: See tables and figures
will subsequently be evaluated
on the basis of initial portfolio Source: www.thewayoftrading.com
simulations.
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he continued his world tour in Texas Instruments, the first market, a move that the New when a lower price did not go any quotations have risen steadily in
Saigon. manufacturer of electronic York state attorney may have lower on three consecutive days. a tight trend channel. On 19th
calculators. “The dream of contributed to. According to October, the stock reached a
The 2-Million-Dollar Strategy the future is what people find Time magazine, the authorities Filters 52-week high at €47.70 and here
As the market began to turn in gripping, not reality,” he said. accused the showman of Several criteria were considered formed a first box at point 2. And
late 1957, Darvas was waiting Expectations rather than possibly misrepresenting the to be a prerequisite for entry: right on the next trading day the
for the first trend to form in facts are traded on the stock huge stock market profits in his The stock had to have formed lower limit of the box formed at
the shares he observed. He market. Additional shares book. Darvas called the action a longer trend with no major €45.46. On 26th October the
decided to be a “bull in a bear met the purchase criteria and against him “cynical” stock breaks out of
market” and telegraphed his first were included in the portfolio: and “irresponsible”. the box with fourfold
purchase order from Bangkok. Litton Industries and Beckman In 1961, the volume compared
The next order to buy 500 shares Instruments. As soon as one investigation was to the previous day
of the Bruce Company came from share broke out of a box, it was dropped by a judge. Expectations rather than (black arrow). At the
Calcutta. Positions that moved bought by Darvas. He always Darvas criticised breakouts from boxes
quickly into the profit zone were used a trailing stop at the lower long-term investors facts are traded on the 3 and 4, the position
increased consistently. end of the box. Supported by calling them true would be increased
In February 1959 Nicolas a strong bull market – the Dow gamblers because stock market. each time. The trade
Darvas returned to New York. On Jones rose by 50 per cent – Darvas they stuck to stocks would later have been
Wall Street the automatic stop- was able to increase his wealth to although their stopped out at €52.90.
loss orders were temporarily over two million dollars in just a prices kept falling
abolished. Some sources few months. Even now he saw no lower and lower, while hoping drawdowns, volume should Conclusion
claim that this was due to their reason to sell a rising stock. Darvas that they would rise again increase on the short term and The strategy presented is easy to
successful application by Darvas. used the trailing stops and went on one day. In his second book the profit trend of the company follow on the basis of daily prices
However, following a boycott by a European tour. Darvas angered market players should soar upwards. – and also quite successful in
the traders this type of order had by describing Wall Street markets with strong trends and by
to be re-introduced. Parting in Anger as a “huge gambling casino Stops using broad diversification. Some
Now the shares from Darvas‘ In the 1960s Darvas wrote a populated by dealers, croupiers Darvas worked consistently with programs offer useful scanners to
watchlist also began to form book that to this day is still highly and tipsters“. In the end, Darvas buy-stop and stop-loss orders. select the stocks. To identify the
initial trends. He bought regarded and withdrew from the died in 1977 and was buried in Since he was only positioned boxes you can also use Darvas
Paris. long, the stop was always placed indicators but these are offered
on the lower limit of the current in a modified form. From today‘s
Strategy Snapshot Entries box. At the same time, these perspective, money management
Entries were made when a lower limits of the box were used is open to criticism, but it must be
stock reached an annual high, as a trailing stop. remembered that it was quite in
Strategy: Trend-following, long only
Entry: New 52-week high or all-time high
or rather an all-time high and line with the then state of financial-
Entry condition: Increasing volume, previous trend, rising profit then exceeded the high of a box. Current Trading Example market theory. In any event, you
Position size: No information Darvas identified the upper limit A good example of the Darvas have now come to know a trader –
Stops: At the lower end of the box, also as trailing stop of a box once the price no longer strategy is the K+S stock from the Nicolas Darvas – who persistently
Pyramiding: Yes reached the high after three DAX. Point 1 marks a provisional developed and implemented a
Exit: Always the trailing stop consecutive days. The lower limit low of the stock on 25th May 2010 strategy that suited him; and was
of a box was marked as such at a price of €35.50. Since then ultimately successful.
09/2011 www.tradersonline-mag.com
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Performance Counts
09/2011 www.tradersonline-mag.com
50
TRADERS´ STRATEGIES
highest to lowest; choose six the screen is not showing a To identify high flyers consistently
month performance for shorter- decline in the current month you must scan daily, or whenever
term trades, or twelve month you would have found it in June. you have exited a trade and have
performance for longer-term Looking back from the low in cash to put to work. Let us now
trends. The goal is to find stocks June for stocks that are down discuss what you do when you
that are not only up over that time over a one month period, but are find these stocks, and how to
frame, but have pulled back over up over a six month period you manage the trades.
a shorter period, and have still will see that GMCR declined 3.31
outperformed the S&P 500. Look per cent, but was up over the Trade Entry
for stocks that have performed last six months (125 trading days) The entire thesis of this article is
well versus the S&P over six 116.71 per cent. This is clearly a to “buy the dip” in an uptrend,
months but have sold off over stock that has been moving in which is defined as a series of
the last month, or for longer-term the right direction, and during the higher lows and higher highs.
trends rank the twelve month same period the S&P 500 was According to Dow Theory a
performance and then look for a only up 2.47 per cent; so GMCR trend continues until it reverses. F2) GMCR vs SPX
sell-off in the last three months. outperformed the S&P 500 by This may seem obvious, but
In Figure 2 GMCR had a six 114.24 per cent. From the June from a strategic point of view it
month performance of 168.96 per low GMCR also outperformed means anticipating the behavior
cent as of 07/23/2011. Although the S&P 500 by 13.18 per cent. to continue; if you buy a low it
should make a higher high. As
for a trade plan there needs to be
Strategy Snapshot three prices before placing the
trade which are Entry, Stop Loss,
and Profit Target. The difference
Strategy name: Performance Counts
Strategy type: Relative Strength
between the entry price and
Time horizon: Monthly, weekly, daily stop loss is the trade risk, and
Setup: This is a long only strategy. Rank the best six or twelve month the difference between the profit
performers and identify those which have fallen over the last target and entry represents the
one to three months respectively potential reward; be sure that the
Entry: ¼ of the range between support and resistance reward to risk ratio is 3:1. Since
Stop-Loss: Place below support, and risk no more than ten per cent of
the distance is known between
the maximum position limit
Take Profit: Take profit at previous swing high, and trail remainder
the last swing high and the last
Trailing-Stop: Trail stop below the low of the last two bars once price hits swing low you can plan the trade.
previous swing high for the time frame the trade was entered Assuming you place the stop
Exit: If price breaks below the low of the last two bars, close below loss some distance below the
trend line or moving average last swing low, then divide the
Risk and Money Management: Maximum Position Size is ten per cent of total portfolio, and difference between the stop loss
stop is based on a maximum of ten per cent of the max
and the profit target by four to In June GMCR declined 3.31 per cent, but was up over the last six
position size for a total account risk of one per cent months (125 trading days) 116.71 per cent. As compared to the SPX
Average number of signals: Discretionary
identify the maximum entry price. which was up 2.47 per cent over the last six months.
Once the entry price and stop Source: www.tradestation.com
loss is known the position size
09/2011 www.tradersonline-mag.com
51
TRADERS´ STRATEGIES
can be calculated by dividing the the $2.98 would be added to a trend-line or moving average.
position limit by the entry price $71.77 to get a maximum entry In this example the profit when
or the account max risk ($1000 in price of $74.75 to maintain a 3:1 the stock returned to the swing
this example) and the risk amount reward-to-risk ratio. Since three high was $1197 ($83.75 - $74.75
(the difference between entry prices are known, now calculate * 133 shares) which when
price and stop loss). the maximum position size. divided by the last trade (in this
Assuming a $100,000 portfolio example $83.75) identifies the
Trade Management with a maximum position size of number of shares to be sold to
Once entered there are several $10,000 and a maximum total take profits (in this case 14.32
ways to manage and exit the loss of $1000 you know that no shares, just round to 15). Once
trade. Revisiting the underlying more than 133 shares ($10,000 the profit is locked, continue to
assumption of this trail the stock until
approach should it is stopped out,
lead you to maintain
the trade beyond the Maintain your position as indicated by the
second purple arrow
previous high as the
trend should continue size and use stops to in Figure 3.
F3) GMCR
which implies higher
levels. Once price manage your risk. Conclusion
Following this
reaches the profit methodical approach
target you can exit to identify the High
a portion of the position, and/or / $74.75) can be purchased. You Flyers through performance
trail the position by placing a new also have to find the maximum ranking not only helps you
stop loss just below the low of position size based on maximum find stocks moving in the right
the last two bars. Let us look at account risk using the lesser of direction, but can also yield
GMCR. the two numbers of shares to no nice results. In Figure 3 you will
exceed the portfolio risk; $1000 notice that the trade from entry
Step by Step divided by $3.01 ($74.75 - 71.77) to exit would have yielded 23.5
Figure 3 illustrates the steps listed to get 332 shares. The lesser per cent over a 21 trading day
above. As the stock declined of the two is 133 shares which period. If you annualise this figure
in value from the swing high a does not exceed the maximum (not including compounding)
plan can be created. The swing account risk. Once the price based on a 252 trading day year
high was 83.75, and the swing has returned to the swing it is the equivalent of a 179.7 per
low was 71.82, the difference high ($83.75) exit a portion of cent return. Obviously historical
between the two is $11.93. Next the position, and/or trail the returns are not indicative of future
divide $11.93 by four to get remainder of the position using returns and remember that during
$2.98 then add this amount to a stop below the low of the major changes in trend direction
a level just below the swing low last two bars until the market this method can yield negative
($71.82) which represents the stops the position out, or you returns. So be sure to maintain The Trade Plan Illustrated showing where to place the Entry, Stop
Loss, and Profit Targets.
stop loss. An additional amount decide to use some other exit position size and use stops to Source: www.tradestation.com
of $.05 was used, therefore criteria such as a close below manage your risk.
09/2011 www.tradersonline-mag.com
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53
TRADERS´ BASICS
09/2011 www.tradersonline-mag.com
54
TRADERS´´ BASICS
TRADERS
09/2011 www.tradersonline-mag.com
55
TRADERS´ BASICS
constructed; all of them are a semiconductor group Imagination software division have been earnings. The unit rumoured for banks’ quantitative easing and a
formula where changing one Technologies (IMG:LSE) will see bobbing around for many years disposal by Anite only represents resumption of spending following
element affects everything. its shares spike whenever the old now, as Anite has previously sold a quarter of the company’s the crunch, but investors were
It is however important to rumour of a potential bid from off another division unrelated operations, meaning its overall starting to become concerned
remember that investing is not a Apple (AAPL:NDQ) resurfaces. to its stated main focus of destiny is ruled by other factors. the upswing had gone too
mathematics exercise and these Every time, the analysts who technology conformance far. A double-dip recession
are real companies, meaning you understand these companies will testing. This has, however, been The Momentum Game had not been ruled out, and
should never make a decision step up and say a deal is unlikely, going on a while now, meaning Towards the end of 2010, a while there was evidence of
based on just one element. as Imagination Technologies investors looking to get in just for whopping third of the FTSE 100 recovery, momentum plays
Also, always be on the lookout supplies chip design to many of a potential deal may be in for a companies were trading at or have a tendency to get ahead of
for unexpected news that can Apple’s competitors and they long wait. In general, buying into around their all-time highs. The themselves.
topple even the most carefully would fall away should Apple take a company based just on vague post-recession optimism meant Investors looking at the
constructed equation. ownership. Still, the rumour will rumour is not a good idea. Also the charts showed soaring valuation metrics of these
not stop the shares from reacting, consider how important a feared, trajectories for companies companies would be concerned
Hype and Fear as there is always someone out or hoped for, event actually as diverse as luxury retailer about prices starting to lose
Hype and fear play a significant there hoping that this time it will is for the company. Often the Burberry (BRBY:LSE) and fruit touch with real earnings, but as
role in stockmarket pricing, and be different. market will get up in arms about grower Asian Citrus (ACHL:AIM). the stocks keep rising, when
you may be forgiven for finding Excitement that software group something that only affects a Real life factors were fuelling do you get out? This is a tricky
this puzzling. For instance, Anite (AIE:LSE) may sell its travel small percentage of a company’s this trend, including central question with no clear answer.
09/2011 www.tradersonline-mag.com
56
TRADERS´ BASICS
A stock’s strong run will attract semiconductor IP (intellectual most expensive takeover since
buyers even after it is becoming property) model, where the costly 2006.
clear things may be overheating, process of chip production is
but at the same time, some of omitted and solely the design for In 2010, ARM was doing
the optimism was justified as the semiconductor is sold to the well,but the stock was at its
companies were announcing customer. ARM has designed highest since the dot-com
better than expected results. the brains of 98 per cent of boom and the valuation metrics
Unless you are a very risk- the world’s mobile phones, a were starting to look dizzying.
tolerant investor, always keep in significant growth market in Speculation of a takeover seemed
mind the fundamentals when a itself, but the company has over unlikely, and in August both
share experiences momentum; a the past few years, focused on the chief executive officer and
correction will occur when numbers broadening its offerings to other finance director sold shares in
are out on results day. Looking at electronic areas. Fundamentally the company. Analysts had been
Burberry, the group’s revenues this is a very well run company bullish on the group through the
rose by 17 per cent in the first half with a strong record of earnings spring, but as autumn arrived
of 2010, and the management growth, but how are the shares most were starting to get cold
expected to increase its selling priced? (Numbers for the year to feet. Still, as the new year
space by 20 per cent. Asian Citrus December 2010.) arrived, ARM’s shares defied
said it expected to see stronger the naysayers and kept ticking
harvests as more trees matured, * P/E and relative P/E: ARM upward; the faith that the group
with improved margins from traded at a P/E of 53x – an would play a significant part in
increased sales via supermarkets. obscene number, irrespective the increasingly hi-tech future
These were signals earnings were of a sector average of 22x. was strong. It is up to each
keeping up with the hype. * Dividend yield and cover: Low investor to find their tolerance
Still, investors may well find it wise yield at 0.43 per cent, but not level, but with each upward step, F2) Micro Focus
to pick a point where they consider unusual for a growth-focused expectations rise and so do the
themselves happy with their gains technology group. Solid cover stakes.
and get out, even if it means losing at 2.52x. Sometimes, however, even
out on the final run. If you are not * Deep value: Net asset value is seemingly solid companies will
a full time trader, chances are you less relevant for an intellectual hit a snag that contradicts years
do not have the time to monitor the property group like ARM, of good faith. Shares in software
minutiae of trading volumes. So if but the discounted cashflow group Micro Focus (MCRO:LSE)
your momentum stock has risen by value was around £3 billion. had steadily improved for years
30 per cent, it is not worth risking it This reflected expectations of before the stock lost half its value
all just for the possibility of three per a significant rise in earnings, in 2010, due to the unexpected
cent more. as ARM collects royalties from departure of two key executives
several new tablet computers. and a subsequent profit warning.
Case Study: ARM’s enterprise value stood The stock started to slowly Share price performance for Micro Focus (MCRO:LSE) between 1
January 2008 and 31 December 2010.
The Sky Is the Limit? at around £6 billion, or 50x recover, but come December
Cambridge-based ARM Holdings earnings before exceptionals. investors were still licking their Source: www.advfn.com
is the proud inventor of the This would have made it the wounds.
09/2011 www.tradersonline-mag.com
57
Characteristics of the Indicator for exact trading situations. On
The Force Index was developed an intermediate basis, a 13-day
by Dr. Alexander Elder and EMA of force index can point to
presented in his book Trading for the likelihood of sustained rallies
a Living. or longer-term market declines,
The Force Index (FI) is an thereby generating trading rules
indicator used in technical for longer-term decision making.
analysis to illustrate how strong The force index is calculated
the actual buying or selling by subtracting yesterday‘s
pressure is. It focuses on three close from today‘s close and
key pieces of market information multiplying the result by today‘s
– price change, extent of price volume.
change and trading volume. The
force of every move is defined Force Index = Close(t) - Close(t-1)
by its direction, distance, and * Volume(t)
volume. If prices close higher,
the force is positive, if lower, If closing prices are higher
then negative. The greater the today than yesterday, the force
change in prices, the greater the is positive. If closing prices are
force; the greater the volume, lower than yesterday‘s, the force
the greater the force. That is the is negative. And the strength of
simple but powerful concept the force is determined either
behind Force Index, and the by a larger change in price or a
basic manner in which Force larger volume – either situation
Index can be used alone or can independently influence the
in conjunction with a moving value and the change in force
average to identify whether index.
bulls or bears have control of
the market. When volume is Using the Indicator
considered, an accurate sense The accompanying Gold chart
Force Index Indicator of the market‘s momentum may in Figure 1 shows how the Force
also be quickly garnered. Force Index Indicator closely follows
09/2011 www.tradersonline-mag.com
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TRADERS´ BASICS
09/2011 www.tradersonline-mag.com
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TRADERS´ BASICS
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TRADERS´ BASICS
is beginning an uptrend or a 2. Add the slow stochastics downtrend: The cyan and red
downtrend. One of the most indicator. lines cross below 20.
important elements to trading
is keeping it simple. Because When Does the Conclusion
as we know, one can make it so Long-term Trend Terminate? It is extremely important that
complex, one forgets what the The trends of the major currency everyone around the world has
trend is. Moreover, once you pairs have to always terminate an idea of where their currency
have figured out the trend this will sometime in its lifespan. Thus, is trending, especially if you are
definitely keep your trading on the the currency of your country may trading. As we all know, like it or
correct side of the market. turn at some point in time to your not our government and other
advantage. In order to assist the institutions influence currency to F3) GBP/USD
Executing the Simple Steps timing of the trend termination, their benefit. This simple study
To figure out what type of follow these simple steps: takes a few minutes to execute
long term trend any of the four Trend termination is determined and analyse. This simple exercise
major currencies are in take the when the following occurs: allows one to question the media
following steps: • If the currency pair is in an sources that relay unreliable
uptrend: The cyan and red information to the public. At least
1. Take a weekly chart of any of lines cross above 80. a few charts will provide an alert
the four major currencies. • If the currency pair is in an to how it will affect us.
1) On a weekly GBP/USD the slow stochs crossed. The cyan line has
crossed below the red line. 2) Then both lines cross below 80 on the
slow stochs; that indicates the GBP/USD is in a downtrend.
Source: www.tradestation.com
F4) USD/CAD
www.tradersonline-mag.com
1) On a weekly USD/CAD the slow stochs crossed. The cyan line has
crossed above the red line. 2) Then both lines cross above the 20 on
the slow stochs; that indicates the USD/CAD is in an uptrend.
Source: www.tradestation.com
09/2011 www.tradersonline-mag.com
62
The Relationship Trade Euro will depreciate vs. the US Euro is the base and the US
The first difference we will dollar, the action is to sell and dollar is the quote. When trading
discuss is the fact that this then to buy for your exit. the USD vs. the Swiss franc, the
market is a relationship trade- Now, here is where the symbol is USD/CHF. Now the
always comparing one currency confusing part comes in: every US dollar is the base and the
to another. Sometimes called a trade you make is actually both Swiss franc is the quote. The
pairs trade, this is unlike trading a buy and a sell. Because this main difference is the direction
stocks. If you believe a stock is a relationship trade, we are on the chart which indicates USD
symbol ABCD, is going to go up not only buying the Euro when strength. In the pair of charts in
in value the action is to hit the we hit the buy button – we are Figure 1, the EUR/USD is trending
“Buy” button. When ABCD hits also selling the US dollar. Most up indicating USD weakness,
your target you will exit that trade trading platforms will read back while the chart on the right is
with a “Sell”. If you believe ABCD your order before it is sent to the trending down, also indicating
will be going lower in price, the market place. At the time of this USD weakness. Confusing,
action is to hit the “Sell Short” writing, the EUR/USD is trading isn’t it? Here is an easy way to
and to exit, hit “Buy to Cover”. at 1.4392. When you hit the buy remember the chart direction and
While trading this imaginary button the order is actually to buy strength of the corresponding
The Subtle Differences You Must Know ABCD stock, you are only trading 100,000 Euro and Sell 143,949 currencies. Look at the first chart
its own strength or weakness in US dollars. While this may seem and the angle it is pointing.
09/2011 www.tradersonline-mag.com
63
TRADERS´ BASICS
of the time of writing, the USD/ currency moves 50 pips would Source: www.tradestation.com
JPY pair is trading at 78.37. The return $500.
09/2011 www.tradersonline-mag.com
Take Home Actionable Trading Advice to Profit in Any Market
Harry Dent
Tom Busby
65
Robert Rethfeld
The Stock Market Is
a Huge Jigsaw Puzzle
Mr Robert Rethfeld (48) operates the Wellenreiter-Invest website, an online publication covering economic, financial and social
developments. The core product is a subscription-based market letter published every trading day. Rethfeld appears regularly as
a guest on the N-TV Teleboerse programme and publishes weekly columns for n-tv.de and other stock-exchange services. He
is also a member of the German Association of Technical Analysts. After leaving a German university with a degree in Business
Administration, Robert Rethfeld’s first worked in the aviation and tourism industries. His stint as an executive assistant of the
International Air Transport Association (IATA) was followed by a five-year period of employment as an in-house consultant at a
travel agency association. In 1995, Rethfeld joined Deutsche Lufthansa, where he helped launch one of the first portals for airline
ticket sales via the Internet. In 1998, he founded a consulting firm for the construction of internet portals. Since 2003 he has been
working on his Wellenreiter-Invest project together with his business partner Alexander Hirsekorn.
TRADERS´: Mr Rethfeld, you at a lot of things from trading understand the stock-market
chose the stock-exchange IPOs to options right down to puzzle better.
business as a new career. intraday trading. Especially in
How did it happen that you my early days, many things went TRADERS´: What is your basic
ultimately ended up in this perfectly well with soaring prices, philosophy in market analysis
exciting industry? which meant that I was able to today?
Robert Rethfeld: The whole thing multiply my equity. In retrospect, Robert Rethfeld: The focus of my
was certainly not foreseeable. I I must say though that my risk analysis is on the macroeconomic
discovered my interest in trading management was not exemplary. level. The easiest way to explain
and the stock market only Starting in 2000, things were this is by way of a comparison.
relatively late – and that was in not going so well any more, Imagine a doctor having to make
the 90s when price rises towards causing me to lose part of my a diagnosis for a patient. He/she
the New Economy began. While capital again. Also, day trading puts the patient through his/her
working in my former job, I was not for me. Such short-term paces and looks for any potential
learned by chance that there things do not suit me, which diseases. In the end, the doctor
is good money to be earned in is probably why things did not has gained a lot of different clues
the stock market, which caused work out as well as they used to. and can combine these pieces of
me to study the whole subject I then focused on considering the puzzle by the weight of their
in more detail. I tried my hand the overall picture and trying to meaning and an interpretation of
04/2011 www.tradersonline-mag.com
05/2010
66
TRADERS´ PEOPLE
the correlations. As a result, he/ Robert Rethfeld: Yes, sort of. So my colleague Alexander we want to understand. This which means that they can
she can then make a prognosis However, such is the stock Hirsekorn and I look at the overall can cause probabilities to be improve their analyses by using
of the health and medical market that we will never find all economic perspective and assessed enabling us in turn to this more or less uncorrelated
condition of the patient, which is the pieces, because reality and sometimes at the development benefit from current trends by perspective. A pure trading
highly likely to be correct. That the flow of information are far of individual sectors. However, “riding” these waves. This is also analysis may result in important
is exactly what I do in the case too complex for that. So at best we rarely go into any detail since the reason why we named our macroeconomic contexts being
of the stock market. I look at we will get a picture with missing in that case everything would be market letter “Wellenreiter“ ( = overlooked and those trades
the action from a distance, then parts, which can nonetheless based too much on individual “wave rider”). So this has nothing ending up on the losing side that
check all possible charts, leading be recognised and interpreted. stocks. to do with Elliott Wave, as one would never have been entered if
indicators and correlations in If we only look superficially at might perhaps expect. the overall perspective had been
economic development, and in correlations, we have too few TRADERS´: So it is not always known.
combining everything arrive at an pieces to enable us to see the about clear predictions, but TRADERS´: What added value
assessment of the current and big picture. And if we want to rather about tendencies and does the macroeconomic level TRADERS´: Can you tell
future market development. be perfectionists and look for trends? have for short-term traders? us about some of your
all the small pieces, we will be Robert Rethfeld: You cannot Robert Rethfeld: Well, most of my approaches?
TRADERS´: So we can imagine overwhelmed by information always make a clear prediction analysis is based on non-trading Robert Rethfeld: Sure. It is
the stock market being a giant overload. It is important to find – except sometimes in extreme indicators. Their advantage is impossible though to show all
puzzle whose pieces just need the big, important parts and market situations. Prices develop that they enable traders to get of our analyses. So I picked out
to be put together correctly? piece them together properly. in cycles whose movement a different view of the markets, a few of the most interesting
09/2011 www.tradersonline-mag.com
67
TRADERS´ PEOPLE
concepts. One example is the only the performance of the last – again, the small caps often
Smart Money Indicator (Figure half hour. Since trading volume rise faster and stronger than
1). The concept is based on significantly increases towards the stocks with high market
the idea that market amateurs the end of the trading day, a capitalisation. Since the A/D line
trade directly after the opening divergence analysis of this index only considers the number of
and therefore are often wrong. – in comparison to the normal stocks that have risen and fallen
Professionals take their time to full-time index – may also provide but an index is usually weighted
begin to build up positions – and valuable information on the by market capitalisation, the A/D
their behaviour is critical to long- behaviour of the major market line runs ahead of the market
term market development. So participants. when small stocks show a leading
we have created an index that behaviour. While this relationship
reflects only the performance TRADERS´: Do you conduct any – like everything in the stock
of the Dow Jones from 4 pm other analyses of divergence? market – is not without exception,
to 10 pm CET and ignores the Robert Rethfeld: Yes, for the A/D line overall is a powerful
first half hour of trading. Then example, we consider tool, especially in the long-term
I compare the original index to divergences between the market view.
my calculated “Smart Money” and the advance/ decline line
version and look for divergences. (A/D line). The latter indicates the TRADERS´: Do you use other
For example, if the Dow Jones ratio of shares that have risen similar concepts?
makes a new high, but the smart to those that have fallen that Robert Rethfeld: We very
money index does not follow day. For example, if the market much like using an indicator, F1) Smart Money Index
suit, this may be a sign of waning develops a new high but the which simply consists of a
interest on the part of institutional A/D line does not, then that is moving average – smoothed
investors. This was, for example, an indication of a possible end over ten days – of the number
the case in 2007, when the stock to the upward trend, or at least or percentage of shares in the
market formed a high. Generally, an indication of a consolidation. overall market that have risen. I
this concept has worked pretty This concept also works for low use this indicator in conjunction
well since the year 2000. points. with the performance of the Dow
Jones, and here, too, it is all
TRADERS´: Isn’t there a Smart TRADERS´: Why does the A/D about divergences.
Money concept for the final line work so well as a leading
trading hours as well? indicator? TRADERS´: Which analysis
Robert Rethfeld: Absolutely, but Robert Rethfeld: That is because do you carry out as far as
I know this version by a different small stocks (i.e. those with low cycles and seasonality are The amateurs in the stock market usually trade directly after the
opening; and they are often wrong. The pros take time to begin to
name, the so-called “Late Day market capitalisation) as a rule concerned? build positions. The Smart Money Index represents the performance
of the Dow Jones from 4 pm to 10 pm CET. Compared to the normal
Index”. Here we include only the start to fall earlier at long-term Robert Rethfeld: This group of full-time index, there are sometimes divergences that may provide
last two hours of trading, and highs than the major large-cap analysis is one of our priorities. valuable clues to impending trend changes. A good example was the
negative divergence at the intermediate high in October 2007, which
divergences from the normal full- stocks do which often hold out Besides the widely known type of represented a higher high in the Dow Jones but a lower high in the
time index can also be examined. until the bitter end of the trend seasonality like “Sell in May and Smart Money Index, indicating a possible weak market phase.
Even more limited is the last and only then plummet. It is the Come Back in October” and the Source: www.tradesignalonline.com
minute index, which reflects same at long-term lows, too year-end rally, we also examine
09/2011 www.tradersonline-mag.com
68
TRADERS´ PEOPLE
the historical development of current mood of market Probably the best indicator of a
patterns such as, for example, the participants? market having marked a low point
presidential-election cycle in the Robert Rethfeld: A good tool for is the appearance of a 90-percent F2) Hypothetical Chart for 2011
US or the significance of year-end sentiment analysis is the put/call upside day (euphoria) shortly
figures. For example, we currently ratio on the basis of the options after a 90-percent downside day
have a pre-election year in the traded on the Chicago Board of (panic) within a downtrend that
US, which basically suggests a Trade (CBOT). The put/call ratio has been in existence for some
good stock-market performance. is simply the ratio of puts traded time. A 90-percent downside
We combine this statistic with the to the traded calls. If the ratio is day is a day on which the total
evaluation of the current year-end high, i.e. correspondingly more volume of all fallen shares makes
digit, which this year is “1” (2011 puts were traded than calls, up more than 90 per cent of the
ends with “1”). So we calculate a negative sentiment can be total volume traded that day. In
the average annual performance derived from that and vice versa. other words, only very few shares
of all pre-election years and all In addition to the traditional have risen and/or the stocks that
the past years ending with “1” put/call ratio, we use the ratio have risen have a very low sales
and combine them. This means of the S&P 100 shares (OEX volume. For this chart, the average annual performance of all pre-election years
and all years ending with “1” in the past have been combined. This
that we will obtain in advance a put/call ratio). Due to the high With similar precision, a results in a hypothetical chart ahead of time for the price development
in 2011. The superimposed actual price development shows a
hypothetical chart for the price average market capitalisation 90-percent upside describes striking similarity to the hypothetical chart – with the exception of the
development in 2011 (Figure 2). of its individual stocks, this the opposite situation. If both Fukushima crash in March 2011.
TRADERS´: How do you Robert Rethfeld: I find it much Robert Rethfeld: For one, Source: www.tradesignalonline.com
analyse sentiment, i.e. the easier to identify low points. several 90-percent upside days
09/2011 www.tradersonline-mag.com
69
TRADERS´ PEOPLE
within a short period of time cannot tell in advance what type sustainable movement, but that
suggest overheating. However, of extreme will develop. does not always have to be the F4) Multiple Time Projections
what is basically true is that In the short term, potential case. Incidentally, since 2009 the
the formation of a significant highs can be identified by stock market in general has seen
high has been in the making taking a closer look at volume. If a relatively low trading volume.
for some time. That is why it volumes and volatility suddenly This can, in my opinion, only be
is so hard to be able to clearly surge without the price rising explained to a limited degree
identify a high. One way that or falling significantly, this is by the migration of liquidity in
we use for both highs and lows usually an early warning sign dark pools (off-exchange trading
is combined time projections. I of a slump. The background to platforms at banks where liquidity
choose several prominent high- this conjecture is that the shares is not visible). I am curious when
low constellations of the past change hands from strong we will see the market return to
and project them onto the future (institutional investors) to weak higher volume.
all at once. The whole thing is investors (short-term oriented To create multiple time projections, several prominent high-low
constellations are first selected from the past and then all at once
called time projection period speculators). So we can say that TRADERS´: The obvious projected onto the future on the basis of Fibonacci numbers. This
results in different projection days for each high-low combination. If
and I use for it Fibonacci-based volume often precedes prices question is how you put all several of these projections fall on (almost) the same day in the future,
multiples, such as, for example, near their highs. The previously these pieces together – and this will result in key days for future highs or lows. It is particularly
exciting when on or near such days there is simultaneously a full moon
1.618 or 2.618. So each of my described A/D line is also well especially how you correctly (marked yellow), or an expiry date for futures and options (marked
high-low combinations will result suited to identifying possible high interpret the resulting red). The Thursday prior to the beginning of the expiration week is also
important because many traders position themselves here (marked
in different projection days in points. Ultimately, though, there incomplete picture of the orange in the chart). The grey marking indicates days with a new
moon. The more signals occur, the more likely this day will actually be
the future. Now it may happen is always the problem with highs market. How does that work? a distinctive high or low in the future.
that several of these projections that even with clear signals the Robert Rethfeld: Joining the Source: www.wellenreiter-invest.de
fall on (almost) the same day herd will flock again to a new pieces of the puzzle is, to all
in the future. Such days are high. intents and purposes, the art
key days for future highs or that is learned over time through F5) Early Long Speculation on NASDAQ-100
lows since they are indicated TRADERS´: Can persistent experience. This can be really
by different projections. So to upward trends develop even at difficult to explain in general
make a prediction, I want to see low volume? since the situation is different
a confirmation through a variety Robert Rethfeld: This can every day. Based on our many
of different projections. It will certainly be observed. I call this analyses and indicators, we try
be particularly exciting when on situation a “dull market”. When to prioritise what is important
or close to such days there is stocks rise continuously at low and how it is important. Here
simultaneously a full moon or volume, investors are simply not indicators which are listed
an expiry date of options and willing to sell larger blocks of in an extreme range, are, of
futures. The more signals we can shares, and buyers continuously course, particularly interesting.
get, the more likely this day will push prices upwards. In other But even here it is important
actually be a distinctive high or words, an increasing demand to differentiate and not put too
low in the future. An example is meets limited supply and that much emphasis on one single On 11th March 2009, shortly after the last major bear-market low of
the financial crisis, Robert Rethfeld switched from short to long on the
shown in Figure 4. Incidentally, just leads to rising prices. In thing. It is important to look NASDAQ-100 (see arrow).
I deliberately say “high or low” classical charting, weak trading at all the market action from a Source: www.tradesignalonline.com
because we believe that you volume is equated with a hardly distance and not take a short-
09/2011 www.tradersonline-mag.com
70
TRADERS´ PEOPLE
term view. Whenever many TRADERS´: When were you TRADERS´: Finally, can you
single pieces of evidence that particularly successful in show us one of your long-term
would otherwise have little to speculating like that? position trades? F6) Long Speculation on the S&P 500
do with each other, run in the Robert Rethfeld: My early long Robert Rethfeld: I had a nice
same direction, we can have a speculation in March 2009 trade in silver. I went long on
clear opinion. One example I worked very well. On 11th March 18th August 2010 since the price
had mentioned when identifying 2009, i.e. shortly after the last was moving in an ascending
lows is a 90-per cent upside major bear-market low of the triangle and the seasonal pattern
day being closely followed by a financial crisis, I switched to long in silver looked good for the
90-per cent downside day with on the NASDAQ 100 (Figure 5). subsequent period of time. I was
the trend having already been Another fine example, where my able to hold the trade until just
moving downwards for a long interpretation worked perfectly, before Easter 2011 and smoothed
time and the put/call ratio being was 30th August 2010 when the it at around €46. To me, the
very high. Further confirmation by US Federal Reserve chairman price development seemed
the A/D line or time projections Ben Bernanke announced the exaggerated at that time, and
may then complete the puzzle to further quantitative easing of in my estimation the level of the Robert Rethfeld’s long setup worked very well on 30th August 2010
when the US Federal Reserve Chairman Ben Bernanke announced the
such an extent that I occasionally monetary policy and the markets silver high of 1980 at $48.70 – at further quantitative easing of monetary policy and the markets went
on to move upwards (see arrow).
speculate on a change in trend subsequently took off (Figure 6). the time of the Hunt Brothers’
aggressively early. speculation – was a massive Source: www.tradesignalonline.com
resistance. Also, I wanted to
go on holiday for a week and
not be exposed to the potential F7) Position Trade in Silver
setbacks. As it subsequently
turned out, this exit was pretty
good (Figure 7).
TRADERS´: Speaking of
holidays and leisure: How do
you find distraction from the
stock market, analyses and
trading in everyday life?
Robert Rethfeld: I often work very
early in the morning and prepare
my analyses during that time.
Since my trading positions are Robert Rethfeld went long on 18th August 2010 since the price was
moving in an ascending triangle and the seasonal pattern in silver
long-term ones anyway, I do not looked good for the subsequent period of time. He was able to hold
the trade until just before Easter 2011 and smoothed it at around €46.
have to sit all day in front of the The price development seemed exaggerated at that time, and in Mr
screen. I go jogging regularly, Rethfeld’s estimation the level of the silver high of 1980 at $48.70 – at
the time of the Hunt Brothers’ speculation – represented a massive
play golf and try to beat the resistance.
backbreaking “curse” of the desk Source: www.tradesignalonline.com
by suitable fitness exercises.
09/2011 www.tradersonline-mag.com
71
TRADERS´ COLUMN
to really be good at something structured approach to eventually faces one of his biggest
inevitably requires experienced be successful. challenges. In the absence of
coaches and trainers as well as Perhaps you are wondering a solid structure, he needs to
a high level of expertise. Another what all this has to do with develop and implement one
essential element, though, is trading. And my answer is – himself. However, more often
the discipline needed to spend everything, because all the than not, this is more difficult
thousands of hours completing virtues and factors mentioned than expected because usually
training sessions, while friends above are also necessary for you already live according to a
and acquaintances are enjoying trading. However, there are fixed set of regulations which
themselves in pubs and discos. certain things that are different include your working hours
In this article, certainly not all, but in trading and those are the and work rules. For this reason,
ones that make it even more most people find it very difficult
difficult to be a successful to develop a structure of their
trader. While training to be a own. As a trader, though, you
A Successful Future – and No Plan? top athlete, doctor, lawyer or have to decide on every little
master craftsman, you very early thing yourself: selecting brokers,
on find structured programmes markets, products, strategies,
including schools and universities trading times, investment horizon,
only the most important factors as well as teachers, instructors, learning sessions and time
can be mentioned, but one of them colleagues etc. By contrast, there periods for analysis, just to name
summarises all the components of is nothing like that in trading. An the most important things. In
a successful career: a plan. aspiring private trader initially has addition, you need to integrate
You will have trouble finding nothing to fall back on: he needs your trading in the best possible
a successful man who was not to open an account without way into your professional and
Thomas Wacker driven by clearly-defined targets. knowing what to look for and personal environment. All this
Chances are that no one would Now almost every person has must decide on a product without is a truly Herculean task for any
Mr Thomas Wacker has been have had the idea that a five-year- certain desires and goals, but really knowing what it is or how trader, especially when they are
making investments at European old Michael Schumacher would very few make them become to use it. Since he is still totally starting out. It is all the more
and American stock exchanges get inside a go-cart and twelve reality. What distinguishes these unfamiliar with risk and money important here to make sure
since 1998. His interest is years later was accidentally a two groups? To achieve his management as well as a trading that you have a well-structured
mainly in trading futures, but Formula 1 racing car driver. Nor objectives, the successful person journal or technical analysis, it is business plan that covers all
he also trades equities and was it surely just a matter of luck uses a detailed plan and goes no wonder that the majority of all the major areas of trading and
foreign exchange. Since 2003, that another ten years on, he on to implement it step by step. new accounts opened end up in provides you with a guideline
Mr Wacker has been doing was the most successful racing While he never loses sight of total loss after a short time. What for future trading. In actual
intensive research on the car drivers of all time. The fact is his grand overall goals, he also is simply missing here is a solid trading then, a professional
subject of trading journals and that there are many contributory sets himself smaller targets that structure including people who trading journal may be a sensible
has developed a professional factors to such a career. First, can quickly be achieved along can pass on their knowledge and approach.
money management software there is the enthusiasm for what the way. Regardless of whether experience to beginners until the The earlier you plan your
for that purpose. you do and then there is an that person is an aspiring top latter can operate independently. trading and structure it in the best
Contact: t.wacker@tradekom.com environment that supports you athlete, a doctor, lawyer or master It is precisely here that a trader possible way, the sooner you will
in what you‘d like to do. And craftsman – they all require a who wishes to trade successfully be successful.
09/2011 www.tradersonline-mag.com
72
TRADERS´ TOOLS
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