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An everyday strategy 14
IN THE VOLUME ZONE

For trending and
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PUT A STOP TO IT
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INTERVIEW
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CONTENTS MAY 2011, Volume 29 Number 6
14 Gap Fill And Go INTERVIEW

by Jamie Theiss 46 Short Swings In Futures With
Here’s a look at two trades using a Markus Heitkoetter
strategy you can use almost every by Jayanthi Gopalakrishnan and
day. Bruce Faber
As founder and Ceo of Rockwell
FEATURE ARTICLE TIPS
Trading, Markus Heitkoetter has
16 In The Volume Zone shared his trading methods and quick-scan, review
by Walid Khalil and David Steckler ideas with more than 300,000 trad- 34 • The Machine Lite
The volume zone oscillator can be ers in over 196 countries. An au- Quick-Scan: Web-based portfolio
applied to trending and nontrend- thor and speaker, he has seen his management system for equities and
ing markets. Find out how it can work published in major publica- exchange traded funds
be used to trade the Djia, Spy, and tions and on thousands of websites
gold. around the world. What’s he got to 56 • MESA 9
say about the market right now? Review: Analysis software
24 Investment Candles 54 Futures For You

by Thomas N. Bulkowski DEPARTMENTS
Which candlesticks work best as by Carley Garner
reversal or continuation patterns? Here’s how the futures market 6 Opening Position
really works. 8 Letters to S&C
30 Putting A Stop To It 59 †Traders’ Glossary
60 Explore Your Options 61 Traders’ Tips
by David Garrard
by Tom Gentile 70 Trade News & Products
A greater focus on your exit Got a question about options?
strategy and less on your entry 72 Traders’ Resource
may make a big difference in your 74 Advertisers’ Index
overall trading results.
AT THE CLOSE TCA
74 Editorial Resource Index
82 New Opportunities In
76 Books for Traders
38 Context Is Everything MSCI Indexes
by Donald Pendergast Jr.
77 Futures Liquidity
by Gil Morales and Chris Kacher 79 Classified Advertising
This is how you use stock and index Never before has the typical
charts to determine market context. futures market participant had so
many trading opportunities avail-
able — and all under one roof.
45 Q&A
by Don Bright
This professional trader answers
a few of your questions.
This article is the basis for Traders’ Tips

TIPS
this month.
TCA WM
These articles – and articles like them – n Cover art: Jose Cruz
can be found online at www.traders.com n Cover concept: Christine Morrison/Jose Cruz
Copyright © 2011 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis of
Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $64.95 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.
4 • May 2011 • Technical Analysis of Stocks & Commodities
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03IB11-357

May 2011 • Volume 29, Number 6
March 2006 • Volume 24, Number 3 O
Opening Position
PENING POSITION
The Traders’ MagazineTM

The Traders’ Magazine TM
S
EDITORIAL
EDITORIAL
editor@traders.com
editor@traders.com
Editor in Chief Jack K. Hutson
O
pring is the season typically associated
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
Editor Jayanthi Gopalakrishnan
Managing Editor Elizabeth M.S. Flynn
Managing Editor Elizabeth M.S. Flynn with
nce renewal,
again we agot time to refresh
a reminder of and
just
Production Manager Karen
ProductionManager KarenE.E.Wasserman
Wasserman reenergize. Alas, the spring of 2011 hasn’t
how sensitive the financial markets
Director Christine
ChristineMorrison
felt
are.that
Weway.
saw We haveselloff
had political unrest in
Art
Art Director Morrison a major in the Japanese
Graphic Designer Wayne
GraphicDesigner SharonShaw
Middle Eastern countries including Tunisia,a
Yamanaka
Staff Writers
Editorial Dennis
Intern D. Peterson,
Emilie Rommel Bruce Faber
markets, which — as expected — triggered
Webmaster Han J.David
Technical Writer Kim Penn Bahrain, Egypt, Yemen, escalating to the crisis
domino effect on markets throughout the
Contributing Dennis John
Staff WritersEditors Ehlers, Bruce Faber
D. Peterson,
Anthony W. Warren, Ph.D. in Libya, which has given rise to international
world. Add disappointing earnings numbers
involvement. There was andthe 9.0have
magnitude
Webmaster Han J. Kim
from US corporations you a situa-
Contributing EditorsDon
ContributingWriters Bright,
John Thomas
Ehlers, KevinBulkowski,
Lund,
Martin
AnthonyPring, Barbara Ph.D.
W. Warren, Star
earthquake and tsunami in Japan that devas-
tion that just got worse. So what started off as
Contributing Writers Don Bright, Thomas Bulkowski,
Martin Pring, Adrienne Toghraie tated the northeastern portion of the island of
a strong year ended up correcting, and rather
OFFICE OF THE Publisher Honshu
rapidly. and triggered
I must admitathatnuclear crisis.correc-
although
Publisher Jack K. Hutson
Credit OFFICE OF Eades
Manager Linda THEGardner
PUBLISHER We have been faced with a year
tions are healthy for any market, whenof crises.
you have If you
a 2%think
drop,about
it getsit,you
in addition
thinking.to
PublisherEngineer
Industrial Jason K. Hutson
Jack K. Hutson the recent crises in the Middle East and Japan, about a year after the BP the
Prior to the Federal Reserve’s F OMC meeting, I usually take a look at oil spill
yieldin
Credit Manager
Project Sean M.
Engineer Linda
Industrial Engineer
Moore
Eades
Jason
Gardner
K. Moore
Hutson
the US Gulf Coast, we have seen quite a number of global events such as floods in
curve. At present, it’s looking a little flat, and given that the general consensus
Karen
Australia,
is that the earthquakes
Fed is goingintoNew Zealand, and currently,
31stcoups in North
I am Africa. With
Accounting Assistant
Project Engineer Sean M. Moore tighten at their January meeting, concerned
Controller Mary K. Hutson
all these events taking place within the past year, the arrival of spring has
that the yield curve may be heading in the direction of being inverted. And been
if that
Accounting Assistants Jane Leonard
Controller Mary K. Hutson
Advertising Sales
4757 California Ave. S.W.
rather
were to bleak.
happen, that would not be a good sign for the US economy. I’m not
suggesting
What happened
that we inareJapan
goingshows us the power of nature and the Butweakness
given thatof
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almost anything can happen, it doesn’t hurt to expect the worst. If nothing and
else,
National Sales Manager Edward W. Schramm
advert@traders.com California, for that matter, are common, given their proximity to fault lines. Japan
it helps to preserve your capital.
Summer L. Davis
has prepared itself for earthquakes, but no matter how prepared you are, nature has
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Classified
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the power of throwing something at you so powerful it is beyond expectation. It’s
Chrisman
So
Production CoordinatorKaren
Production Coordinator KarenMoore
Moore
that unexpected variable
with that that will
in mind, youknock
can seeus akilter.
why it’s Weimportant
live in a world of unknowns,
to design a trading
CIRCULATION
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& Order
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system that gets you out of the market at the right time. When that these unknowns
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important to be thorough with the different types of orders, front-end software, and
Subscription Sales Karen Adams-Thomas,
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Stacy Bagnall, Sales
Subscription Carmen Hale Dimaano, Tina Row
Agnes trading systems that are out there. Lee Leibfarth, in his article “The Automated
Daytrader” hen the world
starting is confronted
on page 22, addresseswiththesuch crisis,
various I prefer
options thatnot
aretoavailable
be actively
and
involved in the markets. I would rather not be in a position where I would
WEBSITE
Website
http://www.traders.com
http://www.traders.com how you can take advantage of them.
Staff members
Staff members may may bebe emailed
emailed through
throughthe
theInternet
Internet be But
taking advantage
before gettingofto the
the rising price
stage of of oilthat
placing andtrade,
gold,you
or wide
need currency fluctua-
to understand the
tions. But I didn’t see any major moves that indicated that the markets were going
using first
using first initial
initial plus
plus last
last name
name plus
plus@traders.com
@traders.com
market you are trading. You should be able to do so after reading Paolo Pezzutti’s
Authorization to photocopy items for internal or personal to take any majorMarket
“Understanding hits. There were theThe
Structure.” usual expected
markets short-term
follow reactions,
different butpat-
behavior the
use,Authorization
or the internto alphotocopy
or personal usefor of internal
specificorclients, is
markets seemed to return to normal quickly. Could it be that there are others who,
items personal
granted
use, or bytheTech nical or
internal Anal ysis, Inc.use
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of specific ered with is terns, and you need to determine if it is volatile, trending, in a trading range, moving
the Copyby
granted
porting
right
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the Copyright
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providedCenter
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Center
Analysis, (CCC)
Inc.
that the(CCC)
for users
base fee
Transactional
registered with
of $1.00 per
Transactional
Re-
copy,
Report- like me, also
strongly in onewould rather not
direction, be involved
or moving in the
but not markets
with much during such times? That’s
momentum.
plus 50¢ perprovided
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paidthe
MA 01923.
directly
base fee
directly Online:
to CCC,
of $1.00 222perRosewood
to CCC,http://www.copyright.
copy, plus
222 Rosewood Drive,
a comforting thought, and I will stick with that for now.
Only when you know what the structure of the market is will you be able to apply
com. For MA
Danvers, those organ
01923. izations
Online: that have been grantedFor
http://www.copyright.com. a theI am confident
correct tradingthat the peopleBut
technique. of Japan
that’s will
just recover
the firstfrom
step.the
You tragedy and to
still have rebuild
have
photocopy license bythat CCC, a sep arategranted
systemaofphotocopy
payment
and regain their strength. Although the beginning of spring may not appear to beofa
those organizations have been
has beenbyarranged.
license The fee code
CCC, a separate system for users of the has
of payment Transac-
been discipline, as you will find out after reading this month’s Technical Analysis
tional Reporting
arranged.
Reporting
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STOCKS & COMMODITIES interview with Ken Tower. Only then will you be able to that will give rise
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expressed offer ing to buy
subject
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more
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8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES
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Stocks | Futures | Forex

The editors of S&C invite readers to submit their opinions and information on subjects FOLLOWUP ON Market
relating to technical analysis and this magazine. This column is our means of communi- Instrument Function
cation with our readers. Is there something you would like to know more (or less) about? Editor,
Tell us about it. Without a source of new ideas and subjects coming from our readers, this The article “The Market
magazine would not exist. Instrument Function”
Email your correspondence to Editor@Traders.com or address your correspondence published in the Decem-
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All ber 2010 issue of S&C
letters become the property of Technical Analysis, Inc. Letter-writers must include their full left me very enthusiastic
name and address for verification. Letters may be edited for length or clarity. The opinions about using this signals processing
expressed in this column do not necessarily represent those of the magazine.—Editor technique, but also perplexed as to how
to do just that.
I have a background in engineering,
MATHEMATICAL EXPECTATION Conceptually, I think there should be a but not in signals processing. After
Editor, preference for the expectancy calculated reviewing the “mathematical discus-
I have been a follower of as a percentage, since it offers the advan- sion” section several times, I still do not
your magazine for quite tage of independence to the price level understand how to compute the E(t-tau)
some time, and usually read of the traded instrument. Can the author device instrument function. Computing
it from cover to cover as offer any further insight on this? the output from the input plus device
soon as it arrives in the mail. For some On a side note, the article mentions instrument function is simple, but how
time I have been using an evaluation that the author works in Wealth-Lab. does one compute the device instrument
methodology similar to what Stephen Does he have any performance visual- function from the input and output? I am
Massel describes in his article, “What izer for the Wealth-Lab platform that interested in an expression of the type
Can You Expect, Mathematically?” in incorporates the measures he mentions “E(t-tau)=...”
the March 2011 issue of S&C. in his article? Could the authors provide an example
I was pleasantly surprised to see the Thanks and keep up the good work. calculation or further reading sugges-
methodology I use in evaluating my Jorge Dardón P. tions on computing the device instrument
trading systems described in such a good Doral, FL function from the input + output?
fashion, and can’t help but ask the author Eric Lanoix
about the single discrepancy I have with Author Steve Massel replies: Vancouver, BC, Canada
the one described in the article. Massel Thanks for your email. Yes, I agree, the
describes the calculation for the reward/ R/R ratio in dollars is more applicable Authors Aleksey Gersimov and
risk ratio as the average profit per trade/ when trade size is an inherent part of the Alexander Ershov reply:
average loss per trade in dollars as an strategy, for example, when adjusting for The main purpose of our article “The
appropriate measure. I moved away from risk. A purer method of evaluation, where Market Instrument Function” was to
using such a measure some time ago, as risk is not adjusted, would be to use R/R introduce you to the instrument function
it is very dependent on the price of the as the average % gain / average % loss, method and to show a forecast for price
instrument being traded (and thus on the as I do in such cases — and as you point movement that was built by this method
position size) — as the author properly out, I discuss this in the section on ap- for such assets as Dia and Spy. In the
states in his “Application To Your Own plication to your own trading. article we showed a five-year forecast.
Trading” section. Instead, I prefer to use I have played around with mathemati- We do not know of any other method that
the payoff ratio, which is calculated as cal expectancies (MEs) in Wealth-Lab. can build such long-term forecasts.
(average percentage profit per trade)/ I have added the ME to the PerfScript In the article’s sidebar titled “Math-
(average percentage loss per trade). code so that it is calculated and displayed ematical discussion,” we showed that
Conceptually, they should be equivalent, as part of the standard metrics in the the presence of an input signal, device,
as both of them are dividing an average performance tab. I have also written and output signal is always equivalent
profit per trade by an average loss per an indicator that shows a rolling ME to the Fredholm equation of the first
trade (one expressed in dollars and the calculation based on period-to-period type. This part of the article is related
other one expressed as a percentage). price moves. I would be happy to share to the problem definition but not to its
However, in practice, I have found that these with you, if you would like. solution. It is a universal mathematical
there are slight differences in the result Please also note that the following description of any problem, in which the
between each approach. In some cases, typo appeared in the article: The scalp device transforms an input signal into
the percentage calculation for the expec- system example, R/R, should have been an output signal.
tancy is higher and in others the absolute 0.8 instead of 0.9 in order to yield an ME For those who are interested in the solu-
amount calculation is higher, as can be of 26. Unfortunately, I did not receive the tion to the problem, the following explana-
seen in the attached spreadsheet [not spreadsheet attachment you mention. tion is a method that makes it possible to
shown—Ed.] with a set of tests runs. determine the instrument function.
+1105 Letters.indd 1 3/24/11 11:10:25 AM

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110724_17_AD_Access_S&Cw-mobile.indd 1 3/17/11 9:18 AM

Consider the function ƒ(τ), the price The solution of the latter equation has NEW FORMAT FOR TRADERS’ TIPS
history, as an input signal; and the the form: Editor,
( (( (
~
function ƒ(t), the future movement of ~ As a long-time sub-
prices, as an output signal. All the fac- ~ 1 f (u) (4) scriber and reader of your
E (u) =
tors influence the pricing we describe 2π y (u)
~
magazine, I enjoy your

with a market instrument function E(t–τ). magazine and get a lot of
According to our article, the detailed ~ good trading ideas from
description is equivalent to the Fredholm ƒ (u) it. However, I dislike the new format for
where the function ~ y(u) must belong to
equation of the first type: the space L2(–∞,∞). the Traders’ Tips column. I don’t like
b By that, the representation of the origi- that you no longer print the code but
~ instead direct readers to your website
f (t) = ∫ f (τ)E(t − τ)dt (1) nal integral equation solution turned out
a to be expressed through representations or to the contributor’s website for the
of the given functions — input and output code. When I tried going to your website
It is clear that if we know the instru- for the code, I found it was down, so I
ment function, we can always determine signals.
~ The solution itself can be expressed by wasn’t able to obtain the code when I
the function ƒ(t) — the future movement wanted to use it. In addition, at some of
of prices — from equation (1). To deter- means of the inverse Fourier formula:
the software developers’ websites, it can
mine E(t–τ), we can divide the history of be very difficult to find the current code
the price movement into two parts and 1 ∞
~
E ( t –τ) = ∫ E (u ) e
− iu ( t − τ )
du or it is not posted there.
consider one of them as the past ƒ(τ) and 2π −∞ I liked your old format where the code
the second one as the future. In this case, was printed in the monthly magazine, so
~
in equation (1), only one unknown func- 1 ∞
f ( u ) − iu ( t − τ ) that I can be sure I’ll have a copy of the
tion is left: function E(t–τ). Our aim is =
2π ∫ ~
y ( u)
e du
code available. Please go back to print-
thereby reduced to solving the Fredholm −∞
ing the code in each month’s hardcopy
equation of the first type relative to the edition.
equation kernel E(t–τ). Herewith, the limits of integration in Paul
This equation is of a convolution type. equation (1) can be determined from the
That’s why we can apply the Fourier maximum of the correlation function of Thank you for writing. We discontinued
transform to equation (1), as follows: ~
the functions ƒ(t–τ) and ƒ(t). printing all the code (for the most part) in
Please note that the dependence of the the Traders’ Tips section because of the
market instrument function E(t–τ) on the
∞
~
g (u ) = 1 space it took and because printed code
∫ g( x ) e
−iux
dx difference of t and τ means the presence
2π just isn’t very useful, given the difficulty
−∞
of temporal shift between the functions (or impossibility) of accurately keying in
~
(2) ƒ(τ) and ƒ(t). long code lists. Since most readers want
Finally, here is a list of further reading to copy and paste the code anyway from
However, according to the convolution readers may find useful: a web page, we opted to move the code
theorem, Fourier transform of convo- online and started printing mainly the
lution is a multiplication of Fourier Hackbusch, Wolfgang [1995]. Integral commentary from the Traders’ Tips con-
integrals–appropriate functions; thus, Equation: Theory And Numerical tributors, producing a more condensed
we get: Treatment, Birkhäuser Verlag. section in the printed magazine, with
Jerri, Abdul J. [1985]. Introduction To some exceptions. (In this issue, we’ve
~ ~ (3) Integral Equations With Applica-
2π E (u)y~(u) = f (u) included some code because the code
tions: Pure And Applied Mathematics, listings were short.)
where: Marcel Dekker. In any case, we regret any frustrations
~ Kanwal, Ram P. [1996]. Linear Integral this change may cause some readers. We
E(u) is a representation of function Equations, 2d edition, Birkhäuser. will continue to print code in articles and
E(t–τ) Polyanin, Andrei D., and Alexander V.
~ in the Letters section.—Editor
y (u) is a representation of function Manzhirov [2008]. Handbook Of
ƒ(τ) Integral Equations, Crc Press. METASTOCK CODE FOR
~ ~
ƒ is a representation of function ƒ(t). Porter, David, and David S.G. Stirling Cup Formations
[1990]. Integral Equations: A Practi- Editor,
Thus, by means of the Fourier trans- cal Treatment, From Spectral Theory In “Identifying Cup For-
form, we managed to reduce the solution To Applications, Cambridge Univer- mations Early” (S&C,
of the original integral equation (1) to sity Press. April 2011), I believe
the solution of the algebraic equation Smithies, F. [2009]. Integral Equations, there is an error in the
(3) for representing the desired solution. Cambridge University Press. first line of the MetaStock
+1105 Letters.indd 2 3/24/11 3:05:27 PM

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1. You will be a Power E*TRADE customer for 60 days when you open and fund a new Power E*TRADE account and enroll in the commission-free trade offer. Thereafter, you will
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receiving access to this platform, you must execute at least 30 stock or options trades by the end of the following calendar quarter.
2. CNBC streaming news and the CNBC logo are provided for informational purposes only under a license agreement with CNBC, Inc. Neither E*TRADE Financial nor any of its
affiliates are responsible for its content and no information presented constitutes a recommendation by E*TRADE Financial or its affiliates to buy, sell or hold any security, financial
product or instrument discussed therein to engage in any specific investment activity.
3. This offer applies only to new Power E*TRADE accounts opened with a minimum $2,000 deposit from an external bank or brokerage account. You will receive up to 500 trade
commissions for each stock or options trade executed within 60 days of the deposited funds clearing in the new account. You will pay $9.99 for your first 149 stock or options trades
and $7.99 thereafter up to 500 stock or options trades (plus 75¢ per options contract). Account must be funded within 60 days of account open. Credits for cash or securities will be
made based on deposits of new funds or securities from external accounts made within 45 days of account open, as follows: $250,000 or more will receive $500; $100,000-$249,999
will receive $250; $50,000-$99,999 will receive $100; $25,000-$49,999 will receive $50. Your account will be credited for trades and deposits within eight weeks. You will not receive
cash compensation for any unused free trade commissions. Excludes current E*TRADE Securities customers (except IRA accounts), E*TRADE Financial Corporation associates and
non-U.S. residents. This offer is not valid for IRAs, other retirement, business, trust or E*TRADE Bank accounts. New funds or securities must remain in the account (minus any
trading losses) for a minimum of 6 months or the credit may be surrendered. One promotion per customer and per linked account. E*TRADE Securities reserves the right to terminate
this offer at any time. Accounts must be opened by December 31, 2011, the offer expiration date.
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System response and account access times may vary due to a variety of factors, including trading volumes, market conditions, system performance and other factors.
©2011 E*TRADE Financial Corporation. All rights reserved.

formula given in the article: Documentation/FEEDbk_docs/2011/04/ 1),0),2*boxlength)-Sum(Max(Ref(FilC,-
TradersTips.html for additional code 1)-FilC,0),
{Basic Definitions}
semicupperiod:=LastValue(Max(BarsSince(C
on cup formations for other software 2*boxlength))/
(eps+Sum(Max(FilC-Ref(FilC,-
>=LastValue(C*parameter)),1))+1; platforms.—Editor]
1),0),2*boxlength)+Sum(Max(Ref(FilC,-1)
For your convenience, below I show -FilC,0),2*boxlength))*100;
I get the following alert at C*: “This the entire code set for the “S&C – Is- DSX2:=Abs(Sum(Max(FilC-Ref(FilC,-
is not a recognized name, constant, or SemiCup”: 1),0),3*boxlength)-Sum(Max(Ref(FilC,-
1)-FilC,0),
operator.” I don’t know what to change 3*boxlength))/
it to or even what that means. Can you MetaStock code
--------------------------------------------
(eps+Sum(Max(FilC-Ref(FilC,-
help? S&C - IsSemiCup
1),0),3*boxlength)+Sum(Max(Ref(FilC,-1)
-FilC,0),3*boxlength))*100;
Bob Robertson --------------------------------------------
{Giorgos E. Siligardos, 2009}
{Conditions}
{Basic Semi-Cup Identification Algorithm}
Author Giorgos Siligardos replies: isSemicup:=
There is no error in the code. The basic {parameter}
{1}(semicupperiod>=20)
AND
code segment is just a part of the “S&C- parameter:=Input(“parameter”, 1, 100,2);
{2} (Ref(DSX1,-(b5-b2))>25)
IsSemiCup” indicator. You are getting the FilC:=(Log(C));
AND
eps:=0.0000000001;
error because you input only part of the {3} (DSX2<25)
indicator. The indicator is the “S&C – Is- {Basic Definitions}
AND
{4}(Cum(If(Cum(1)>=b2, FilC>L3,0))= 0)
SemiCup” indicator, and the Basic code semicupperiod:=LastValue(Max(BarsSinc
AND
must be inserted in the line that reads e(C>=LastValue(C*parameter)),1))+1;
{5}(Cum(If(Cum(1)>=b4, FilC>L2,0))= 0) ;
Ptop:=LastValue(HHV(FilC,Semicuppe
<insert BASIC CODE here>. riod));
Please review the article and also Pbot:=LastValue(LLV(FilC,Semicupperi
LastValue(isSemicup*semicupperiod);
find the entire code listing at the od));
----------------------------------------------------
S&C website in the Subscriber Area boxheight:=LastValue(Abs(Ptop-Pbot)/5);
boxlength:=LastValue(Max(Int(semicupp
at: http://technical.traders.com/sub/ eriod/5),1)); CLARIFICATION: Trade News &
Codes/2011/042011Siligardos.asp. [To
Products
navigate to the Subscriber Area, go {Grid Nodes}
A listing of an eSignal product update in
to S&C’s homepage at www.Traders. b0:=LastValue(Cum(1)-semicupperi-
od+1); the March 2011 Trade News & Products
com, click on “Stocks & Commodi- b5:=LastValue(Cum(1)); column should have included an image
ties,” and click on “Subscriber’s Area.” b1:=LastValue(Min(b0+boxlength,b5)); of eSignal’s website, not that of the
You will need to enter your last name b2:=LastValue(Min(b1+boxlength,b5));
parent company, Interactive Data. In
and subscriber number, found on your b3:=LastValue(Min(b2+boxlength,b5));
b4:=LastValue(Min(b3+boxlength,b5)); addition, the website associated with the
magazine’s mailing label, to enter this L2:=Pbot+2*boxheight; eSignal software is www.eSignal.com,
area. Then scroll all the way down L3:=Pbot+3*boxheight; not its parent company website, www.
until you see the heading “S&C Article
InteractiveData.com.
Code.” See also the S&C Traders’ {Directional Strength}
DSX1:=Abs(Sum(Max(FilC-Ref(FilC,-
Tips online at http://www.traders.com/
eSignal.com
S&C
“Yes, Freman, those people down there look tiny – and given our
directives and business matrix, unfortunately, they are tiny.”
+1105 Letters.indd 3 3/24/11 11:10:53 AM

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ETRADE.COM / 1-800-ETRADE-1
Customers who receive promotional offers from affiliates of E*TRADE Financial Corporation may be subject to IRS Form 1099-MISC reporting requirements should the total
value of those items exceed $599 in a calendar year. Please consult a tax professional.
1. This offer applies only to new Power E*TRADE accounts opened with a minimum $2,000 deposit from an external bank or brokerage account. You will receive up to 500 trade
commissions for each stock or options trade executed within 60 days of the deposited funds clearing in the new account. You will pay $9.99 for your first 149 stock or options trades and
$7.99 thereafter up to 500 stock or options trades (plus 75¢ per options contract). Account must be funded within 60 days of account open. Credits for cash or securities will be made
based on deposits of new funds or securities from external accounts made within 45 days of account open, as follows: $250,000 or more will receive $500; $100,000-$249,999 will
receive $250; $50,000-$99,999 will receive $100; $25,000-$49,999 will receive $50. Your account will be credited for trades and deposits within eight weeks. You will not receive cash
compensation for any unused free trade commissions. Excludes current E*TRADE Securities customers (except IRA accounts), E*TRADE Financial Corporation associates and non-U.S.
residents. This offer is not valid for IRAs, other retirement, business, trust or E*TRADE Bank accounts. New funds or securities must remain in the account (minus any trading losses) for
a minimum of 6 months or the credit may be surrendered. One promotion per customer and per linked account. E*TRADE Securities reserves the right to terminate this offer at any time.
Accounts must be opened by December 31, 2011, the offer expiration date.
2. The Power E*TRADE Pro trading platform is available at no additional charge to Power E*TRADE active trader customers who execute at least 30 stock or options trades during
a calendar quarter. To continue receiving access to this platform, you must execute at least 30 stock or options trades by the end of the following calendar quarter.
3. The projections or other information generated by Strategy Scanner regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment
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Using Candlesticks And Simple Moving Averages
Gap Fill And Go

Here’s a look at two trades using a strategy you can use THE SETUP JOSE CRUZ
almost every day. To set up these trades, please observe that the eight- and 21-pe-
riod SMAs are in an uptrend on the five-minute chart. While
by Jamie Theiss not shown, the SMAs are also in an uptrend on the higher time
frame charts, such as the 15-minute and 60-minute charts.
I’m
going to show you two trades using a bread & butter Next, we have a bullish gap up on the opening bell. Now
strategy you can use almost every day to capture the hardest part of the trade is sitting on your hands for the
profits from the stock market. As you can see from first 30 minutes of trading. You want to just sit and observe.
Figures 1 and 2, I use candlesticks and moving Then, you may begin to notice the gaps are starting to fill.
averages on a five-minute time frame. I use the eight- and This is just a version of the well-tested slogan, “Buy the dips
21-period simple moving averages (SMA), which are displayed and sell the rallies.” You are just waiting for the dip to occur
in green and blue, respectively, along with the 200-period in the predetermined uptrend.
SMA (red). Of course, eight and 21 are Fibonacci numbers.
In addition, the 200-day SMA is watched by so many that it THE FAS TRADE
has practically become self-fulfilling. I call the technique the In the Direxion Daily Financial Bull 3X Shares exchange
“gap fill and go.” traded fund (FAS) trade in Figure 1, you are waiting for the
14 • May 2011 • Technical Analysis of STOCKS & COMMODITIES
+1105 Theiss.indd 1 3/24/11 11:11:59 AM

Sell
first green bar to take out a red bar. This will

usually happen during the 10:00 am reaction
time. This could be anywhere from 9:50 am
to 10:10 am. The fourth red bar’s highest
price is just below $30.20, so you want to
buy one cent over that red bar, or $30.21, and
place your protective stop one cent below
the entry bar, which is $29.98. I don’t wait
for the bar to close and take the entry as
soon as the previous bar’s high is taken out. Buy
The current low of the not-yet-closed entry
bar is what the stop would be. If that low is
broken, then the reason for the trade is over.
That gives you a 23-cent risk for this trade.
It is critical you share-size correctly for the
BLACKWOOD PRO
risk amount. For example, if your risk per
trade is $100, using a risk of 23 cents gives
you a share size of 435 [100/$0.23 = 435].
It is wise to average down to 400 shares to Figure 1: the fas trade. The eight- and 21-period SMAs are in an uptrend and there is a bullish gap
up on the opening bell. Once you see a potential winning trade, you calculate your risk-reward ratio, position
account for slippage and transaction costs, size, and place your protective stop.
and to keep you from using odd lots.
In addition, I hope you noticed how the
flat 200-period Sma (red) acted as a floor of
support for the price movement. It is almost
as if by magic.
To recap, we have a reversal bar off the
flat 200-period Sma with rising eight- and
Sell
21-period Smas, at the 10 am reaction time.
We’ve identified a potential winning trade,
calculated the risk, determined share size, and
placed our protective stop. Now we sit on our
hands again and let our edge play itself out, and
wait for our profit-taking plan to activate.
While there are many ways to trail the price
and take profits, for this method I will use a
five-minute bar-by-bar trail method. But first
I have to be willing to let the trade breathe
a bit and let my edge play out. I am going
to wait until I have two consecutive bars of Buy
profitability. Only then will I move my stop
to breakeven and start the bar-by-bar break
count.
Looking at the Fas chart, you can see the
first bar break is after the little doji bar. That Figure 2: the ntap trade. The setup is similar to the FAS trade, but in this case, the 200-period SMA
narrow range bar is only high $30.55/low is overhead. This gives you a possible price target. An effective method to manage your positions would be
$30.48, so I would exit the trade as soon as to take partial profits just below the SMA overhead resistance and trail your remaining positions. In the event
$30.47 prints in the time & sales window. My there is a big run to the upside, you would be in a good position to take advantage of it.
entry was at $30.21 and I am flat at $30.47,
which leaves a profit of 26 cents on 400 shares, or $104. It is but pulled back with the rest of the market to fill the gap by
not the most profitable trade at only a 1:1 risk-reward ratio, the 10:00 am reaction time. Again, I am looking for a green
but it is a profit, nonetheless. bar to take out a red bar.
The entry price triggered at $54.03, but the spread and slip-
The NTAP trade page got my cost to $54.05. The low of that big red bar at the
In Figure 2, the setup is almost the same as with Fas. The Smas pivot on the 20-period Sma is $53.71, so my stop will be at
are rising on the five-, 15-, and 60-minute charts. NetApp Inc.
(Ntap) showed some strength on the first two five-minute bars Continued on page 36
May 2011 • Technical Analysis of Stocks & Commodities • 15
+1105 Theiss.indd 2 3/31/11 8:38:09 AM

+Khalil Steckler indd 1 3/24/11 10 14 32 AM
INDICATORS
Trending Or Nontrending?
In The Volume Zone

Here’s a look at the volume zone oscillator, which The volume zone oscillator
can be applied to trending and nontrending Volume is simply the number of shares or contracts
markets. Find out how it can be used to trade the that have been traded throughout the day, so the higher
Djia, Spy, and gold. the volume, the more active the security. Volume is
always treated as a secondary indicator, despite its
importance in confirming trends and chart patterns.
axiom of technical analysis states that Volume analysis is a key component of analyzing
An with few exceptions, all technical indi-

cators can be classified as either trend-
and predicting the future direction of an asset. Joe
Granville introduced the on-balance volume (Obv)
ing or oscillating (nontrending) in their indicator in his Granville’s New Key To Stock Market
design. This new indicator, the volume Profits. This was one of the first and most popular
zone oscillator (Vzo), addresses both. indicators to measure positive and negative volume
In his book Technical Analysis Of The Financial flow. The concept behind Obv is that volume precedes
Markets, John J. Murphy explains that using oscil- price. Obv adds a period’s volume when the close is
lators provides three benefits: up and subtracts the period’s volume when the close
n Overbought and oversold conditions warn that
is down.
price trend is overextended and vulnerable. Unlike the Obv, which discards such criteria, Vzo
takes into account both time and volume fluctua-
n Divergence between oscillator and price action tions from bearish to bullish and vice versa. Vzo
shows hidden strength or weakness in the market, takes volume actions one step forward by smoothing
which is not apparent in the price action.
the volume and plotting such actions in the form
n The crossing of the zero line can give an impor- of an oscillator, not as a trend-following indicator
tant trading signal. like the Obv. These modifications take the form
of a leading indicator that provides buy/sell signals
The formula depends on only one condition: If based on oversold/overbought behavior.
today’s closing price is higher than yesterday’s,
then the volume will have a positive value VOLUME ZONE OSCILLATOR CODE
AYA KAKEDA
(bullish). Otherwise, it will have a negative With appreciation to Aapta member Bob Plot1(VZO, “VZO”);
value (bearish). So: Fulks for assistance with the TradeSta- Plot2(+60, “+60”);
tion coding. Plot3(+40, “+40”);

Volume zone oscillator = 100 x (VP/TV) TradeStation

Plot4(+15, “+15”);
Plot5(-5, “-5”);
Volume zone oscillator: Plot6(-40, “-40”);
where: Plot7(-60, “-60”);
VP (Volume position) = X-days Ema (± volume) Input: Period(14); Plot99(0, “zero”);
Vars: MV(0), R(0), VP(0), TV(0), VZO(0);
MetaStock
and MV = iff(DataCompression >= 2, Volume zone oscillator:
AbsValue(Volume),Ticks);
TV (Total volume) = X-days Ema (volume) R = Sign(Close - Close[1]) * MV; Period := Input(“Y” ,2 ,200 ,14 );
VP = XAverage(R, Period); R :=If(C>Ref(C,-1),V,-V);
TV = Xaverage(MV, Period); VP :=Mov(R,Period ,E);
TV :=Mov(V,Period ,E);
if TV <> 0 then VZO = 100 * VP / TV; VZO :=100*(VP/TV);
by Walid Khalil and David Steckler VZO
+Khalil Steckler.indd 2 3/24/11 10:14:50 AM

^DJI Weekly INDICATORS
9/11/2009 Open 9440.13 Hi 9698.67 15,000
Lo 9402.8 Close 9605.41 (1.7%) 4 14,000
13,000
2
12,000
3 11,000 and its money flow analysis
1 10,000 also explain Dow theory’s
trend phases of accumula‑
6 9,605.41
9,000
tion, public participation, and
8,000
7 distribution.
Uptrend Turning point Downtrend Uptrend
5
7,000 Figure 1 displays more than
three years of Dow Jones
6
Industrial Average (D jia )
^DJI - Volume Zone OSC (14) = 31.05
4
31.0627
weekly data, numbered at
1 2
3
7 points discussed in detail, and
^DJI - Volume()
5 the zones are colored, accord‑
ing to their trend. The chart
AMIBROKER
shows only the four major

zones (+60, +40, ‑40, ‑60) plus
Figure 1: the volume zone oscillator (vzo). On this weekly chart of the DJIA you see all the components of the VZO: the zero (horizontal black line):
60-period EMA, 14-period ADX, and the seven oscillator zones.

The Vzo discerns bullish volume from bearish volume and 1 During the uptrend period starting from October 2005
is useful for identifying at which zone (bullish or bearish) until October 2007 (area 1), Vzo was moving with
volume is positioned. The oscillator is plotted on a vertical the trend, fluctuating between the zero line and the
scale of&
Analysis of STOCKS ‑100 to +100. Movements
COMMODITIES above +40 are considered
magazine upper zone (public participation phase).
overbought, while an oversold condition would be a move
2 At area 2, price was rising normally while the Vzo was
under ‑40. Movements above +60 mark extreme overbought
th approval or changes: declining, forming a negative divergence (distribution
levels, while an extreme oversold condition is a move under
phase).
‑60. The zero line demonstrates equilibrium between buyers
06-938-1307 • email: KMoore@Traders.com
and sellers. The components of the Vzo system are: 3 At turning point zone 3, Vzo has made a new two-year
low, giving a warning that more shares than usual have
n 60-period exponential moving average (Ema)
been distributed (distribution phase).
n 14-period average directional movement index (Adx)
4 At point 4, for the first time in more than two years,
PROOF #1 Vzo has failed to reach the upper boundary, giving
n Seven oscillator zones: +60, +40, +15, zero, ‑5, ‑40,
and ‑60. another warning that bears are taking control (distribu‑
tion phase).
VZO clarifies money flow 5 At zone 5, Vzo clearly shows the heavy selling pressure
Volume figures alone do not provide a clear money flow analysis
confirming the downtrend (panic & public participation
or even explain changes in volume attitude during different
phase).
trends; Vzo analysis can add important information about the
trend as well as a clear money flow analysis. Vzo movements 6 At point 6, and for the first time since April 2007,
Vzo has reached +40, indicating new money flows
(accumulation phase).
NEW for 2011: BWT PRECISION AUTO TRADER - TRADE SMARTER, TRADE AUTOMATED 7 Finally, at point 7, Vzo has rebounded from the zero
Stop Losing and Start Winning by Keeping Your Emotions in Check 100% Automated Entry line without reaching ‑40, indicating an uptrend attitude
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(accumulation phase).
The volume zone oscillator is useful in uptrending, down‑

trending, or sideways market conditions. The following ex‑
amples of the Vzo include the seven oscillator zones: +60 is
marked with green crosses, the +40 with a green line, the +15
All technical analysis

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264433mea02_B.indd DM
SPY
L=112.81 0.16 0.14% B=112.81 A=112.82 O=112.32 Hi=112.92 Lo=111.98 V=87,961,317 Mov Avg Exponential (Close,60,0) 109.72 124.00 INDICATORS
122.00
120.00
118.00
116.00
and +40, indicating more buying
pressure than selling pressure.
114.00
112.81
Uptrend system
112.00
60-Day EMA 109.72
rules 108.00
When the Adx is above 18, 106.00
Volume Zone Oscillator (14) 25.01 60.00 40.00 15.00 -5.00 -40.00 -60.00 0.00 the action is considered to be
80.00
60.00 trending. The price crossing the
40.00
25.01 60-day Ema determines whether
the trend is bullish (above the
15.00
-5.00
Ema) or bearish (below the
-20.00
-40.00
ADX w/Level (14, 18, Black) 18.63 18.00 18.00
-60.00
45.00
E ma). When the Adx is below
40.00 18, the action is considered
35.00
30.00
to be sideways, regardless of
25.00 whether price is above or below
the Ema.
TRADESTATION
18.63
15.00
11 • Technical Analysis of STOCKS & COMMODITIES magazine When price is above the 60-
Figure 2: the seven oscillator zones. On the daily chart of the SPY, these zones are marked on the VZO subchart, with day Ema and Adx is greater than
each horizontal line representing one zone. 18, buying signals are issued
act Karen Moore with approval or changes: when:
with a gray line, zero with a black line, ‑5 with a light blue n The Vzo crosses from below ‑40 to above ‑40 (over‑
6) 938-0570 • fax: 206-938-1307
line, • email:
‑40 with a red line, KMoore@Traders.com
and ‑60 with red crosses. The zones sold reversal)
are marked on the daily Spy with Vzo in Figure 2.
n A retracement down from +40 that fails to reach ‑40
is common during an uptrend. Vzo will not reach the
Uptrend psychology
PROOF #1 lower boundary and will rebound from a low above
During uptrends, volume rises with rising prices
‑40. Thus, crossing from below zero to above gener‑
and falls during corrections. This is one of Dow
ates a buy signal. To reduce whipsaws, you can wait
theory’s basic tenets, as expressed by Robert
for a crossing from below zero to above +15.
Edwards and John Magee: “Volume goes with the
trend.” Long-term investors tend to accumulate Three selling conditions occur during a long position
shares gradually, leading to a major shift in the demand/supply when:
outcome toward the demand, which in turn leads to waves of
n The Vzo rises above +60 and starts to go down
higher lows followed by higher highs.
Volume tends to increase upon reaching new price territo‑ n A negative divergence appears at an extreme level
ries and decrease during downward corrections. The Vzo will and Vzo breaks below +40
react to that behavior by staying in the upper zone between zero
n Price goes below the 60-day Ema and Vzo falls
below zero.
Downtrend psychology
During downtrends, volume rises with falling prices and falls
Advanced algorithms deliver during upward corrections. Long-term investors tend to lay off
low lag, low noise analysis. their shares gradually, leading to a major shift in the demand/
supply outcome toward the supply, which in turn leads to
waves of lower highs followed by lower lows. The Vzo will
react to that volume behavior by staying in the lower zone
Now featuring between ‑40 and zero, indicating more selling pressure than
Tools for... buying pressure.
Downtrend system rules

Also for: AmiBroker, Wealth-Lab, MetaTrader, Wavewi$e, Excel, Investor/RT, BioComp Profit, NeoTicker, When price is below the 60-day Ema and Adx is greater than
Tradecision, TradingSolutions, MATLAB, TradeStation, Ninja Trader, eSignal, NeuroShell Trader, Financial
Data Calculator, Genesis TradeNavigator and TradersStudio. 18, sell short signals are issued when:
www.jurikres.com • 800-810-3646 • 719-686-0074 n The Vzo crosses from above +40 to below +40 (over‑
bought reversal)
For more information circle No. 10

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SPY
L=112.73 0.08 0.07% B=112.73 A=112.74 O=112.32 Hi=112.92 Lo=111.98 C=112.73 V=88,987,876 Mov Avg Exponential (Close,60,0) 109.72 124.00
INDICATORS
122.00
120.00
118.00 n The Vzo falls below ‑60
116.00 and starts to go up
114.00
112.73
112.00 n A positive divergence
60-Day EMA appears at extreme lev‑
els and V zo breaks
109.72
above ‑40
108.00
106.00
Volume Zone Oscillator (14) 25.07 60.00 40.00 15.00 -5.00 -40.00 -60.00 0.00 Bearish divergence
80.00
n Price goes above the
60.00 60-day Ema and Vzo
Sell
Buy S Sell short
40.00
25.07
rises above zero.
15.00
-5.00
B -20.00 With this information, now
review the Spy with Vzo in
-40.00
-60.00
Figure 3, but annotated with
ADX w/Level (14, 18, Black) 18.63 18.00 18.00 45.00
buy and sell information.

35.00
Back in mid-February 2010,

25.00
18.63
15.00
when the Adx was greater
FIGURE 3: TRENDING CONDITIONS. All conditions for the buy and sell signals are met in the areas marked buy and sell on the VZO. than 18, Spy rose back above
18.63
Also note the sell short signal on June 11, 2010. Price was below its 60-day EMA and the VZO crossed up and down through zero. its 60-day Ema while the Vzo
crossed up and down through
the zero line. The price closing
GLD above the Ema on February
17 (far left, blue ellipse) was
L=123.80 0.22 0.18% B=123.79 A=123.80 O=123.97 Hi=124.29 Lo=123.43 C=123.80 V=8,061,633 Mov Avg Exponential (Close,60,0) 119.45
122.00
120.00 accompanied by the Vzo clos‑
119.45
118.00 ing at 7.80 (blue rectangle,
116.00 labeled buy), its highest close
114.00
since January 19. This posi‑
112.00
tion would have remained
112.73 long until March 18 when the
110.00
110 Vzo closed well above +60
and then fell lower (second
60-Day EMA 108.00
106.00
blue ellipse and second blue
104.00
rectangle, labeled sell).
Volume Zone Oscillator (14) 25.07 60.00 40.00 15.00 -5.00 -40.00 -60.00 0.00
80.00
The next buying opportu‑
60.00 nity came on March 29. Spy
40.00
22.16
15.00
was trading above its 60-day
-5.00 Ema (third blue ellipse) and
--20.00
-40.00
the Vzo fell below and then
ADX w/Level (14, 18, Black) 18.56 18.00 18.00
-60.00 rose back above zero (third
26.00
blue rectangle, labeled B).
18.56
This trade was also profitable,
14.00 exiting on April 16 when the
Vzo clearly made a bearish
FIGURE 4: NONTRENDING CONDITIONS. In such situations, the VZO fluctuates between ‑40 and +40, indicating a balance between divergence with price (note
buyers and sellers. the rising price trendline and
the falling Vzo trendline) and
n A retracement up from ‑40 that fails to reach +40 is com‑ after rising above +40, closed below +40 (fourth blue ellipse
mon during a downtrend. Vzo will not reach the upper and fourth blue rectangle, labeled S).
boundary and will fall lower from a high below +40.
Thus, crossing from above zero to below zero generates
a sell short signal. To reduce whipsaws, you can wait In nontrending
for a crossing from above zero to below ‑5 periods, the demand/
There are three covering/closing conditions during a short
supply outcome is
position when: neutral.

GLD
L=123.80 -0.22 -0.18% B=123.79 A=123.80 O=123.97 Hi=124.29 Lo=123.43 C=123.80 V=8,061,633 Mov Avg Exponential (Close,60,0) 119.45
122.00
120.00
119.45
118.00
n The Vzo crosses from
116.00
below +15 to above
+15.
114.00
112.00
112.73
60-Day EMA
110.00
Two selling conditions occur
108.00 during a long position if:
106.00
104.00 n The Vzo rises above
Volume Zone Oscillator (14) 25.07 tt 15.00 -5.00 -40.00 -60.00 0.00
+40, use the sell rules
Sell 80.00 from when Adx is great-
er than 18
60.00
Buy 40.00
Buy
22.16
15.00
-5.00 n The Vzo never rises to
+40, sell when it closes
Sell Multiple buy signals --20.00
-40.00
ADX w/Level (14, 18, Black) 18.56 18.00 18.00

-60.00 below ‑5.
26.00
18.56 If the Adx is less than 18,
14.00 sell short signals are issued
when:
FIGURE 5: BUY AND SELL SIGNALS IN NONTRENDING CONDITIONS. Two buy and two sell signals were indicated by the VZO. There
were also numerous buy signals on GLD after June 7, 2010, when the ADX fell below 18 and the VZO rose above 15. n The Vzo crosses up from
above +40 to below +40
A few days later came the flash crash on May 6 that sent n The Vzo crosses from above ‑5 to below ‑5.
Spy below its 60-day Ema. Time to watch the short side! The
Vzo rose above ‑40 and chopped around for a week in late Two covering/close conditions can be found during a short
May to early June. The sell short signal came on June 11 and position if:
the following few days (yellow rectangle, labeled sell short), n The Vzo falls below ‑40, use the close/cover rules
when with price still below its 60-day Ema (yellow ellipse), from when Adx is greater than 18
the Vzo start crossing up and down through zero.
Figures 2 and 3 explained how Vzo is used in trending n The Vzo never falls to ‑40, cover/close when it closes
conditions, when the Adx is greater than 18. Figures 4 and 5 from below +15 to above +15.
display the Vzo action in nontrending conditions when the
Adx is less than 18. Take a look at Figure 4. Now look at the Gld chart with annotations in Figure 5.
On March 3, 2010, the Vzo rose above +15 when the Adx
Nontrending (oscillating) psychology was well below 18. That was the first buy signal (first yellow
In nontrending periods, the demand/supply outcome is neutral, rectangle, labeled buy). The Vzo fell below ‑5 on March 8
with periods of buying followed by periods of selling. The Vzo (blue rectangle) so the trade would have been sold for a loss
usually reacts to this volume behavior by fluctuating between of 1.56% before transaction costs.
‑40 and +40, indicating a balance between buyers and sellers. The Vzo issued another buy signal on March 29, 2010
If Vzo reaches the zone between ‑40 and ‑60, it means that (second yellow rectangle, labeled buy); ignore the relationship
sellers are finishing offloading their shares, which increases between price and the Ema when Adx is less than 18. Gld
the likelihood of buyers stepping in. If Vzo reaches the zone rallied, and by April 9, the Vzo was above +60. On April 12,
between +40 and +60, it means that buyers are finishing up the Vzo fell below +60 (green ellipse), so even though the
accumulating their shares, which increases the likelihood of Adx is below 18 (it was 17.46), follow the sell rules for when
sellers stepping in. Adx is greater than 18 and sell on the close.
This second trade would have been sold for a 3.9% gain
Nontrending (oscillating) system rules before transaction costs. These trades assume entries and
Nontrending conditions exist when the Adx is less than 18. exits at the closing price and are hypothetical, so there’s no
When the Adx is below 18, it appears as black crosses. When guarantee they would work this way in the future.
that is the case, the relationship between price and the 60-day Note the Vzo strategy does not incorporate a stop-loss
Ema is ignored. Vzo rarely reaches +60 or ‑60 when Adx is methodology. Some technicians avoid using a stop-loss when
less than 18. swing trading, on the grounds that it hurts more than it helps.
When the Adx is less than 18, buying signals are issued These technicians exit a long position when their strategy issues
when: a sell signal, and they manage risk by adjusting their position
n The Vzo crosses up from below ‑40 to above -40
Continued on page 28

dard & Poor’s 500 from August
1996 to August 2006. I split the list
and discarded the rare ones. That
left just 13 candle types, which I
describe here.
Configuration
and definition
Before I discuss the performers,
let’s review the configuration.
Figure 1 shows two candlesticks,
one black and the other white. The
price bar’s high is at the top of the
candle, and the low is at the bot-
tom. Between those two extremes
are the opening and closing prices,
the order of which determines the
candle body’s shade. The thin bars at
either end are the shadows or wicks,
with a body sandwiched in between.
A candle need not have a shadow,
and the body can be a flat line as in
a four-price doji. In those situations,
all four prices are the same.
If price closes lower than the
open, the candle is shaded (shown
as black in the figure). If price closes
above the open, then the candle is
clear (white in the figure). Candle
color is not a representation of
price closing higher or lower than
the previous day.
In the discussion that follows, the
numbers pertain to results from a
bull market only, not a bear market.
A candle line is a single price bar.
I chose to define a close above
the top of the candle pattern as an
upward breakout and below the bot-
tom of the pattern as a downward
breakout. The thinking behind this
definition is that a reversal candle-
stick should reverse the prevailing
LISA HANEY
price trend immediately. After the

breakout, a continuation candle
Candlesticks, Statistically should see the price trend resume
Investment Candles
the trend direction leading to the
candle pattern.
Defining a reversal in this way is
Which candlesticks work best as reversal or continuation patterns? Find out here. like having your mom tell you to
pick up your socks from the floor.
by Thomas N. Bulkowski She doesn’t mean do it within the
I
next three days or a week. She
nvestment-grade candlesticks work as reversal or continuation patterns at least means Now! If a candle acts as a
two-thirds of the time (66%), and they are plentiful. By “plentiful,” I mean that I reversal, then signs of that behav-
sorted a list of 103 candlestick patterns by how often they appeared in the Stan- ior should occur promptly.
+Bulkowski.indd 1 3/24/11 11:15:12 AM

You might think that having the closing price at the
end of the candle pattern means an immediate break- High
out the next day. That’s wrong. A gravestone doji has Above the
the closing price at the bottom of the day’s range, and Upper stomach
yet it takes an average of three days to close lower. A shadow
dragonfly doji is the opposite of a gravestone because Open Close
the closing price is at the bar’s high. It takes an average
of three days to break out upward.
The point is this. During those three days, there is
Body
plenty of time for price to reverse if it is going to. A
true reversal will pick up their socks when their mom Close Open Bearish
says so, and not wait until Dad comes home. doji star
Lower
“Above the stomach” shadow
Figure 1 shows an example of the above the stomach
candle pattern. The three thin vertical lines are my way of
marking the price trend leading to the start of the candle Low
pattern. In this case, it is downward, meaning that the
candle must appear in a short-term downtrend. Figure 1: basic candlestick configuration, above the stomach and bearish
Following the trendlines is the two-line above the doji. Here you see the configuration of a candlestick, a reversal pattern that appears in a
stomach pattern. It begins with a black candle on the first short-term downtrend referred to as “above the stomach” and a bearish doji star, which is
day followed by a white candle that opens and closes considered to be a bearish reversal but doesn’t act that way 69% of the time.
at or above the midpoint of the black candle’s body.
This pattern works as a bullish reversal 66% of the time in engulf (overlap) the shadows, only the body. Either the tops of
a bull market. the bodies can be the same price or the bottoms, but not both.
The bearish engulfing has one of the highest reversal rates:
Bearish doji star 79% in a bull market.
Figure 1 also shows an example of a bearish doji star, one of the
lucky 13 performers. It forms in an uptrend, and the two-line
candle begins with a tall white candle. “Tall” means a height above Investment-grade candlesticks work
most other candles leading to the appearance of the doji star. as reversal or continuation patterns at
Following the tall white candle is a doji, which is a price least two-thirds of the time (66%).
bar in which the opening and closing prices are the same or
nearly so. The body of the doji must be above the prior
bar’s body, but the shadows can overlap. That’s the only
tricky thing about this candle pattern. Avoid unusually Bearish Bullish Bearish
long shadows on the doji. engulfing belt hold belt hold
The bearish doji star is supposed to act as a bearish
reversal, but it doesn’t to the tune of 69% of the time in
a bull market. In other words, price continues moving
higher in more than two out of three contests. You may
roll your eyes, but remember that all price has to do is
close above the top of the pattern to stage an upward
breakout. Even so, tests on this candle show that it takes
three days to close above the top of the doji. Deliberation Last engulfing Last engulfing
bottom top
Bearish engulfing
Figure 2 shows a bearish engulfing candlestick that lives
up to its name. It’s supposed to act as a bearish reversal
and it does, but more about that later.
The bearish engulfing candlestick is a two-line pattern
that must form in an upward price trend. The first candle
line is white and the second is black. The body of the black
Figure 2: bearish engulfing, bullish and bearish belt hold, delibera-
candle engulfs the body of the first, meaning the opening tion and last engulfing top and bottom. The bearish engulfing and the belt
price is above the prior bar’s close and the closing price is hold act as strong reversal patterns. The deliberation acts as more of a continuation
below the white candle’s open. The body does not have to pattern as do the last engulfing patterns.

CANDLESTICK CORNER
Bullish and bearish belt hold ing found it is a bullish continuation 77% of the time. Look
Figure 2 shows the bullish and bearish belt hold candles. The for price to close above the top of the pattern (a continuation
belt hold family is one of the few single-line candles that do of the uptrend) more often than it closes below the bottom (a
not act randomly. trend reversal).
For the bullish belt hold, look for the candle to appear in a
downward price trend with a tall white candle. The opening Last engulfing, top and bottom
price should be at the low (meaning no lower shadow) and Figure 2 shows the last engulfing top and bottom patterns. First
price should close near the bar’s high. up: bottoms. What’s the difference between a bearish engulfing
The bearish belt hold has the identification guidelines re- pattern (top left inset in the figure) and the last engulfing bot-
versed. Price must trend upward, leading to the candlestick. tom? Answer: The price trend leading to the candlestick.
Price opens at the high for the bar and closes near the low, In the last engulfing bottom, the price trend leading to the
leaving a tall black candle to print on the chart. candle is downward. The first bar is a white candle followed
The bullish belt hold acts as a bullish reversal 71% of the by a black candle whose body engulfs the prior candle’s
time, and the bearish belt hold reverses the short-term trend body. The black candle need not engulf the shadows of the
68% of the time. white candle.
The last engulfing bottom is supposed to act as a bullish re-
Deliberation versal, but it is really a bearish continuation 65% of the time.
The deliberation is another candle- The last engulfing top is a two-line pattern, with the first
stick that is supposed to act as a candle being black followed by a white candle. The white
reversal but doesn’t. That’s probably candle’s body overlaps or engulfs the prior candle’s body,
due to its height. It’s far easier to not including the shadows. As you might have guessed, this
break out upward from this three-line supposedly bearish reversal actually acts as a bullish continu-
candle, since price closes near the top ation 68% of the time.
of the candle.
Identification is trickier for this one Rising and falling windows
than for the other candles discussed so A rising window is a bullish gap in an upward price trend, and
far. An uptrend must precede forma- an example appears in Figure 3. Candle color is not important,
tion of this candlestick pattern. The which is why I show half-shaded candles. Look for the high
first two candles are tall white ones. price on the first bar to be below the low on the second bar,
The last candle in the pattern is a small-bodied candle that leaving a gap or window on the chart. A rising window acts
opens near the prior bar’s close. Each line’s open is above the as a bullish continuation pattern 75% of the time, as measured
prior open, and the close is above the prior close. using the candles surrounding the gap.
The candle is supposed to act as a bearish reversal, but test- A falling window is also a gap, but some call it a bearish
gap. I show an example of this in Figure 3. The low
price in the first candle of the pattern remains above
Rising Falling Three the high of the next bar’s price. A falling window ap-
window window outside up pears in a downward price trend and it acts as a bearish
continuation pattern 67% of the time.
Three outside up and down

The three outside up and down candle patterns are
bullish and bearish engulfing candlesticks, respectively,
with price confirming the pattern by closing higher
(three outside up) or lower (three outside down). The
Three outside Two black price trend leading to the candle pattern is as shown in
down gapping Figure 3, along with the candle color. The last day of
the three-line patterns can be any color.
The three outside up candlestick acts as a bullish
The bullish belt hold acts as a

bullish reversal 71% of time, and
FIGURE 3: RISING AND FALLING WINDOWS, THREE OUTSIDE UP AND DOWN, TWO
BLACK GAPPING. The rising and falling windows act as continuation patterns, the three
the bearish belt hold reverses the
outside up and down patterns act as bullish and bearish reversals, respectively, most of the short-term trend 68% of the time.
time, and the two black gapping patterns act as continuation patterns 68% of the time.

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• Objective Buy/Sell/Stop Signals an excellent Stop Loss and Profit Protect discipline. The
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THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN System; Futures Trading System
ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RE- & Option Trading System
SULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL
TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT Now Also Available
ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF for NinjaTrader
OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND
AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

CANDLESTICK CORNER
reversal of the short-term downtrend 75% of the time. The S&C Contributing Writer Thomas Bulkowski is a private
three outside down is a bearish reversal 69% of the time. investor with 30 years of experience and considered by some
to be a leading expert on chart patterns. He is the author of
TWO BLACK GAPPING several books, the most recent of which is Encyclopedia Of
The final performer in our candlestick circus is the two black Candlestick Charts. His free website and blog have more
gapping candle pattern, as shown in Figure 3. As the name than 500 articles dedicated to price pattern research and can
suggests, it includes two black candles with a downward price be found at www.thepatternsite.com. He may be reached at
trend leading to them. The high price of the first black candle tbul@hotmail.com.
remains below the low of the price bar, leaving a falling window
on the chart. The next day shows another black candle, with SUGGESTED READING
the high of this bar being below the prior bar’s high. Bulkowski, Thomas N. [2011]. “What
The two black gapping pattern acts as a bearish continuation You Don’t Know About Candle-
68% of the time. sticks,” Technical Analysis of
STOCKS & COMMODITIES, Volume
CLOSING POSITION 28: March.
The candlestick patterns discussed here are the best-performing _____ [2008]. Encyclopedia Of Candle-
reversal or continuation patterns in a bull market. Each works stick Charts, John Wiley & Sons.
as described at least 66% of the time and are as plentiful as _____ [2005]. Encyclopedia Of Chart
fleas on an untreated dog housed outside. Patterns, 2d ed., John Wiley &
Before you rush to your nearest stock market and shop for Sons.
these patterns, realize that high reversal or continuation rates _____ [2006]. Getting Started In Chart
are not the same as how well price performs after the breakout. Patterns, John Wiley & Sons.
To learn about the best candlesticks for price performance, _____ [2002]. Trading Classic Chart
read my next article, “Top 10 Candles That Work.” Patterns, John Wiley & Sons.
S&C
INDICATORS
IN THE VOLUME ZONE Walid Khalil, CFTe, MFTA, is a member of the International
Continued from page 23
Federation of Technical Analysts (IFTA) and chief technical
size. Other technicians will not enter any trade without a stop- strategist at Premiere Securities, Cairo, Egypt. He teaches
loss. There are pros and cons to both sides of the argument, technical analysis at the Egyptian Society of Technical Analysts
so you have to make that decision yourself. (ESTA). He may be reached at waleedkhalil@live.com.
There were numerous buy signals on GLD after June 7, when David Steckler, JD, is an investment advisor with Global
ADX once again fell below 18 and the VZO rose above 15. Sell Investment Solutions, and is a past president of the American
signals (not shown) occurred when the VZO closed below -5. Association of Professional Technical Analysts (AAPTA). He is a
member of IFTA. He may be reached at DSteckler@aol.com.
SWINGING WITH THE VZO
Conservative swing traders might want to see the VZO fall SUGGESTED READING
to -40 or rise above +40 before buying or shorting when the Edwards, Robert D., and John Magee [2007]. Technical
ADX is below 18. The risk is that by the time the VZO rises Analysis Of Stock Trends, 9th ed., W.H.C. Bassetti, ed.
or falls to those levels, the ADX will probably be above 18 AMACOM.
so you would need to monitor the relationship between price Granville, Joseph E. [1969]. Granville’s New Key To Stock
and the EMA before taking a directional trade. Market Profits, Prentice Hall/Simon & Schuster Profes-
Another possibility when the ADX is below 18 is to buy or sional Publishing.
write option straddles or strangles. A low ADX means vola- Murphy, John J. [1999]. Technical Analysis Of The Financial
tility is low. These neutral option strategies are used when Markets, New York Institute of Finance.
you believe the underlying security is stable and you don’t ‡TradeStation
think it is going to make a large price move. An ADX move
above 18 would be a signal to consider exiting the straddle See our Traders’ Tips section beginning on page 61 for implemen-
or strangle. tation of Walid Khalil’s and David Steckler’s technique in various
Next month we will introduce a similar, complementary technical analysis programs. Accompanying program code can be
indicator: the price zone oscillator (PZO). found in the Traders’ Tips area at Traders.com.
S&C

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there is a substantial risk of loss in trading commodity futures, options and off-exchange foreign currency products.Past
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MONEY MANAGEMENT
Putting A Stop To It
More Exit, Less Entry
A greater focus on your exit strategy and less on your entry is posted. It is important to understand the asymmetry built
GARY BERNARD
may make a big difference in your overall trading results. into a loss/win cycle. Figure 1 shows that if you post a loss of
10%, it will take a percentage gain of 11.1% to recover. Okay,
by David Garrard you can live with that as a recovery target. So what happens if
you post a loss of 30%? It requires a recovery of 43% above
I
nvestors and traders alike devote a considerable your present net holdings to get back to your original account
amount of time focusing on what investments to value. What happens if you lose 80% of your holdings? Well,
make and what tools to use to make these invest- that will require a 400% price move to recover your losses —
ments. Novices often spend very little time planning not much chance of that in today’s markets. The lesson here
the exit strategy. This is the key difference between seasoned is to cut your losses early. That is where the proficient use of
traders and novices. In fact, a greater focus on the exit and less stop alerts comes in.
on the entry might make the real difference in your overall Consistently deploying stops can be painful, but it will al-
trading effectiveness. low you to know the maximum limit of your loss in advance,
moving you away from later stage fear–based decision-making
Why use stops? that can occur when a trade goes against you. It’s already been
When a loss is posted, we always measure it relative to our decided in your trading plan; you exit with a controlled loss.
original holdings. A similar measure is calculated when a profit In fact, if you develop good exit techniques based on trailing
+1105 Garrard.indd 1 3/24/11 5:00:52 PM

stops, you can also control the greed that often sets in when
trades go in your direction. You can often end up with more Recovery required from a drawdown
profit due to systematic usage of stops. 1200
Required recovery (percent)

There are all sorts of complicated mechanisms, but as is 1000
common in most investing situations, simple is best. We’ll
review some of these.
800
600
Static stop-losses 400
The simplest stop type is normally referred to as a “stop-loss,” 200
“protective stop,” or “hard stop.” It is usually implemented as
a static stop level introduced upon entry into a position. These 0
Recognia, Inc
0 20 40 60 80 100
stops can be either percentage price offset based, or dollar loss 25.01
Loss (percent)
amounts defined by an overall portfolio risk assessment.
For simplicity, most traders use a percentage offset approach. Figure 1: recovery from a drawdown. A loss of 10% will take a percentage
Depending on your trading style, you might calculate a stop gain of 11.1% to recover. A loss of 30% requires a recovery of 43%. A loss of 80% of
your holdings requires a 400% price move to recover your losses.
price based on an acceptable percentage loss. If you are a short-
term trader, you likely will use a tighter percentage, whereas
longer-term investors will use a looser percentage stop. CALCULATING ATR
Very often, if the price moves in the desired direction suf- The true range (TR) is the greatest of either:
ficiently, the stop-loss level can then be set at the entry price
• The difference between the current high and current low
(plus commission costs) and held there. This is a conservative
approach to risk mitigation that ensures that you do not lose • The absolute value of the difference between the current high
any money on the particular trade. and yesterday’s close
Some traders may place protective stops based on support • The absolute value of the difference between current low and
and resistance levels. This has the added advantage of forcing yesterday’s close.
you to evaluate the relative position of these levels prior to The average true range (ATR) is the average of the TR.
trade entry. By reviewing these levels relative to the present The calculation of the 14-period ATR is:
price, and evaluating the potential reward and risk absorbed ATR = [(ATR of previous day x 13) + Current TR] / 14
before the levels are reached, you have effectively performed
a rudimentary risk/reward analysis. If the calculated potential
reward is greater than the potential risk defined by the support stops. If you did your homework and set your stop outside
and resistance levels, then you have further reason to execute the noise, this type of stop can minimize the occurrence of
the trade. For a simple and low-maintenance stop methodology, undesired exits due to whipsaws. Your personal trading goals
enter your stop just below the recent support (long positions) also should be used when defining the proximity of the volatil-
or just above the recent resistance level (short positions). ity stop. If you are a short-term trader, you might keep your
Volatility and
trailing stops Dynamic volatility stops in action with tight, medium and loose offsets
If you feel you are ready for more complex
stop methods, spend some time looking at 9.00
the recent price volatility of the stock you
are considering. Investigate the average
8.50
true range (Atr) indicator as a tool for
price volatility evaluation. Your goal is to
8.00
specify a percentage offset that stays outside
the noise/deviations that the daily stock
price exhibits. More complex approaches 7.50
use dynamic volatility and an evaluation 25.01
of standard deviation of the price series to 7.00

offer loose, medium, and tight stop recom- Tight
mendations (Figure 2). Medium 6.50
Volatility stops work best in trending Loose
environments. Use a trend indicator such as 2010 14 Jul Aug 23
a moving average or trendline to determine Figure 2: volatility and trailing stops. Here you see the application of a more complex approach
the direction and extent of the price trend, to stops using dynamic volatility and an evaluation of standard deviations of the price series. Note that there
then trail your open positions using volatility are loose, medium, and tight stop levels.
+1105 Garrard.indd 2 3/31/11 9:30:35 AM

MONEY MANAGEMENT
stops, you may find that if the stock you are holding gets into
This study introduces some of the a period of sideways movement, you may end up holding the
basics that can lead to improved position longer than normal unless you impose a time limit.
As a trader, you can elect to execute your stop exits based
position exits via the use of stops. on manual or automatic methods. If you are planning to trade
your exits manually, you must expect an additional slippage
amount since there will be a delay between when you are
stop closer to the noise. If you wish to stay in the position notified of your stop trigger and the execution of your exit
longer and are willing to expose yourself to higher potential trade. In rapidly falling markets, this slippage can be very
drawdowns, then use a looser volatility stop. large. Under these conditions, slippage will also occur with
Highly volatile and directionless markets are the worst condi- preentered orders, but unless the liquidity is very limited,
tions under which to trade using a volatility-based stop. Under traders who preenter stop exit trade levels should experience
these conditions, stops are likely to get hit frequently. Use your less slippage than those who do not place and update their
2011 • Technicaldiscretion
Analysiswhenof deploying
STOCKSstops under these conditions.magazine
& COMMODITIES protective stop trades.
Another trailing stop method involves maintaining a stop at
the lowest low in the recent past. Depending on your planned Conclusion
tact Karen Moore withhorizon,
trading approvalyouor changes:
might track the trailing stop at the level This is by no means a comprehensive study of stops but
of the lowest low in the last 20 bars for a long position. You introduces some of the basics that can lead to improved posi-
6) 938-0570 • fax: 206-938-1307
would use the highest•high
email:
in theKMoore@Traders.com
last 20 bars for a short position exits via the use of stops. The key message is that as an
tion. Decreasing or increasing the number of bars effectively investor or trader, you are well advised to spend more time
tightens or loosens the stop proximity. This approach has the improving your exit methods and following a more consis-
dual advantages of being both conservative and simple to tent approach to planning and executing your position exits.
calculate and track.PROOF #2 Successful traders and investors know that the exit is equally
Note that many trailing stops have no built-in time limita- as important as the entry when it comes to optimizing your
tion. If you are a short-term trader and elect to use trailing odds of success.
Brokerages are now adding new tools to their websites
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David Garrard is VP, Asia-Pacific for Recognia Inc., provid-

Join hundreds of Bright Traders Worldwide! ing actionable investment research products for institutional
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• QUARTERLY TRAINING – register early!
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cHEcK OUT OUR WEBSITE fOR mORE INfO! Suggested reading
Vervoort, Sylvain [2009]. “Using Initial And Trailing Stops,”
Technical Analysis of Stocks & Commodities, Volume
Register early for our 27: May.
_____ [2009]. “Average True Range Trailing Stops,” Technical
NEW tRaiNiNg schEdulEs Analysis of Stocks & Commodities, Volume 27: June.
Open a Branch Location or be an Individual Trader! _____ [2009]. “Trailing Resistance And Support Stops,”
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In addition to selecting an equity, select some filters such as maximum number of positions, scaling in strategies, the universe of stocks and ETFs, and the
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“It’s heartbreaking to see Reynolds in trouble for fraud. to determine which ones are best for you.
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+1105 QS Machine Lite.indd 1 3/24/11 8:58:17 AM

QUICK-SCANS
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trading day. All symbols traded in the this till you find a combination that suits
NASDAQ, NYSE, and AMEX are monitored your needs.
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(20%). By default, you will see the ‡The Machine Lite www.TRADERS.com • Circ@Traders.com
returns displayed on an annual basis, (The Connors Group, Inc.) S&C
May 2011 • Technical Analysis of STOCKS & COMMODITIES • 35
+1105 QS Machine Lite.indd 2 3/24/11 9:12:13 AM

REAL WORLD
GAP FILL AND GO
total of $359 for the first hour of the trading day. I’m probably
I’m going to show you two trades done for the day unless I see something so extraordinary that
using a strategy you can use I can’t stand not to take it. But even then I will probably cut
almost every day to capture my risk in half and share-size accordingly.
What I’ve showed you here is something that happens
profits from the stock market. almost every day. And in case you are wondering, it works
just as well on the short side, maybe even better, since fear is
$53.70. That gives me a 33-cent risk, and using the $100 risk more powerful than greed and the price usually drops faster
per trade example, a share size of 300. Wait for two consecutive than it goes up. For the short trades, all you have to do is the
bars of profitability before moving your stop to breakeven. converse. The SMAs should be declining and you should get
One difference in this trade is that the 200-period SMA is a bearish gap down.
overhead and giving you a price target. This price target is Some of the key points to remember are rising SMAs on
almost at $55.00, which, being a whole number, is another the five-, 15-, and 60-minute charts for long positions. You
obvious target price. Because of this, I will need to manage are buying the dips on a confirmed uptrend. On the short side,
the profit taking a little differently. I want to set a take-profit you are selling the rallies on a confirmed downtrend. Wait for
order on 200 shares just below $55, which is also a test of the green bar to take out a red bar at a moving average at the
the overhead 200-period SMA resistance area. If it does not 10 am reversal time. You have a reversal bar, at the reversal
get there, I will still use the bar-by-bar break to get out. In time, on a moving average line. Identify your risk and share
addition, I will trail my remaining 100 shares on a bar-by-bar size correctly to your risk amount. Set your stop one cent below
break if the take-profit order is hit. I want to leave some shares the entry bar or the pivot bar, whichever is lower, then sit back
on, just in case there is a big run to the upside. and let your edge play out. After two consecutive bars of profit,
Just like the previous trade, I have identified a potential move your stop to breakeven. Take profits using the bar-by-bar
winning trade. There is a reversal bar off the rising 20-period break or other well-defined price target. Happy trading!
SMA, at the 10:00 am reaction time. I have identified my risk
of 33 cents, share-sized correctly, and put my protective stop Jamie Theiss is a full-time trader who daytrades stocks, swing
in place. Now I have to let my edge play out. trades forex, and from time to time position trades commodi-
It gets a little dicey when the rising 20-period SMA is retested ties. He may be reached at jamie_theiss@ yahoo.com.
on the very next bar, but it soon takes off and goes right to the ‡Blackwood Pro
200-period SMA. It tested the resistance point of the overhead
200-period SMA and went as high as $55.02. My take-profit
order at $54.98 is taken out and my remaining 100 shares are
sold when the five-minute bar is broken at $54.74. With my
cost being $54.05, I have a profit of 93 cents on 200 shares and
69 cents on the last 100 shares. That gives me a $255 profit on
the NTAP trade. This is a much more respectable 2.5:1 risk-
reward ratio. Add the $104 from the FAS trade, and I have a S&C
magazines • articles • books • software
Get the exact information

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+1105 Theiss.indd 3 3/24/11 11:12:34 AM

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TASC_p-tasc_02_17_11.indd 1 2/23/11 2:01 PM

Charts And Checkpoints
Context Is Everything
This is how you use stock and index charts to determine stocks go up, and in a bear market, most stocks go down, so this
JOSé CRUZ
market context. basic idea that market context can provide meaningful clues
when studying stock charts is already something we are familiar
by Gil Morales and Chris Kacher with when we speak of bull and bear market environments.
It’s the context

Y
ou do not have to be a Chartered Market Technician
to understand how market context can influence While the use of stock charts can be very complex, often the
the price behavior of stocks. No stock is an island, exercise of comparing the price behavior of a stock to a chart
and how a stock behaves is often a function of the of the market as represented by, for example, a major market
market at large, which in turn is a function of underlying index such as the Nasdaq Composite Index or the Standard
conditions — the context within which any particular market & Poor’s 500 can help you understand a stock’s potential
environment is developing. strength. You are also able to better understand why certain
In the simplest of terms, we know that in a bull market, most price movements are evident in a stock’s overall price chart.
+1105 Morales.indd 1 3/24/11 11:59:44 AM

Price window
1 2021
1974
2 1927
1880
3 1833
1786
When it comes to understanding the price/ 1739
1692
volume behavior of stocks, context is NASDAQ Composite Index daily chart 1998
1645
1598
everything. 1551
1504
1457
The patterns don’t 4
1410
1363
have to be perfect Volume window 50 DMA line
11200
In autumn 1998 the stock market was 9600
experiencing a very sharp selloff in a very
8000
6400
short period of time: a sort of “instant 5/99 6/98 7/98 8/98 9/98 10/98
bear market” that lasted not quite three
BONUS 2011Charles • Technical Analysis
(SCHW) dailyof StockS & commoditieS
Price window
13.0
Schwab, Inc. chart 1998 12.5
months but saw the Nasdaq fall 33% 12.0
from peak to trough in that time. In Figure 11.5
Please
Index contact Karen Moore with approval or changes:
11.0
1 we see the Nasdaq Composite 1 10.5
3
daily chart from that period stacked on
10
phone: 206-938-0570 ext. 312 • fax: 206-938-1307 2 • email: KMoore@Traders.com
9.5
top of a daily chart of Charles Schwab, 9.0
Inc. (Schw), one of the early leaders

8.5
8.0
that emerged from the market bottom 7.5
proof #1
7.0
of October 1998. In this example, the 4 6.5
Cup-with-handle
Nasdaq came down in a series of three Volume window 50 DMA line
base formation
154385
very sharp waves, the first ending in early

123508
TRADESTATION
92631
August, the second in early September, 61754
and the third in early October.

x100
5/99 6/98 7/98 8/98 9/98 10/98
As the Nasdaq was approaching a top Figure 1: a cup with a jagged handle. The NASDAQ came down in a series of three very sharp waves.
in July at point 1 on the chart, Schw was As the NASDAQ was approaching a top in July at point 1, SCHW was attempting to emerge from a sideways
in fact attempting to emerge from a side- consolidation on brisk volume. Note the powerful countertrend move in SCHW when the NASDAQ bottoms at
point 4. This could be the deciding factor in purchasing shares of SCHW.
ways consolidation on brisk volume — an
indication of strength. However, the market began to roll over,
putting a lid on Schw’s attempted breakout.
The stock wanted to break out and move higher, but the
pressure of a topping market overwhelmed the breakout and
Schw fell back into its base. As the market began an initial leg
down from point 1 to point 2, Schw mimicked the action of
the general market by pulling back down in similar fashion.
As the second leg to the downside began at point 2, Schw
also broke sharply to the downside, again mimicking the action
®
+
of the market on the downside break as well as the reaction
rally up to point 3. The market then broke down again to a
lower low at point 4, but this time Schw did not mimic the
action of the market as it made a higher low. In fact, the entire
pattern became an O’Neil-style cup-with-handle formation
where the cup is formed between points 1 and 3 and the jag- Thank you for voting
ged handle is formed between points 3 and 4.
In most cases, this steep pullback in the handle would be NeuroShell Trader #1
25.01
improper, as a truly constructive handle area will generally Artificial Intelligence Software
hold within a relatively tight price range of 11% or less.
However, the extremely volatile and sharp downside break
9 yeArS In A row!
in the Nasdaq Composite Index from point 3 to point 4 ex-
plains similar volatility in Schw’s handle within the overall
cup-with-handle formation, and in fact Schw is displaying Just announced
powerful countertrending behavior by the time the market
bottoms and turns back to the upside at point 4. New 6.0 & Power User versions
This was a critical factor in our decision to purchase Schw
aggressively in October 1998 as the market confirmed a new
rally phase. Often, technicians search for perfect chart patterns,
www.neuroShell.com
but in some cases an imperfect one can be explained by the
market environment.
301.662.7950
+1105 Morales.indd 2 3/24/11 11:59:57 AM

Price window - Semi-log
NASDAQ Composite Index
3159 trading techniques
weekly chart 2001-2002 2925
2691
2457
3
Where is the
2223
2106
money moving?
1989
2 1872
1 1755
1638
Note that in August 2001, major defense
4
1521 stock Lockheed-Martin (Lmt), shown
1404 on a weekly chart on the bottom half of
1287 Figure 2, was moving higher in a shallow
uptrend leading up to the tragic events
Volume window 50 DMA line
101776
76332
50888
of September 11, 2001. What did Lmt
x100 know? At that point, the market, shown
on a weekly chart, had been in a seri-
4/12/01 6/1 7/6 8/3 9/10 10/5 11/12 12/7 1/4/02 2/1 3/1 4/5 5/3 6/7 7/5
Price window - Semi-log 4 69
Lockheed-Martin Corp. (LMT)
weekly chart 2001-2002
66
63
ous bear market that began in March
60 2000, and when the market reopened
2
a week after 9/11 on September 17, it
57
54
3 Finds support
along the
51 split wide open as it sold off for five
1
straight days.
48
Note series of 10-week
tight closes along 45
the lows of this
moving
average 42 During that week, Lmt staged a new-
consolidation 39 high gap-breakout as we saw in the
36 stacked weekly charts of the Nasdaq
33 Composite index, our proxy for the
344508
market, and Lmt. After selling off for
258381
172254 five days, the market then turned around
x100 and began a short rally that carried for
15 weeks from point 1 to point 3.
4/12/01 6/1 7/6 8/3 9/10 10/5 11/12 12/7 1/4/02 2/1 3/1 4/5 5/3 6/7 7/5
Figure 2: institutional buying. What is important to note here is the series of tight weekly price ranges Lmt continued to move higher from
and closes along the low of LMT’s base from point 2 to point 3. This is a subtle sign of steady institutional buying. point 1 to point 2, then pulled back and
An even starker clue was LMT’s breakout to new highs as the market began to move to the downside.
began consolidating its prior gains from
point 2 to point 3. Lmt pulled back during
1 2552 the first three weeks of the consolidation
NASDAQ Composite Index
weekly chart 2010
4 2436 at point 2 before leveling out and drifting
3
2 2320 upward over the next eight weeks in a
2204 series of tight weekly price ranges and
2088 closes. At point 3 the market topped out
1972 and began a new leg in a continuing bear
1914 market, but Lmt began to move up off the
1856
1798 lows of its consolidation, or base.
1740
1662
The series of tight weekly price ranges
and closes along the lows of Lmt’s base
from point 2 to point 3 is a subtle sign of
149210
steady institutional buying. With money

119368
89526
8/7/09 9/4 10/2 11/6 12/4 1/8/10 2/5 3/5 4/1 5/7 6/4 7/2 8/6 9/3 10/1 11/5
x100 coming out of other sectors in the market,
54 institutions were looking to redeploy in
tradables that would benefit from the fact
52
Rovi Corp. (ROVI) 4 50
3
that a significant underlying condition
weekly chart 2010 48
46
2
was coming into play: that the US was
44
1 42
40
38
about to move to a war footing. The clue
36 that institutions were moving money
in that direction is partly explained by
34
32
Stock closes very tight 30 Lmt’s tight price action along the lows
on a weekly basis for
several weeks 28 of the base, but its breakout to new highs
26 as the market began to roll over to the
downside was an even starker clue.
173192
129894
86596 Lmt continued to move higher for the
8/7/09 9/4 10/2 11/6 12/4 1/8/10 2/5 3/5 4/1 5/7 6/4 7/2 8/6 9/3 10/1 11/5
x100
next several months, finally topping out
FIGURE 3: THE POTENTIAL LEADERS. On this weekly chart of Rovi Corp. (ROVI), you see a base-on-base forma- in June 2002. In this case, market con-
tion that continues in a sustained uptrend. During this time, the NASDAQ was correcting. Once the market started text in the form of changing underlying
rallying higher, ROVI was able to continue higher at a more consistent pace. conditions as the US began preparations
+1105 Morales.indd 3 3/24/11 12:01:17 PM

Price window
NASDAQ Composite Index daily chart 2541
2508
2 2475
1 2442
2409
4 2376
3 2343
for war, combined with logical clues 2310
in the weekly chart of Lmt, were the 2277
2244
pointers telling you where the money 5 2211
2178
was moving. 2145
2112
2079
Identify potential Volume window 50 DMA line
42147
leaders 36126
The next two examples

30105
24084
show why we view market 4/10 5/10 6/10 7/10 8/10 9/10
x100
corrections and even bear Price window 180

Chipotle Mexican Grill (CMG) daily chart
markets as constructive
174
168
market periods, in that 2
3 4 5 162
156
nascent leadership will often make itself 1 150
known amid the more obvious negative

144
138
tone of a market correction or outright A pocket
132
126
bear market. pivot buy
point
120
In the first example, we compare

114
108
the 2010 weekly charts of the Nasdaq 102
96
Composite Index (top) and Rovi Corp. Volume window 50 DMA line 29940
(Rovi) in Figure 3. Rovi was a relatively 23952
17964
unknown name as it wended its way higher 11976
x100
going into April 2010 as it moved in phase 4/10 5/10 6/10 7/10 8/10 9/10
with the market’s uptrend. At point 1, FIGURE 4: THE TIDAL PULL. Although CMG gapped up at point 1, it did tend to pull back because of the weight of
however, things began to change as the the market. But for the most part, it still held the lows of the gap-up move to point 1. At point 4 it follows the market
market broke off of its peak and began but holds its ground after the pocket pivot buy point. Once the market correction came to an end, CMG quickly
to correct. Rovi acted in lockstep with moved to new price highs.
the market for exactly one week as it too
broke off its peak at point 1, but it quickly leveled off as it April to August 2010 was very bullish for Rovi, and once the
moved sideways for several weeks. weight of the market lifted, the stock was able to continue
Meanwhile, the market continued lower into point 2, but higher at a more consistent pace.
Rovi broke out of its tight sideways consolidation or base and Another example from 2010 can be seen in the chart of
made a new price high. The market bounced up into point 3 Chipotle Mexican Grill (Cmg) in Figure 4. It shows some
as Rovi continued to move higher after its breakout. At point different dynamics during the same market correction from
3, however, the market pulled back once more, but Rovi held April to August that we examined in conjunction with Rovi in
up as it built a second consolidation on top of the first one Figure 3. The key juncture occurs right at the end of April as
from which it broke out at point 2. This is an O’Neil-style Cmg is trending higher with the market and when the market
“base-on-base” formation, and if a stock were to form such a begins a steep downside break that culminated in the flash
pattern during a strong bull market rally, we might consider
that it was lagging.
However, market context is everything, and when a stock
like Rovi builds a base-on-base formation as it moves up
slowly while the market is simultaneously going through an
intermediate-term correction, then that is showing significant
relative strength that identifies the stock as a strong potential cartoon
leader when the market recovers and begins a new uptrend
as it does at point 4.
Rovi then broke out of the second base in the base-on-base
formation at point 4 and continued in a sustained uptrend.
Throughout the market’s correction, Rovi wanted to move
higher, but the action of the market acted as a weight upon
the stock, effectively putting a lid on its attempts at new price
highs.
Instead of correcting with the market, however, Rovi showed
its strength by holding each breakout and consolidating the
move to new highs each time as it built its formation. In this “Charlie, it’s your broker. He wants to know
case, such action in the context of a market correction from when you’re getting back into the market.”
+1105 Morales.indd 4 3/24/11 12:00:37 PM

trading techniques
Price window - Semi log
2820
2 2632
1 3 2444
2256
crash of May 6.
2068
NASDAQ Composite Index weekly chart
2007-2009
1880
At point 1, Cmg was in fact gapping
1692 up and breaking out to new all-time price
1504 highs, but the weight of the general market
was felt by the stock as it too pulled back,
1316 but for the most part held the lows of the
gap-up move at point 1. The stock then
Volume window 50 DMA line 163150
130520
97890 proceeded through points 2–4 as it made
a higher high each time.
x100
12/06 2/07 4/07 6/07 8/07 10/07 1/08 3/08 5/08 7/08 9/08 11/08 1/09 3/09 5/09
2
Price window
3 221 Each of these moves to a new high co-
Potash Saskatchewan, Inc. (POT)
incided with points 2–4 on the Nasdaq
195
weekly chart, 2007-2009 169
1
143 chart, which are all peaks of bouncing
117 rallies within a broader downtrend. In fact,
91 at this stage Cmg was telling investors
78 that it really wanted to move higher, but
65
the weight of the market downtrend was
52
keeping a lid on the stock. After point 4 the
39 market broke sharply to new lows, and the
tidal pull was more than Cmg could resist,
so it too began to move lower.
Volume window 50 DMA line 130348
97761
65174
Eventually, the market bottomed and
began to rally, but Cmg rolled over and
x100
12/06 2/07 4/07 6/07 8/07 10/07 1/08 3/08 5/08 7/08 9/08 11/08 1/09 3/09 5/09
FIGURE 5: SHORT-SELLING OPPORTUNITIES. It is only at point 3 where POT is in sync with the NASDAQ that
shook out once more to lower lows before
you should consider shorting POT. This is critical in understanding why you shouldn’t short a stock at the formation turning back to the upside.
of the head in a head & shoulder formation, instead waiting for right shoulders to form first. A pocket pivot buy point marked the
turnaround in Cmg. As we moved into
point 5, the market, as indicated by the Nasdaq’s chart,
began to roll over again, but Cmg stood its ground, moving
roughly sideways from the pocket pivot buy point. At point
5 the market made a final low and Cmg was free to do what
it wanted to do all along — go higher.
In this case, the action of Cmg during the market correction
offered numerous clues that helped to distinguish it as a strong
name during a market correction, which then took a major lead-
ership role in the ensuing market bottom and new rally phase
that began in early September. Within the market context of a
sharp correction, Cmg displayed strong relative strength that
would have helped alert investors identify it as a strong leader
once the market correction came to an end. From this point,
Cmg ran some 65% higher over the next three months.
Identify short selling

opportunities
Nowhere is market context more impor-
tant than in short-selling operations. In a
bull market, most stocks, even the “dogs,”
will tend to go higher. Hence, trying to
sell stocks short within the market context
of a bull rally is not advisable, as it will
tend to offer far lower probabilities of
success relative to selling stocks short within the proper market
context, namely, a bear market.
In Figure 5 we see the Nasdaq stacked on top of Potash
Saskatchewan (Pot), both of which are in strong uptrends at
point 1 in each of the charts. At point 1 on the Nasdaq chart,
the market tops, but Pot continues higher. At this point, the
+1105 Morales.indd 5 3/24/11 12:01:42 PM

trading techniques
Charts as visual checkpoints

Investors can make use of Investors can make use of stock charts in many ways, from
stock charts in many ways, the highly complex to the extremely simple. Often, valuable
information can be gleaned by understanding how to use
from the highly complex to charts without having to understand statistics or mathematical
the extremely simple. formulas. Often, charts are most useful when implemented as
visual checkpoints, as we have done here.
only thing investors know for sure is that the market is begin- Gil Morales is the managing director and chief portfolio
ning what could turn out to be a short-term pullback, and often, manager for MoKa Investors and the cofounder of VirtueOf-
leading stocks will continue higher even as the market tops or SelfishInvesting.com; coauthor of GilmoReport.com; and
is in the process of topping. In this case, the market corrects formerly a senior proprietary portfolio manager for William
from point 1 to point 2 with a leg down and then a reaction O’Neil + Co. He is also the coauthor of the book Trade Like
rally, but Pot maintains its uptrend right into point 2. An O’Neil Disciple: How We Made 18,000% In The Stock
From points 1 to 2, Pot is essentially marching to its own Market.
tune as it begins to countertrend the market, but from points Chris Kacher is the managing director and chief investment
2 to 3 it begins to get back into sync with the market. By the strategist of MoKa Investors, and the cofounder of VirtueOf-
time we get to point 3, note that Pot has formed a head & SelfishInvesting.com. He is a former research analyst and
shoulders top with one left shoulder, a head at point 2, and senior proprietary internal portfolio manager for William
two short right shoulders right around point 3. These two right O’Neil + Co. and coauthored Trade Like An O’Neil Disciple:
shoulders also mimic the market action at the same point, as How We Made 18,000% In The Stock Market.
we’ve outlined with dotted lines on the Nasdaq chart.
In this case, it only makes sense to short Pot once it has Further reading
formed an identifiable breakdown and topping formation, in Morales, Gil, and Chris Kacher [2010]. Trade Like An O’Neil
this case a head & shoulders. In addition, note that the proper Disciple: How We Made 18,000% In The Stock Market,
time to short Pot is nearly four months from its absolute peak John Wiley & Sons.
at point 2 and only when it begins to act in synchrony with O’Neil, William J. [2009]. How To Make Money In Stocks,
the market action. 4th ed., McGraw-Hill.
When the market breaks down after point 3 in a major bear _____ [2003]. The Successful Investor, McGraw-Hill.
market down leg, Pot follows right along as it too blows to ‡TradeStation
pieces. In this case, market context was critical in understand-
ing when it was not correct to short a leading stock like Pot,
and only once Pot began to get in sync with the market did it
confirm the potential for further weakness by finishing off its
head & shoulders formation with two right shoulders that led to
the final break that occurred in synchrony with the market. S&C
YOUR ONLINE
RESOURCE
FOR
TECHNICAL
ANALYSIS
+1105 Morales.indd 6 3/24/11 12:02:07 PM

Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Don Bright of Bright Trading
MARK TO MARKET ACCOUNTING daytrade instead of doing longer-term Second, we have a plan in place for
You have written about the tax advan- trading. You have mentioned that you specific stock price movements. If we
tages of being a professional trader like to avoid “news stocks” — and that see a gap up, premarket, we have a plan
versus a retail trader. You also men- makes sense, but I’m not sure how you for it, the same thing at the end of the
tioned something about mark to market define a news stock. Can you give me day when we see major market on close
accounting. Could you expand on these some insight, please? —Yelpmaster (Moc) imbalances published. So basi-
points? —JBelliott Really good questions. Let me try to cally, keep up to date, prepare a plan for
Sure, glad to shed some light on this. explain our thought process. First off, let price movements, and keep your share
If you were to buy 1,000 shares of GE me address “news stocks.” Remember, size appropriate for your account size.
at $20, yet it is now trading at $21, you our traders tend to trade the same stocks Now to global events that we simply
have a mark to market profit of $1,000, (our “children”), much like a surrogate have no way of anticipating. A lot boils
even though you haven’t sold the shares specialist or market maker and/or build down to simple common sense. After the
yet. In my mind, this gives a better and up a portfolio of correlated pairs. All of horrific BP spill in the Gulf of Mexico,
truer reflection of where you really stand. these stocks are researched heavily, and we had dozens of traders with positions.
On the other end, if you bought 1,000 we have excellent software to update our Some closed out immediately (good
shares of Google [Goog] a few months information daily. I mention this because move), some cut their overall exposure to
back at $640, and it’s now trading at there are many traders who like the idea oil stocks (another good move), and yes,
$575, you have a mark to market loss, of filtering for the latest big-mover com- some just sat there like deer in headlights
but not a capital gain loss. Some retail (not a good move). “When in doubt, get
traders tend to almost kid themselves by A fundamentally solid out” is a good motto.
saying, “I haven’t really lost any money But let’s take this a step further. Many
because I haven’t sold the stock yet.”
stock in a good trading of our traders have dozens of pairs of
Well, as cute as that sounds, you really range can be moved by stocks in many sectors, and some of these
have lost money, no doubt about it. rumors or actual news. traders are really smart. The BP spill
We don’t have to match up trades, would have an effect on many sectors
which is a total nightmare. We simply buy pany on a daily basis. for months after the initial report was
and sell as needed, and whatever our net We’ve found that if one of our “chil- made — fishing and canneries, hotels
gain is, we pay K-1 type taxes on it (dis- dren” is constantly in the spotlight, it on beaches, restaurants (tourism in gen-
tribution of partnership income). We are takes away from our overall comfort eral), and so on. So naturally, many of
also exempt from Fica (self-employment level in the fundamentals and technicals. our people made some major changes to
tax). We see on a daily and even minute- A fundamentally solid stock in a good their portfolios — a good thing.
by-minute basis exactly where we stand trading range can be moved by rumors Remember, we are in a global financial
in real time. Another big benefit is if we or actual news. There is a difference, of marketplace, so plan for an exchange
do suffer a loss, it can offset other income course. Rumors tend to have some truth rate impact within various sectors as
rather than being carried forward at only to them, but more important, rumors well. You’ll be able to see the effect of
about $3,000 per year. bring in overzealous speculators. They the quake on the Japanese currency, for
might start buying options or even the example.
DEFINING NEWS STOCKS actual stock, simply based on one thing So keep share sizes appropriate to
I have wondered about what your traders or another. For most rumor-type news account size. Have a contingency plan
do when some major global event hap- items, we usually prosper because we for adjustments. Use common sense
pens — for example, hurricane Katrina, are up to date with what is going on in to follow the trail of secondary sector
the BP oil spill, and now this massive the company. We have generally done impact. Prepare for currency effects.
earthquake and tsunami in Japan. I our homework, and anticipate such Hope this helps.
sometimes think it might be safer to just news items.
S&C
+1105 Bright Stocks QA.indd 1 3/24/11 4:08:59 PM

INTERVIEW
Don’t Make It Overly Complicated
Short Swings In Futures

With Markus Heitkoetter
As founder and CEO of Rockwell Trading, Markus Heitkoetter has shared his
trading methods and ideas with more than 300,000 traders in over 196 countries.
Heitkoetter started trading stocks 19 years ago, using point & figure charts from
numbers published in the morning newspaper. In 1996, he began developing a
number of trading systems, and in 2002, he decided to leave his job as a director at
IBM to become a professional trader. Throughout his career, Heitkoetter has traded
virtually everything from stocks, options, futures, commodities, and spreads, all
the way to forex and interest rates. In addition, he is the author of the bestselling
book The Complete Guide To Day Trading and is a regular speaker at Trading
Expo and CME Group–sponsored events. His articles and videos are published on
MoneyShow.com, in major publications, and on thousands of websites around the
world. Heitkoetter lives with his family in Austin, TX.
STOCKS & COMMODITIES Editor Jayanthi Gopalakrishnan and Staff Writer
Bruce Faber interviewed Markus Heitkoetter via telephone on March 7, 2011.
I wasted two years

arkus, can you tell us about course encouraged me. But I noted that
M yourself and how you got with the little money I had at that time I trying to automate a
started in trading? could not really be a trader. So I saved trading system until
I am originally from Ger- some more and then started trading op- it finally dawned
many, but I live in Texas right now. I tions. I did some straddles and strangles, on me: I needed to
did my first trade when I was in high and I had the quotes from the morning
school. I was 18, which is when I was newspapers, and some hand-drawn point simplify my trading.
legally allowed to trade in Germany. At & figure charts. This is how I identified
that point I bought one share of VW, stocks in the DAX 30 that were poised for
which is a share in the German DAX. I a breakout. That is how I started building So what did you do?
bought it for around 50 Deutschemarks. my account. Like every trader, I went through the
I was so excited. I could only afford one From then I started trading stocks. I phase of automating trading systems,
share. Talk about disposable income in tried everything that everyone knows so I thought, “I am smarter than ev-
money you can afford to lose! these days. I tried fundamental analysis. erybody else.” Having a programming
After I bought that share I would, twice I tried the CANSLIM method. I did all of background, I thought I could develop
a day, go to a pay phone in my school and this until finally in 1995, when computers the perfect trading system. I read a lot
call my broker. I would ask him things became more powerful, I went into chart of books about it. At that time I had not
like, “How are we doing? How much analysis. I was fascinated by it. I bought discovered the Internet yet, so all of
money did I make?” This went on until my first software, which was SuperCharts my quotes came from dial-up. I wasted
the third day when my broker said, “You by Omega Research, now TradeStation. two years of my life trying to automate
know, Markus, how much money would This is where I first started reading a trading system when it finally dawned
you like to make on this trade?” I said about indicators. I have a German book on me: I needed to simplify my trading.
to myself, “If I could make 10 Deutsch- about 600 pages long, The Big Book Of I had to keep it easy so I could know, at
marks, that would be awesome.” So I Indicators, with 167 indicators. I think I any given time, when to enter and when
told him, “Ten Deutschmarks. That is the plotted 163 of them on my screen. I just to exit.
profit I want to make.” He said, “Done. thought that the more indicators I used, I discovered daytrading, so in 1998–99
Stop by my office tomorrow morning. I the better. Little did I realize that half of I started discovering the emini S&P, and
will give you the 10 Deutschmarks, but the indicators were screaming “Buy!” and the currency market. I started daytrading
stop calling me every single day.” the other half were screaming “Sell!” I these markets in 2000, and then finally in
This was my first trade, and it turned was sitting there with analysis paralysis, 2002 I felt confident enough to leave my
out to be a profitable one, which of not knowing what to do. job at IBM, and moved to Austin with the
+1105 Interview.indd 1 3/24/11 5:05:09 PM

goal of becoming a professional trader. is going sideways. On the other hand, fading and one is a scalping strategy. The
And here I am. trend fading strategies work perfectly in a market is either trending or going side-
sideways market, but as soon as the market ways. In my own trading, I noticed there
Expanding on your idea of simplifying starts trending, you get hurt. It dawned on is also a transitional phase where I am not
your trading system, I noticed that you me it might make sense to actually have at quite sure if the market is still trending
had your trading plan available for least two strategies — a trend-following or if it is already going sideways. This is
people to view on your website. It is strategy for a market that is trending, and a often happening in the opening.
actually a very simple plan. The other trend fading strategy for when the market I love using my scalping strategy at
thing I noticed was that you have con- is going sideways. This has helped me the open when the market is looking for
ditions for different markets. You have tremendously in my trading. direction because at this point, it is not
time frames for each of those markets, It is not the idea of, “Okay, I can fix really going sideways. It wants to start
and then you have different strategies. everything with a hammer.” You know trending, but it is not trending yet. So
Can you tell us why all of those things what they say: “To him who only has a I love trading the market with a scalp-
are so important to a trader? hammer, everything looks like a nail.” It’s ing strategy during the first five to 10
Yes. First of all, as a trader you need good to have a toolbox. Trend-following minutes. I try to put some money in the
to follow multiple markets and you must strategies are great to trade. They have bank to finance my stop-loss for the trend-
have multiple trading strategies. Let’s a high reward–risk ratio. It is said that following strategy, which I expect to be a
talk about the trading strategies first. the markets are only trending 20% of the more rewarding strategy. That is my take
Early in my career I noticed there was time. I don’t know if that is true, because on having multiple trading strategies.
no hybrid strategy. By this I meant that I I have never measured it, but looking at
noticed there were either trend-following the market it sure feels this way. So I What about multiple markets?
strategies or trend fading strategies. wanted to make sure I had a strategy for We know that markets change all the
Obviously, trend-following strategies any market condition. time. I am a futures daytrader. I love
work great in trending markets, but you Well, today I trade four different strate- trading futures. I love looking at the
frequently get stopped out if the market gies. Two are trend following. One is trend emini S&P as an index, and there was a
Now FREE With any

Charting Subscription!
May 2011 • Technical Analysis of STOCKS & COMMODITIES • 47
+1105 Interview.indd 47 3/25/11 9:15:38 AM

INTERVIEW
time when the emini S&P was fantastic charts and try to make sense of them. I average from nine to 12.
to trade. But the emini S&P has changed. like to simplify my trading. I like to keep I have had the best experience with
Now it just has small trends and turns it easy so that at any given time when I a setting of 12 for the standard moving
around on a dime. look at a chart I know exactly whether average, and two for the standard devia-
Right now, crude oil and gold are the I should go long, go short, or stay out tion for the Bollinger bands. These give
hot markets to trade. I like to watch five of the market. you the really nice signals for the trend. I
different markets and since these are like to support what I see using the Bol-
futures markets I am very well diversi- What are some of the indicators you linger bands with two other indicators,
fied. I love watching the emini S&P as a like to use? the moving average convergence/diver-
stock index. I like watching the euro as I have narrowed it down to three gence (Macd) and the relative strength
a currency. I like watching the 30-year indicators. The main indicator I like to index (Rsi). The relative strength index
bond as an interest rate product, and use is the Bollinger bands, which are by J. Welles Wilder was originally de-
then I like watching crude oil and gold a fascinating concept. I use them in a veloped as an oscillator. The idea was,
as the metal and energy market. If I am slightly different way. Many traders if the Rsi moved above the reading of
watching these five markets with my like to use Bollinger bands as a trend 70, the market is overbought and should
four trading strategies, there is always fading opportunity, saying that if price turn around. However, in my daytrad-
something to trade. is touching the upper band, you should ing, I have noticed that as soon as the
I am an extremely lazy trader. I only sell, and if they are touching the lower Rsi moves above 70, we get the really
like to trade the first two hours of the band, you should buy. That is not what strong trends. As long as the Rsi stays
morning. If I had just one market and one I do. Instead, I like to use the Bollinger above 70, the trend is perfectly fine.
strategy, I might not see an opportunity bands to confirm my trend. However, when the Rsi dips below 70,
during this time. The more opportunities, If you look at a chart in a downtrend, that is another warning signal that the
the easier it becomes for me to choose you’ll see that the lower Bollinger band uptrend might be over.
which ones are the best. Do I have a nice is nicely pointing down in a 45-degree
trend in gold, or is it an ugly trend in angle or more, and prices are constantly What about in a downtrend?
the emini S&P, for example? By being touching the lower Bollinger band. It is The same is true for the downtrend. I
diversified and looking at just these five like a trendline that is attracting prices. It use an Rsi with a setting of seven. I am
markets I can focus on the best trades. is like a trendline underneath the prices looking seven bars back, and as soon
in a downtrend. as I see that the Rsi is dipping below
If you look at the S&P on a daily basis, You can also see that this downtrend is 30, it is usually indicating a very strong
it has been trending up since November over as soon as the lower Bollinger band trend. Once I see the Rsi getting above
2010. But if you look at a day where starts to flatten or turn around. The same 30 again, it means this trend is losing
the range has been wide and trending is true for an uptrend. In an uptrend, you steam and might be over soon. That is
down, do you as an intraday trader look will see that the upper Bollinger band is how I use the Rsi in conjunction with
at the day’s trend or do you make your pointing up at a 45-degree angle or more, what I see on the Bollinger bands.
decisions based on the market trend? and prices are constantly touching the With the last indicator, the Macd, I
In situations like this, I would just upper Bollinger band. This up move is use the standard settings of 12, 26, and
like to use my indicators to tell me over when the upper Bollinger band starts 9. But I also like to use the Macd with
which direction the market is going. To to flatten or turn around. So I like to use a twist. First, there’s the traditional way
answer your question, no, I do not look Bollinger bands to identify trends in the many traders use the Macd. It is a simple
at the bigger picture. I do not care if the market. Macd crossover. We have the Macd,
markets are trending up on a daily basis. As a daytrader I have to modify the and we have a signal line. Many traders
If I see shorting opportunities like today, settings of the Bollinger bands. The use this as a signal as soon as the Macd
in a market that is crashing down, I’ll standard settings for the Bollinger bands crosses the signal line as a buy or sell
take those. For example, today the emini are usually around 18, 20, or 21 for the entry. In order to avoid whipsawing, I
S&P dropped 25 points and represented moving average, and two for the standard add one more twist. In order to go long,
a terrific opportunity to go short. Yes, I deviation. According to John Bollinger I want to see that the Macd has crossed
will trade against the long-term trend, himself, he suggests that if you are look- its signal line from below and it is above
because today I think the emini S&P ing at a time frame that is smaller than a the zero line. This is when I usually see
dropped like 25 points. daily chart — that is, if you are looking at the really nice uptrends.
There are plenty of opportunities and an intraday chart — you should shorten I look at it the same way during
plenty of money to be made. I am not the number of bars used in the moving downtrends. I want to see that the Macd
really looking at the overall picture. As is below its signal line and below the
a daytrader, I am happy if I can predict zero line. By adding this one criterion,
where the market is going in the next 10 I avoid a lot of whipsawing that occurs
minutes. This is why I never look at daily when you are using the Macd. If you

combine all three indicators together — trades take place, a new bar or candle stay within this two-point range, you
the Bollinger bands, the Macd, and the is plotted. These traders take the time will not get a new bar or candle. If prices
Rsi — you get clear-cut signals on the element out of charts and basically just break out of this two-point range — that
charts. You know exactly when a trend look at volume. If there is a lot of activity is, they are moving more than two points
is starting and when a trend is over. you get more bars, and in times of low from the low or are moving away more
activity you get fewer bars. than two points from the high — then
What else do you look at? With range bars you are looking at we will get a new bar. Again, we are
I like to use some major support and volatility. With range bars you define the taking the time element out of charts
resistance lines. Most traders are familiar range. For example, in the emini S&P, I and we are just looking at volatility. So
with the concept of pivot points and know like to use two points. As long as prices if the market is moving quickly, we get
the pivot point study where you have
a pivot point, a resistance area 1 and a LEGAL NOTICE
resistance area 2, and support areas 1 and
2. Many traders use the pivot points. I
NOTICE OF CLASS ACTION SETTLEMENT
like to consider the pivot point itself as
major support and resistance for the day.
I also like to take a look at the resistance If You Purchased a June 2005 Ten Year Treasury Note
2 line and the support 2 line. Futures Contract (“June Contract”)
But instead of support 1 and resistance
1, I like to use the previous day’s high Between May 9, 2005 and June 30, 2005, Inclusive,
and the previous day’s low. Those who In Order to Liquidate A Short Position In the June Contract,
are trading on the daily charts often use
these two values to determine their entry Then Your Rights May Be Affected
points. There are many traders who like and You May Be Entitled To A Benefit
to buy the breakout of yesterday’s high,
and so it often acts as resistance. The The purpose of this notice is to inform you of a Settlement with defendants
same applies to the previous day’s low Pacific Investment Management Company, LLC and PIMCO Funds
that acts as support. (“Defendants”) in the certified class action Hershey, et al., v. Pacific
The five major support and resistance Investment Management Company, LLC, et al., Docket No. 05-cv-04681
lines I am looking at are the pivot point (RAG) (“Action”) pending in the U.S. District Court for the Northern
itself, resistance 2 of the pivot point District of Illinois. The Court has scheduled a public Final Approval
study, support 2, and then the previous Hearing on April 7, 2011, 2:00 p.m. at the Everett McKinley Dirksen
day’s high and the previous day’s low. United States Courthouse, 219 South Dearborn Street, Chicago, Illinois,
I will not enter a trade into support and Courtroom 1219.
resistance if there is not enough room In order to resolve the claims against them, Defendants have agreed to
to take profits before I hit support or wire transfer $59,375,000 into the Escrow Account within ten days of the
resistance. If I am getting a signal close Court’s Order requiring that notice be sent to the Class and an additional
to support or resistance, I wait until prices $59,375,000 into the Escrow account at least seven days before the Final
are breaking through before I consider Approval Hearing. Together, the foregoing payments, plus all interest
taking the trade. earned thereon, constitute the Settlement Fund.
A copy of the Settlement Agreement, the formal Settlement Notice, Proof
You also use range bars as opposed to
of Claim and other important documents are available on the settlement
time-based charts. Why? website at www.pimcocommoditieslitigation.com. For additional
Range bars are fascinating. When you information, you may also contact the Settlement Administrator (Rust
are looking at charts we have three ways Consulting, Inc.) at 1 866-216-0282.
to look at them: First, constructing bars
or candles based on time. This is what If you are a member of the Class, you may seek to participate in the
many traders use, like a one-minute chart, Settlement by filing a Proof of Claim on or before June 7, 2011. You may
a five-minute chart, or a 10-minute chart. obtain a Proof of Claim on the settlement website referenced above. If
Recently, it has become more popular you are a member of the Class but do not file a Proof of Claim, you will
to look at volume-based charts, which still be bound by the releases set forth in the Settlement Agreement if the
Court enters an order approving the Settlement Agreement. All objections
are also known as tick charts. The term
must be made in accordance with the instructions set forth in the formal
is a bit misleading because what we
Settlement Notice and filed with the Court and served on the Parties’
are looking at is a trade. This is where
counsel by March 15, 2011.
traders might use a 300-trade chart, or
tick chart, and after a certain number of

INTERVIEW
the low will be. We know that the bar

Time-based charts are erratic. Traders will either close at the high or the low.
who switch to range bars say that they Based on this, we know where the next
bar will open. This gives me an edge in
get a much clearer picture. It is all the market.
about simplicity, at least for me. I look at charts differently. Knowing
where the bar closes and opens helps
me in my trading. If you have never
more bars on the chart. When we get low points away from the high. used range bars, I encourage all readers
volatility, like in the overnight sessions, By definition a range bar can only to check them out. It smoothes out the
we get fewer bars on the chart. We are close at the high or the low. It cannot chart. You might see beautiful signals if
contracting and expanding the chart close anywhere in between because if you just use range bars and your favorite
based on volatility. the market breaks out of this range, it indicators. Time-based charts are erratic.
Here is why I like these bars, or candles will move an additional tick and we get Traders who switch to range bars say that
— it doesn’t matter what you use. A a new bar. Based on the close of bar we they get a much clearer picture. It is all
candle or a bar is constructed based on also know where the next bar will open. about simplicity, at least for me.
four variables: the open, high, low, and If a range bar closed at the high, the next
close. When using range bars, you know bar must open one tick above the high. Are range bars readily available?
where the high of the bar will be because The same is true for the low. If we close I would say so. Most charting software
based on the criteria, the high of the bar at the low, using range bars, the next bar packages include them. They might be
will be two points away from the low. It must open one tick below the low of the called something else in your charting
cannot be any other way. Therefore, range bar. If you think about it, you have the software. They are called range bars,
bars all have exactly the same length. By same four variables — the open, high, or momentum bars, or breakout bars,
the same token we know where the low low, and close. When using range bars we depending on the charting software you
of the bar will be because it will be two know where the high will be and where use, but it’s all the same. Since very few
traders are using them, often they are
hidden deep in the charting software and
you might have to contact the support
team to find where you can apply the
settings for range bars. I would say that
more than 90% of the charting software
packages have them.
Basically, it is the good old point &
figure concept. Point & figure charts are
also breakout charts. The only difference
is that here we are using bars or candles
instead of point & figure charts, but it is
Sneak preview … the same concept.
Are range bars primarily for finding or

following trends, as opposed to finding
Top 10 Candlesticks That Work Daytrading Cup Breakouts other things price is going to do?
by Thomas Bulkowski by Ken Calhoun I also use the range bars to time my
Which candlestick patterns trend the most Here’s how to trade momentum daytrades. entry, especially when using the scalping
in 10 days? Let’s find out here. strategy, or my trend fading strategy. I
Exchanges, ECNs, And Market noticed that the two-point range of the
The Price Zone Oscillator Centers: Mergers And Growth emini S&P gives me fantastic opportuni-
by Walid Khalil and David Steckler by Don Bright ties to enter at the opening of the next
In this, the second part of the series, Changes in structures cause changes bar. If you are a technical trader who
we introduce the price zone oscillator, a in order routing. This is vital to all trad- uses any sort of indicators, you will
complementary indicator to the volume ers, and you need to know about it. know that most indicators are based on
zone oscillator. the closing price of the bar. And that’s
why using range bars with any sort of
…Coming soon! indicator, you will get a much clearer
picture. They help identify trends, but
also determining exactly when to enter

For more information circle No. 21
Rockwell Navigator
smoother the trend is in the range bar.
What kind of money management

Figure 1: 15-minute chart of the euro strategies do you use?
I just love the idea of Ryan Jones’s
fixed ratio money management approach.
The idea here is to look to make a fixed
amount of money each week, and over
time, earn the right to increase your con-
tract size in proportion to your account
balance. So, if you start trading with a
single contract and your goal is $100 per
week, you might establish that after eight
weeks and $800 in profits, you will start
to trade two contracts. Now your goal
is $1,600 (two contracts x $800) and
when you have grown your account an
additional $1,600, you may now trade
three contracts. Conversely, if your ac-
count starts to dip, you need to reduce
the number of contracts you are trading
until you build back your account.
Now your goal is to make $1,600. You
are still trying to make $800 per contract,
Figure 2: 16-tick range bar of the euro. Note how the trend is much more refined in the range bar than but since you are now trading two con-
the 15-minute bar chart. tracts, you are shooting for $1,600. If
you make that, then you can trade three
contracts. You are always increasing by
and when to exit. You see the sideways fine-tune when I want to enter into this one. You are not suddenly jumping up
moves in the market and then just one trend. I can enter much earlier than many from one to two to four to eight, like some
long beautiful trend because we are traders who are using time-based charts. other management techniques suggest.
expanding the amount of bars. For comparison purposes, look at the And yet this technique will allow you to
Instead of having one bar that is 10 15-minute chart of the euro in Figure 1 double your trading account, in less than
points long, say on the emini S&P, you versus the 16-tick range bar on September a year, making only $100 per week, per
will have five bars each being two points 22, 2009, in Figure 2. Note how much contract traded.
long. If you have one bar that is five points This takes a lot of pressure off of
long, by the time your indicators are telling traders. Many traders think they have to
you to enter or exit, the move is already make five points on the emini S&P every
over. However, if I break it down into five day. I tell them no. It is about consis-
bars, I have an opportunity to basically tency. Try to make small but consistent

INTERVIEW
profits, because then you can use money to breakeven. There is no need to let a trading. To achieve such a small goal,
management to leverage responsibly and winning trade turn into a losing trade you just need a simple strategy. You don’t
turbo-boost your trading results. just by not properly managing it. But I need complex trading strategies. For a
I tell traders to try to make $100 per don’t use trailing stops, so I just use the simple goal you don’t even need money
week per contract. Then, using proper basic trade management here. management. Just start somewhere.
management techniques, you will still be As a daytrader, I might have several Make your first $100. Once you have
able to double your trading account in less trades on at any given time. I might be achieved this, focus on your next $1,000.
than a year. That is a revelation for many in three, four, or five trades at a time. In order to make $1,000, you might need
traders. They say, “Yeah, this sounds like If I were to use some complicated exit multiple trading strategies. You have to
a goal I can actually achieve: $100 per strategy, I don’t think I would be able learn how to read a chart because you
week per contract? I should be able to do to manage this. I like to keep it simple, have to be able to identify whether the
that.” And you don’t have to stop there. which is why I like to work with premarket is trending or going sideways,
You can just keep adding one contract defined profit targets and stop-losses. because, based on this, you will apply
until you reach a comfortable point. the appropriate trading strategy: a trend-
What are some common mistakes that following strategy in a trending market,
How long do you stay in a trade on you see traders making? and a trend fading strategy in a sideways
average? If I had to pick only three, I would say market. So move from your first $100 to
On average, I would say maybe the first is making it too complicated. I your first $1,000.
around 10 or 12 minutes, especially on see traders who have trading plans that From there you move on to your first
the scalping trades. I want to see the are so complex that they are difficult $10,000. That is when you need to un-
scalping trades happen quickly. The to follow. These traders have so many derstand how to use money management.
scalping trades should work out within indicators on their screens that they You may even apply some more trading
30 seconds to two minutes. However, if don’t know when to enter and when to strategies. You are trying to achieve these
I have a trend-following trade, it might exit. My screen is extremely organized. goals in a systematic way. It is not that
go on for 10 to 30 minutes. It is clean, and at any given time I know you immediately say, “I have a $5,000
I work with fixed profit targets and whether I should go long, short, or stay account. I need to make $10,000.” No.
stop-losses, and here’s why. I found that out of the market. When I am in a trade I Start with making a profit of $100, and
it is much easier if I know exactly where also know exactly when to exit a trade. I only then acquire the information you
to exit a trade before I enter it. By doing have simplified my trading, and this has need for each stage. For the first $100,
this I can let my trading platform manage helped me tremendously. there is no need to know everything
my trades for me. Second, I believe traders are overambi- about 45 different money management
This has helped me tremendously tious. This is the second common mis- techniques. You don’t need 113 indica-
because, like many other traders, there take: setting unrealistic or overambitious tors to make your first $100. You can even
are many emotions going on once you goals. We talked about the power of small achieve it with a very simple scalping
are in a trade. These days the enemy of a but consistent profits, and then applying strategy. You don’t need complex trading
trader is that you currently see the open proper money management techniques. strategies or algorithms here. Then just
profit and loss. This lets your emotions Many traders start with unrealistic goals. build it up from there.
fly high. So I like to put my trades on They start with maybe a $5,000 or $10,000
autopilot once I am in. account and expect to make a living by So you would say “Keep it simple”?
I am a discretionary trader. I decide trading. Then they are surprised when they I don’t even remember what I said at
what trading signals I take. I have a are not making $250 a day on a $5,000 the very beginning of this interview. This
rule-based trading system, so based on account. Start small and set small goals. is why I need to keep my trading simple.
my trading strategies I have a rule for Once you achieve that goal, then you can Two minutes into my trading, and I don’t
when I should enter and exit trades. But start raising the bar. remember why I entered there or what
then I am making the decision whether The third is not having a systematic my plan was. So keeping everything
I take a trade. approach. I am not talking about a trading simple helps me in my trading. I don’t
However, once I am in a trade, I like system. I am talking about a systematic make it overly complicated.
to remove discretion from my trading approach to achieving goals. I tell trad-
and really have my trading platform ers, if they are new to trading, that their Thank you for your time, Markus.
manage the trade for me by automatically first goal should be to make $100 with
applying a profit target and a stop-loss. Related reading
In between I will manage the trade, but Heitkoetter, Markus [2008]. The
just a basic trade management, because Complete Guide To Day Trading,
I like to keep it simple. If I see that a Outskirts Press.
trade has already moved two-thirds ‡Rockwell Navigator
toward my profit target, I move my stop S&C

Alexander Elder
Inflation fears.
Tom DeMark Middle East turmoil.
An anemic US economy.
What trading strategies
Toni Hansen
will you use to profit?
I will get answers from
Corey Rosenbloom
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FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? DeCarley Trading senior analyst
and broker Carley Garner answers your questions about today’s futures markets.
To submit a question, post your question at http://Message-Boards.Traders.com.
Answers will be posted there, and selected questions will appear in a future issue of
S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options
and A Trader’s First Book On Commodities, are available from FT Press.
Carley Garner
DISTINCTIVELY DIFFERENT DELIVERY of a yen is 1.224 cents, or the cost of 100 there were such a thing) will be trading
Why are there dramatic differences in yen is $1.224. in the 1.20s.
the way the yen is quoted in the futures However, currencies in forex aren’t For instance, assume a yen futures
market relative to the foreign exchange always traded in the same manner. In value of 1.22400 is the equivalent to
market? forex, traders are executing buys and sells one yen/1.22400 (Jpy/Usd) or one yen
There are distinct differences between on a pair, rather than a single currency is equal to 1.22400 cents. The inverse
the futures and the forex markets that cre- that is automatically paired against the of this can be found by dividing one
ate dramatically different pricing for the dollar. Yen speculators have the freedom by 1.22400 (1/1.2240), or 0.8169. In
yen, yet in both markets the currency’s to place wagers on the value of the yen forex, however, you will see the yen
inherent value will always be similar. For relative to the euro, the Canadian dollar, quoted with two digits on the right of the
starters, yen futures and the dollar/yen and many others. In pairs trading, buying decimal such as 81.96. By moving the
currency pair in forex are each quoted in one currency means selling the currency decimal, the price is now quoted in the
different terms; second, forex contracts it is paired with. To illustrate, if you are cost per one US dollar. In other words,
represent immediate delivery and futures buying the Eur/Usd it is the equivalent 81.96 yen are required to purchase one
represent “future” delivery, which causes of simultaneously purchasing the euro US dollar.
some variation in pricing. and selling the US dollar. It isn’t any Adding to the complexity, unlike the
Although speculators are essentially Usd/Jpy currency pair in forex, yen
betting on the same underlying assets The value of a single futures are priced for future delivery
when trading currencies in either the yen is nearly worthless (as the title of the contract implies). The
forex or futures market, very different forex market is known as the spot market
standards are set in each trading arena.
and can be thought of as because delivery of the underlying as-
For instance (ignoring the relatively new similar to a penny in US set is set to occur immediately should a
currency pair futures introduced by the currency. trader fail to “roll” their contracts to a
Cme Group and Ice), the traditional Cme distant delivery date (usually the next
Group currency futures are all paired different from buying the euro against day). Currency futures, on the other
against the US dollar. Specifically, all are the dollar in the futures markets, but hand, represent quarterly delivery of
quoted and traded in terms in which the the reality isn’t displayed in nearly as the underlying. There are four delivery
dollar is the quote currency. The price you obvious of terms. months: March, June, September, and
are buying or selling a currency futures Forex pairs are standard regardless of December. Futures speculators not in-
contract at is quoted in terms of the US the brokerage firm you choose. In es- terested in taking delivery of a currency
dollar. For instance, if the euro is trad- sence, you can trade the Eur/Usd pair, will only need to roll their positions four
ing at 1.3345, it takes exactly $1.3345 but you couldn’t trade the Usd/Eur pair. times per year, as opposed to daily.
to purchase a single euro. If you wanted to be long the US dollar, Because delivery takes place at a spe-
The yen is an exception in the currency you would simply sell the pair (that is, cific date in the future, the market tends
world. The value of a single yen is nearly sell the euro and buy the dollar). to have expectations as to what the value
worthless and can be thought of as being In the case of the yen, it is traded of any particular currency will be at that
similar to a penny in US currency. That against the greenback in the standard date. Just because the Usd/Jpy is trading
is, if the US dollar didn’t exist and all of Usd/Jpy pair, which is the opposite of near 81.69 today doesn’t mean the futures
our transactions took place in pennies, the yen futures contract traded on the contract set for delivery three months
the US currency would trade like the yen. Cme Group. Therefore, the price quoted (or more) from now will be trading at
You might see the yen futures contract for the yen futures and the Usd/Jpy are or near 1.2240. Variations in the value
quoted at a rate of 1.22400. Unlike the the inverse of each other. Accordingly, might stem from expectations of interest
euro, this does not mean it would cost the Usd/Jpy in the forex market will be rates, or other fundamental factors.
$1.224 to buy a single yen. Instead, it trading in the 80s while the yen futures
can be looked at in two ways; the price contract (essentially the Jpy/Usd, if S&C
+1105_Garner_FuturesQA.indd 1 3/24/11 4:19:35 PM

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product review
Mesa9
Mesa and physicist Joseph
6595 Buckley Drive Fourier (1768–1830),
Cambria, CA 93428 employs the linear
B
Phone: 805 927-3065 sum of sine and cosine
D
Fax: 805 927-3065 waves. Amazingly, you
Email: ehlers@mesasoftware.com can replicate a repeat-
Product: Analysis software ing square waveform
Requirements: TradeStation, with a series of sine
MutiCharts, or NeuroShell Trader and cosine waves in the E
platforms. limiting case. But the A C
Price: $495; $250 to upgrade answer you get is not
one that is tradable, and Figure 1: SINUSOIDAL PRICE MOVEMENT. If a price series could be characterized
by Dennis D. Peterson Ehlers makes that point as a sine wave superimposed on a straight line, it would look like the blue oscillating line
on top, as opposed to the cyclic price series in red at the bottom. Point A marks the zero
in his user manual. value line. Points B and C mark the endpoints of trend amplitude, while points D and E
M esa9 is a set of studies for He employs filtering mark the endpoints of cyclic amplitude. If the amplitude of the trend (B to C) is twice that
TradeStation, MultiCharts, and techniques using a of the cyclic component (D to E), then MESA9 declares that prices are in a trend.
NeuroShell Trader that employs feedforward design to
the latest evolution of John Ehlers’s measure the dominant cycle, as opposed to way. In the real world, the cycle period
analysis techniques. The indicators are the feedback design he had with Mesa8. is constantly changing, especially if you
a set of tools, and without a doubt, one When Ehlers talks about a spectrum of are using relatively few datapoints, where
of the most powerful approaches that try frequencies, he is really talking about a set the influence of the latest datapoint will
to predict price behavior. of cycles for which he has calculated their matter more, as opposed to, say, adding
The premise of Ehlers’s approach is amplitude, and the cycle with the greatest an extra day to the last five years of daily
unassailable. A price series is nothing amplitude is the dominant cycle. data. You can see a graphic representa-
more than a time series and therefore One thing to keep in mind as you tion of a dominant cycle by inserting the
subject to signal analysis techniques. The look at the oscillating red and blue lines Mesa9 bandpass indicator. I will discuss
overall approach is to find what Ehlers in Figure 1 is that while the real world the bandpass indicator later.
refers to as the dominant cycle. If price can be cyclic, it almost never continues
were to move up and down following a to have the same periodicity. Figure 1 Trend vigor
perfect sine wave, prediction would be is an idealized view in more than one Trend vigor is the ratio of trend ampli-
a snap, and of course, the dominant
cycle would be that sine wave. But
alas, the real world is more compli-
cated.
In a perfect world, it’s not difficult
to imagine taking the normal up and
down price movements and convert-
ing them to a sine wave. Borrowing a
picture from Ehlers’s user manual, a
sine wave superimposed on a straight
line (see Figure 1) begins to look like
price in a trend. If only it were so easy.
A trend following a straight line is,
especially if it’s daily data, a highly
unlikely event, if not impossible.
Dominant cycle
The temptation here is to use a Fou-
rier series. Or at least explain what
the analysis is doing in terms of a Figure 2: DAILY QQQQ WITH MESA9 HEAT MAP. The vivid colors indicate trend: green is an uptrend, red is a downtrend, and
Fourier series. A Fourier series, in- blue is no trend (sideways). The scale at the right of the color map indicates the number of bars in a peak-to-peak cycle. The range
vented by the French mathematician is 12 to 60, so that the peak-to-valley values are 6 to 30, which are values you would use in a typical indicator such as RSI.
+PR Mesa 9.indd 1 3/24/11 9:21:13 AM

tude (Figure 1: distance between
points B and C) and cycle amplitude
(Figure 1: distance between points
D and E). Trend vigor greater than
1 suggests an uptrend, while vigor
less than ‑1 suggests a downtrend,
and if between +1 and ‑1, then price
is in a cyclic mode. While there is
a separate indicator for vigor, you
can get an idea of how a price series FIGURE 3: DATA RANGES AT TWO DIFFERENT SIGNAL TO NOISE RATIOS (SNR). Profit is just lucky when noise equals
goes from upward to downward to signal (left-hand chart: 0 dB SNR), but when the signal is twice as strong as noise (right-hand chart: 6 dB SNR), the results are
worthwhile profit.
neutral by inserting the heat map
indicator (Figure 2).
Since Ehlers likes to start his
analysis with the heat map, let’s
discuss it for a moment. The way
you use the heat map is simply to
pick a point in time and, using the
color, find candidates for the number
of cycles. For example, starting with
the lower left portion, you see where
the red (downtrend or a short posi‑
tion) first turns to blue (no trend) at
the beginning of June or so. At this
point in time — transitioning from
red to blue — the last of the short-
term short trades disappears (at least
for the time being), and suggests you
hold the trade for six days (half times
lower range of 12).
But also at the beginning of June,
note that the red extends all the way FIGURE 4: DAILY QQQ WITH MESA9 INDICATORS. Overlaid on the price are two lines that come from inserting the trendline
indicator. The subcharts below the price chart are (starting from the top): bandpass showing the dominant cycle (oscillating
to the top of the heat map range, red line), trend vigor showing the ratio of trend to cycle strength (oscillating blue line between white +1 and ‑1 thresholds), and
which says a short position held for detrend showing the result of subtracting the instantaneous trendline from prices and then scaled for display with + and ‑1
30 days (half of maximum range of sigma lines (green bars oscillating between parallel white lines).
60) should make a profit. We have the
benefit of history, and the result is that on crest, but at the low of that daily bar, you of that, you now have the signal. Simply
June 4, 2010, Qqqq closed at 45.09, and have used the cycle correctly, but making put, it is the root mean square (Rms) of
on July 1, 2010, Qqqq closed at 42.59, a zero profit due to the noise. On the other the dominant cycle. Ehlers would say
profit from a short sale. hand, if you use the “signal is twice as you have an acceptable Snr if the ratio
strong as noise (6 dB Snr)” bars, you of the signal to the noise is two or more,
Signal to noise ratio see some worthwhile profit, regardless or in digital processing terms, the signal
“Digital signal processing” also uses the of your noisy entrance and exit points. is 6 dB above the noise.
term signal to noise ratio (Snr). Noise So how does Ehlers calculate the signal
is the random up and downs that reflect to noise ratio? He calculates noise as Indicators
neither a cycle nor a trend. If you are the average daily range. The signal is There are 10 indicators that come with
going to use cyclic data, you would like taken from the dominant cycle, which he Mesa9. Having gotten this far with the
to know that it is more than just a shot finds using his feedforward techniques. explanations given here, the names should
in the dark — that you won’t be trading Using Figure 1 again, note the bottom not be a surprise, with names like “Mesa9
noise. Ehlers gives a nice example of red wave. If you take the values from the Snr” or “Mesa9 trend vigor.”
data that is in an environment where the curve starting at zero on the left (point Let’s talk about one more with an
noise equals the signal (Figure 3: 0 dB A), to point where they cross zero again, example, namely Mesa9 detrend. The
Snr) and where the signal is twice that and are rising (point C), form the sum explanation in the user manual should
of the noise (Figure 3: 6dB Snr). of squares (since in Figure 1 half of the now read easily: “This Mesa9 indica‑
If you enter a long position at the values of the oscillating red line are tor detrends the price by subtracting the
cyclic valley, but at the high of the daily below zero), divide by the number of instantaneous trend line from the price.
bar, and exit the long trade at the cyclic samples and take the square root of all The display is scaled to show the price
+PR Mesa 9.indd 2 3/24/11 10:09:42 AM

These are top-notch
analytics. A few
products attempt to
be adaptive, and this
is one that succeeds.
FIGURE 5: DAILY QQQQ WITH MESA9 INDICATORS. Overlaying the price bars, shown in red and cyan, are the trendline
indicators. The subcharts below starting at the top are the following: SNR (signal to noise ratio), sinewave with leading and
lagging waves, and trend vigor. The fuzzy look to SNR is indicative of a weak signal. The crossover of the red and cyan lines of
the sinewave indicator shows potential entry points.
relative to plus one sigma and minus sigma the heat map (Figure 2). What you are yourself that there is no countermove.
values.” The results are in Figure 4. looking for is solid green or red swaths In mid-October, detrend is flat, which is
When the detrend indicator touches of color. What you don’t want is the mix the condition you want for confirmation.
one of the threshold sigma lines, price of colors that you see in August 2010. Mid-October (October 15, 2010) shows
is in a cyclic mode and is likely to be Ehlers would describe the heat map as where you would take a long position in
a reversion to mean, such as the case the view from 30,000 feet. Qqqq, since the heat map is showing a
seen at the beginning of July (Figure 4: Next, you need to focus more. Cre‑ large amount of green, vigor is above
bottom subchart). ate the chart you see in Figure 4. Check one and not falling off, bandpass has
vigor (Figure 4: middle subchart with formed a valley, and detrend is flat.
Analysis plan example sinusoidal blue line) to assure that the But suppose vigor says that you are in
Now that you have an idea of the pieces, trend is not falling off. For focus, use a cyclic mode — that is, vigor is between
let us look at an example of how to use the bandpass and detrend indicators. +1 and ‑1. This occurs, roughly speak‑
the indicators to analyze a price series. Use the bandpass indicator (Figure 4: ing, in the July, August, and September
We’ll use daily Qqqqs, but any stock or top subchart with sinusoidal red line), (2010) time frame.
commodity would work. The emphasis and when you see a valley, you should Just prior to this time frame, you see
in this plan is to buy the trend, because buy because price should be in a dip. that the signal to noise ratio is showing a
the reality is that most of the money is This occurs in the second week in Oc‑ low Snr (Figure 5). What you are looking
made in that fashion. Start by looking at tober. Use detrend (Figure 4) to assure for is a crossover of the two lines of
the sinewave indicator, while vigor
is at least roughly between +1 and
‑1, and Snr is not indicating a weak
signal (Figure 5: top subchart fuzzy
area). Note it is not a lot of time to
get some decent trades. The sinewave
indicator is a pure sine wave based
on the phase of the dominant cycle.
The phase is advanced 45 degrees to
create the lead wave (cyan).
Other
Ehlers has included several Easy‑
Language code examples in the user
manual. Looking at the first example,
adaptive Rsi code, what you should
conclude is that any indicator that
uses a fixed number of periods is
only a guess at the real number of
FIGURE 6: DAILY S&P MIDCAP. Here’s a NeuroShell Trader screen with sinewave (top subchart) and trend vigor (bottom periods. If the indicator is an oscil‑
two subcharts) indicators. lator, you can be misled. From the
+PR Mesa 9.indd 3 3/24/11 10:11:51 AM

product review
heat map, you can see that the number At-the-Money (ATM) — An option whose whose strike price is higher than the
of periods to use is changing, but even strike price is nearest the current price underlying stock or future’s price.
more prominent are the changes in peri- of the underlying deliverable. Long — Establishing ownership of the
ods you see manifested in the dominant Average Directional Movement Index responsibilities of a buyer of a trad-
cycle (Figure 4: top subchart — red line) (ADX) — Indicator developed to able; holding securities in anticipation
and the sinewave indicator (Figure 5: measure market trend intensity. of a price increase in that security.
middle subchart). Average True Range — A moving aver- Money Flow — A number of technical
As mentioned at the beginning, age of the true range. indicators that incorporate volume
Mesa9 is also available on a number Bid and Ask — Highest price and lowest and price action to measure buying
of platforms. MultiCharts supports Ea- price that an investor will pay for a or selling pressure. Calculated by
syLanguage files, and as a result, you tradable. multiplying the day’s volume by its
see the same type of screens you get Bollinger Bands — Bands widen during average price.
with TradeStation. The first five figures increased volatility and contract in Moving Average — A mathematical
were all created using TradeStation. The decreased volatility, and when broken, procedure to smooth or eliminate the
implementation in NeuroShell Trader is are an indication that the trend may fluctuations in data and to assist in
a bit different, however. The heat map continue in that direction. determining when to buy and sell.
isn’t available, but the rest of the Mesa9 Call Option — A contract that gives the Moving Average Crossovers — The point
indicators are. For example, when you buyer of the option the right but not where the various moving average
insert the sinewave indicator, the two the obligation to take delivery of the lines intersect each other or the price
sine waves are in separate subcharts. But underlying security at a specific price line on a moving average price bar
you can get the same appearance and within a certain time. chart.
functionality that you see in Figure 5 by Candlestick Charts — A charting Moving Average Convergence/ Diver-
merging the two subcharts by clicking method, originally from Japan, in gence (MACD) — The crossing of
and dragging one of the sine wave sub- which the high and low are plotted two exponentially smoothed moving
charts onto the other sine wave subchart as a single line and are referred to averages that are plotted above and
(Figure 6: top subchart). Trend vigor has as shadows.
S&C below a zero line.
a histogram-like look (Figure 6: bottom Covered Call — Selling a call option Near-the-Money — An option with a
two subcharts), so up- and downtrends while holding an equivalent in the strike price close to the current price
stand out better. underlying tradable. of the underlying tradable.
Use version 5.6 (or later) of Neu- Doji — A session in which the open Out-of-the-Money (OTM) — A call op-
roShell Trader, and similarly, version and close are the same (or almost tion whose exercise (strike) price is
6.0 of MultiCharts and version 8.6 for the same). above the current market price of the
TradeStation. Elliott Wave Theory — A pattern-recog- underlying tradable.
nition technique published by Ralph Put Option — A contract to sell a speci-
Summary Nelson Elliott in 1939. fied amount of a stock or commodity
These are top-notch analytics. A number Euro — European unit of currency, of at an agreed time and price.
of traders might be surprised at what is the European Union. R/R Ratio—Reward/risk ratio. The ratio
seen here, namely, that the number of Exchange-Traded Funds (ETFs) — Col- of profit target or trade gain and risk
periods in a cycle is constantly chang- lections of stocks that are bought and or trade loss.
ing, perhaps not every day, but certainly sold as a package on an exchange. Relative Strength Index (RSI) — An indi-
every few days or a couple of weeks. If Exponential Moving Average — A varia- cator invented by J. Welles Wilder and
you are using oscillators and you are tion of the moving average, the EMA used to ascertain overbought/oversold
not changing the number of periods to places more weight on the most recent and divergent situations.
fit what Ehlers calls the dominant cycle, closing price. S&P Emini — Electronically traded,
then this is likely to be one of the reasons Fade — Selling a rising price or buying smaller-sized ($50 times the S&P 500)
you are losing money. A few products a falling price. contracts of the Standard & Poor’s
attempt to be adaptive, and this is one Fibonacci Ratio — The ratio between 500 index.
that succeeds. This is exactly the type of any two successive numbers in the Stochastics Oscillator — An overbought/
product that is worth your investment in Fibonacci sequence. oversold indicator that compares
time and money. Gap — A day in which the daily range today’s price to a preset window of
is completely above or below the high and low prices.
Dennis Peterson is a Staff Writer for previous day’s daily range. Volatility Index — A widely used measure
Stocks & Commodities. In-the-Money (ITM) — A call option of market risk. Sometimes referred to
whose strike price is lower than the as the “investor fear gauge.”
‡Mesa9 stock or future’s price, or a put option
S&C S&C
+PR Mesa 9.indd 4 3/24/11 10:12:08 AM

Explore Your Options
Got a question about options?
Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com),
an education and publishing firm dedicated to teaching investors how to minimize
their risk while maximizing profits using options. To submit a question, post it to
our website at http://Message-Boards.Traders.com. Answers will be posted there,
and selected questions will appear in a future issue of S&C.
Tom Gentile of Optionetics
A Stronger Call Position This type of action converts the posi- the-money, he or she can put in a “do not
I’ve noticed many stocks see their strongest tion from a long call into a synthetic long exercise” notice with their broker. Similarly,
or weakest price levels in afterhours or straddle or a full-fledged long put if 100 an option that appears to have expired
premarket trade immediately following shares are shorted for every call held. A worthless based on the closing price of
an earnings release. With the stock’s listed couple caveats to using short stock as a shares at expiration can always be subject
options not open during those sessions, it hedge against a long call are the trader’s ac- to assignment if a holder of that contract
seems an investor with a long call, if the count being approved and being financially decides to exercise it.
move is up, could be missing out on exiting capable of holding short stock. In addition, While neither instance is common, news
at more opportune levels. Why is this and if the stock in question is hard to borrow, after the official close that affects shares in
do you see any changes in the future? this type of hedge wouldn’t be allowed, as the afterhours could prompt this kind of
Whether listed equity options will trade your broker won’t be able to locate shares surprise. The “surprise” of being assigned
in the afterhours or premarket sessions and to be shorted. may also be the result of the contract holder
afford option strategists the same type of One way around this possible road block needing to reduce risk.
access as stock traders have to their shares would be to use a synthetic long call made As a trader who focuses on verticals,
is, in the end, a political thing. I haven’t up of long stock and a long put, in lieu of the you’re covered to guard against unlimited
heard of any pending reform to do so. regular call. Again, the capital requirement risk regarding any surprises with your short
One real deterrent to extending trading for non–risk based accounts will be greater contract. Since you own an offsetting long
hours for options is liquidity. Remember, than it would for an equivalent amount of call or put, you could opt to exercise or re-
calls and puts are derivatives of the un- regular long calls because of the cost of quest your own “do not exercise” action.
derlying, which we can assume will have the stock. However, if your concern is not Under circumstances where you become
less liquidity during these trading sessions. being able to trade in the extended hours aware after expiration of a change in the
Thus, even if you are holding a typically and when stocks do hit extremes not seen in underlying shares that could affect the ob-
well-traded front month option, closing or the regular session, the flexibility to hedge ligation with your short contract, you can
adjusting into an attractive spread would is more readily available. take the same action as the counterparty of
likely prove challenging at best. your short option. This may wipe out your
An argument to extend trading hours “Your Assignment is Complete” profits, but at least your open-ended risk
for a security’s options might be following I thought the process of automatic exercise would be eliminated.
an earnings announcement. For the most guaranteed assignment at expiration if the The good news is scenarios like these
highly capitalized companies that also stock crossed a certain price threshold. aren’t commonplace. However, with the
sport strong institutional liquidity during Recently, I was alarmed to learn that’s automatic threshold for exercising down
the regular trading session, this could make not necessarily the case. Is this true? to a penny, the surprise of finding oneself
sense. For companies such as Apple (Aapl), Under what circumstances would I have with an unwanted long or short stock
Google (Goog), Bank of America (Bac), to be concerned as a trader who focuses position that won’t be covered until the
and the like, we might expect there to be on verticals? next trading session does seem to pose
sufficient interest to make a special session Automatic exercise will occur without a greater risk. In fact, according to the
worthwhile. the contract buyer needing to take any Options Clearing Corp. (Occ), 20.50%
Currently, traders who are long a call (or action on expiration if the call (or put) is of in-the-money options (which can mean
a put) who find themselves with a quick in-the-money by a penny or more. However, a penny, mind you) went unexercised in
profit on paper can still take some action in remember that the owner of a contract is 2010. For what typically amounts to a few
the afterhours or premarket. For instance, not obligated to convert the call or put, less pennies profit to close out this type
with an existing long call, if shares rally to regardless of price. of position prior to expiration, that makes
attractive levels and where you might look If the trader decides not to take on the good “sense” to us.
to sell out the position, the trader can short obligation of long or short stock via the Contributing analysis by senior Optionetics
the stock up to the number of contracts held exercise process, even though the contract strategist Chris Tyler
in order to take partial or lock in profits. has been determined to have expired in- S&C
+1105_Gentile_Tyler_QA.indd 1 3/24/11 4:03:13 PM

For this month’s Traders’ Tips,
the focus is Walid Khalil and Da-
vid Steckler’s article in this issue,
“In The Volume Zone.” One addi-
tional Traders’ Tip is contributed
for Koos van der Merwe’s article
in the December 2010 issue of
S&C, “Less Stress With The JM Internal Band.”
Code for the volume zone oscillator for MetaStock and
TradeStation is already provided in Khalil and Steckler’s
article. Subscribers will also find the same code at the
Subscriber Area of our website, www.Traders.com. Pre-
sented here is an overview of possible implementations
for other software.
Traders’ Tips are provided to help the reader imple-
ment a selected technique from an article in this issue.
The entries are contributed by various software develop-
ers or programmers for software that is capable of cus-
tomization.
Readers will find all the code listings that accompany
the following Traders’ Tips at our website, Traders.com.
Provided here is some discussion of the technique's im- Figure 1: TRADESTATION, volume zone oscillator. This shows a daily
plementation by the Traders’ Tips contributors as well as chart of SPY with several indicators and the “_VZO_Strategy” applied.The indicators
some example charts. include the _VZO_Ind (cyan plot in subgraph 2), 60-bar EMA of the close (red plot
To locate Traders’ Tips at our website, use our site’s with the price data), and the custom two-lines indicator (subgraph 3) plotting the
search engine, or click on the Traders’ Tips link from our 14-bar ADX (yellow) and the value of 18 (cyan line). The value of 18 for the ADX
home page. For past Traders’ Tips, click on the “Stocks is the breakpoint for trending versus nontrending, according to the authors.
& Commodities” link from our home page in the red box
on the left, then click on the “Article Abstracts” link in the
red box on the left, then click on the issue of interest, then
on “Traders' Tips.” F eSIGNAL: volume zone oscillator
For this month’s Traders’ Tip, we’ve provided the formula
VolumeZoneOsc.efs based on the formula code from Walid
Khalil and David Steckler’s article in this issue, “In The
F TRADESTATION: volume zone oscillator Volume Zone.”
In the article “In The Volume Zone” in this issue, authors The study contains one formula parameter to set the number
Walid Khalil and David Steckler present a volume zone oscil- of periods, which may be configured through the Edit Chart
lator (Vzo) that can be used to incorporate both trending and window.
oscillating price action. They also suggest some methods by To discuss these studies or download complete copies of the
which the Vzo can be used with other indicators and rules formula code, please visit the Efs Library Discussion Board
for trading. forum under the Forums link from the Support menu at www.
We have prepared code for this indicator (_Vzo_Ind) and
a strategy (_Vzo_Strategy). The strategy utilizes the 60-bar
Ema of the close, the volume zone oscillator, and the 14-bar
Adx. An Adx above 18 is considered trending, while below
18 is considered nontrending, according to the authors. Alerts
were coded in the indicator to alert when the Vzo crosses the
overbought and oversold values as set by the inputs.
To download the EasyLanguage code for the indicator, go to
the TradeStation and EasyLanguage Support Forum (https://
www.tradestation.com/Discussions/forum.aspx?Forum_
ID=213) and search for the file “Vzo.Eld.”
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of trading or
investment recommendation, advice, or strategy is being made, given, or
in any manner provided by TradeStation Securities or its affiliates.
—Chris Imhof, TradeStation Securities, Inc.
A subsidiary of TradeStation Group, Inc.
www.TradeStation.com Figure 2: eSIGNAL, volume zone oscillator
+Traders_Tips_1105_NEW.indd 1 3/24/11 10:28:20 AM

esignal.com or visit our Efs KnowledgeBase at http://www.
esignal.com/support/kb/efs/. The eSignal formula scripts (Efs)
are also available for copying and pasting from the Stocks
& Commodities website at Traders.com.
—Jason Keck
Interactive Data Desktop Solutions
800 815-8256, www.eSignal.com/support/
Figure 4: WEALTH-LAB, volume zone oscillator. Here is a Wealth-Lab

F BLOOMBERG: volume zone oscillator Developer 6.1 chart showing the volume zone oscillator strategy applied to a natural
The Bloomberg chart in Figure 3 shows the volume zone gas continuous futures contract (NG20_I0B, daily).
oscillator described in the article by Walid Khalil and David

Steckler in this issue, “In The Volume Zone.” Based on the in the sample files provided with regular Sdk updates, and the
uptrend rules given in the article, a bullish signal is present studies will be included in the Bloomberg global study list.
during December 2010 (defined by a rectangle) that coincides —Bill Sindel
with the early stage of the rally that peaked in mid-February Bloomberg, LP
wsindel@bloomberg.net
2011. The oscillator crosses above the zero line on December
6, the final day on the chart where the entire bar is below the
60-day Ema. At that point, the Adx line hovers just around
the 18 level, as evidenced by the orange line that cuts through
the Adx histogram. Three days later, on December 9, the Vzo F wEALTH-LAB: volume zone oscillator
crossed back above +15, the market gapped above the 60-day The volume zone oscillator system presented in Walid Khalil
Ema, and the Adx is close to 20, showing the strengthening and David Steckler’s article in this issue, “In the Volume Zone,”
of the up move. is now available as a free download to Wealth-Lab users, as
In their article, the authors also note that the Vzo will react well as many other ready-made trading strategies.
to that volume behavior by staying in the lower zone between To start using this strategy and exploring its potential to help
-40 and zero, indicating more selling pressure than buying you switch gears to trade in both trending and range-bound
pressure. Conversely, on this chart, one can observe the Vzo markets, simply click the “Download” button in Wealth-Lab’s
oscillating in a range between zero and +40 as the market is Open Strategy dialog.
in the first wave of the up move during the second half of Although the new oscillator implementation is fairly
December. straightforward, the accompanying system rules have to
Using the CS.Net framework within the Stdy<GO> func- function in different market regimes and cover such events
tion on the Bloomberg Terminal, C# code or Visual Basic as positive and negative price/oscillator divergences. The
code can be written to display the volume zone oscillator. complexity of their implementation is hidden in an additional
The C# code for this indicator is shown at Traders.com. All library, “Community Components,” available for download
Bloomberg code written for Traders’ Tips can also be found to Wealth-Lab customers from our site, www.wealth-lab.com
(see the “Extensions” section). Users can see the divergence
lines drawn on a chart, both in the traditional way and as a
“binary wave” to be used in mechanical trading systems.
—Eugene
www.wealth-lab.com
F aMIBROKER: volume zone oscillator

In their article in this issue, “In The Volume Zone,” authors
Walid Khalil and David Steckler present a new volume zone
oscillator that can be easily implemented using AmiBroker
Formula Language. A ready-to-use formula for the indicator
can be found at Traders.com and is also shown below.
Figure 3: BLOOMBERG, volume zone oscillator. Here is a one-year
To use the code, enter the formula in the Afl Editor, then
daily chart of Goodyear Tire & Rubber (GT), with the volume zone oscillator press “Insert indicator.” To modify the averaging period of the
and ADX shown in separate panels below the price chart. volume zone oscillator, click on the chart with the right mouse
+Traders_Tips_1105_NEW.indd 2 3/31/11 4:51:45 PM

Figure 6: TC2000, volume zone oscillator. Here is a weekly chart of SPY
with the 60-period exponential moving average of price, VZO with oscillator zones,
Figure 5: AMIBROKER, volume zone oscillator. Here is a weekly and ADX. The watchlist also shows columns for price above the 60-day EMA, ADX
price chart of the DJIA (upper pane) with a 14-period volume zone oscillator above 18, and VZO crossing up through -40.
(middle pane).
you’ve set up the plot guides the way you want them, click
button and select “Parameters” from the context menu. on the indicator and select Save. You now have your own
A sample chart is shown in Figure 5. customized version of the indicator available to you in the
indicator library.
function VZO( Period )
{ Using the “QuickSort/Add Column” feature, you can find
R = sign( Close - Ref( Close, -1 ) ) * Volume; stocks meeting the various Vzo system rules. As seen in Figure
VP = EMA( R, Period ); 6, we’ve added columns to find stocks passing the uptrend
TV = EMA( Volume, Period );
return Nz( 100 * VP / TV ); buy rules. Symbols Wfr and Qep are trading above their 60-
} day exponential average, Adx is above 18, and Vzo has just
crossed up through -40. This all happens in real time.
Period = Param(“Period”, 14, 1, 100 );
For more information on TC2000 or to start a free trial, visit
Plot( VZO( Period ), “Volume Zone Osc” + _PARAM_VALUES(), www.TC2000.com. You can also access your watchlists, scans,
colorBlack, styleThick ); and chart template while away from your computer using the
Plot( 60, “”, colorLightOrange, styleNoLabel );
Plot( 40, “”, colorLightOrange, styleNoLabel ); new TC2000 Mobile app for Android 2.0 and higher (www.
Plot( 0, “”, colorBlack, styleNoLabel ); TC2000.com/Mobile).
Plot( -40, “”, colorLime, styleNoLabel ); —Patrick Argo, Worden Brothers, Inc.
Plot( -60, “”, colorLime, styleNoLabel ); www.TC2000.com
—Tomasz Janeczko, AmiBroker.com

www.amibroker.com
F NEUROSHELL TRADER:
volume zone oscillator
The volume zone oscillator (Vzo) described by
Walid Khalil and David Steckler in their article in this issue
F WORDEN BROTHERS TC2000: volume zone oscillator can be easily implemented with a few of NeuroShell Trader’s
The volume zone oscillator (Vzo) in Walid Khalil and David 800+ indicators. Simply select “New Indicator…” from the
Steckler’s article in this issue is now available in the TC2000 Insert menu and use the Indicator Wizard to set up the fol-
indicator library. To add the indicator to your chart, just click lowing indicator:
the “Add indicator” button and select it from the list.
In Figure 6, we’ve plotted a 60-period exponential moving Multiply2( 100, Divide( ExpAvg( Multiply2(
average of price and the Adx with the period and smoothing NumPosNegMom(Close,1,1), Volume), 14), ExpAvg(Volume, 14) ) )
set to 14. These additional indicators are used to evaluate the
To create a volume zone oscillator trading system, select
system rules explained in the article.
“New Trading Strategy …” from the Insert menu and enter
The oscillator zones on the Vzo are marked using plot
the following in the appropriate locations of the Trading
guides on the Vzo indicator. To add/edit the plot guides on an
Strategy Wizard:
indicator, click on the name of the indicator and select “Edit
plot guides.” You can add and customize plot guides on any Generate a buy long market order if ALL of the following are true:
indicator in the system to mark significant levels. And once A>B(Close, ExpAvg(Close, 60) )

Figure 8: AIQ SYSTEMS, volume zone oscillator AND SYSTEM. This shows
Figure 7: NEUROSHELL TRADER, volume zone oscillator. This Neu- the equity curve for the VZO system trading long only using the NASDAQ 100 list of
roShell Trader chart demonstrates the volume zone oscillator and corresponding stocks compared to the SPX index for the test period 1/1/98 to 3/11/11.
trading system.
A>B(ADX(High, Low, Close, 14, 14), 18 ) the article. The divergence sell/cover rules were especially
OR2( CrossAbove(VZO, -40), CrossAbove(VZO,0) ) troublesome to interpret, so my version may not be what the
authors intended. In addition, note that the nontrending case
Generate a sell long market order if ONE of the following is true:
AND2( A>B(VZO, 60), A<B(Momentum(VZO,1), 0 )
is not provided or tested.
CrossBelow(VZO, 40) I ran a backtest using the Portfolio Manager module from
AND2( A<B(Close, ExpAvg(Close, 60), A<B(VZO, 0) ) 1/1/1998 to 3/11/2011 using the Nasdaq 100 and also the
Russell 1000 list of stocks. In Figure 8, I show the test results
Generate a sell short market order if ALL of the following are true:
A<B(Close, ExpAvg(Close, 60) )
of simulated trading on the Nasdaq 100 list of stocks using
A>B(ADX(High, Low, Close, 14, 14), 18 ) the following parameters for capitalization:
OR2( CrossBelow(VZO, 40), CrossBelow(VZO,0) )
1) Maximum positions per day = 3
Generate a cover short market order if ONE of the following is 2) Maximum total positions allowed = 10
true: 3) Choose candidates using ADX values in descending order
AND2( A<B(VZO, -60), A>B(Momentum(VZO,1), 0 ) 4) Size each position at 10% of total account equity, recomputed
CrossAbove(VZO, -40)
daily.
AND2( A>B(Close, ExpAvg(Close, 60), A>B(VZO, 0) )
For the test period, the average annual return was 13.5%
If you have NeuroShell Trader Professional, you can also
with a maximum drawdown of 49.9% on 12/31/2002.
choose whether the parameters should be optimized. After
The short side test was unsuccessful, as the system lost
backtesting the trading strategy, use the “Detailed Analysis…”
all its capital during the early years of the test. (Results not
button to view the backtest and trade-by-trade statistics for
shown.) I tried adding an index trend filter, but this did not
the strategy.
save the short side from total loss.
Users of NeuroShell Trader can go to the Stocks &
The code and Eds file can be found at Traders.com or
Commodities section of the NeuroShell Trader free technical
can be downloaded from www.TradersEdgeSystems.com/
support website to download a copy of this or any previous
traderstips.htm.
Traders’ Tips. —Richard Denning
A sample chart is shown in Figure 7. info@TradersEdgeSystems.com
—Marge Sherald, Ward Systems Group, Inc. for AIQ Systems
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F TRADERSSTUDIO: volume zone

F AIQ: volume zone oscillator oscillator
The Aiq code for “In The Volume Zone” by Walid The TradersStudio code for the Vzo indicator based on Walid
Khalil and David Steckler in this issue has now been Khalil and David Steckler’s article in this issue, “In The Volume
prepared for Aiq users. I have coded both the volume zone Zone,” has now been prepared for TradersStudio users.
oscillator (Vzo) and the system that uses the Vzo indicator. Figure 9 shows the Vzo indicator on a chart of Adbe.
I used my own interpretation of what the rules of their sys- The code can be downloaded from the TradersStudio web-
tem mean since the exact code for the system is not given in site at www.TradersStudio.com Traders Resources Free-

Figure 9: TRADERSSTUDIO, volume zone oscillator. Here is the VZO
indicator on a TradersStudio chart of Adobe Systems (ADBE).
Code or www.TradersEdgeSystems.com/traderstips.htm.
—Richard Denning
info@TradersEdgeSystems.com Figure 10: STRATASEARCH, volume zone oscillator. The volume zone
for TradersStudio oscillator can be seen in the bottom panel of this chart displaying weekly bars of the
Dow Jones Industrial Average.
//*********************************************************
// Volume Zone Oscillator
F STRATASEARCH: Volume Zone Oscillator //*********************************************************
Period = parameter(“Period”);
Using volume as a confirmation for price action is an excellent
idea, and the volume zone oscillator (Vzo), as presented in MV = volume;
Walid Khalil and David Steckler’s article in this issue, shows R = sign(close - ref(close, -1)) * MV;
some great potential despite its simplicity. In fact, we were VP = mov(R, Period, exponential);
TV = mov(MV, Period, exponential);
able to assemble a very nice system using the volume zone
oscillator as the foundation. VZO = 100 * VP / TV;
Using the uptrend system rules provided by the authors,
however, we had only limited success. Testing a wide variety —Pete Rast
of parameter sets, we were able to find profitable systems that Avarin Systems, Inc.
beat their benchmark, but the percentage of profitable trades www.StrataSearch.com
was quite low, there were large numbers of consecutive losses,
and profit often came primarily from outlier trades.
In a separate test, we then placed the Vzo in an automated
search for supporting trading rules. This can be done in
StrataSearch by setting the Vzo as a primary trading rule, and F TRADINGSOLUTIONS: volume zone oscillator
automatically testing it alongside thousands of preprogrammed In the article “In The Volume Zone” in this issue, Walid Khalil
supporting rules. The results from this automated search were and David Steckler present an oscillating indicator based on
much more positive, with higher annual returns, percentage volume and price direction.
of profitable trades approaching 70%, and very few outlier The TradingSolutions function is provided below and is
trades. In short, the Vzo can be a very nice indicator, but as also available as a function file that can be downloaded from
with many indicators, it works best when used alongside the the TradingSolutions website (www.tradingsolutions.com) in
proper supporting rules. the Free Systems section.
StrataSearch users can download and import a plugin for the
volume zone oscillator from the Shared Area of the StrataSearch Function Name: Volume Zone Oscillator
user forum. The plugin contains a chart, a strategy setup, and Short Name: VZO
Inputs: Close, Volume, Period
all the settings needed to run the Vzo in an automated search
for supporting trading rules. Mult (100, Div (EMA (If (Inc (Close), Volume, Negate (Volume)),
A sample chart is shown in Figure 10. Period), EMA (Volume, Period)))
—Gary Geniesse, NeuroDimension, Inc.

800 634-3327, 352 377-5144
Find the complete collection of Traders’ Tips www.tradingsolutions.com
and code at our website,www.Traders.com.

FIGURE 11: TRADECISION, volume zone oscillator. Here is the VZO
plotted on a chart of the SPY.
Figure 12: NINJATRADER, volume zone oscillator. This NinjaTrader chart
shows the VolumeZonesOscillator applied to a daily chart of the SPDR Dow Jones
Industrial Average ETF (DIA).
F TRADECISION: volume zone oscillator

The article by Walid Khalil and David Steckler Once you have it downloaded, from within the NinjaTrader
in this issue, “In The Volume Zone,” demonstrates the volume Control Center window, select the menu File → Utilities
zone oscillator (Vzo), which can be applied to trending and → Import NinjaScript and select the downloaded file. This
nontrending markets such as Dia, Spy, and gold. indicator is for NinjaTrader version 7 or greater.
To recreate Khalil and Steckler’s Vzo indicator in You can review the indicator source code by selecting the
Tradecision, use Tradecision’s Indicator Builder to input the menu Tools → Edit NinjaScript → Indicator from within
following code: the NinjaTrader Control Center window and selecting
“VolumeZoneOscillator.”
VZO indicator
input NinjaScript uses compiled Dlls that run native, not
Period:”Enter the Period:”, 14, 2, 100; interpreted, which provides you with the highest performance
end_input possible.
var A sample chart implementing the strategy is shown in
R:=0; Figure 12.
VP:=0; —Raymond Deux & Ryan Millard
TV:=0; NinjaTrader, LLC
VZO:=0; www.ninjatrader.com
end_var
R:=iff(C >Ref(C, -1), V, -V);

VP:=Mov(R, Period, E);
TV:=Mov(V, Period, E); F UPDATA: volume zone oscillator
VZO:=100 * (VP / TV); This tip is based on “In The Volume Zone” by
return VZO;
Walid Khalil and David Steckler in this issue.
In their article, the authors present an indicator that takes
To import this strategy into Tradecision, visit the area into account both time and volume fluctuations for predicting
“Traders’Tips from Tasc Magazine” at www.tradecision.com/ future price direction, of equal application to trending or
support/tasc_tips/tasc_traders_tips.htm or copy the code from oscillating market phases.
the Stocks & Commodities website at www.Traders.com. We have added the Updata code for this indicator to the
A sample chart is shown in Figure 11. Updata Indicator Library. It may be downloaded by clicking the
—Yana Timofeeva, Alyuda Research Custom menu and then “Indicator library.” Those who cannot
510 931-7808, sales@tradecision.com access the library due to a firewall may paste the following
www.tradecision.com code into the Updata Custom editor and save it.
PARAMETER “Exp. Averaging Period” #ExpAvgPeriod=14

NAME “VZO (“ #ExpAvgPeriod “)” “”
DISPLAYSTYLE Line
F NINJATRADER: : volume zone oscillator PLOTSTYLE Thick2 RGB(0,0,0)
The volume zone oscillator (Vzo), as presented by Walid INDICATORTYPE Chart
Khalil and David Steckler in their article “In The Volume @R=0
Zone” in this issue, has now been implemented as an indica- @VolumePosition=0
tor for NinjaTrader. The indicator is available for download @TotalVolume=0
at www.ninjatrader.com/SC/May2011SC.zip. @VolumeZoneOsc=0

FIGURE 14: CHARTSY, volume zone oscillator. Here is a sample chart of
the volume zone oscillator (VZO).
FIGURE 13: UPDATA, volume zone oscillator. This chart shows the
14-period VZO applied to the S&P 500 index. If the VZO breaks below zero
while price falls below its 60-period EMA, it signals closing out long positions
established during this uptrend.
FOR #CURDATE=#ExpAvgPeriod TO #LASTDATE
@R=Sign(Close-Close(1))*Vol
@VolumePosition=Sgnl(@R,#ExpAvgPeriod,E)
@TotalVolume=Sgnl(Vol,#ExpAvgPeriod,E)
@VolumeZoneOsc=100*(@VolumePosition/@TotalVolume) FIGURE 15: CHARTSY, PROPERTIES WINDOW. Here, the indicator properties
window is shown for the volume zone oscillator.
@PLOT=@VolumeZoneOsc
‘Draw Oscillator Zones A sample chart is shown in Figure 14. The properties window
DRAWLEVEL LINE,0,RGB(100,100,100)
DRAWLEVEL LINE,15,RGB(255,0,0) for the Vzo is shown in Figure 15.
DRAWLEVEL LINE,-5,RGB(255,0,0) To download Chartsy, discuss these tools, and help us de-
DRAWLEVEL LINE,40,RGB(0,0,255) velop other tools, please visit our forum at www.chartsy.org.
DRAWLEVEL LINE,-40,RGB(0,0,255) Our development staff will be happy to assist and you can
DRAWLEVEL LINE,60,RGB(0,255,0)
DRAWLEVEL LINE,-60,RGB(0,255,0) become a Chartsy contributor yourself.
—Larry Swing
NEXT (281) 968-2718, theboss@mrswing.com
www.mrswing.com
—Updata support team
support@updata.co.uk
www.updata.co.uk
F SHARESCOPE: volume zone oscillator
Here is a ShareScope script to implement the volume zone
oscillator (Vzo) based on Walid Khalil and David Steckler’s
F Chartsy: volume zone oscillator article in this issue, “In The Volume Zone.”
For Windows, Mac, and Linux
//@Name:VZO
The indicator presented in “In The Volume //@Description:Volume Zone Oscillator. As described in Stocks &
Zone” by Walid Khalil and David Steckler in this issue Commodities magazine, May 2011 issue.
is available for Chartsy version 1.4 or higher as the “vol-
var period = 14;
ume zone oscillator” plugin. To install this plugin, go to function init()
Tools→Plugins→Available Plugins. {
setSeriesColour(0, Colour.Red);
You can find the Java source code for the volume zone setTitle(period+” VZO”);
oscillator (Vzo) here: setHorizontalLine(60);
setHorizontalLine(40);
setHorizontalLine(0);
http://chartsy.svn.sourceforge.net/viewvc/chartsy/trunk/Chartsy/ setHorizontalLine(-40);
Volume%20Zero%20Oscillator/src/org/chartsy/vzo/Volum- setHorizontalLine(-60);
eZoneOscillator.java?revision=423&view=markup }
function getGraph(share, data)
+Traders_Tips_1105_NEW.indd 7 3/24/11 10:55:35 Am

in Trade Navigator.) On the chart, click on the MovingAvgX
label and drag it into the price pane.
Hold down the Crtl key and click in the pane with the
volume zone oscillator to make seven horizontal lines. Click
once for each line at the -60, -40, -5, 0, 15, 40, & 60 values
in that pane. They do not have to be exact because you can
either drag the line to the correct position later or set it in the
Chart Settings window.
Click on the chart and type the letter E to bring up the chart
settings window. Click on the MovingAvgX in the list under
price. Change the values as follows: Expression: close, Bars
used in average: 60, and Show initial bars: false.
Figure 16: SHARESCOPE, volume zone oscillator
Click on the pane 3: Adx line to highlight it. Then click the
Add button at the bottom. Select Add Indicator → Add Indicator
{ to Selected Pane. With “custom indicator” highlighted, click
var VZO = []; the Add button. Type “18” and click the OK button. Click in
var ma1 = new MA(period, MA.Exponential);
var ma2 = new MA(period, MA.Exponential); the Function name box and change it from custom indicator
for (var i=1; i<data.length; i++) to 18 line.
{
var ema1 = ma1.getNext((data[i].close>data[i-1].close?1:- Next, click on the Adx to highlight it in the list on the left.
1)*data[i].volume); Set “Bars used in calculation” to 14. Click the Add button and
var ema2 = ma2.getNext(data[i].volume); select “Add HighlightBars to selected indicator.” With “Custom
VZO[i] = ema2!=0?(100*ema1/ema2):0;
} HighlightBars” highlighted, click the Add button. Click the No
return VZO; button when prompted to use indicators from the active chart.
}
Type Adx (14, False)>18 and click the OK button.
—Tim Clarke
www.sharescope.co.uk
Setting up the template
Click on 18 line to highlight it in the list on the left. Click the
Add button and select “Add HighlightBars to selected indica-
tor.” With “Custom HighlightBars” highlighted, click the Add
F TRADE NAVIGATOR: volume zone oscillator button. Click the No button when prompted to use indicators
Trade Navigator offers everything needed for recreating the from the active chart. Type Adx (14, False)<18 and click the
indicators and highlights discussed in Walid Khalil and David OK button. Under Appearance, change the type to “highlight
Steckler’s article in this issue, “In The Volume Zone.” markers” and the icon to “+.”
Detailed instructions and code to recreate the custom Highlight each indicator, line, or highlight bar and change
indicator and add it to any chart in Trade Navigator are it to the desired color, value, and style in the chart settings
shown here and at Traders.com. We also show you how to window. When you have them the way you want to see them,
use the custom indicator alongside existing indicators in Trade click on the OK button.
Navigator to set up a template that can be easily applied to Click on the Templates button on the toolbar at the top.
any chart. Select “Manage chart templates.” Click the New button, type
Here is the TradeSense code to create the custom indicator. a name for the template, and click the OK button.
Input this code by opening the Trader’s Toolbox, then click You now have a template that you can apply to any chart
on the Functions tab, and click the New button. by going to the Templates button in the toolbar and selecting
the template from the list.
Volume zone oscillator Genesis Financial Technologies has provided a library called
&R := IFF (Close > Close.1 , Volume , Volume * -1) “In the Volume Zone,” which includes the template “SC1105
&VP := MovingAvgX (&R , 14 , False)
&TV := MovingAvgX (Volume , 14 , False) In the Volume Zone” with the custom indicators discussed in
&VZO := 100 * (&VP / &TV) this article. You can download a special file named “SC1105,”
&VZO downloadable through Trade Navigator.
—Michael Herman
To create a chart template, go to the “Add to chart” window Genesis Financial Technologies
on a daily chart by clicking on the chart and typing “A” on the www.GenesisFT.com
keyboard. Click on the Indicators tab, find the volume zone
oscillator in the list, and either double-click on it or highlight F MICROSOFT EXCEL: volume zone oscillator
the name and click the Add button. The volume zone oscillator (Vzo) proposed by Walid Khalil
Repeat these steps to add the Adx and the MovingAvgX and David Steckler in their article in this issue, “In The Vol-
indicator. (These are just two of the many indicators provided ume Zone,” helps to visualize the activity of the big financial

Figure 18: VT TRADER, JM INTERNAL BAND TRADING SYSTEM. This shows
the JM internal band trading system on a EUR/USD daily candlestick chart.
Figure 17: MICROSOFT EXCEL, volume zone oscillator. Here is the volume
zone oscillator (VZO) on a chart output from Excel.
leaders and the subsequent activity of the financial follow- F VT TRADER: JM INTERNAL BAND TRADING STRATEGY
ers. No matter how slowly or carefully an elephant enters a This Traders’ Tip is based on “Less Stress With The JM In-
pool, the water will rise. And it will subsequently fall when ternal Band” by Koos van der Merwe, which appeared in the
he leaves the pool. December 2010 issue of S&C.
The sharp Vzo increase in April 2010 might well reflect one In the article, the author describes a trading system using
or more of these larger entities moving into Gld. The decline a 15-period simple moving average with bands above and
through early May 2010 could well be these same players below at +/-2% respectively for identifying potential trading
leaving the pool before the price dropoff in mid-May. opportunities. A long trade is initiated when the price breaks
Without an Excel-accessible price history database to scan, out above the upper band, and a short trade is initiated when
this month’s Traders’ Tip for Excel is a static solution. As the price breaks out below the lower band. Exits are initiated when
Excel user, you must capture historical price data for a given price crosses the moving average in the opposite direction of
stock or other tradable that you wish to study, and place it in the band breakout.
the “InputPriceData” tab. The VT Trader instructions for setting up the JM internal
To complete the Data Windowing capability introduced last band trading system are shown at Traders.com and the system
month in Traders’ Tips, I have added a usability feature to the is available for download in our VT client forums at http://
Excel template I use for Traders’ Tips. A button now appears forum.vtsystems.com, along with many other precoded and
on the calculations tab which will automatically: free trading systems.
To learn more about VT Trader, visit www.vtsystems.com.
• Adjust the charts to reflect a user-chosen number of A sample chart is shown in Figure 18.
points to plot; Risk disclaimer: Forex trading involves a substantial risk of loss
• Set the vertical scales (y-axis) on the price chart to get and may not be suitable for all investors.
the “best” use of the available vertical plot space; and —Chris Skidmore
Visual Trading Systems, LLC
• Vertically align the three charts; in particular, it will 212 871-1747, info@vtsystems.com
vertically align the x-axis of all three charts. www.vtsystems.com
S&C
For this button to work properly, you will need to enable
Vba macro content. You may view the macros after you open
the spreadsheet by using Alt-F11 to open the Vba integrated Find the complete collection of
development environment. Traders’ Tips and code at our
Click on “VolumeZoneOscillator.xls” at Traders.com to
download the volume zone oscillator spreadsheet.
website,www.Traders.com.
A sample chart output from Excel is shown in Figure 17.
—Ron McAllister
EXCEL and VBA Programmer
rpmac_xltt@sprynet.com

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Atom Align 1.3, which introduces Cqg’s high-speed connectivity follows
several ways to streamline portfolio their hosted direct market access to
WEBCAST FOR DAYTRADERS rebalancing and trading, establishing a the Ose. Tocom is part of its efforts to
DayTradersWebCast launched a daily straight-through process for model and provide traders with broad coverage of
webcast hosted by Dave Dawson, devel- order management. Global changes are Japanese exchanges. Cqg’s connections
oper and founder of Market Analytical. quickly implemented, while ensuring gives customers the ability to execute
The webcast features high-speed, real- taxable and tax-deferred accounts are strategies on a range of Japanese mar-
time market analysis, and highlights assigned the appropriate securities. kets.
entry and exit points through a variety Seamless integration with Portfolio Finally, Cqg announced that Me-
of trading strategies. The goal is to help Center is another feature where users trixx360 has connected to Cqg’s mar-
daytraders understand rapidly changing can now access an efficient solution ket data servers and hosted Exchange
market forces. The webcasts are recorded for portfolio rebalancing and trading, gateways via Cqg’s data and trading
and posted nightly to the website. complete with integrated account details, Apis. This expands Cqg’s fixed-income
tax lot information, security details, offering and enables Cqg Integrated
and also existing models. Several other Client users to quote, chart, and model
enhancements are available for Atom Metrixx360 information in the existing
Align 1.3. suite of Cqg functions. Traders can also
utilize Cqg’s server-side spreader and
new server-side aggregation to increase
their liquidity pools.
www.DayTradersWebCast.com
IPC offers Trading Communications

and Applications Platform
Ipc Systems has launched Unigy, a
unified trading communications and
applications platform. Unigy can help www.blazeportfolio.com
trading firms transform their trading www.cqg.com
workflow, making a firm’s trading teams
+1105 Trade News_New.indd 1 3/24/11 2:29:06 PM

New Optimization Engine Helps and cost-plus brokerage commissions
Investors Salvage Investments for transactions in FactorShares Etfs
Macroaxis has launched a product and will not impose short-term trading
upgrade with features that make per- fees.
sonal investment management easier.
Improvements include enhanced portfo- Smartphone ETF Trades on NASDAQ
lio optimization and backtesting, better A new exchange traded fund (Etf) based
correlation and volatility introspection, on the NasdaqOmx Cea Smartphone
larger position coverage, and more cat- Index (Nasdaq: Qfon) has begun trad-
egorized asset allocation options. Users ing on Nasdaq under the symbol Fone.
will be able to track portfolio asset allo- The Etf provides a way for investors
cation by sector, equity type, and market to take advantage of the positive trends www.CMEGroup.com
cap, utilize larger historical horizons, that are shaping the smartphone indus-
verify new optimized portfolios against try. The NasdaqOmx Cea Smartphone Clovernest Introduces free
a backtesting tool, rebalance portfolios Index was introduced in April 2010 as online meeting room
manually with immediate optimization a benchmark for the telecommunica- The cornerstone of the Clovernest firm’s
and feedback, and originate new portfo- tions sector focused on wireless mobile efforts to be “the best trader assisted firm
lios via one screen interface to execute devices with advanced communications in the industry” is Live Market Exercise,
multiple transactions. functionality. a complimentary online meeting room
where clients of the firm can watch trader
Jay Norris point out trade setups and
signals in live markets for three hours a
day, four days a week during the London
and US trading sessions.
The firm also plans on offering one-on-
one client evaluations, and free weekly
trading workshops for its clients. Clo-
vernest offers discount pricing in both
futures and forex along with offering
multiple trading platforms including
https://indexes.nasdaqomx.com/data.aspx?IndexSym
www.macroaxis.com bol=QFON&menuIndex=2 NinjaTrader, MetaTrader, eSignal,
and BestDirect8, which has futures
Commission-Free Trading Of ETFs TradeStation, CME Group Host and forex on one platform.
Interactive Brokers is now offering Live webinar
commission-free trading of the first TradeStation and Cme Group said
five exchange traded funds launched they would cosponsor Futures Outlook,
by Factor Advisors to clients using its a monthly webinar series providing
award-winning Trader Workstation plat- analysis and discussion of the most
form. Commission-free trading currently actively traded futures markets. Futures
applies to the first five FactorShares 2x Outlook hosts will be Dan Gramza,
products: S&P500 Bull/TBond Bear, Nick McDonald, and David Stendahl.
TBond Bull/S&P500 Bear, S&P500 The hour-long sessions are designed to
Bull/Usd Bear, Oil Bull/S&P500 Bear, feature timely, incisive analysis of the
and Gold Bull/S&P500 Bear. Interactive US futures markets.
Brokers has agreed to waive the flat-rate
www.clovernest.com
www.interactivebrokers.com/factorshares www.TradeStation.com Continued on page 78
+1105 Trade News_New.indd 2 3/24/11 2:30:33 PM

Exchanges
TRADERS'
RESOURCE
With the explosion of exchanges around
the world and the increasing poaching of TOP 10 VIEWED
products between exchanges, traders should LINKS
be aware of all the places where trading
EXCHANGES
opportunities occur. No longer bound by
national borders or even physical locations, 1. Malaysia Derivatives Exchange
exchanges can be no more than a box in the 2. London Metal Exchange
corner of an office. Differentiation comes 3. Euronext.liffe
in the form of product, volume, speed, pricing, and investor 4. Hong Kong Futures Exchange
protections.
Look for an exchange with extensive trade documentation 5. Chicago Mercantile Exchange
so that disputes can be resolved quickly and with quick 6. Meff Renta Fija
reference to events. Since more and more alternatives are 7. Stock Exchange of Hong Kong
rapidly becoming available, don’t be afraid to direct your 8. Singapore Exchange
business to the exchange of your choice. The plethora of
investor choice is forcing a rapid decline in transaction costs 9. Tokyo Stock Exchange
already, and exchange monopolies are a thing of the past. 10. Shanghai Futures Exchange
Use the listing of exchanges in the Traders’ Resource da- These are the 10 exchanges viewed most often on the Traders’ Resource website,
tabase at our website to find the websites of the exchanges where each company is listed in order of clicks received. This is not an editorial
handling your tradable, then go to the site to get the specifics of rating or ranking.
the trading vehicle. Better yet, get several equivalent products
at several exchanges and be sure your broker can direct your also find listings of other trading-related products and ser-
business to the venue of your choice. vices such as software, publications, courses and seminars,
brokerages, data services, trading systems, and more. We
Traders’ Resource at Traders.com hope this will help you learn about products to help in your
In addition to our listing of exchanges at Traders.com, you’ll trading endeavors.
To reach the Traders’ Resource area of our website, just click
on the Traders’ Resource link from Traders.com. Then follow
the category link for exchanges, or use the search feature to
find products or services with specific attributes in this or other
categories.
S&C
The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and
all liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express
or implied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations
whatsoever in connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to
cease using it. This list is updated frequently. If you are aware of a business that should be listed, please email us at Editor@Traders.com.
+TR_Exchanges 1105.indd 1 3/24/11 8:56:37 AM

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BROKERAGES Software Product PAGE
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thinkorswim.com vectorvest.com/sc Updata 66
18 TradeStation Bellyband 24 Ward Systems 39 Chartsy 67
tradestation.com neuroshell.com ShareScope 67
20 TradeStation 3 25 Worden Brothers 83 Trade Navigator 68
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VT Trading 69
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4 Bright Trading 32 3 Blue Wave Trading 18
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1105_Ad Index.indd 2 3/31/11 2:48:57 PM

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1105_Ad Index.indd 3 3/23/11 10:21:40 AM

Death Of The American Investor: The ment blithely ignored the lessons from pre- cisions. This book gives plain-English ex-
Emergence Of A New Global eShare- vious market crises, leading to its downfall. planations of everything you need to know.
holder (237 pages, The author, an ex-Lehman managing di- The book gets you
$17.95 paperback, rector and Olympic in a technical mind
2011, ISBN 978-0- medalist, reviews frame for select-
615 -39262-2) by how both Wall Street ing indicators that
Nico R. Willis, pub- and Lehman — intox- match your person-
lished by Networth icated with their own ality and preference
Publications. This greatness — failed for risk. It helps you
work was inspired to imagine what understand how to
by the troubles of could lay in wait. observe price bars
the average Ameri- The book is a syn- and small patterns, how to use the indica-
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about the future of investment. This is a that weaves the tale ing, the strength of the trend, and when the
glimpse into the future of investing, leading of how Lehman and Wall Street failed to see trend is getting ready to reverse. You will
the reader down the road of recovery, and its own delusion and went awry. find out why timing is everything.
the benefits of evolving into the new global
eshareholder. It is a must-read for investors, Safety Net: The Strategy For De-Risk- Trading In The Footsteps Of Sherlock
financial institutions, and the average Amer- ing Your Investments In A Time of Tur- Holmes: Balancing Probabilities For
ican. It is as much a warning as a solution bulence (196 pages, $23 hardcover, 2011, Successful Investing (186 pages, $24.95
to the complexity of investing strategies and ISBN 978- 0 -307- paperback, 2010, ISBN 9781934354186)
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K. Glassman, pub- W&A Publishing/TradersPress. In Sher-
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$129.99 hardcov- of Crown Publish- problem solving can
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1-59280-450-4) by of Random House. cial trading tech-
D avi d Vo mund, You can construct niques. Anthony
published by Mar- a financial investing Trongone, who is a
ketplace Books. strategy to protect frequent contributor
To find consistent yourself, yet still get the growth to ensure to S tocks & C om -
profitability, traders a solid financial future. Even in these tur- modities , taps the
must continuously bulent times, you can build an investing net best of Holmes’s sage advice on psychol-
adapt. By their very that gives you the gains needed for growth, ogy, mental dexterity, self-discipline, obser-
nature, exchange and still have protection against the down- vation, and deductive reasoning. Trongone
traded funds (Etfs) provide adaptability. To- side. The insights given here include re- also shows you how to apply a calm, ana-
day’s Etfs allow investors to use these new ducing stock ownership, investing in bonds, lytical approach to executing trades. While
trading vehicles to get the maximum bene- own bear funds, and funds based in other many investing books encourage read-
fit and returns from their portfolios. The ap- countries. You might even consider some ers to embrace a particular trading system,
proaches presented in this work allow you derivatives. Recommendations and sample this one does not. With Trongone acting as
to trade with the confidence that your meth- portfolios provide starter ideas for balancing a modern-day Watson, you can develop
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Lehman Brothers’ Dance With Delusion: Technical Analysis For Dummies, 2nd
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paperback, 2010, ISBN 9781453791561) ISBN 978-0-470-88800-1) by Barbara www.createspace.com
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+1105 Books for Traders.indd 1 3/24/11 9:14:01 AM

FUTURES LIQUIDITY
T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown being by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.
Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
Eurodollar Interest Rate CME 0.1 1.8 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
3 Mo Euribor Interest Rate LIFFE 0.1 1.0 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Mini S&P 500 Index CME 8.8 18.5 9 ••••••••••••••••••••••••••••••••••••••
30 Day Federal Funds CBT 0.0 0.1 1 ••••••••••••••••••••••••••••
Crude Oil - Light Sweet NYM 6.5 9.5 4 •••••••••••••••••••••••••
Short Sterling LIFFE 0.1 1.4 6 •••••••••••••••••••••
3 Yr. Cmmnwlth T-Bonds SFE 0.0 0.6 2 ••••••••••••••••••••
Natural Gas NYM 11.1 5.0 3 ••••••••••••••••••
DJ Euro Stoxx 50 Index EUREX 7.5 10.9 10 •••••••••••••••••
S&P 500 Index CME 8.8 18.5 2 •••••••••••••••
Brent Crude Oil IPE 4.5 6.8 3 •••••••••••••
Corn CBT 5.9 8.2 11 ••••••••••
10 Yr Treasury Notes CBT 1.8 13.3 16 ••••••••
Gold 100 troy oz NYM 4.7 9.0 4 ••••••••
Gas Oil ICE-EU 4.3 8.0 5 ••••••
Soybeans 5000 bushels CBT 6.9 11.3 6 •••••
5 Yr Treasury Notes CBT 1.1 8.5 17 •••••
RBOB Gas NYM 5.3 7.1 3 ••••
Heating Oil #2 NYM 5.0 8.2 3 ••••
2 Yr Treasury Notes CBT 0.4 5.2 17 ••••
Silver 5000 troy oz NYM 6.2 6.2 1 ••••
Mini Russell 2000 CME 5.7 11.2 7 ••••
CAC-40 Stock Index MATIF 6.3 10.1 8 •••
10 Yr German Euro Bund EUREX 1.7 17.3 15 ••• CBT Chicago Board of Trade
Xetra DAX-30 Stock Index EUREX 4.4 9.3 2 ••• CME Chicago Mercantile Exchange including
FT-SE 100 Index LIFFE 5.3 21.8 12 ••• the International Monetary Market (IMM)
2 Yr Euro Schatz EUREX 0.3 6.7 36 ••• CMX Commodity Exchange, Inc. CME Group
Sugar-World #11 CSCE 12.3 17.3 12 ••• EUREX European Exchange, Zurich & Frankfurt
5 Yr German Euro BOBL EUREX 0.9 10.1 19 •••
ICE-EU Intercontinental Exchange-Futures - Europe
US Treasury Bonds CBT 3.1 22.5 16 ••
ICE-US Intercontinental Exchange-Futures - US
Cotton #2 NYCE 9.9 11.5 3 ••
KCBT Kansas City Board of Trade
Mini-Nasdaq 100 Index CME 7.9 14.6 11 ••
3 Mo EuroSwiss LIFFE 0.0 1.3 7 •• LIFFE London International Financial Futures and
Aust. Share Price Index SFE 5.2 11.7 5 •• Options Exchange
Wheat - Soft Red CBT 11.2 18.9 12 •• MATIF Marché à Terme International de France
Copper NYM 5.4 7.6 3 •• NYM New York Mercantile Exchange
Long Gilt LIFFE 2.1 16.3 11 •• SFE Sydney Futures Exchange
Soybean Oil CBT 6.0 9.7 13 •
Swiss Market Index EUREX 8.2 13.7 7 •
Coffee C CSCE 7.3 11.3 4 •
Japanese Yen ¥ CME 3.9 11.4 5 •
Cattle - Live CME 3.0 8.3 16 •
Mexican Peso CME 5.3 5.8 7 •
Euro Currency € CME 2.4 18.6 11 •
Wheat - Hard Red KCBT 7.4 11.7 10 •
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).
+1105 Futures Liquidity.indd 1 3/24/11 4:08:19 PM

Continued from page 71 and convenience, bid prices have been close or modify existing positions, and
added to spot-price displays. view your account history. You can also
SunGard’s Astec Analytics Gets display real-time price feeds for currency
New Portfolio Evaluation Tool pairs and access charting capabilities,
SunGard has increased the coverage calculators and other tools.
of Astec Analytics Lending Pit, its
browser-based market access solution The CBOE iPad App Now Available
for securities finance professionals, The Cboe said that the only comprehen-
with the Lending Pit XL add-in, which sive iPad app developed exclusively for
gives users access to more than six years option traders is free and available now
of historical daily securities lending at the iTunes store. Featuring detailed
market data. quotes and option chains, interactive
The Lending Pit XL helps market par- charts, streaming video from CboeTV,
ticipants leverage a larger pool of rebate/
www.FizTrade.com robust educational content is available
fee and loan information volume, giving in the app, including courses and trading
greater transparency when maximizing strategies, a watchlist, and more.
securities lending spreads in a market
that can feature widely divergent rebate
rates and fees.
In other news, SunGard has enhanced
its Stream post-trade derivatives solu-
tions. SunGard’s support of Otc products
helps provide automated centralized
clearing and settlement, which helps
Cme Clearing members and market
participants increase transparency, miti- www.cboe.com/apps/ipad/
gate counterparty credit risk, and gain
www.dillongage.com
S&C
processing efficiencies.
FXDD Launches Mobile
Trading Apps
Fxdd has launched Fxdd iTrader and
Fxdd droidTrader, free mobile foreign
exchange trading apps for the iPhone and
the Android markets. Fxdd customers
can now access their Fxdd trading ac-
count from virtually anywhere. The new
apps work as mobile companions to the
MetaTrader 4 forex trading platform.
t e r s
wrainted
They are both available in English, Japa-
nese, Chinese, and Russian, while iTrader
www.sungard.com is available in Arabic and droidTrader is
available in Turkish. You can log onto
w
Are you knowledgeable about technical
Dillon Gage Updates FizTrade your accounts and obtain real-time ac- indicators, charting, trading systems,
Trading System count information, place new orders, and money management?
Dillon Gage has unveiled the latest Or have a solid background with
intraday trading, trading psychology,
version of its FizTrade online-trading options and cycles?
system for precious metals. The updated If so, we’d like to hear from you!
system makes trading easier because us- To write for any of our publications
ers don’t have to keep traveling between and obtain more information, please visit:
http://www.traders.com/Documentation/
pages. Launched in 2006, FizTrade EDitorial_Dept/Editorial.html
allows banks, jewelers, coin dealers, or email Editorial@Traders.com
refiners, and pawn shops to buy and sell
gold, silver, platinum, and palladium bars
and coins. Customers can see buy and
sell prices for particular metals products
on a single page. For the sake of ease www.fxdd.com
+1105 Trade News.indd 3 3/24/11 1:44:50 PM

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AT THE CLOSE
With this many MSCI index futures
Emerging markets markets trading under one roof, savvy
n Msci EM traders should have little trouble in
n Msci Bric learning how to best profit from them.
Based on their own literature, it appears that as many as 15 And then there are a few other interesting tidbits worthy of
different Msci index futures contract products will ultimately serious traders’ attention. Msci index futures are cash-settled
trade at Nyse Liffe US in the coming years, offering some against the underlying indexes, eliminating tracking errors in
easily discernible benefits to savvy futures traders. relation to their benchmarks. Nyse Liffe US is also aggres-
First, there’s the ability to minimize datafeed and/or ex- sively courting specific groups of traders and market makers
change fees. Just think, if you can trade futures on nearly in order to rapidly increase the liquidity of these new futures
every conceivable Msci stock index in the world and all at products and also offer a rebate program.
one exchange, you may be able to save hundreds or even
thousands of dollars by consolidating all of your trading at As the market changes
Nyse Liffe US. Since they already offer the Nyse Liffe US As the global futures market continues to grow, the number
metals futures products (mini and full-sized gold and silver of venues in which to trade appears to be steadily declining
futures and futures options), you will eventually have an as wave after wave of mergers take place, eventually result-
enormous number of markets with which to fine-tune your ing in a seamlessly integrated, transnational arena in which
futures trading strategy — again, all under a single roof. skilled traders of every nationality can compete on a scale
Then there’s the fact that many of the Msci index-linked never before imagined.
exchange traded funds (Etfs) also trade on Nyse Arca, and Trading systems and proven charting techniques know no
their related options trade on Nyse Amex can also mean greater language or cultural barriers, and these technical tools will
efficiencies and hedging opportunities for larger traders and work just as well on an Msci index EM or Bric futures market
entities. As Msci index futures, which are now a part of the chart as they will on one of the Msci index Eafe or Msci
same gigantic Nyse market, show, the opportunities to increase index Usa futures market charts. Hedgers and spreaders may
profitability and efficiencies by way of the enormous amount also find that these new futures contracts permit them much
of market liquidity residing under the big Nyse tent should easier deployment of their own unique trading strategies.
not be discounted. All in all, it’s never been a better time to be a skilled futures
Msci indexes are at least as well known as their S&P trader as the sheer number of markets from which to choose
counterparts and have the added advantage of better global can help keep a well-developed trading regimen fully deployed
coverage than S&P-linked indexes. In a world where brand in virtually any conceivable market condition. There’s always
recognition and brand loyalty is critical to success, the ever- a bull market somewhere, and with this many Msci index
widening sphere of Msci index recognition by traders can futures markets trading under one roof, savvy traders should
only help to further fuel interest in these new Nyse Liffe US have little trouble in learning how to best profit from whatever
futures products. opportunities the global markets present them with.
Donald Pendergast has been trading/investing since 1979,

and after making a 50% gain in silver in six weeks, began a
lifelong study of the financial markets, trading systems, and
broad economic trends. He develops, tests, and implements
stock, forex, and futures trading systems and currently has two
futures systems available for autotrading at Striker Securities
in Chicago, IL. He may be reached at www.chartw59.com.
This article was first published online as a Traders.com Advantage piece on

February 10, 2011. For this and similar pieces, visit Traders.com.
S&C
S&C
+At the Close-Pendergast.indd 2 3/24/11 12:03:57 PM

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WM_Invest_ISLAND.indd 1 2/4/10 9:41:15 AM

AT THE CLOSE
New Opportunities In MSCI Indexes
Never before has the typical futures market participant futures market products. MINJIN LEE
had so many trading opportunities available — and all Currently, there are two main classes of Msci indexes li-
under one roof. censed by Nyse Liffe US for futures trading: those focused
on developed markets and those that deal solely in emerging
In late 2009, Nyse Liffe US began offering futures markets. Between these two classes of indexes, six specific
contracts based on the Morgan Stanley Capital In- regions are covered, which essentially covers the entire in-
ternational (Msci) indexes, one of the most widely ternational trading and investing arena:
followed group of market index benchmarks in the world.
While I can’t even begin to scratch the surface as to how big Developed markets
the implications are, especially for US-based traders, here are
n Msci Usa (styles, sectors)
some of the major advantages of moving at least a portion of
your trading activities to any or all of these Msci index–linked n Msci Europe (large cap, styles, sectors)
n Msci Emu (large cap, styles, sectors)
n Msci Eafe
by Donald W. Pendergast Jr. Continued on page 80

+At the Close-Pendergast.indd 1 3/24/11 4:02:24 PM

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