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Percentage Price
Oscillator
A multiple-timeframe
approach to looking at charts 8

Profit-Taking
And Resets
Part 2: Short-term trading 14

Sector Rotation
Examining momentum
strategies using ETFs 22

GAP PATTERNS
Four you can trade 26

INTERVIEW
Michael Bryant
of Adaptrade 34

QUICK-SCAN
n XTF.com

FEBRUARY 2018
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 XLY
XLU

XLP

XLK

XLE

XLRE

XLF

CONTENTS FEBRUARY 2018, Volume 36 Number 2

XLB

XLV
FEATURE ARTICLE
XLI

8 Weekly & Daily Percentage 26 What’s The Fib Pinball?

Price Oscillator TIPS by Avi Gilburt
by Vitali Apirine When you pull the lever in pinball,
Modifying a traditional indicator the ball caroms between the game’s 38 Q&A
can make you look at a chart bumpers, like stock market prices by Rob Friesen
differently. You can compare zigzagging within price channels This professional trader answers
indexes, look at price movements and meeting resistance at Fibonacci a few of your questions.
during extended periods of time, levels. Here’s a look at how market
and make trading decisions based sentiment, Elliott wave analysis,
and Fibonacci ratios were used to 55 Futures For You
on your observations.
successfully forecast the post- by Carley Garner
election markets. Here’s how the futures market
12 Price Action And Volume really works.
Correlations 29 Explore Your Options
by Ken Calhoun 60 Your Intuition’s Role In
by Jay Kaeppel
The market always brings us Trading Decisions
something we can at least eke out a Got a question about options?
by Robert Reifert
little profit from, but we often miss
those signals. Here’s one pattern 30 A Simple Approach We’ve all been taught that
that can help you identify breakout sometimes you must trust your
To Gap Trading instincts, but should you let your
opportunities. by Solomon Chuama portfolio be guided by your
Anyone who has looked at a price intuition? Find out what the
14 Profit-Taking And Resets, chart knows that gaps occur. But all intersection of behavioral finance
Part 2: Short-Term Trading gaps aren’t the same. Here’s a look and evolutionary psychology has to
by Perry J. Kaufman at the characteristics of four and say about it.
Trends can be useful for longer- how you can trade them.
term trades but what about
short-term trades? Do they work INTERVIEW QUICK-SCAN
just as well? Here’s a look at a 34 Trading Systems With
trading system that can be applied 41 XTF.com
successfully to shorter-term trends.
Michael Bryant ETF evaluation website.
by Jayanthi Gopalakrishnan
With advanced degrees in
22 Capitalizing On Sector mechanical engineering and
Rotation Strategies
DEPARTMENTS
computer science, working in
by Marisa Yang the aerospace industry and then 6 Opening Position
Traders can always learn something in academia, Michael Bryant 7 Letters To S&C
from investors and vice versa. found the markets a fascinating 39 †Traders’ Glossary
Typically, investors put more weight distraction. He gravitated toward
trading futures and went on to
46 Traders’ Tips
on investments in outperforming
sectors. But is that the best way? developing trading systems and 56 Trade News & Products
Let’s find out. then to developing software 57 Advertisers’ Index
for traders. Bryant is the owner 57 Editorial Resource Index
of Adaptrade Software, which
develops products that are easily 58 Futures Liquidity
This article is the basis for
TIPS Traders’ Tips this month. accessible to retail and professional 59 Classified Advertising
traders. We spoke with him about 59 Traders’ Resource
n Cover: Jose Cruz what it takes to develop a trading 62 Books For Traders
n Cover concept: Christine Morrison system.

Copyright © 2018 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
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4 • February 2018 • Technical Analysis of Stocks & Commodities

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 February 2018 • Volume 36, Number 2
Opening Position
The Traders’ MagazineTM

EDITORIAL
editor@traders.com
T he 2008 financial crisis left a bad
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6 • February 2018 • Technical Analysis of Stocks & Commodities

 2017 WINNER
AI TRADING SOFTWARE

The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communi- Winner
cation with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers, this
15 years
magazine would not exist. in a row!
Email your correspondence to Editor@Traders.com or address your correspondence
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
letters become the property of Technical Analysis, Inc. Letter-writers must include their full Build powerful
name and address for verification. Letters may be edited for length or clarity. The opinions
expressed in this column do not necessarily represent those of the magazine.—Editor trading systems in
MINUTES
Weekly & Daily MACD 8: “Weekly & Daily Percentage Price
without coding
Editor, Oscillator” (abbreviated as W&D PPO).
Thank you very much This article follows up on some of his
to Vitali Apirine for ideas presented in his December 2017
all the time and effort article on the weekly & daily MACD. The ®

that he has put into article also includes code in MetaStock

coding and develop-
ing profitable indica-
tors for the trading
community. He did an especially great
job on the weekly & daily MACD indica-
tor and automated strategy, described in
his article that appeared in the December
2017 issue of Stocks & Commodities.
My friends and I have been using the
automated strategy with much success
this week. The futures instruments on
which we’ve used the automated strat-
egy (6B, 6E, and GC), we’ve discovered
the most profitable trading times to be
between 3–6 am and again from 8–9 am
Eastern Time.
As such, we were wondering if the
author had a version of the strategy that
would enable us to turn it on and off
during specific times. Also, would it
be possible to enhance the strategy for
renko bars?
We sincerely appreciate the author’s
consideration of these requests.
David
Author Vitali Apirine replies:
Thank you for your favorable evaluation
of my articles. Unfortunately, I don’t use
an automated strategy. You can employ
the weekly & daily MACD indicator
on standard price charts to confirm or
refute your findings on renko charts.
Editor: Fans of Apirine’s work will be
interested to find another article by Vitali
Apirine in this issue beginning on page
format.
MORE
Editor,
I just wanted to thank Vitali Apirine for
the excellent articles he has been writing
for Stocks & Commodities (“Weekly
& Daily MACD,” December 2017; “Vola-
tility Oscillator,” August 2017; “Moving
Average Stochastic,” May 2017; “Higher
Highs & Lower Lows,” February 2016;
and others).
His indicators are very helpful and he
writes in a way that is easy to understand.
It helps those of us who are not engineers
by training yet are somewhat knowl-
edgeable about numbers and statistics.
I greatly appreciate his willingness to
share his ideas with us in a way that
allows us all to use them.
Lately I have noticed that the magazine
has published articles by people who
seem to want to sell a service rather
than to teach all of us how to become
better traders. Thus, I greatly appreciate
Apirine’s willingness to share his ideas
in a way that helps others. After years
of trading stocks and some options (not
February 2018
www.NeuroShell.com
301.662.7950
always successfully), I have moved into
forex trading. I am using his moving aver-
age stochastic and his HHLL indicators
quite a bit and find them helpful.
Ed
We are glad you have found Vitali
Apirine’s articles useful. You’ll find a
new article of his in this issue that we
hope you’ll also be able to use. Our mis-
sion is to publish how-to articles that
contain information traders can apply
to their trading.—Editor
three wishes
Editor: The following is a holiday senti-
ment we received from a reader: “Dear
Santa Claus, grant everyone three wishes
in 2018:
1. Enjoy nature daily.
2. Embrace healthy ways.
3. Discover abundant happiness.
P.S. An extra dose of prosperity too!”
Marshall Chee
• Technical Analysis of Stocks & Commodities • 7
8 • February 2018 • Technical Analysis of Stocks & Commodities
 INDICATORS
A Percentage Perspective
Weekly & Daily
Percentage Price Oscillator
Modifying a traditional indicator can make you
look at a chart differently. You can compare indexes,
look at price movements during extended periods
of time, and make trading decisions based on your
observations.
S
ometimes we get so accustomed to using
an indicator that we overlook the differ-
ent things we can do with it. The weekly
& daily percentage price oscillator (W&D PPO) is
one such indicator. It’s made up of two momentum
oscillators—a weekly PPO and a relative daily PPO.
Each oscillator measures the difference between two
moving averages as a percentage of the largest moving
average (130-day EMA).
The W&D PPO is shown with a centerline. Signals
are generated from relative daily PPO line crossovers,
centerline daily and weekly crossovers, and diver-
gences. These signals are similar to those associated
with the W&D MACD, an indicator I wrote about in
the December 2017 Stocks & Commodities. But
there are some differences, which I will focus on in
this article. You can read my earlier article on the
W&D MACD for more about signals that are common
to both the W&D MACD and W&D PPO.
Calculating it
Let’s look at how the components of the W&D PPO
are calculated. The individual weekly and daily per-
centage price oscillators are calculated as follows:
1. Weekly percentage price oscillator:
{(60-day EMA - 130-day EMA)/
JOSE CRUZ
130-day EMA}*100
by Vitali Apirine
2. Daily percentage price oscillator:
{(12-day EMA - 26-day EMA)/
130-day EMA}*100
3. Relative daily percentage price oscillator:
Weekly percentage price oscillator +
daily PPO oscillator
While the MACD (weekly or daily) measures the
absolute difference between two moving averages,
the W&D PPO makes the values relative by dividing
differences by the slowest moving average, which in
this case is the 130-day exponential moving average
(EMA). The W&D PPO is simply the W&D MACD
value divided by the longest moving average. The
result is multiplied by 100 to move the decimal place
two spots.
The MetaStock code for calculating the W&D PPO
is given in the sidebar “MetaStock Code For W&D
PPO.”
Metastock Code for W&D PPO
Here is the MetaStock code for the W&D PPO (60,130,12.26):
Length1:=60;
Length2:=130;
Length3:=12;
Length4:=26;
WM:=((Mov(C,Length1,E)-Mov(C,Length2,E))/Mov(C,Length2,E))*100;
DM:=((Mov(C,Length3,E)-Mov(C,Length4,E))/Mov(C,Length2,E))*100;
WM;
WM+DM;
February 2018 • Technical Analysis of Stocks & Commodities • 9
 FIGURE 1: CALCULATING VALUES. This spreadsheet shows calculation of the 60-day EMA, 130-day EMA, 12-day EMA, 26-day EMA, weekly MACD, daily MACD,
relative daily MACD, weekly PPO, daily PPO, and relative daily PPO.
The table in Figure 1 shows data for the Russell 2000 index
with values for the 60-day EMA, 130-day EMA, 12-day EMA,
26-day EMA, weekly MACD, daily MACD, relative daily
MACD, weekly PPO, daily PPO, and relative daily PPO. The
EMAs, W&D MACD, and W&D PPO values in the spread-
sheet are not very accurate. Had the calculation period been
extended to at least 250 periods or more, the accuracy would
have been better.
On the chart in Figure 2 you see that W&D MACD values
range from -33.56 to +36.59. W&D PPO puts this in percentage
terms with values ranging from -2.94 to +3.07. Think of -2.94
as equivalent to -2.94% and +3.07 as equivalent to +3.07%.
The weekly PPO is based on the 60-day EMA and the 130-
day EMA. The daily PPO is the difference between the 12-day
EMA and 26-day EMA divided by the longest moving average
(130-day EMA).
Values
shown in
spreadsheet
example
PPO (percentage)
MACD (absolute)
Metastock
Figure 2: w&d macd VERSUS w&d ppo. Although both indicators are similar, the
W&D PPO is in percentage terms.
10 • February 2018 • Technical Analysis of Stocks & Commodities
These parameters can be changed according to your prefer-
ences. I have used closing prices to calculate the moving aver-
ages, so W&D PPO signals should be measured against closing
prices. While the W&D PPO and W&D MACD have similar
shapes on shorter-term charts, the advantage of the percentage
calculation for the W&D PPO is evident on longer-term charts
because the W&D PPO is fairly constant, unlike the W&D
MACD. See the daily chart in Figure 3.
Interpretation
The weekly W&D PPO reflects the convergence and divergence
of a 60-day EMA and 130-day EMA. The weekly PPO is posi-
tive when the 60-day EMA is above the 130-day EMA. The
weekly PPO moves further into positive territory as the 60-day
EMA distances itself from the 130-day EMA. This reflects
strong weekly upside momentum.
FIGURE 3: W&D MACD VERSUS W&D PPO ON A LONGER-TERM CHART. The
advantage of having the indicator in percentage terms is that in a longer-term chart the
W&D PPO is constantly moving up and down, whereas the W&D MACD has long periods
where there’s hardly any change.
 lower high
underperforming
breakout
higher low
resistance break
higher high
higher low
4.83
0.08
higher high resistance break
higher low
3.25
0.61
FIGURE 4: COMPARING THE PERFORMANCE OF TWO INDEXES. If you closely
examine how the different indexes move, you’ll notice the PPO weekly range is greater
for the Nasdaq 100 index, which means it’s more volatile than the S&P 500 index.
The weekly W&D PPO is negative when the 60-day EMA
is below the 130-day EMA. Negative readings grow when the
60-day EMA distances itself from the 130-day EMA. This
reflects strong downside momentum. The relative daily PPO is
positive when it is above the zero line. The relative daily PPO
is negative when it is below the zero line.
When the relative daily PPO is below the weekly PPO but
above the zero line, it means daily downside momentum out-
paces daily upside momentum, but in an environment where
there is less weekly upside momentum. So a positive difference
between the 60-day EMA and 130-day EMA is greater than a
negative difference between the 12-day EMA and 26-day EMA.
If the relative daily PPO is below the zero line (negative) and
the weekly PPO is above the zero line (positive), it indicates
that the daily PPO experienced whipsaws or signaled future
change in weekly momentum. If the weekly PPO is above the
zero line and the relative daily PPO is above the weekly PPO,
it indicates that weekly upside momentum and daily upside
momentum outpace weekly downside momentum and daily
downside momentum, respectively. The most profitable long
trade occurs when the weekly PPO and relative daily PPO
rise together.
When the relative daily PPO is above the weekly PPO but
below the zero line, it means daily upside momentum outpaces
daily downside momentum, but it is less than the weekly
downside momentum. In other words, negative differences
between the 60-day EMA and 130-day EMA are greater than
positive differences between 12-day EMA and 26-day EMA. If
The W&D PPO provides an added
dimension as a percentage
version of W&D MACD.
the relative daily PPO is above the zero line (positive) and the
weekly PPO is below the zero line (negative), it is possible that
the daily PPO whipsawed or signaled future change in weekly
outperforming
momentum. If the weekly PPO is below the zero line and the
relative daily PPO is below the weekly PPO, it indicates that both
weekly downside momentum and daily downside momentum
outpace weekly upside momentum and daily upside momentum,
respectively. The most profitable short trade occurs when the
weekly PPO and relative daily PPO drop together.
The relative daily PPO is faster. The weekly PPO line is slower
and less reactive to price changes in the underlying security.
3.48 Comparing different indexes
The chart in Figure 4 shows the price relative
indicator ($NDX/$SPX), the Nasdaq 100 index
with PPO(130,60,1,1) and the S&P 500 index
with PPO(130,60,1,1). The price relative indi-
cator is used here to compare the performance
of the Nasdaq 100 index against the benchmark
S&P 500 index.
Both indexes traced out higher highs and higher lows. $NDX
outperformed $SPX from late December 2011 to early April
2012. The price relative peaked in early April and formed a
slightly lower high in early September 2012. The NDX weekly
PPO and SPX weekly PPO peaked in April (4.83 and 3.25,
respectively). The NDX weekly PPO formed a lower high in the
beginning of October 2012 and the SPX weekly PPO formed
a lower high 10 days later.
SPX upside momentum (0.61) bottomed in early July 2012,
and NDX upside momentum (0.08) bottomed at the end of
December 2012. The price relative broke support in the middle
of October 2012 and signaled the beginning of an NDX un-
derperformance.
SPX broke resistance in early January 2013, NDX broke
resistance at the end of April 2013. The price relative formed
a higher low when SPX upside momentum (3.48) peaked at the
end of May 2013. NDX started to outperform $SPX again. The
Nasdaq 100 index is more volatile than the S&P 500 index so
its PPO weekly range is greater.
Conclusions
Combining the W&D PPO and price chart signals could bring
about profitable trades. The W&D PPO provides an added
dimension as a percentage version of W&D MACD, allowing
you to compare W&D PPO readings for different securities.
In addition, W&D PPO levels in one security can be compared
over extended periods of time, even if the price has doubled
or tripled. This is not the case with the W&D MACD. W&D
PPO can’t identify overbought or oversold conditions because
movements are unlimited. Relative strength index (RSI) and
the stochastic oscillator are limited and this makes them bet-
ter suited to identify overbought and oversold levels. W&D
PPO can’t identify overbought or oversold conditions because
movements are unlimited.
Continued on page 40
February 2018 • Technical Analysis of Stocks & Commodities • 11
 TRADING ON MOMENTUM
Three Bars At A Time
Price Action And
Volume Correlations
The market always brings us something we can at least eke
out a little profit from, but we often miss those signals. This
is why it’s necessary for traders to continuously search for
opportunities, whether it be patterns that keep repeating
themselves, pattern breakouts, or a pattern that’s your best
secret. Here’s one pattern that can help you identify breakout
opportunities.
O
by Ken Calhoun
ne of my favorite technical analysis activities is
examining strong winning charts to see whether
there are repeatable patterns that can be used for
future trades. You should always be on the look-
out for early technical breakout patterns that can give you a
clue as to potential future price action. You can think of it
as becoming a market detective, to uncover visual clues that
lead to winning trades.
This month, we’ll look at a momentum candlestick and
volume confirmation pattern you can begin using to identify
new, emerging breakout swing trading opportunities. The key to
this pattern’s success is to make sure price action is confirmed
with a series of increasing volume days immediately prior to
entering your trade. From a technical analysis standpoint, it
is always helpful to look for correlations between indicators
and signals to identify strong combinations.
esignal
FIGURE 1: THREE-DAY PRICE ACTION AND VOLUME CONFIRMATION. Look for entries after price and volume
increase three or more days in a row.
12 • February 2018 • Technical Analysis of Stocks & Commodities
The power of three
I prefer to see a sequence of three increasing “momentum
candles” in an uptrend prior to entering my trades, because
this price action pattern indicates increasing buying activity.
This is illustrated in the 90-day daily chart of D.H. Horton
(DHI) in Figure 1. While this alone provides a sufficient tech-
nical entry signal, as with most technical analysis patterns, it
becomes more consistent once you also see a corresponding
increase in volume during the uptrend.
Seeing an increase in price action alone can lead to false
breakouts if increasing volume is not also present during
the timeframe prior to your entry. For example, if you see a
three-day increase in price with a corresponding decrease in
daily volume during those days, it means buying pressure is
not strong and so the trade should be avoided (or traded on
lighter share size).
Step-by-step action plan
Here’s how you can use this price action volume confirma-
tion strategy with your swing trades, using a 90-day daily
candlestick chart for stocks priced in the $20–$70/share
price range:
Step 1: Look for charts in which there is a sequence of three
daily candles that are increasing in both price and height,
as seen in Figure 1.
Step 2: Next, narrow your focus
to charts in which day-over-day
volume is also increasing, as seen
in the chart.
Step 3: An initial entry trigger is
set at $0.50 above the high of the
most recent candle.
Step 4: As with our other profes-
sional swing trading breakout
patterns, we use an initial stop-loss
value (and trailing stop) of $2.00.
Insights: Why this
technique works
When institutional traders buy large
blocks of shares, price increases
over time. When price and volume
Continued on page 33
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 Leave The Trend At Home
Profit-Taking And Resets
Part 2: Short-Term Trading
Trends can be useful for longer-term trades but what about
short-term trades? Do they work just as well? Here’s a
look at a trading system that can be applied successfully to
shorter-term trends.
L
by Perry J. Kaufman
ast month in part 1 we looked at profit-taking and
resets for long-term (macro) trend systems. The
overwhelming result was that profit-taking reduced
returns by exiting too soon. We looked at ways to
reset the trade, hopefully at a better price, but the
strongest markets don’t retrace; therefore, they don’t
give you a chance to reenter. You tend to miss the
best trends.
Offsetting that was less market exposure. In some cases,
the returns per day were much better with profit-taking, but
14 • February 2018 • Technical Analysis of Stocks & Commodities
the total returns far less. While I know of some successful
firms that take profits using a macrotrend system, I don’t do
that. The loss of returns seems to far outweigh the savings in
risk. There are other ways to offset risk.
$ ART: MATTZ90/GOLD: NUM LLPHOTO/SHUTTERSTOCK/COLLAGE: NIKKI MORR
Short-term trading is different
While macrotrend trading tries to get on the right side of
economic policy, driven mostly by interest rates, short-term
trading capitalizes on price noise, temporary reactions to
news, earnings announcements, brief supply interruptions—
essentially anything that will move prices for a day or two, but
is not structural and does not cause a lasting change.
The most popular techniques that are used to exploit these
price moves are:
• Arbitrage, for example, buying Wal-Mart (WMT) and
selling Amazon (AMZN) when AMZN announces good
 TRADING SYSTEMS
Figure 1: net profits based on a moving average applied to
15-minute SPY data from 2010 to mid-August 2017. Here you see the
profits from applying a moving average using a cost of $8 per trade.
earnings a day or two ahead of WMT. The profit comes
when Wal-Mart also has good earnings and catches
up to Amazon. It is common for two companies in the
same retail space to have similar performance in the
same quarter.
• Outright mean reversion—buying or selling a stock that
has made a big move down or up, expecting it to “revert
to the mean,” or give back a good deal of the move as
traders become more rational.
• Price patterns, such as stochastic divergence, three-day
cycles, or high-volume reversals. These are specific rules
that identify high-probability situations, often resulting
in short-term profits.
Why trends don’t work
for short-term trading
Trends lag. A 20-day moving average has a lag of 10 days.
A 10-bar average, applied to 15-minute bars, has a lag of 75
minutes. That’s too long for a short-term trade. If you need
75 minutes for an entry signal and 75 minutes to get out,
you’ve lost 2 ½ hours of a 6 ½-hour trading day. That’s 38%.
Those results are shown in Figure 1 (cost $8 per trade) and
FIGURE 3: SPY, 15-minute data, net profits applying a breakout
strategy. Results are better in the short term but similar overall.
Figure 2: net profits based on a moving average at no cost. As you
can see, the results are not consistent.
Figure 2 (no cost) for SPY using 15-minute data from 2010
to August 2017.
Note that the test range of 5 to 100 bars of 15-minute data is
equivalent to one hour and 15 minutes up to four days, which
covers what we normally think of as a short-term trade. To
give the trend more of a chance, you could try using a breakout
instead of a moving average, because a breakout tends to react
faster to price changes normally associated with short-term
trading. In Figure 3 we see that the breakout pattern is slightly
different, with more profits in the shorter trends, but about the
same maximum and minimum net. That means, after costs,
we’ll see the same net losses everywhere.
If we increase the calculation periods, we can get the
equivalent to a daily moving average. In Figure 4 we can see
a more orderly pattern where the longer calculation periods
are profitable, while the shorter ones are not.
Summing up the usefulness of the trend
As a short-term trading system, the trend doesn’t work for SPY,
nor for most markets, but that doesn’t mean it’s not useful. If
we use a short-term breakout as filter, we don’t incur costs
directly. We could also use the longer-term trend as a filter, a
more reliable choice, but it may keep us out of trades for a long
time if we’re biased to the long side. Let’s leave the trend for
FIGURE 4: SPY, 15-MINUTE DATA, NET PROFITS BASED ON LONGER CAL-
CULATION PERIODS. There is a more orderly pattern where the longer calculation
periods are profitable, while the shorter ones are not.
February 2018 • Technical Analysis of Stocks & Commodities • 15
 FIGURE 5: INTRADAY BREAKOUT STRATEGY APPLIED TO US BOND FUTURES
FROM 2010. The close and open yielded similar, poor results. Bonds have small
moves, so the cost is a serious obstacle to profits.
another time and see if we have a successful strategy without
it, and how profit-taking helps or hurts short-term trading.
Intraday breakout
strategy
We’ll use one of the basic intraday
strategies, the opening range breakout
(ORB), but we’ll measure the break-
out from both the previous close and
current open. We’ll get more trades
using the previous close because a gap
opening is likely to trigger a signal in
the direction of the gap. It also might prove to be less reliable.
One advantage of using the open as the basis for the breakout
is that it has no memory of the past and will be uncorrelated
to other systems. The disadvantage is that it reduces the part
of the daily range that would be our profit.
The rules for this strategy will be to buy when the upper
threshold is penetrated, sell when the lower one is penetrated,
and exit at the close of the day. We can buy and sell on the
same day, reversing our position as many times as it occurs.
We set the thresholds based on the 20-day average true range
(not the 15-minute bars):
FIGURE 7: INTRADAY BREAKOUT STRATEGY APPLIED TO S&P FUTURES FROM
2010. The S&P favored larger breakouts due to its intrinsic noise, even though the
data began in 2010, a period that was unusually trending for equities.
16 • February 2018 • Technical Analysis of Stocks & Commodities
FIGURE 6: INTRADAY BREAKOUT STRATEGY APPLIED TO CRUDE OIL FUTURES
FROM 2010. Crude oil was far better with the previous close, and more volatility
offset any cost issues.
Upper threshold = Previous close or today’s open +
factor × ATR(20)
Lower threshold = Previous close or today’s open - factor
× ATR(20)
We tested three representative futures markets, all beginning
in 2010, and all with slightly different bar sizes, US 30-year
bonds (US, 25-minute bars), the emini S&P (ES, 30-minute
bars), and crude oil (CL, 20-minute bars), and all with $8
per contract per side cost. Results are shown in Figures 5
through 7. All favor using the previous close, implying there
is a trending component to price moves.
In the case of bonds, which was the most trending of the
futures markets tested, both the close and the open yielded
similar, poor results. Bonds have small moves, so the cost is
a serious obstacle to profits. Crude oil was far better with the
previous close, and more volatility offset any cost issues. The
S&P favored larger breakouts due to its intrinsic noise, even
though the data began in 2010, a period that was unusually
trending for equities.
Breakout results
Having defined the intraday trading
system, we need to go back to the
original question, “Should we use
profit-taking?” Intuitively, we know
that short-term price moves have a
large degree of noise. That explains
why trends don’t work well and why we
expect that taking profits will capture
returns that could be lost due to fast
reversals. Let’s see if that’s true. First, we’ll define the entry
rules using the open as the basis for the breakout threshold.
Even though the previous close was more profitable, using
the open has less correlation and makes a more attractive
candidate for diversification. We’ll pick a breakout threshold
from the center of the successful areas in Figures 5, 6, and 7.
Note that the markets with less noise have smaller breakouts,
and for the S&P we only take long positions.
 All Trades Long Trades Short Trades
US 0.2 ­— US 30-year bonds (breakout 0.2) Optimization_US_25m_BO+MR
Total Net Profit $391,859 $443,723 ($51,864)
Profit Factor 1.07 1.09 0.95
Total Number of Trades 1,562 1,277 285
Percent Profitable 48.6% 49.5% 44.6%
Avg. Trade Net Profit $251 $347 ($182)
Max. Shares/Contracts Held 38 38 38 P/L
0.1
CL 0.4 — Crude oil (breakout 0.4)
0.2
Total Net Profit $328,668 $338,370 ($9,702) 0.3
0.4 2.0
Profit Factor 1.08 1.08 0.61 0.5 1.5
Breakout 0.6
Total Number of Trades 897 893 4 0.7 1.0
Mean reversion
0.8 0.5
Percent Profitable 50.4% 50.4% 50.0%

PSI Plot
Avg. Trade Net Profit $366 $379 ($2,426)
Max. Shares/Contracts Held 37 37 18 FIGURE 10: bonds (25-minute bars), test of breakout and mean-
reversion thresholds
ES 0.8 — emini SP (breakout 0.8)
Total Net Profit $118,942 $118,942 $0
Profit Factor 1.13 1.13 n/a
Optimization_CL_20m_BO+MR
Total Number of Trades 252 252 0
Percent Profitable 54.8% 54.8% 0.0%
Avg. Trade Net Profit $472 $472 $0
Max. Shares/Contracts Held 64 64 0
FIGURE 8: Test results using only the breakout threshold, exiting
at the end of day. Bonds and crude can go long and short, even on the same
day, but the S&P can only go long. P/L
0.1
0.2
0.3
0.4 2.0
0.5
1.5
Breakout 0.6
0.7 1.0
Mean reversion
0.8 0.5

figure 11: Crude oil (20-minUTE bars), test of breakout and

mean-reversion thresholds. It may not be so smooth but it has a clear
pattern clustering at 0.4 breakout and 1.8 profit level and reversal (toward the
center right).

FIGURE 9: Cumulative net profits using the breakout only, data
beginning 2010. Overall results are profitable but not impressive. Only crude oil
shows an upward trend in net profits, and that with some performance volatility.
profited only on the long side, although there were very large
swings in both directions and prices are now low.
Overall, results are profitable but not impressive, as seen
in Figure 9. Only crude oil shows an upward trend in the net
profits, and that with some performance volatility.

• Bonds, breakout entry at the open ±0.2

• Crude oil, breakout entry at the open ±0.4
Large intraday moves up are
• S&P, breakout entry at the open +0.8 (long-only
breakouts)
not sustained and there is
more to be made by shorting
The table in Figure 8 and the chart in Figure 9 show the Trade­ when that initial move runs
Station results using the selected breakout thresholds, exiting at out of steam.
the end of the day. Bonds are profitable only on the long side,
even though there were periods of rising rates. Crude oil also
February 2018 • Technical Analysis of Stocks & Commodities • 17
 Notice of Class Action Settlements
If you transacted in Euribor Products1 between June 1, 2005 and
March 31, 2011, inclusive (“Class Period”), then your rights will be affected and
you may be entitled to a benefit.
The purpose of this Notice is to inform you of your rights in
connection with the proposed settlements with Settling
Defendants Barclays plc, Barclays Bank plc and Barclays
Capital Inc. (collectively, “Barclays”), HSBC Holdings plc and
HSBC Bank plc (collectively, “HSBC”), and Deutsche Bank
AG and DB Group Services (UK) Ltd. (collectively, “Deutsche
Bank”) in the action titled Sullivan, et al. v. Barclays plc, et al.,
13-cv-2811 (PKC) (S.D.N.Y.). The settlements with Barclays,
HSBC, and Deutsche Bank (collectively, the “Settlements”) are
not a settlement with any other Defendant and thus are not
dispositive of any of Plaintiffs’ claims against remaining
Defendants.
What Is This Litigation About?
Plaintiffs allege that Defendants, during the Class Period,
conspired to manipulate and manipulated Euribor and the prices
of Euribor Products. Defendants allegedly did so by using
several means of manipulation. For example, panel banks that
made daily Euribor submissions to Thomson Reuters, such as
Barclays, HSBC, and Deutsche Bank, allegedly falsely reported
their costs of borrowing in order to financially benefit their
Euribor Products positions. Defendants also requested that other
Defendants make false Euribor submissions on their behalf to
benefit their Euribor Products positions.

The Settlements have been proposed in a class action lawsuit Plaintiffs further allege that Defendants continuously
concerning the alleged manipulation of the Euro Interbank conspired to fix the prices of Euribor Products in the
Offered Rate (“Euribor”) and the prices of Euribor Products over-the-counter market to financially benefit their own Euribor
during the Class Period. The Settlements provide $309 million Products positions. In addition to coordinating Euribor
to pay claims from persons who transacted in Euribor Products submissions and agreeing on where to price Euribor Products,
during the Class Period. If you qualify, you may send in a Proof in order to effectuate their alleged manipulations of Euribor and
of Claim and Release form to potentially get benefits, or you Euribor Products during the Class Period, Defendants allegedly
can exclude yourself from the Settlements, or object to them. engaged in “pushing cash,” transmitted false bids and offers,
used derivative traders as submitters, and rigged bids and offers
The United States District Court for the Southern District of for Euribor Products.
New York (500 Pearl St., New York, NY 10007-1312)
authorized this Notice. Before any money is paid, the Court will Plaintiffs have asserted legal claims under various theories,
hold a Settlement Hearing to decide whether to approve the including the Sherman Act, the Commodity Exchange Act, the
Settlements. Racketeering Influenced and Corrupt Organizations Act, and
common law.
Who Is Included? Barclays, HSBC, and Deutsche Bank have consistently and
You are a “Settlement Class Member” if you purchased, sold, vigorously denied Plaintiffs’ allegations.
held, traded, or otherwise had any interest in Euribor Products
during the Class Period, and during the Class Period were either What Do the Settlements Provide?
domiciled in the United States or its territories or, if domiciled Under the Settlements, Barclays agreed to pay $94 million,
outside the United States or its territories, you transacted HSBC agreed to pay $45 million, and Deutsche Bank agreed to
Euribor Products in the United States or its territories during the pay $170 million into the Settlement Funds. If the Court
Class Period. “Settlement Class Members” include, but are not approves the Settlements, potential Settlement Class Members
limited to, all persons who during the Class Period traded CME who qualify and send in valid Proof of Claim and Release forms
Euro currency futures contracts, all persons who during the may receive a share of the Settlement Funds after they are
Class Period transacted in NYSE LIFFE Euribor futures and reduced by the payment of certain expenses. The Settlement
options from a location within the United States, and all persons Agreements, available on the Settlement Website, describe all
who during the Class Period traded any other Euribor Product of the details about the proposed Settlements. The exact amount
from a location within the United States or its territories. each qualifying Settlement Class Member will receive from the
Contact your brokerage firm to see if you purchased, sold, Settlement Funds cannot be calculated until (1) the Court
held, or traded or otherwise had any interest in Euribor approves the Settlements; (2) certain amounts identified in the
Products. If you are not sure you are included, you can get more full Settlement Agreements are deducted from the Settlement
information, including the Settlement Agreements, Mailed Fund; and (3) the number of participating Class Members and
Notice, Plan of Allocation, Proof of Claim and Release, and the amount of their claims are determined. In addition, each
other important documents, at www.EuriborSettlement.com Settlement Class Member’s share of the Settlement Funds will
(“Settlement Website”) or by calling toll free 800-492-9154. vary depending on the information the Settlement Class
Member provides on their Proof of Claim and Release form.

1
“Euribor Products” means any and all interest rate swaps, forward rate agreements, futures, options, structured products, and any other instrument or
transaction related in any way to Euribor, including but not limited to, New York Stock Exchange (“NYSE”) London International Financial Futures and
Options Exchange (“LIFFE”) Euribor futures contracts and options, Chicago Mercantile Exchange (“CME”) Euro currency futures contracts and options, Euro
currency forward agreements, Euribor-based swaps, Euribor-based forward rate agreements, and/or any other financial instruments that reference Euribor.
(continued from previous page)
Notice of Class Action Settlements
If you transacted in Euribor Products1
between June 1, 2005 and March 31, 2011,
inclusive (“Class Period”), then your rights
will be affected and you may be entitled to a
benefit.
The number of claimants who send in claims varies
widely from case to case. If less than 100% of the
Settlement Class sends in a Proof of Claim and Release
form, you could get more money.
How Do You Ask For a Payment?
If you are a Settlement Class Member, you may seek to
participate in the Settlements by submitting a Proof of
Claim and Release to the Settlement Administrator at the
address in the Settlement Notice postmarked no later than
August 1, 2018. You may obtain a Proof of Claim on the
Settlement Website or by calling the toll-free number
referenced above. If you are a Settlement Class Member but
do not file a Proof of Claim and Release, you will still be
bound by the releases set forth in the Settlement
Agreements if the Court enters an order approving the
Settlement Agreements.
What Are Your Other Options?
All requests to be excluded from any of the Settlements
must be made in accordance with the instructions set forth in
the Settlement Notice and must be postmarked to the
Settlement Administrator no later than April 13, 2018. All
requests for exclusion must comply with the requirements
set forth in the Settlement Notice to be honored. The
Settlement Notice, available at the Settlement Website,
explains how to exclude yourself or object. If you exclude
yourself from the Settlement Class, you will not be bound by
the Settlement Agreements and can independently pursue
claims at your own expense. However, if you exclude
yourself, you will not be eligible to share in the Net
Settlement Funds or otherwise participate in the Settlements.
The Court will hold a Settlement Hearing in this case on
May 18, 2018, to consider whether to approve the
Settlements and a request by the lawyers representing all
Settlement Class Members (Lowey Dannenberg, P.C. and
Lovell Stewart Halebian Jacobson LLP) for an award of
attorneys’ fees of no more than twenty-three percent (23%)
of the Settlement Funds for investigating the facts,
litigating the case, and negotiating the settlement, and for
reimbursement of their costs and expenses in the amount of
no more than approximately $1,600,000.00. The lawyers
for the Settlement Class may also seek additional
reimbursement of fees, costs, and expenses in connection
with services provided after the Settlement Hearing. These
payments will also be deducted from the Settlement Funds
before any distributions are made to the Settlement Class.
You may ask to appear at the Settlement Hearing, but you
do not have to. For more information, call toll free 800-492-9154
or visit the website www.EuriborSettlement.com.
Optimization Results_ES_30m_BO+MR
P/L
0.1
0.2
0.3
0.4 2.0
0.5
1.5
Breakout 0.6
0.7 1.0
Mean reversion
0.8 0.5
FIGURE 12: Emini S&P (30-minUTE bars), test of breakout and mean-
reversion thresholds
Using profit-taking two ways
We now come to profit-taking. But exiting on profits must also
mean there is little expectation of further gains for the day.
If so, why not go short at that level? We then can buy on an
upward breakout, reverse at the upper profit level, and reverse
again to long at the lower profit level. Sounds like fun! Even
better if it’s profitable.
To find the profit-taking level, we programmed these reversal
rules into TradeStation, then tested for the breakout threshold
and the profit level. Naturally, the best breakout threshold
remained the same as the original test, but the profit levels
varied. Figures 10, 11, and 12 show the results as a three-
dimensional surface plot with the left axis as the breakout,
the right axis as the profit-reversal threshold, and the vertical
axis as the resulting net profit.
The bond and S&P charts are smooth, which is what we
would like to see, while crude is messy. Even then, crude does
have a clear pattern clustering at 0.4 breakout and 1.8 profit
level and reversal (toward the center right). Results of the
combined strategy are shown in the table in Figure 13.
Comparing the original results of just the breakout (Figure
8) with the combined strategy (Figure 13), we see that net
profits (even with $8 per contract) are at least doubled, as are
the number of trades (Figure 14). The biggest difference is
the profits in the short sales. In all three markets, the short
sales were surprisingly good in terms of reliability and profit
factor. The S&P was the most outstanding, with a 1.46 profit
factor.
The S&P is the easiest to understand because of the high
degree of price noise. These results say that large intraday
moves up are not sustained and there is more to be made by
shorting when that initial move runs out of steam. Bonds are
more difficult to understand because they are not normally
volatile. But around the Fed announcements and employment
statistics, they show added volatility. Those must be the days
in which both breakout and mean-reversion profits occur.
February 2018 • Technical Analysis of Stocks & Commodities • 19
 All Trades Long Trades Short Trades
US 0.2 x 0.8 — US 30-year bonds (BO 0.2 x MR 0.8)
Total Net Profit $783,180 $475,879 $307,301
Profit Factor 1.08 1.07 1.1
Total Number of Trades 3,793 2,375 1,418
Percent Profitable 53.5% 53.5% 53.5%
Avg. Trade Net Profit $206 $200 $217
Max. Shares/Contracts Held 38 38 38
CL 0.4 x 1.8 — Crude oil (BO 0.4 x MR 1.8)
Total Net Profit $581,106 $474,516 $106,590
Profit Factor 1.12 1.11 1.19
Total Number of Trades 1,169 982 187 figure 14: Cumulative net profits of combined breakout and
Percent Profitable 52.1% 51.6% 54.6% mean-reversion strategy. Net profits (even with $8 per contract) are at
least doubled, as are the number of trades. The biggest difference is the profits
Avg. Trade Net Profit $497 $483 $570 in the short sales. In all three markets, the short sales were surprisingly good, in
Max. Shares/Contracts Held 37 37 37 terms of reliability and profit factor. The S&P was the most outstanding, with a
1.46 profit factor.
ES 0.6 x 1.7 — emini SP BO 0.8 x MR 1.7)
Total Net Profit $291,079 $101,664 $189,415
Profit Factor 1.09 1.04 1.46 Further reading
Kaufman, Perry J. [2018]. “Profit-Taking And Resets, Part
Total Number of Trades 867 707 160
1: Trend-Following,” Technical Analysis of Stocks &
Percent Profitable 50.1% 49.9% 50.6%
Commodities, Volume 36: January.
Avg. Trade Net Profit $336 $144 $1,184 [2017] “Optimization—Getting It Right,” Techni-
Max. Shares/Contracts Held 64 64 62 cal Analysis of Stocks & Commodities, Volume 35:
FIGURE 13: Statistics for the combined breakout and mean- September.
reversion reversal strategy [2013]. Trading Systems And Methods, 5th ed., Wi-
ley.
The rest is up to you [2015 ]. A Guide To Creating A Successful Algorithmic
What you’ve seen here is a fast look at how Trading System, Wiley.
profit-taking can be used, and should be [2003]. A Short Course In Technical Trading, Wiley.
used, for intraday trading. That means it’s [1995]. Smarter Trading, Wiley.
best for daytrading and short-term trading, ‡TradeStation
the price window where noise dominates ‡See Editorial Resource Index
trend. While each market used different parameters and differ- †See Traders’ Glossary for definition
ent bar sizes, they were consistent with regard to the amount of
noise we attribute to those markets. The more noise, the larger
the initial breakout and the larger the reversal threshold.
You’ll want to test this yourself with your preference for
data bars—5 to 30 minutes for daytrading—and you might use
the previous close rather than the open. For that purpose, the
Want to see your name in print?
TradeStation code that was used to produce the results can be Are you knowledgeable about technical indicators,
found at the Stocks & Commodities website (Traders.com) charting, trading systems, & money management?
in the S&C Article Code section. Note that there are other Or have a solid background with
features in the program. For example, you can restrict trades intraday trading, trading
to those days following an inside day or compression.
psychology, options &
I hope you’ll have fun with this and be profitable. And about
resets, they don’t apply here. cycles? If so, we’d like
to hear from you!
Perry Kaufman is a trader and financial engineer. He is
the author of many books on trading and market analysis,
including Trading Systems And Methods, 5th ed. (with the
first edition published in 1978 as a seminal book in the field
of technical analysis), and A Guide To Creating A Successful
Algorithmic Trading System (2016). For questions or com- To write for any of our publications or obtain more information,
please click on Contact Us at www.Traders.com.
ments, please go to www.kaufmansignals.com.
20 • February 2018 • Technical Analysis of Stocks & Commodities
 XLY
XLU

XLP

XLK

XLE

XLRE

XLF

XLB

XLV

XLI

Rotate With It

Capitalizing On Sector
Rotation Strategies
XLY

Traders can always learn something XLP from investors and vice
versa. Typically, investors put more weight into outperforming
sectors. But is that the best way? Let’s find out.
by Marisa Yang
egy. What makes the strategy effective? It generates excess
returns over related benchmarks. These benchmarks could be
various asset classes such as commodities, equities, bonds,
and currencies.
In What Works On Wall Street, James O’Shaughnessy

S
elaborates on how price momentum-based sector rotation
strategy ranks highly on the performance list. Investors are
ometimes it’s oil, sometimes real estate, or some- often rewarded for investing in strong sectors and avoiding
times just plain old large-cap stocks.
XLEIf you follow weak ones. Similarly, in Relative Strength Strategies For In-
RIKKALL/SHUTTERSTOCK

sectors and reallocate your investments by more
heavily weighting them into the outperforming
sectors, consider yourself ahead of the game when
it comes to momentum-based sector rotation strat-
22 • February 2018 • Technical Analysis of Stocks & Commodities
vesting, Meb Faber writes that a simple momentum strategy
outperformed buy & hold approximately 70% of the time.
Investing in sectors with the highest returns outperformed
buy & hold over a period of more than 80 years.
 INVESTING STRATEGY

Taking advantage of the Best Momentum Worst Momentum Mid-tier Momentum S&P 500
Year Equal-Weighted
sector rotation investment Strategy (Rank1) Strategy (Rank9) Strategy (Rank5) (SPY)
strategy makes sense: It 2000 3.37 -58.08 22.47 -9.79 -5.88
capitalizes on the economic 2001 -30.01 20.88 -24.23 -10.12 6.86
cycle by focusing on outper- 2002 -14.79 -25.43 -8.67 -21.38 -24.48
forming sectors and avoiding 2003 18.87 16.35 32.39 26.69 32.28
underperforming ones in 2004 9.69 20.78 3.19 10.59 11.91
unfavorable market environ- 2005 -0.64 23.16 11.50 4.83 11.72
ments. The popularity and ac- 2006 19.44 32.51 14.15 15.18 13.62
cessibility of exchange traded 2007 31.34 -6.36 11.41 5.30 -1.23
funds (ETFs) that concentrate 2008 -54.30 -35.80 -8.09 -42.24 -42.64
on specific industry sectors 2009 31.01 23.88 36.02 26.52 43.84
make it possible for the self- 2010 19.61 36.75 9.12 15.98 17.70
directed investor to access the 2011 10.08 -0.06 -6.56 3.73 9.96
sector rotation strategy. In this 2012 -5.53 13.01 22.66 15.82 14.84
article, I’ll discuss a system- 2013 29.04 6.93 27.42 29.20 19.59
atic study of sector rotation 2014 6.63 3.86 12.67 12.89 10.83
strategy that’s based on price 2015 -11.85 -2.32 -4.39 1.68 1.76
momentum. Using historical 2016 15.93 20.28 17.45 11.52 15.65
sector SPDR ETF data, I’ll Avg Year 4.58 5.31 9.91 5.67 8.02
look at which momentum Sharpe Ratio 0.20 0.21 0.61 0.31 0.41
strategy provides optimal MaxDD -54.30 -58.08 -32.90 -42.24 -43.87
risk-adjusted return in the Std 22.77 25.20 16.31 18.33 19.71
US equity market. The sector FIGURE 1: OVERALL PERFORMANCE OF THE MOMENTUM STRATEGIES AND SPY. “Rank1,” “Rank9,” and “Rank5” refer
SPDR ETFs consist of 10 sec- to the best, worst, and fifth-best momentum strategies, respectively.
tors: Consumer Discretionary
(XLY), Consumer Staples
(XLP), Energy (XLE), Financials (XLF), Health Care (XLV), Best is not necessarily superior
Industrials (XLI), Materials (XLB), Real Estate (XLRE), Tech- You can see from Figure 1 that the best momentum strategy
nology (XLK), and Utilities (XLU). I’ve excluded XLRE from doesn’t necessarily yield better results relative to the SPY.
the analysis due to its recent introduction. Adjusted quarterly From 2000 to 2016, the best momentum sector’s average
close price data were obtained from Yahoo Finance. annual return is around 4.58%; the average annual return of
the SPY is 5.67%. The best momentum sector ETFs also un-
What is the strategy? derperform according to other metrics, such as volatility and
Since the strategy involves placing more weight to sectors that maximum drawdown (MaxDD). Volatility, which is measured
are outperforming, I’ve based the momentum-based sector by the standard deviation of the annual returns, is 22.77 for
rotation strategy on relative strength. I rank each sector based the best momentum strategy, and 18.33 for SPY; the maximum
on its current quarterly performance, that is, percentage change drawdown is -54.30% for the best momentum strategy, and
in price between the previous quarter and current quarter close. -42.24% for SPY. These results suggest that chasing the best
The sector ETF with the best return in the current quarter is momentum sectors may not be your best bet.
the best momentum sector; the continual investment in each
quarter’s best momentum sector is referred to as the best mo- The worst? Well, it’s bad
mentum strategy, labeled as “rank1.” The continual investment It’s not unusual for investors to chase the worst-performing
in each quarter’s second-best momentum sector is referred to sectors in hopes of buying low and selling high. Figure 1
as the second-best momentum strategy, labeled as “rank2,” and shows that the worst momentum sector ETFs have an aver-
so on. Each ranked sector ETF is purchased at current quarter’s age annual return of 5.31% from 2000 to 2016. The average
close; its performance is evaluated based on its next quarterly annual return of the SPY is 5.67%. What’s more alarming
performance, that is, percentage change in price between the is the standard deviation of 25.20 for worst momentum sec-
current and next quarter’s close. These quarterly results are tor ETFs versus 18.33 for the SPY. Similarly, the maximum
then added according to their calendar years to generate the drawdown is -58.08% for the worst momentum strategy and
annual return for the momentum strategy. For each momen- -42.24% for SPY. From this, we can infer that the worst
tum strategy, I compute the annual average return, standard momentum strategy underperforms not only in terms of av-
deviation, and maximum annual drawdown. Finally, the S&P erage annual returns, but also in terms of risk and volatility;
500 total return (SPY) is used in this comparative analysis as investors should be discouraged from using the strategy in
the market benchmark. its current format.

February 2018 • Technical Analysis of Stocks & Commodities • 23

 circle in Figure 2) versus a -42.24%
from SPY.
The performance of the fourth-best
momentum strategy is particularly
noteworthy because it yields an aver-
age annual return of 10.83% (as illus-
trated in Figure 2), the highest among
all momentum strategy studies;
however, it suffers from high levels
of volatility with a steep maximum
drawdown of -53.45% and a standard
deviation of 23. I’ll discuss how to
mitigate this risk later on. The overall
results show that investing in mid-tier
momentum sector ETFs appears to
be the superior strategy.
FIGURE 2: RISK–REWARD PROFILE OF THE NINE MOMENTUM STRATEGIES. “Rank1” refers to the best mo-
mentum strategy, “rank2” refers to the second-best momentum strategy, and so on. Bubble sizes are proportional
to the maximum annual drawdown of each portfolio. Can moving averages
refine results?
In addition to identifying an optimal
momentum-based sector rotation
strategy, I also studied the effects of
a simple moving average on reduc-
ing risk.
While the fourth-best momentum
strategy produces the best average
annual return, its high volatility and
MaxDD should give investors some
pause if they want to invest in the
strategy. So I introduced a simple
moving average to find out if this
strategy could be refined.
I used a look-back period for the
XLY moving average that ranges from two
to 10 quarters to examine its impact
FIGURE 3: EFFECT OF THE SIMPLE MOVING AVERAGE ON THE RISK–REWARD PROFILE OF THE FOURTH- on the risk/reward tradeoff. The
BEST MOMENTUM STRATEGY. “MA2” denotes a simple moving average with a lookback period of two quarters, strategy is based on initiating a buy
XLPmoving average. Bubble sizes are proportional to the maximum order when the ranked ETF is above
and so on. “No MA” denotes no application of a simple
annual drawdown of each moving average. the moving average.
If you look at Figure 3, you see
Middle of the road the MaxDD and volatility of the fourth-best momentum
may be your ticket strategy are profoundly reduced after applying the moving
You may not give much thought to investing average to the model. The MaxDD decreases from -53.45%
in mid-tier momentum sectors; however, the (No MA) to -15.92% and its standard deviation from 22.95 XLU
results from this study suggest that perhaps (No MA) to 14.18. This is evident in Figure 3 from the
you should. Mid-tier momentumXLE sectors, in movement of the larger blue bubble (no MA) to the smaller
general, outperform. In Figure 2, the optimum
position for a momentum strategy would be at the top left;
this represents the strategy with higher Sharpe ratios. The
third-best, fifth-best, and sixth-best momentum strategies Investing in mid-tier XLK
would outshine their peers in this regard. Taking both return momentum sector
and volatility into account, the fifth-best momentum strategy ETFs appears to be the
yields the best results with an average annual return of 9.91%,
which is almost double that of the SPY. In addition, the fifth-
superior strategy.
best momentum strategy is significantly less risky. It has aXLF
maximum drawdown of -32.90% (shown by the relatively small
24 • February 2018 • Technical Analysis of Stocks & Commodities
red bubble (MA4). No MA MA2 MA3 MA4 MA5 MA6 MA7 MA8 MA9 MA10
The results show that using a
Sharpe Ratio 0.38 0.47 0.38 0.45 0.38 0.39 0.40 0.38 0.39 0.42
simple moving average as a filter
can potentially reduce volatility MaxDD -45.43 -22.62 -26.15 -24.39 -24.79 -25.75 -26.83 -29.17 -27.22 -24.08
and MaxDD for most of the STD 20.89 13.50 15.63 14.52 14.46 14.93 15.46 15.35 14.78 14.42
momentum strategies. However, FIGURE 4: EFFECT OF THE SIMPLE MOVING AVERAGES ON RISK REDUCTION. “Sharpe ratio,” “MaxDD” and “STD”
it doesn’t improve their average are taken from an average of all nine momentum strategies from 2000 to 2016.
annual returns.
From the table in Figure 4 you can see significant drops and standard deviation relative to those of the S&P 500.
in standard deviation and MaxDD after the moving average Other advantages to this equal-weighted strategy include:
was incorporated into the system. On average, standard devia- 1. It’s conceptually simple
tion drops from 20.89 to 14.78, and MaxDD from -45.43% to
-25.67%. My takeaway: The simple moving average strategy 2. It has low maintenance
could potentially reduce risk, which is something the investor 3. It’s potentially more tax-efficient.
should be aware of.
The common mentality in sector investment is that the
Equal-weighted sector ETF saves the day best momentum sector in the current quarter should continue
A sector rotation strategy that is an alternative to the SPY (which to outperform in the next. But more often than not, this is
is a weighted index) is the equal-weighted sector approach. not the case. By overinvesting in outperforming ETFs and
So which one produces sustainable risk-adjusted returns for underinvesting in underperforming ones, investors may lose
investors? Figure 5 compares the annual returns of an equal- the opportunity to capture rising price movements during the
weighted sector approach with the returns of the SPY. next quarter. We’ve seen that past outperformance doesn’t
As shown in Figure 5, the equal-weighted sector strategy has portend future ones.
outperformed S&P 500 total returns nine out of 17 times from
2000 to 2016. It has an average annual return of 8.02% com-
pared to 5.67% for the SPY. The strategy has similar MaxDD Continued on page 45

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DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET
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February 2018 • Technical Analysis of Stocks & Commodities • 25

 Life Is An Arcade
What’s The Fib Pinball?
When you pull the lever in pinball, the ball caroms between
the game’s bumpers, like stock market prices zigzagging within
price channels and meeting resistance at Fibonacci levels.
Here’s a look at how market sentiment, Elliott wave analysis,
and Fibonacci ratios were used to successfully forecast the
post-election markets.
If
by Avi Gilburt
you are like most in the market, you probably
believed Hillary Clinton was going to win the
presidential election in November 2016, that the
stock market would rally because of it, and that
gold would tank. And you were also told that if
Donald Trump were able to pull off a win, then the market
would tank and gold would skyrocket. These perspectives
were based solidly in various fundamental perspectives that
26 • February 2018 • Technical Analysis of Stocks & Commodities
dictated these market expectations.
However, what occurred in the real world was drastically
different from what was expected. Well, that is, from what
was expected by most. Our sentiment analysts at Elliottwave-
Fib proportion: KISAN/WAVES: ALPHABE/SHUTTERSTOCK/COLLAGE: C MORR
trader.net were looking for a stock market rally and a drop in
gold (to our bottoming target) no matter who won. Yes, you
heard me right.
The importance of sentiment
Markets are not driven by the substance of news or exogenous
events. Many social experiments have been conducted over
the last 30 years that proves this to be true, despite the public’s
belief to the contrary. And as these experiments have proven,
what does control market direction is something we term
“market sentiment” or “social mood.”
The prevailing social mood or market sentiment interprets
the exogenous events we hear about, and the “spin” applied
 CHARTING
by the prevailing social mood is what moves the market. If
sentiment is positive, then the market will react positively,
even if the news is negative, and vice versa. This is why we
often see markets go up on bad news and down on good news,
and it makes many scratch their head, especially if they are
looking to “logic” to explain the markets or if they are look-
ing for their directional cues from news or fundamentals.
And this is why so many were looking the wrong way when
Trump won the election.
Market sentiment for equities was clearly suggesting we
were heading higher in early November no matter who won
the election, as well as pointing down for gold to our bot-
toming target.
Measuring sentiment through
mathematical analysis
How does Elliott wave analysis measure market sentiment,
and what does “Fibonacci pinball” have to do with any of this?
The answer begins with an understanding of a mathematical
principle called phi.
In 1228, Leonardo Fibonacci da Pisa published his monu-
mental work titled Liber Abaci, in which he “rediscovered”
what is commonly known today as the Fibonacci sequence
of numbers: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, etc. Within
this sequence, each higher number is the sum of the prior
two numbers, and the ratio of any two consecutive numbers
approximates 1.618 or its inverse, 0.618. The higher you
move through the sequence, the closer you move toward the
1.618/0.618 relationship. This 0.618 number has been referred
to as the golden mean throughout history. We also refer to
this number as phi.
There is significant evidence, based on recent studies,
that behavior and decision-making within a herd and on an
individual basis display mathematically driven distributions
based on phi. This basically means that mass decision-making
will move back and forth based on mathematical relationships
within their movements. This is the same mathematical basis
with which nature is governed. The same laws that were set
in place for nature also govern man’s decision-making, en
masse and on an individual basis.
Elliott wave’s use of Fibs
to predict markets
In Elliott wave analysis, we use ratios based on phi, the Fibo-
nacci ratio of 1.618, and its inverse 0.618, among other ratios,
to predict the progression and regression of stock prices.
In Figure 1 you see an example of a classic five-wave market
advance. As you’ll see, each upwave has five subwaves within
it, and each downwave has three subwaves, with each subwave
having a specific phi-derived target.
Once the first two waves (i and ii on the chart) are complete,
the subwaves of the following three waves become relatively
easy to prognosticate, as they advance or decline based on
Fibonacci extensions that are calculated based on the length
of the first two waves.
We call this phenomenon, in which we can more reliably
FIGURE 1: CLASSIC FIVE-WAVE ELLIOTT WAVE PATTERN. Once the first two
waves (i and ii) are complete, the subwaves of the following three waves become
relatively easy to prognosticate, because they tend to advance or decline based
on Fibonacci extensions that are calculated based on the length of the first two
waves.
predict the subwaves starting in the third wave, Fibonacci
pinball.
Essentially, like a caroming pinball, price takes off in a
classic third wave, zigzagging in five relatively predictable
subwaves. The relative predictability continues into the fourth
and fifth waves.
Fibonacci pinball in predicting
the Trump rally
The simple truth is that the market was in the heart of what
we Elliotticians call a “third wave,” and they are relentless and
the most powerful segment of a five-wave Elliott structure. In
fact, we had been within the heart of a third wave since early
November 2016 when we went against the common “market-
think” and called for a strong rally to 2300 and beyond, even
though Trump won the election.
On Saturday, November 5, 2016. the same day Barron’s
predicted a 10% selloff should Trump win the following
Tuesday, we wrote: “I would not expect a larger downside
move to occur from here if our expectations are correct. Once
the market moves strongly through the 2098 SPX level, and
is able to continue through the 2125 level, that is our initial
indication that we could have a long-term low in place, and
finally begin our run to 2350 SPX next.”
The prevailing social mood or
market sentiment interprets the
exogenous events we hear about,
and the “spin” applied by the
prevailing social mood is what
moves the market.
February 2018 • Technical Analysis of Stocks & Commodities • 27
 SPX target =
2611
SPX target = 2350
by mid-February 2017

Nov. 5, 2016: If market

moves strongly through
2098 level, then a run to
2350 could be next Dip mid-April
2017

2016
election
STOCKCHARTS.COM

FIGURE 2: S&P 500. Just before the election on November 5, 2016, we wrote that we did not expect a larger downside move to occur. If the market moved strongly
through the 2098 SPX level and was able to continue through the 2125 level, that would be an indication that a long-term low may be in place and a run to 2350 SPX
could be next.

As it happened, the S&P 500 blew through 2098 the very
next session on Monday, November 7, 2016, and has hardly
looked back since (Figure 2). It surpassed our 2350 target in
mid-February 2017, came down into mid-April 2017 as we
anticipated, and proceeded to rally into the end of the year,
exceeding our target of 2611 set two years ago by a little
over 2%.
As for gold, we also wrote on November 5, 2016: “Normally,
based upon our Fibonacci pinball perspective, the wave (4)
of iii pullback ‘should’ not break below the 0.618 extension,
which was at the 25 level. And since we broke that level, this
is a warning to me … as long as the GDX maintains below
25.47, there is a downside setup in place. In order to follow
through on this immediate downside setup, we need to break
below 24.42 and follow through below 23.90.”
The metals broke down the next session (Monday) and
bottomed below 19 in the GDX in late December 2016, right
in our bottoming target region.
Our call for a post-election rally in the S&P 500 was actually
one of many correct market calls in 2016. All year long, we
were noting that the market was set up to rally in 2016 (Figure
3), with a minimum target of 2300, even while many were still
looking for that elusive stock market crash. Our expectations
for a rally did not care about Brexit, who won the US election,
the referendum in Italy, interest rate hikes, terrorist attacks,
or any other exogenous event ... and it seems that neither did
Continued on page 40

FIGURE 3: 2016 MARKET CALLS. The comments on the chart show what the market calls were based on the published forecasts.

28 • February 2018 • Technical Analysis of Stocks & Commodities

Explore Your Options
ue that the options seller demands in
Got a question about options? Jay Kaeppel has over three decades of experi- order to assume the risk of selling the
ence in the options markets. He was a head trader for a CTA firm, an options option in the first place. Therefore, it can
trading software developer, and is a portfolio manager for an investment be stated that the more time premium
management firm. He also spent several years writing a weekly column titled there is built into the price of an option,
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http:// the higher its implied volatility and vice
jayonthemarkets.com). He is the author of several books, including The Four versa. Monitoring the overall level of
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability, implied volatility for the options on a
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques- given security allows us to objectively
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected measure whether options on that security
questions will appear in a future issue of S&C. are “cheap” or “expensive” since high IV
levels tell us that there is a lot of time
premium currently built into options
prices and low IV levels tell us that there
IMPLIED VOLATILITY: IS THAT OPTION these inputs, the model can calculate the is much less time premium currently built
CHEAP OR EXPENSIVE? seventh variable—a “fair value” for the into options prices. This knowledge can
What is implied volatility, how is it cal- option in question. Fair value is simply help a trader to maximize the tradeoff
culated, and what does it mean? an estimation of what price an option between reward and risk.
In short, implied volatility is a variable “should” be trading at, given a current
calculated by an options pricing model set of variables. How can implied volatility be used in
that can tell an options trader whether Implied volatility is calculated slightly trading?
the price for options on a given security differently than the fair value. To calcu- When you enter into an option trade,
are presently “cheap,” “expensive,” or late IV, the current actual market price of in most cases you are either “buying
somewhere in between. This knowledge the option itself is passed to the options premium” or “selling premium.” Know-
can be extremely useful in deciding pricing model as the seventh variable, ing whether the current level of implied
which options strategy to use and/or in along with the other “known” variables volatility is high or low relative to its
managing existing positions. mentioned in 1 through 6 above. The own history can help guide you to an
Mathematically, implied volatility options model then takes these variables optimal strategy.
(IV) measures the expected percentage and solves for the eighth variable, a vola- For example, if IV is “low” on a his-
of volatility that options traders antici- tility value. This output is the implied torical basis, as in the case of Market
pate for a given security going forward. volatility value for that option. Vectors Gold Miners ETF (GDX) in
Each individual option has its own IV In this scenario, the higher the actual Figure 1, we can typically conclude that
value. However, traders often look at the market price for the option under exami- options are “cheap” (that is, the amount
average IV for all the options traded on a nation, the higher the IV, and the lower the of time premium built into the option
given security and compare this current actual market price for the option under price is low) and therefore, strategies that
average to the individual option’s histori- examination, the lower the IV. involve “buying premium” are typically
cal range to determine if the current level As I discussed last month in this col- preferred. By buying “cheap” options,
of IV is high or low. umn, the price of each option is comprised
Before focusing on how IV can be of any “intrinsic value” (equal to the Continued on page 45
used, let’s first define what it is and amount by
how it’s derived. IV is derived from an which the op-
options pricing model such as the Black- tion is cur-
Scholes model, which is probably the rently in-the-
most widely known model. In order for money) plus
an options pricing model to calculate a any addition-
fair “theoretical” price for a given call al “extrinsic
or put option, it takes in several inputs, value.” An-
typically including 1) the strike price other term
of the option, 2) the current price of for “extrin-
the underlying security, 3) the amount sic value” is
Optionsanalysis.com

of time left until option expiration, 4) a “time premi-

current interest rate, 5) upcoming divi- um,” that is,
dends – if any – and, 6) a volatility value. the amount
One approach is to enter the current above a nd
statistical volatility for the underlying beyond any FIGURE 1: LOW IMPLIED VOLATILITY (IV). Here you see that the 90-day at-the-money IV is
security itself as a volatility value. With intrinsic val- making a new four-year low.
February 2018 • Technical Analysis of Stocks & Commodities • 29
 They Come In Different Forms
A Simple Approach
To Gap Trading
Anyone who has looked at a price chart knows that gaps
occur. But all gaps aren’t the same. Here’s a look at the
characteristics of four and how you can trade them.
by Solomon Chuama
G
aps—the spaces between price bars—are common
on forex charts. These visible gaps often occur on the
charts between the close of forex trading on Friday
afternoon and the opening on Sunday afternoon.
Sometimes you’ll see gaps appear in equity or index
charts when a news report is released. Your ability
to trade a gap depends on your identifying the type
of gap that forms and the price action that follows.
That said, let’s look more closely at gaps.
Gaps: What and how
Gaps are areas on a chart that are not filled, or prices where
no trades took place. You see them in just about any price
chart. The reason they are common on forex charts is that
the markets close on Friday afternoon and reopen on Sunday
afternoon. Sometimes after the market closes on Friday af-
30 • February 2018 • Technical Analysis of Stocks & Commodities
ternoon, finance ministers and central banks release meeting
minutes and other data. If some high-impact news is released,
the market’s volatility increases and the bid/ask spread widens,
resulting in a gap. As major news is released, the market will
move early on Sunday, and as the opening hour approaches,
the market will become more volatile.
But is it realistic to think you can trade all the gaps that ap-
pear over a weekend? It depends on the type of gap that occurs
and also whether you can expect gaps to get filled.
Dertermining a tradable gap
Let’s take a look at the different types of gaps before figuring
out which ones are tradable.
Exhaustion gaps
An exhaustion gap (Figure 1) usually signals the end of a trend,
that is, price makes a final gap and then reverses. This signal
indicates that the gap is expected to be filled and is tradable.
LISA S/SHUTTERSTOCK
It’s the last gap that forms at the end of the trend and it’s
expected that the gap should be marked with a large amount
of volume. Once the gap is filled, the pattern is considered to
be complete and signals that the trend can reverse.
 FOREX TRADING

Continuation gap Stop loss

Continuation gaps (Figure 2)
are also called runaway or Reversal
measuring gaps. They occur
in the middle of a trend and Exhaustion gap
because of this, can lend a
hand in measuring the length
of a trend. Continuation
gaps are used to confirm
the trend’s direction and
are less likely to be filled.
This means you can trade
with the trend. A bullish
runaway gap is when price
action rises and is followed
by a gap. You place a buy
order on the close of the gap
day. A bearish runaway gap FIGURE 1: exhaustion gap. An exhaustion gap usually signals the end of a trend—that is, price makes a final gap and then
reverses. This signal indicates that the gap is expected to be filled and is tradable.
is when prices fall in a bear
trend followed by a gap. You
place a sell order on the close
of the gap day.

Breakaway gap
A breakaway gap (Figure 3)
occurs after a currency pair Buy @ 1.08360
has traded in a consolidation
pattern in a nontrending Runaway gap
market. The gap moves a
currency pair from a non-
trending market to a trend-
ing market. A breakaway
gap is a sign that a new
trend has begun. Therefore,
a breakaway gap breaks out
of a trading range with a
powerful blast and doesn’t
FIGURE 2: Continuation gap (runaway/measuring gaps). Continuation gaps occur in the middle of a trend are used
come back to fill the gap to confirm the trend’s direction. They are less likely to be filled and can be used to trade with the trend.
pattern. A breakaway gap
out of a consolidation is con-
sidered to be stronger than a non-gap move. The occurrence How to trade gaps
of a breakaway gap out of a consolidation period indicates a Exhaustion gaps
significant change in sentiment in the gap’s direction. This In exhaustion gaps that occur in a trending market, you’ll
change in sentiment will last for some time. However, the typically see low volume. Traders often use exhaustion gaps to
greater the volume out of a gap, the more likely the currency
pair will continue in the direction of the gap and reduce the
chance of being filled.

Common gaps Your ability to trade a

Common gaps (Figure 4) are also referred to as “area gaps” gap depends on your
or “trading gaps” and occur as a result of low-volume trading
days or after a significant news announcement. As their name
identifying the type of gap
suggests, they occur frequently and you’ll often see them that forms and the price
when the market price is moving sideways. Common gaps are action that follows.
generally bound within support & resistance levels. They are
not big in size and get filled within a couple of days.
February 2018 • Technical Analysis of Stocks & Commodities • 31
 trade trend reversals. There
are two types of exhaustion
gaps, namely the bearish and
bullish exhaustion gap.
On the chart of NZD-
JPY in Figure 1, you see
a bearish exhaustion gap.
Typically, in a bearish ex-
haustion gap, you will find Breakaway gap
a bullish trend, bullish gap,
and bearish trend reversal.
To not mistake an exhaus-
tion gap for a continuation
gap, you could wait for the
A period of
market to confirm the ex- consolidation.
haustion gap. Here’re some
observations and actions to FIGURE 3: Breakaway gap. A breakaway gap occurs after a currency pair has traded in a consolidation pattern in a non-
take after an exhaustion gap trending market. The gap moves a currency pair from a nontrending market to a trending market. A breakaway gap is a sign that
has formed: a new trend has begun. It breaks out of a trading range and doesn’t fill the gap.

1. B e a r i s h r eve r s a l
candlesticks could
indicate the market is
reversing.
2. There will be a period
of price consolidation Common gap
with price testing a
new level of resis- Common gap
tance. Then you can
place a short trade
(sell) once resistance
has been tested.
3. Place a stop-loss
above the market turn-
ing point (resistance
level).
4. During the gap’s for-
mation, volume was FIGURE 4: Common gaps. Also referred to as “area gaps” or “trading gaps,” these occur frequently and often in a sideways
low, but during the market. They will appear during low-volume trading days or after a significant news announcement. They tend to get filled within
a couple of days.
reversal, volume in-
creased (Figure 1).
5. When exhaustion is confirmed together with price action, during this type of gap:
the price reversal can be rapid and severe.
1. Runaway gaps occur in the middle of a trending market.
6. In Figure 1, here is how to think about exiting: It could be a bullish or bearish runaway gap.
• You can exit your trade as soon as or part of the gap 2. When you identify a runaway gap, you know that the
is filled. A gap is filled when price moves back to previous trend would hold and would trade in the trend’s
the original pre-gap level. direction.
• You can set a trailing stop and monitor price action 3. During a bullish runaway gap, price action is rising, so you
and the key levels (support & resistance). would place a buy order at the close of the gap day.
4. During a bearish runaway gap, prices are falling, so you
Runaway gaps
would place a sell order at the close of the gap day.
It’s important to properly identify a runaway gap and put in
place your risk tolerance when trading runaway gaps. The fol- 5. You can set a trailing stop with a moving average as
lowing are some observations and actions to be implemented in Figure 2.
32 • February 2018 • Technical Analysis of Stocks & Commodities
Breakaway gap
During a breakaway gap, you’re likely to see high volume.
This indicates the currency will continue moving in the trend’s
direction. There’s also a strong chance the gap will not be
filled. In an upward breakaway gap, the previous resistance
becomes a new line of support. Here’s how you can trade a
breakaway gap:
1. As price gaps up every day, you can find support areas
at which to go long.
2. You can exit the trade with a trailing stop.
Common gaps
Common gaps are more likely to get filled than other types
of gaps mostly because they are bound within support & re-
sistance levels. They are used for short-term intraday trading.
Here’s how you can trade them.
1. Fade the gap in the opposite direction after determining
the pre-gap level.
2. If the currency pair gaps up, then place a sell order.
Similarly, if it gaps down then place a buy order.
3. Exit your trade by placing your take-profit at the pre-
gap level.
TRADING ON MOMENTUM
CALHOUN / PRICE ACTION AND
VOLUME CORRELATIONS
Continued from page 12
increase significantly during a three-day time window, it often
leads to a significant upside breakout continuation, because
of supply & demand forces. In addition, astute professional
traders are ready to enter these types of trades based on price
action momentum.
Some of the biggest challenges you may face as a trader are
hit-and-miss technical entries, inconsistent signals, and false
breakouts. By seeking to trade with the help of correlated
technical analysis patterns, you gain a trading edge over less
knowledgeable retail traders.
TRADE MAnAGEMEnT TiPs:
TRADE WiDE, noT DEEP
Traders vote with volume, and buy or sell based on price action.
When using volume confirmation in your trades, keep an eye
out for consolidating prices and/or declining volume, and take
this as a warning. If price action stalls and goes sideways (and/
or if volume drops), I always tighten a trailing stop to $0.50
under the most recent day’s low, in case this is the start of a
reversal downward. Similarly, if price keeps going up, I look
Conclusion
The best way to trade a gap is to know the different types of
gaps. Some traders can predict a gap after economic data related
to a currency pair is released. For example, if the economic
data is bullish, then they can expect the pair to gap up at the
following open. So in anticipation of such a move, traders may
buy during the after-hours market. But the market is unpre-
dictable, so you don’t want to overload your trades. Gaps can
be filled within minutes or can continue to move for days or
weeks. It’s best to stick to your normal risk parameters.
Solomon Chuama has been working in the financial industry
for 16 years. He is a training seminar organizer and instructor
who tries to pass on to students his passion and knowledge
of forex trading.
By seeking to trade with the help
of correlated technical analysis
patterns, you gain a trading edge over
less knowledgeable retail traders.
to scale in and add to the winning position to capitalize on
increasing momentum. I often add shares to an initial winning
position every two points or so during an uptrend.
A final tip: It is helpful to trade multiple positions that show
this type of pattern, using small share size initial trades. By
“trade wide not deep,” I mean that it makes more sense to trade
many initial positions on small share size instead of trading
larger share size on just a couple of trades.
Ken Calhoun is a producer of trading courses, a live trading
room, and video-based training systems for active traders. He
is the founder of TradeMastery.com, an educational resource
site for active traders, and is a UCLA alumnus.
February 2018 • Technical Analysis of Stocks & Commodities • 33
 INTERVIEW

Make System Tracking A Habit

Trading Systems
With Michael Bryant
With advanced degrees in mechanical engineering and computer science,
working in the aerospace industry in the field of spacecraft design, and then in
academia in the departments of ophthalmology and mechanical engineering,
Michael Bryant found the markets a fascinating distraction. He gravitated
toward trading futures and with his background it’s no surprise he went on to
developing trading systems and then to developing software for traders. Bryant
is the owner of Adaptrade Software, which develops products that are easily
accessible to retail and professional traders.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with
Michael Bryant on December 8, 2017 about what it takes to develop a trading
system.

Mike, can you tell us a little
bit about your background
and how you got interested
in trading?
My education is in en-
gineering. I have a PhD in mechanical
engineering with a minor in computer
science. I had several different careers
before I started trading. I was in aero-
space engineering in spacecraft and
launch vehicle design. I then switched
to working as a research professor in a
medical school developing biomechani-
cal engineering models for the eye in the
department of ophthalmology. It was
around that time that I got interested
in the futures market. And because of
my background it was natural for me to
gravitate toward systematic trading, and
I started developing trading strategies.
Later on, I started developing position
sizing tools for trading. And eventually,
I thought that maybe some of the tools I
developed for my own trading might be
of interest to other traders.
So I started a side business selling
those tools and when I decided I didn’t
want to work the rest of my life in aca-
demia, I started to think about how to
make the move to self-employment. I
finally made the transition to being self-
employed full time in 2003. I started by
trading for my own account and selling
my software. At some point, I realized
34 • February 2018 • Technical Analysis of Stocks & Commodities
I liked analyzing the markets and de-
veloping new trading techniques and
particularly the software more than
I actually liked trading. So I shifted
my focus entirely a few years ago to
developing and selling the software.
And now I focus entirely on the soft-
ware side of things.
I still work on new trading tech-
niques and methods, but now, instead
of trading them, I incorporate them
into my software. I also write about
them in an email newsletter. I write
about three email newsletters.
Tell us about your software.
My company is Adaptrade Software.
I call the strategy-generating program
Adaptrade Builder. I have another tool for
position sizing and management called
Market System Analyzer.
I specifically wrote the Builder soft-
ware to generate code for other platforms.
So it generates EasyLanguage and other
programming languages that you find in
your trading platform.
A lot of traders are interested in devel-
oping their own trading systems, but
they don’t know where to start. What’s
a good launch pad or a good stepping
stone for them?
There’s so much you need to know to
develop trading strategies. It depends on
You have to monitor your
trading strategies and
make sure they’re still
within an acceptable range
and are still performing up
to expectations.
what stage you’re in. If you’re already a
trader and you understand the markets
and the details of the markets you’re trad-
ing, then your next step would be strategy
and logic. So then it’s a matter of whether
you already have an idea that you just
want to program or you need to come up
with your own idea. Once you have an
idea, you’ll have to translate your trading
idea into strategy code, which requires a
scripting language. But of course, most
scripting languages are tied to a specific
trading platform. So then it becomes not
just about selecting a scripting language
but also the trading platform.
The reason I developed my Builder
software was to shorten this process for
people. So it combines strategy genera-
tion with the selection of the logic; writes

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When you start trading
with real money, emotions
become a factor. One of
the things I like about
systematic trading is that it
helps in that regard.
the code; and enforces good strategy
design principles and rigorous testing
methods.
Once someone comes up with an idea
and once it has been coded, how do
they determine if it’s a reliable system
to trade? Or if it’s a good system, how
do they know when to stop using it?
I usually recommend that real-time
tracking should be the final arbiter of
whether the system is viable before going
live. But I think where most people get
tripped up is in the development phase
before they’re even ready for real-time
tracking. For that, I use a three-segment
approach—I have a training segment, a
test segment, and a validation segment.
The training and test segments typically
work together. So if you’re still develop-
ing your strategy and you’re making
changes to it, you would evaluate those
on the training segment and use those
results to determine which changes to
make. Then you can periodically check
the performance on the test segment.
In other words, you want to make sure
you’re not making things worse on the
test segment because typically, things
always look good on the training segment
because that’s what you’re using it for.
But oftentimes, it will initially look good
on the test segment, but as you make
additional changes and optimize inputs
and so on, things tend to flatten out or
decline on the test segment, which is a
sign of overfitting.
There’s also have a third segment, the
validation segment, which you don’t use
until you’re done with everything. Then
you can do the final validation check-
ing on that segment. After that, you can
implement real-time tracking.
36 • February 2018 • Technical Analysis of Stocks & Commodities
And what does real-time
tracking involve?
Most trading platforms are
good enough that you can
just run the system in real
time, in simulation mode.
But you want to see how it’s
doing to make sure it actually
holds up in that scenario. So
you have to regularly look at
the P/L.
But when you’re trading in a simulated
mode, it removes the emotions from the
picture. When you switch to trading in
real time, emotions will enter the equa-
tion. How do you incorporate those
emotions when trading in real time?
Emotions are one of the big challenges
when it comes to trading. It does make a
difference. When you start trading with
real money, emotions become a factor.
One of the things I like about systematic
trading is that it at least helps in that
regard. It doesn’t solve the problem
entirely, but at least if you’re using a
trading system, the only decision you
have to make is whether or not to follow
your system. So, in a way, it simplifies
that process but doesn’t remove emotion
completely. But because the impact of
emotions is reduced, it’s easier to make
trading decisions.
It is, but there’ll be times when you have
losing trades. So when you’re using a
trading system, how do you manage
your positions and handle risk when
you experience losses?
One of the characteristics of the mar-
kets that makes them challenging is they
tend to be nonstationary. Their statistical
properties change over time, which is
probably the biggest reason that trading
strategies tend to fade over time. So you
absolutely have to monitor your trading
strategies and make sure they’re still
within an acceptable range and are still
performing up to expectations. And if
they’re not, you have to either redevelop
them or replace them with good ones.
So by closely following your systems,
you are able to determine if they’re
working. You developed your first
trading strategies in the early 1990s.
Have you seen significant changes in
the market’s behavior that made you
change the methods you use to develop
systems?
Markets change over time, but it de-
pends on your timeframe. It’s different
if you’re trading, say, one-minute bars
versus weekly bars. It’s a matter of
isolating the signal from the noise and
trying to find a signal that’s stable long
enough to profit from it in real time. How
long those signals stay stable depends
on your timeframe. If you’re trading a
one-minute bar, you might develop new
trading strategies every six months. If
your trading timeframe is shorter, you’ll
need to develop new strategies more of-
ten. I have a trading strategy I developed
17 or so years ago that requires some
tweaks every now and then with param-
eter values but the basic fundamentals
still hold up. But that’s more of a swing
trading timeframe.
So it depends on what signal you’ve
isolated to trade with and how long that
signal holds up.
I would imagine that systems give
different results for different trading
instruments. For example, one system
may work better for equities versus
for oil futures. How do you account
for that?
You can always try to find some trad-
able signal that works across multiple
symbols and timeframes. It may not be
as effective as something that’s tailored
to a specific market, but it will probably
be more robust, and that signal’s likely to
persist longer than a signal that’s specific
to a certain timeframe or market.
Could you give me some examples of
certain market conditions that are
consistent or work well across multiple
symbols?
My approach is strictly mathematical.
I’m not trying to analyze the markets
in terms of any specific condition. It’s
a matter of whether you can confirm
that a strategy is still performing within
the performance specifications that it’s
designed to or not. If it’s not, then you
have to say that something in the market
has changed, which means it’s no longer
a valid system. It’s hard to say what a
valid system is.
When you run backtests of your trading
systems, what specific data points do
you consider?
I think it’s important to look at certain
metrics more than others. A lot of people
will maximize net profit and leave it at
that. But I think it’s helpful to have a
set of metrics that represent what I call
strategy quality. This includes things
like profit factor, maximum adverse
excursion, entry & exit efficiency, con-
sistency of results, among others. I find
that when I maximize things like that,
I tend to get better-quality strategies
that are a little more robust and hold up
better over time.
One of the things system traders tend
to do is they tend to overfit, which you
mentioned earlier, and that can have
its problems. Why is that and what are
the problems associated with it?
I think overfitting is probably the big-
gest problem system developers face. An
overfit system looks great in backtesting
but fails in real-time trading. It’s probably
most often a result of over-optimization.
But sometimes it could just be because
there’s not enough data, so you’ll be
optimizing over too little data or there
are too many parameters in the model
or strategy. In the context of trading
strategies, too little data means too few
trades.
You have to have a large-enough
sample of trades to make sure you’re
not fitting the noise. The good news is
there are a lot of techniques that can be
used to prevent overfitting and there are
ways to detect it such as looking at how
the results change on a separate segment
of data. One of the lessons I’ve learned
over the past 10 years or so of watching
progress in the machine-learning field
is that overfitting doesn’t have to be a
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deal-breaker. If you look at some of
these machine learning methods, like
deep-learning neural networks, they’ve
been extremely successful. That wouldn’t
have been the case if they hadn’t learned
to deal with overfitting. There’s a lot you
can learn just from that field. Some of
those techniques are things like mea-
suring complexity in your strategy and
making sure you don’t have an overly
complex strategy; building a strategy
over multiple data sets so it’s not tied
to one set of data; limiting the amount
of optimization, which in the machine
learning field is called early stopping;
and introducing randomness in vari-
ous ways such as considering random
combinations or random changes to
your input parameters so the results are
not too dependent on one specific set of
February 2018
Bull Flags
Pivot Points
Key Reversals
inputs. Those are the types of things I
include in my strategy-building software
to make sure it deals with overfitting
properly.
Another thing is when it comes to
developing systems, many traders
are not really too anxious to learn to
program something. How can they go
about adopting a systematic method
for their trading?
First of all, systematic trading doesn’t
have to mean a coded trading strategy.
If you have a set of rules that are suf-
ficiently well-defined that anyone who
understands them would get the same
results, then you have a systematic
method, whether it’s written on the back
of a napkin or coded into a scripting
language. But there are advantages to
coding a trading strategy. It makes it more
objective, you can backtest it, evaluate
it, and track it more easily.
But if you don’t code, you really only
have three options if you want to develop
and create your own strategies: You ei-
ther have to learn to code, pay someone
Continued on page 40
• Technical Analysis of Stocks & Commodities • 37
 Q&A

SINCE YOU ASKED

Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation
hosting independent proprietary traders, an online trading school, and the Stock-
Odds database, answers a few of your questions. To submit a question or suggest a
topic, email him at robfriesen@brighttrading.net. Selected questions will appear in
a future issue of S&C.
Rob Friesen

While You Were Sleeping...
Something changed ... it really
changed!
CryptoKitties was born of ones and
zeros, bits and bytes, and rose to lofty
heights utilizing the Ethereum platform.
You can’t help but wonder if the block-
chain, which has the power to change
companies, industries, and even nations,
is the best use of a technology.
To its credit, this “game” teaches users
how to use the blockchain and participate
in crypto currencies (if that is a good
thing). On the downside, it has risen to
become the top decentralized applica-
tion (DApp) on the platform, actually
causing network traffic to slow. Hard
to imagine in this new industrial age
that all the rage is to collect and breed
digital images in the shape and form of
cats. I think of all the global challenges
that need to be solved through technol-
ogy. My hope is that some of those who
learn through tools like this will use their
knowledge to accomplish great things
in the future.
So what happened to the world while
we were sleeping?
Physical assets depreciated. Digital
assets appreciated. Obviously, this is a
general statement, but on balance it is
true. The mindset has shifted to place
more value on digital items. But really,
can a picture on a computer screen have
more value than a Rembrandt hanging
on a living room wall?
Digital assets aren’t new and neither
are digital currencies. It is the blockchain
that has fostered the growth of the in-
dustry as well as the protection of digital
property. Distributed ledgers operating
on a blockchain have allowed people,
organizations, and nodes who don’t trust
each other to operate in a secure environ-
38 • February 2018 • Technical Analysis of Stocks & Commodities
ment. It is the blockchain mechanism to
date that has greatly fostered the change
in mindset for keeping value in a digital
form. This makes perfect sense when
you think how material “stuff” can be
stolen, damaged by weather, altered,
counterfeited, and more.
It is important to note, however, that in
this game and with many other DApps,
while application logic and execution
may be decentralized, there is still a
governing body. In CryptoKitties, it is
the CEO and COO, who can change the
algo, or issue kittens from the house for
promotional and other purposes.
Distributed ledgers
operating on a
blockchain have
allowed people,
organizations, and
nodes who don’t
trust each other to
operate in a secure
environment.
Normally, a digital image could be
tampered with. Think of all the spoof
shark pictures being passed around
through email and Facebook. But in the
case of a digital image born from ones
and zeros and then cryptographically
locked into a transaction block, it now
has a time-stamped origin and properties
that cannot be altered, erased, or revoked.
It is this kitty on the blockchain that
has found so many followers laying the
money down to buy Ethereum (ETH),
which can be used to purchase … you
guessed it … cats.
In addition, the mystique of the game
algorithm that can “breed” new kittens
adds to the excitement of that investable
item and garners participation. Their
website describes it as a “genetic algo-
rithm” and as each kitten can be either
a mother or father and also reproduce,
they would be hermaphroditic. A person
purchasing and reselling an existing
kitty, or birthing a new kitten is doing
so utilizing the new kind of Ethereum
token standard, ERC721, which is really
a “smart” contract preserving the unique
properties of the image.
In the days and years ahead, we will
probably witness many more uses of this
through trading many forms of digital
collectibles, DApps, and games. Again,
the new mindset is that digital assets have
value and in many cases, may exceed the
value of tangible and physical assets.
The purpose of my preamble was to let
you know the world had changed, which
I am sure you already knew.
So how do we apply this to trading stocks
and commodities?
There are two key items to observe
here—scarcity and abundance. Nor-
mally, when you digitize an item, you
make it widely available, as in abundant,
but certain applications and items have
the appeal of scarcity. Bitcoin is one of
the crypto assets that players perceive to
be scarce, as in a limited supply.
A company that has a unique product
that is scarce could have great margins.
A company that is disrupting an industry
by making a product or service abundant
would have low margins but be making
it on the volume or by being the vehicle
that crushes or replaces existing prod-
ucts and services with an entirely new
approach.
 Q&A
Fundamental changes are some of the
largest catalysts for stock price moves.
Look at the companies whose stocks you
own to see what innovations they have
going on. What exponential technologies
have they acquired or are developing and
implementing? Think of all the value
destruction that has plagued companies
that have been and are no more, or are
still around but surviving at a fraction of
their previous size. Remember that when
new technologies and services come out,
they are often disappointing and don’t
work as advertised, so we as consumers
and onlookers tend to abandon them.
But then, in the dark, they are improved,
implemented commercially, and spring
back out into the light, new and improved.
That is when it is often too late and the
moves are well underway.
What technologies are impacting your
companies, or have the potential to
impact your companies?
Oil is a commodity that impacts stock
and commodity traders alike. If I made
a statement that “it is the end of the oil
age,” what would that mean? No more
oil? No. We are not talking about peak
oil but rather that we are rolling over
from peak demand. There is plenty of oil
and technology helps discover more and
extract it more cheaply, but we have other
energy sources that are declining in cost
rapidly. If you believed this, you would
use this information in your analysis of
the stocks and commodities you trade
and be positioned to take advantage of
this macro.
Cryptocurrency—A digital asset used as a
transactional currency that uses cryptog-
raphy to secure its transactions, control
the creation of additional units, and to
verify the transfer of assets. Cryptocur-
rencies are a subset of digital currencies.
Bitcoin, created in 2009, was the first
decentralized cryptocurrency.
Gap—A day in which the daily range does not
overlap the previous day’s daily range.
Hard fork—When a blockchain diverges
into two potential paths forward. Those
who use the blockchain may choose to
support one choice over the other. If
a network permanently splits creating
I encourage you to think about every
symbol you trade in light of the exponen-
tial availability of new products, services,
commodities, and the disruption it brings.
There can be significant persistence of
trends caused by these fundamental and
macro influences. Think also of any
areas of scarcity.
Let’s talk a bit more about bitcoin and
other crypto currencies, since they are
all the rage.
The perception is
scarcity but the
reality is there will
be thousands more
cryptos, and even
bitcoin will have
dozens of hard forks
creating more bitcoin-
related products.
1. The perception is scarcity but the
reality is there will be thousands
more cryptos, and even bitcoin will
have dozens of hard forks creating
more bitcoin-related products. I
ultimately view cryptos in the light
of abundance, therefore having a
deflationary effect.
2. If you are going to trade cryptos,
do your homework and purchase on
exchanges that allow limit orders.
Market orders are disadvantaged,
as you know.
two blockchain histories, two separate
currencies could emerge.
Overfitting—The parameters of a trading
system are selected to return the highest
profit over the historical data.
Price relative indicator—An indicator that
compares the performance of one security
against that of another by plotting the two
as a ratio. When the ratio rises, the first
security in the ratio can be considered
as outperforming, and underperforming
when the ratio is falling.
Price-weighted index—An index in which
component stocks are weighted by their
individual prices, with lower-priced
February 2018
3. Understand the maker-taker models
and transaction costs and other
fees.
4. Understand the handicaps of the
game and all the rules of engage-
ment.
5. Examine the exchange arbitrage,
limitations, inefficiencies, and types
of players on each exchange.
6. Remember, it’s all speculation as no
one knows the future.
7. It’s global and it’s 24/7.
Crypto currencies and crypto assets,
which fall under the commodity ban-
ner, are getting so much focus by media
and some market participants that they
could drain capital flows away from
traditional instruments. Still, there are
some traditional products like futures,
options, and exchange traded funds that
have been formed to track these digital
products.
In summary, things are moving rapidly,
and it takes extra time and effort to stay
informed and ride the wave of change.
There are many converging technologies
that create greater pressures, disruption,
and opportunity. I expect there to be
lower volatility persisting overall, but
there will be green shoots of opportunity
popping up quickly to live for a short
time before withering, replaced by yet
another green shoot.
stocks having a smaller impact than
those with higher prices.
Stationary/nonstationary time series—
Stationary implies that no trend is
observed in the time series, identified
when the time series has a constant mean
and variance. Using nonstationary time
series for analysis or modeling could yield
misleading results, as if comparing apples
with oranges. Nonstationary data is often
transformed into stationary data using
some sort of transformation process so
that data time series can be more fairly
compared.
• Technical Analysis of Stocks & Commodities • 39
Apirine/WEEKLY & DAILY PPO Further reading
Continued from page 11 Apirine, Vitali [2017]. “Weekly & Daily MACD,” Technical
Analysis of Stocks & Commodities, Volume 35: Decem-
Vitali Apirine is a programmer engineer with an interest ber.
in technical analysis, especially the application of relative ‡MetaStock
strength index to trading. He may be reached at vitapirine@ ‡See Editorial Resource Index
mediacombb.net. †See Traders’ Glossary for definition

The code given in this article is available in the Article Code section
of our website, www.Traders.com.

See our Traders’ Tips section beginning on page 46 for commentary

and implementation of Vitali Apirine’s technique in various technical
analysis programs. Accompanying program code can be found in the
Traders’ Tips area at Traders.com.

GiLBUrT/pinBALL
Continued from page 28 The simple truth is that the
the market. The setup for this move—based on Elliott wave market was in the heart of what
analysis and Fibonacci pinball—had been in place for some we elliotticians call a “third
time, with the market providing some twists and turns along wave,” and they are relentless
the way, most of which we were able to identify before they and the most powerful segment
occurred throughout the year.
of a five-wave elliott structure.
Avi Gilburt is an Elliott wave technical analyst and cofounder
of ElliottWaveTrader.net, a live trading room offering his
intraday market analysis (including a focus on the emini
S&P 500, metals, oil, USD & VXX), an interactive member- cal Analysis of StockS & commoditieS, Volume 31:
analyst forum, and a library of Elliott wave educational March.
content. Gilburt is a frequent contributor to MarketWatch. [2013]. “News Events, Earnings, And Economic Num-
com, SeekingAlpha.com, Nasdaq.com, and other sites. He bers,” Technical Analysis of StockS & commoditieS,
can be reached at info@elliottwavetrader.net. Volume 31: June.
‡StockCharts.com, ‡ElliottWaveTrader.net
Further reading ‡See Editorial Resource Index
Gilburt, Avi [2013]. “Is It Too Late To Jump In?” Techni-

inTerVieW/MiCHAeL BrYAnT
Continued from page 37
else to do it, or use some kind of a code
generating tool like the one I sell.
Obviously, I’m biased towards the
latter approach, but even with that ap-
proach, there’s still a learning curve. You
still have to understand the basic logical
components of a trading strategy, the
metrics that you use to evaluate them,
and whatever process the tool uses to
develop those strategies. So there’s still
a lot to learn, but all of those are part
of the strategy development process in
general, regardless of whether you do
40 • February 2018 • Technical Analysis of Stocks & Commodities
Overfitting basically is
a result of fitting the
the coding yourself or let the noise rather than the
computer do it.
signal in the market, and
Thank you so much for speak- it typically comes from
ing with us, Mike. over-optimization.
Further reading
Bryant, Michael B. [2001]. “Mon-
ey Management Indicators,” Techni- Analysis of StockS & commoditieS,
cal Analysis of StockS & commodi- Volume 19: February.
tieS, Volume 19: October.
______ [2001]. “Position Sizing With
Monte Carlo Simulation,” Technical
 XTF.COM
LSEG Information Services
(US) Inc.
Email: support@xtf.com
Internet: www.xtf.com
Requirements: Windows 8 or
higher and Internet access
Product: Online software platform
providing technical and fundamental
research on the US ETF universe
incorporating a proprietary rating
service
Price: The basic service is free. Two
premium services are available: $39/
mo. for the gold level and $99/mo.
for the platinum level.
FIGURE 1: ETF RATINGS SERVICE. The five main tabs enable the user to access the remaining sections of
the website. This page provides a quick look at the top trending ETFs, stocks, and investment objectives.
by Leslie N. Masonson

ETF growth has been remarkable since
the SPDR S&P 500 ETF (SPY) introduc-
tion on January 22, 1993. Since then, the
number of domestic ETFs has increased
to 2,097, valued at $3.28 billion, offered
by 119 fund sponsors and listed on four
exchanges, according to XTF.com. Year
to date (as of November 6, 2017), there
have been 206 new funds launched with
125 delistings, with a net increase of
$730.9 billion in net assets.
In 2001, the founders of XTF.com
began researching ETFs and develop-
ing analysis software. Since 2008, the
company has developed one of the most
sophisticated, easy-to-use, rules-based,
and highly rated ETF evaluation web-
sites, tracking all US ETFs, with daily
data updates. The website excels in data
manipulation and search. Moreover, no
vendor ads appear on the website, nor are
fees accepted from ETF providers, help-
ing to ensure the information provided
is unbiased.
After signing up for the basic free ser-
vice or one of the two premium levels, the
first page that opens is the ETF Ratings
Service (Figure 1). The main sections of
the website are shown across the top of
the screen (not shown in this view of the
screen): Ratings, Marketplace, Research,
Heatmaps, and Education Center.
This screen lists the top 10 trending
ETFs for the past seven days (or 30 days
or all-time), the top 10 trending stocks,
and the top 10 trending investment ob-
jectives (for example, retail, Vanguard,
technology, and financial). By keying in
any ticker symbol in the upper search box,
such as QQQ, the extensive amount of
EFT data available becomes apparent.
XTF proprietary ratings
Figure 2 provides a snapshot of the ETF
ratings screen for PowerShares QQQ.

FIGURE 2: ETF RATINGS SCREEN FOR QQQ. This screen provides the key metrics for QQQ with the XTF proprietary rating of 7.5 (out of 10). The most useful tabs are
the “structural integrity” and “investment metrics” tabs.

February 2018 • Technical Analysis of Stocks & Commodities • 41

 FIGURE 3: ETF EXPLORER. Here, the user can specify any of five different investment objectives, as well as filter the results with seven options. All the ETFs meeting
the criteria appear in the bottom half of the screen with their key metrics.
The overall XTF rating at the top left
of the page combines the structural
integrity and investment metrics that
includes 1,407 ETFs in its asset class.
QQQ’s XTF rating is 7.5 on a scale of 1
to 10 (best). This overall rating allows
users to compare ETFs on a level play-
ing field, encompassing all critical data
elements. This proprietary rating, based
on a multifactor algorithm, is relied on
by institutional investors, advisors, hedge
funds, traders, and individuals in per-
forming their due diligence on potential
ETF purchases and sales.
The current screen shown is labeled
“structural integrity” and provides 26
ETF data points (many not shown due
to space limitations). The key metrics
include expense ratio, bid–ask spread,
tracking error, level of diversification,
and tax efficiency. Note that QQQ is
ranked in the 95th percentile among all
equity ETFs over the past six months for
structural integrity.
The next tab to the right is investment
metrics. QQQ ranks in the 41st percen-
tile. The metrics include risk-adjusted
performance (Sharpe ratio), annualized
return, standard deviation, short-term
momentum (ratio of one-month to six-
month price appreciation), and earnings
and dividend yield, if available. The
metrics are provided on the screen for
four timeframes (for example, six months
and one, three, and five years). For those
42 • February 2018 • Technical Analysis of Stocks & Commodities
users who want more information on
XTF’s ratings methodology, an 11-page
comprehensive explanation is provided
under the methodology tab.
Next is the fund holdings tab that pro-
vides a complete list of the 108 stocks that
make up QQQ with their ticker symbols.
Also provided is each stock’s percentage
weighting in the QQQs, its sector, and
industry. By clicking on any ticker sym-
bol, such as AAPL (for Apple Inc.), the
“ETF insider” screen (subtab under the
research tab on the home page) appears.
Users will find this
information very useful
for constructing a
portfolio of ETFs that
are made up of a high
percentage of specific
stocks.
All the ETFs that hold AAPL shares, for
example, are shown with their ETF ticker
symbol, the XTF proprietary rating of
that ETF, the name of the ETF, market
cap in dollars, a link to a performance
chart, and the percentage weighting of
AAPL in each of the ETFs.
On the day I accessed this data, there
were 255 ETFs that held AAPL shares
and they held 5.6% of its outstanding
shares. The three XTF top-rated ETFs
(9.4 rating or above) holding about 14%
of AAPL in each of their portfolios
were Select SPDR Technology (XLK),
iShares Morningstar Large-Cap (JKD),
and Vanguard Information Technology
(VGT).
Users will find this information very
useful for constructing a portfolio of
ETFs that are made up of a high percent-
age of specific stocks. For example, if
you wanted to buy ETFs that held a large
position in Tesla, Amazon, Priceline
Group Inc., and Mastercard Inc., that
would be extremely easy to do using
the “fund holdings” screen. Just key in
the ticker symbol of the stocks one by
one and the ETFs that hold these stocks
pop up on the screen with their percent
holdings. The ETFs that match these
criteria are, in order: ARK Industrial
Innovation ETF (ARKQ) holding 8.68%
of its portfolio in TSLA; VanEck Vec-
tors Retail ETF (RTH) holding 18.56%
of Amazon; PowerShares NASDAQ
Internet Portfolio (PNQI) holding 7.8%
of Priceline Group Inc.; and PowerShares
DWA Financial Momentum (PFI) hold-
ing 6.48% of Mastercard Inc.
The “fund exposure” screen provides
both sector and industry exposure in
a chart showing the percentage of the
holdings in both those categories in the
top portion. Other data shown on this
page includes exposure percentages to
FIGURE 4: ETF COMPARISON. Here, a comparison of six dividend/income ETFs is provided with 29 metrics. Three of the data points on the bottom of the screen are
premium-priced.
style, capitalization, region and country,
emerging markets, and currency, among
others.
The upper three colored tabs under
the XTF rating are performance, volume
analysis, and view fact sheet. They all
provide additional information. For
example, the performance tab shows
a simple line chart over various user-
defined time periods. The chart’s value
and usefulness could be improved if the
website was able to use the free access
to StockCharts.com utilizing the more
useful candlestick charts and a few mov-
ing averages.
“Marketplace” tab
This tab opens to four subtabs. The first
one offers a statistical summary of the
aggregate ETF universe since inception,
indicating the number of ETFs and their
total assets, as well as year-to-date and
the current month numbers.
The second subtab lists all newly is-
sued ETFs for the current month with
the 11 other months archived for instant
viewing. As with most other screens, the
user can download the screen data to a
spreadsheet, as well as print a fact sheet
of that information.
The third subtab is fund sponsors and
index providers that lists all the fund
sponsors and index providers with their
market cap in two separate lists on the
left side of the screen. The main screen
for fund sponsors lists all the 2,074 ETFs
with their ticker symbols, description,
XTF rating (in order from high to low),
expense ratio, performance chart link,
market cap, and index provider’s name.
Also, the XTF rating column can be
sorted from low to high as well, however,
the newest ETFs with low asset size
and other characteristics do not have a
current rating.
Research and heatmaps
for useful analytics
In addition to the proprietary XTF
rating mentioned earlier, the in-depth
analytical capability of this software is
embedded in the research and heatmaps
tabs. I would have liked to provide an
additional 10 more screenshots here of
all the analytics available, but due to
space limitations that is not possible.
Therefore, I’ll comment on a few of the
most dynamic features.
The user could have a field day ana-
lyzing the ETF marketplace from many
perspectives that are not offered by other
services, to my knowledge. By clicking
on any one or more of the different op-
tions in each column as well as any of the
filters, the user can extract those ETFs
that make it through the process, thereby
saving hours of research time, compared
to a strictly manual effort.
Figure 3 is the “ETF explorer” view.
Here you can see the different investment
objectives that can be researched based
on geography, investment philosophy,
February 2018 • Technical Analysis of
asset class, index composition, and
leverage used. Also, there are filters
that can be applied to further limit the
universe including country of domicile;
ETF, ETN, or exchange traded managed
fund; currency-hedged or not; socially
responsible or not; and fund sponsor
(120) and index provider (140).
The main listing on the bottom half
of the page shows the list of ETFs in
the overview screen for the “dividend/
income” category (which I selected)
under investment philosophy (after
clicking on enhanced strategy). There
were 144 ETFs that met those criteria
with DGRO, SCHD, and VYM topping
the category with an XTF rating of 10.
Additional information from the blue
“performance” option (price change over
multiple periods and percentage above
26-day and 200-day EMAs), fund flows
(over similar periods), and customization
using specific criteria can be obtained by
clicking on any of those tabs.
One very useful feature is the listing
of “similar ETFs” that you can compare
to the ones shown. For example, ETFs
similar to SCHD are OUSA, DJD,
EDOW, PFM, and VYM. You can put a
checkmark in the box to the left of SCHD
and in the column labeled “similar ETFs”
on the same line as SCHD. Then just go
to the “compare ETFs” box right above
the similar ETFs and click on the second
picture, which opens as “view table” to
see the evaluation.
Stocks & Commodities • 43
 Figure 4 provides a
view of this screen (called
“ETF comparison tool”)
containing these six
ETFs. Up to six ETFs can
be compared at any time
for 58 different data points
shown on the left side of
the screen. According to
this comparison, SCHD
(Charles Schwab ETF)
had a maximum XTF
rating of 10.0 while VYM
(Vanguard ETF) was also
rated at 10.0 and the oth-
ers below 8.2. Moreover,
SCHD’s expense ratio
was the lowest at 0.05%
with the annual yield the
next-to-highest at 2.76%.
Also, this ETF contained
99 companies compared
to 398 for VYM. The
one-year performance of
SCHD was 21.87% com-
pared to 18.52% for VYM,
while the five-year per-
formance was 102.52%
vs. 98.03% (not shown on
this partial screenshot),
respectively. Therefore,
an investor comparing FIGURE 5: INDUSTRIES HEATMAP. The screen shows the 10 sectors with their industry components. The performance period
was set to one year. Aluminum and commodity chemicals had the best performance in the “basic materials” group.
these ETFs can easily see
that SCHD has a slight
overall edge. And the whole process to (not shown here) changes to reflect that trader, is president of Cash Management
reach this conclusion only takes a minute selection. The user can then click on the Resources, a financial consulting firm
or two, certainly much faster than with blue ETF link or the components link that focuses on ETF strategies. He is the
any other method available. to bring up more data. author of Buy—Don’t Hold: Investing
The heatmaps main tab opens up to The firm is working on an ETF back- With ETFs Using Relative Strength To
a screen with multiple choices. There testing application that will be available Increase Returns With Less Risk; and
are various heatmap options based on within a few months. This added feature All About Market Timing, as well as
regions or country, geography, asset class will provide even further value to a top- Day Trading On The Edge. His website
and sectors, industries, commodities, notch product. Moreover, in the works is is www.buydonthold.com, where he
and currency. I clicked on the thematic the expansion of their coverage to non-US writes a weekly blog.
global option. Figure 5 illustrates the ETFs with Canadian and European ETFs
heatmap for industries broken down by coming onboard in December 2017, and Further reading
10 commonly used sector categories set Asia and other countries in future months. Masonson, Leslie N. [2017]. “All-
to the YTD performance tab. Clearly, in Overall, this high-quality, user-friendly Inclusive ETF Websites,” Technical
the upper part of the screen, the leading website offers users a comprehensive Analysis of Stocks & Commodities,
industries in one-month performance resource to evaluate all aspects of the Volume 35: September.
(dark green color) are in the consumer ETF marketplace, with a unique rules- ‡XTF.com
cyclical (television and radio, followed based rating system to help you select ‡See Editorial Resource Index
by movies and entertainment, depart- the most appropriate ETF that meets your
ment stores, and publishing). By high- requirements.
lighting any choice, the user will notice
that a box on the right side of the screen Leslie N. Masonson, an active ETF
44 • February 2018 • Technical Analysis of Stocks & Commodities
Yang/Sector Rotation
Strategies
Continued from page 25

Recap
The results from this study show that the
best momentum strategy does not generate
higher returns relative to the benchmark.
It was the fifth-best momentum strategy
that historically generated higher returns
as well as lower risk/volatility. Note that
the best and worst momentum strategies
have a tendency to underperform relative
to other strategies. If you’re looking to
minimize risk when investing in equities,
you could apply a moving average filter.
And finally, if you’re looking to let your
money work for you, applying an equal- FIGURE 5: ANNUAL RETURNS OF EQUAL-WEIGHTED VS. S&P 500. The horizontal line represents the
weighted technique may be the most average annual return of the respective tactics.
rewarding investment strategy yet.
ing,” April 1. Available at SSRN: https://ssrn.com/ab-
Marisa Yang is currently a student with a keen interest in stract=1585517 or http://dx.doi.org/10.2139/ssrn.1585517
capital market applications of big data and statistical infer- O’Shaughnessy, James [2011]. What Works On Wall Street,
ence. She may be reached at marisa.yang429@gmail.com. 4th ed., McGraw-Hill Education, November 14.

Explore Your Options

Further reading
Faber, Meb [2010]. “Relative Strength Strategies For Invest-

Monitoring the overall level of

implied volatility for the options
on a given security allows us to
objectively measure whether
options on that security are
‘cheap’ or ‘expensive.’

KAEPPEL
Continued from page 29
a trader not only takes advantage of
relatively low options prices but also has
the potential to profit from a subsequent
increase in implied volatility (which
would serve to inflate options prices).
Vega is used to figure out how much
the price of an option will move when
there’s a change of one percentage point
in IV. So check your option’s vega to see
how much the options will gain in time
premium.
On the other hand, if IV is “high”
on a histori-
cal basis, as
in the case
of Autozone
(AZO) in Fig-
FIGURE 2: HIGH IMPLIED VOLATILITY (IV). The 90-day at-the-money IV in AZO is
ure 2, we can making a new four-year high.
typically con-
clude that op-
tions are “expensive” (that is, the amount decrease in implied volatility (which
of time premium built into the option would serve to deflate option prices).
price is high) and therefore, strategies that Check your option’s vega to figure out
involve “selling premium” are typically how much the options will lose in time
preferred. By selling “expensive” op- premium with a one-percentage-point
tions, a trader not only takes advantage of decrease in IV.
relatively high options prices but also has
the potential to profit from a subsequent
February 2018 • Technical Analysis of Stocks & Commodities • 45
 For this month’s Traders’ Tips, the
focus is Vitali Apirine’s article in this
issue, “Weekly & Daily Percentage
Price Oscillator.” Here, we present
the February 2018 Traders’ Tips
code with possible implementa-
tions in various software. New this
month is code for Quantacula Studio software.
The code for the following Traders’ Tips selections is
posted here:
• Traders.com  Home–S&C Magazine 
Traders’ Tips
The Traders’ Tips section is provided to help readers im-
plement a selected technique from an article in this issue
or another recent issue. The entries here are contributed
by software developers or programmers for software that Figure 1: TRADESTATION. Here is a daily chart of EIX with the WeeklyAndDai-
is capable of customization. lyPPO indicator applied.

WM( 0 ),
DM( 0 ) ;

WeeklyFastValue =
F TRADESTATION: FEBRUARY 2018 TRADERS’ TIPS CODE XAverage( Price, WeeklyFastLength ) ;
In “Weekly & Daily Percentage Price Oscillator” in this issue, WeeklySlowValue =
author Vitali Apirine expands on an idea he introduced in the XAverage( Price, WeeklySlowLength ) ;
December 2017 issue of Stocks & Commodities that used DailyFastValue =
XAverage( Price, DailyFastLength ) ;
the classic MACD indicator. While the percentage price oscil- DailySlowValue =
lator discussed in this issue and the MACD technique from XAverage( Price, DailySlowLength ) ;
his article December 2017 issue (“Weekly & Daily MACD”)
are somewhat similar, Apirine notes that the percentage price WM = iff( WeeklySlowValue <> 0, 100 *
oscillator has advantages when used with longer-term charts. ( WeeklyFastValue - WeeklySlowValue )
In addition, the author shows that due to its construction, the / WeeklySlowValue, 0 ) ;
percentage price oscillator is well-suited to comparing differ- DM = iff( WeeklySlowValue <> 0, 100 *
( DailyFastValue - DailySlowValue )
ent securities, whereas the used of the MACD as described in / WeeklySlowValue, 0 ) ;
his previous article is better suited to identifying overbought
and oversold levels of a single security. Plot1( WM, "Weekly PPO" ) ;
Here, we are providing some TradeStation EasyLanguage Plot2( WM + DM, "Daily PPO" ) ;
code for an indicator based on the author’s ideas. Plot3( 0, "ZL" ) ;

Indicator: WeeklyAndDailyPPO To download the EasyLanguage code please visit our

TradeStation and EasyLanguage support forum. The files
// TASC FEB 2018 for this article can be found here: https://community.trades-
// Weekly and Daily PPO
tation.com/Discussions/Topic.aspx?Topic_ID=142776. The
// Vitali Apirine
filename is “TASC_FEB2018.ZIP.”
inputs: For more information about EasyLanguage in general,
Price( Close ), please see http://www.tradestation.com/EL-FAQ.
WeeklyFastLength( 60 ), A sample chart is shown in Figure 1.
WeeklySlowLength( 130 ), This article is for informational purposes. No type of trading
DailyFastLength( 12 ), or investment recommendation, advice, or strategy is being made,
DailySlowLength( 26 ) ; given, or in any manner provided by TradeStation Securities or
its affiliates.
variables: —Doug McCrary
WeeklyFastValue( 0 ), TradeStation Securities, Inc.
WeeklySlowValue( 0 ), www.TradeStation.com
DailyFastValue( 0 ),
DailySlowValue( 0 ),

46 • February 2018 • Technical Analysis of Stocks & Commodities

F eSIGNAL: FEBRUARY 2018 TRADERS’ TIPS CODE
For this month’s Traders’ Tip, we’ve provided a study based
on the formula described in Vitali Apirine’s article in this
issue, “Weekly & Daily Percentage Price Oscillator.” In the
article, the author presents a modification of the percentage
price oscillator.
The study contains formula parameters that may be con-
figured through the edit chart window (right-click on the
chart and select “edit chart”). A sample chart is shown in
Figure 2.
To discuss this study or download a complete copy of the
formula code, please visit the EFS library discussion board
forum under the forums link from the support menu at www.
esignal.com or visit our EFS KnowledgeBase at http://www.
esignal.com/support/kb/efs/. The eSignal formula script FIGURE 2: eSIGNAL. Here is an example of the study plotted on a daily chart of
(EFS) is also available for copying & pasting from the $RUT.
Stocks & Commodities website, traders.com, in the Trad-
ers’ Tips section and is also shown here.
setStudyTitle("W&D PPO");
setCursorLabelName("WeeklyPPO", 0);
/********************************* setCursorLabelName("RelativePPO", 1);
Provided By: setDefaultBarFgColor(Color.RGB(0,148,255), 0);
eSignal (Copyright c eSignal), a division of Interactive setDefaultBarFgColor(Color.RGB(255,106,0), 1);
Data
Corporation. 2016. All rights reserved. This sample eSig- var x=0;
nal
Formula Script (EFS) is for educational purposes only and fpArray[x] = new FunctionParameter("nFast", Function-
may be Parameter.NUMBER);
modified and saved under a new file name. eSignal is not with(fpArray[x++]){
responsible setName("Fast Length");
for the functionality once modified. eSignal reserves the setLowerLimit(1);
right setDefault(12);
to modify and overwrite this EFS file with each new re- }
lease.
fpArray[x] = new FunctionParameter("nSlow", Function-
Description: Parameter.NUMBER);
Weekly & Daily Percentage Price Oscillator by Vitali with(fpArray[x++]){
Apirine setName("Slow Length");
setLowerLimit(1);
Version: 1.00 12/04/2017 setDefault(26);
}
Formula Parameters: Default:
Fast Length 12 fpArray[x] = new FunctionParameter("nMult", Function-
Slow Length 26 Parameter.NUMBER);
Multiplier 5 with(fpArray[x++]){
setLowerLimit(1);
setDefault(5);
Notes: setName("Multiplier");
The related article is copyrighted material. If you are not a }
subscriber
of Stocks & Commodities, please visit www.traders.com. }

**********************************/ var bInit = false;

var bVersion = null;
var fpArray = new Array();
var xSlowDailyEMA = null;
function preMain() { var xFastDailyEMA = null;
var xSlowWeeklyEMA = null;
setPriceStudy(false); var xFastWeeklyEMA = null;

February 2018 • Technical Analysis of Stocks & Commodities • 47

 }

function verify(){

var b = false;
if (getBuildNumber() < 779){

drawTextAbsolute(5, 35, "This study requires version

10.6 or later.",
Color.white, Color.blue, Text.
RELATIVETOBOTTOM|Text.RELATIVETOLEFT|Text.
BOLD|Text.LEFT,
null, 13, "error");
drawTextAbsolute(5, 20, "Click HERE to upgrade.@
URL=http://www.esignal.com/download/default.asp",
Color.white, Color.blue, Text.
RELATIVETOBOTTOM|Text.RELATIVETOLEFT|Text.
BOLD|Text.LEFT,
null, 13, "upgrade");
return b;
Figure 3: THINKORSWIM. This sample chart shows the WeeklyAndDailyPPO as }
well as the WeeklyAndDailyMACD plotted below a one-year daily chart of the Rus- else
sell 2000 index. b = true;

return b;
}
var xDailyPPO = null;
var xWeeklyPPO = null;
—Eric Lippert
function main (nFast, nSlow, nMult){ eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
if (bVersion == null) bVersion = verify();
if (bVersion == false) return;

if (getBarState() == BARSTATE_ALLBARS){
bInit = false;
}

if (!bInit){ F THINKORSWIM: FEBRUARY 2018 TRADERS’ TIPS CODE

Thinkorswim has the ability to build the very weekly & daily
xFastDailyEMA = ema(nFast); percentage price oscillator studies that are featured in the ar-
xSlowDailyEMA = ema(nSlow); ticle “Weekly & Daily Percentage Price Oscillator” by Vitali
xFastWeeklyEMA = ema(nFast * nMult);
xSlowWeeklyEMA = ema(nSlow * nMult); Apirine in this issue.
We built this study using our proprietary scripting lan-
xDailyPPO = efsInternal("CalcPPO", xFastDailyEMA, guage, thinkscript. We have made the loading process ex-
xSlowDailyEMA); tremely easy—simply click on the link: http://tos.mx/sAv0RV
xWeeklyPPO = efsInternal("CalcPPO", xFastWeekly- and then choose to view the thinkScript strategy.
EMA, xSlowWeeklyEMA);
addBand(0, PS_DASH, 1, Color.grey, 2); The chart in Figure 3 shows the WeeklyAndDailyPPO as
bInit = true; well as the WeeklyAndDailyMACD plotted below a one-
} year daily chart of the Russell 2000 index.
—thinkorswim
var nDailyPPO = xDailyPPO.getValue(0); A division of TD Ameritrade, Inc.
var nWeeklyPPO = xWeeklyPPO.getValue(0); www.thinkorswim.com

if (nDailyPPO != null && nWeeklyPPO != null)

return [nWeeklyPPO, (nWeeklyPPO + nDailyPPO)];
}

function CalcPPO (xFastEMA, xSlowEMA){

var nFastEMA = xFastEMA.getValue(0);

var nSlowEMA = xSlowEMA.getValue(0); F NINJATRADER: FEBRUARY 2018 TRADERS’ TIPS CODE
The WnDPPO indicator, as discussed in the article “Weekly
if (nFastEMA != null && nSlowEMA != null) & Daily Percentage Price Oscillator” by Vitali Apirine in this
return ((nFastEMA - nSlowEMA) / nSlowEMA) * 100; issue, is available for download at the following links for

48 • February 2018 • Technical Analysis of Stocks & Commodities

 F WEALTH-LAB: FEBRUARY 2018 TRADERS’ TIPS CODE
The weekly & daily PPO (W&D PPO) oscillator described
by Vitali Apirine in his article in this issue, “Weekly & Daily
Percentage Price Oscillator,” combines the two PPO oscillators
(weekly and daily) on a daily chart (Figure 5).
After updating our TASCIndicators library to v2018.01
(or higher), the RelativeDailyPPO and WeeklyPPO indica-
tors can be found under the TASC Magazine Indicators
group. You can plot them on a chart or use as an entry or exit
condition in a rule-based strategy without having to program
any code yourself.
The following strategy code will help you plot the indica-
tors on a chart:

Wealth-Lab strategy code (C#):

using System;
Figure 4: NINJATRADER. The WnDPPO indicator is shown alongside the W&D using System.Collections.Generic;
MACD indicator on a daily ES chart between August and December 2017. using System.Text;
using System.Drawing;
using WealthLab;
using WealthLab.Indicators;
NinjaTrader 8 and NinjaTrader 7: using TASCIndicators;

NinjaTrader 8: www.ninjatrader.com/SC/February2018SCNT8.zip namespace WealthLab.Strategies

NinjaTrader 7: www.ninjatrader.com/SC/February2018SCNT7.zip {
public class MyStrategy : WealthScript
Once you’ve downloaded the file, you can import the in- {
private StrategyParameter paramDailyLength1;
dicator into NinjaTader 8 from within the Control Center by private StrategyParameter paramDailyLength2;
selecting Tools → Import → NinjaScript Add-On and then private StrategyParameter paramWeeklyLength1;
selecting the downloaded file for NinjaTrader 8. To import private StrategyParameter paramWeeklyLength2;
into NinjaTrader 7, from within the Control Center window,
select the menu File → Utilities → Import NinjaScript and public MyStrategy()
{
select the downloaded file. paramDailyLength1 = CreateParameter("Daily
You can review the indicator’s source code in NinjaTrader Length 1",12,2,300,20);
8 by selecting the menu New → NinjaScript Editor → Indi- paramDailyLength2 = CreateParameter("Daily
cators from within the Control Center window and selecting Length 2",26,2,300,20);
the WnDPPO file. You can review the
indicator’s source code in NinjaTrader
7 by selecting the menu Tools → Edit
NinjaScript → Indicator from within
the Control Center window and select-
ing the WnDPPO file.
NinjaScript uses compiled DLLs that
run native, not interpreted, which pro-
vides you with the highest performance
possible.
A sample chart displaying the indica-
tor can be seen in Figure 4.
—Raymond Deux & Jim Dooms
NinjaTrader, LLC
www.ninjatrader.com

Figure 5: WEALTH-LAB. Here’s an example of the oscillators applied to a daily chart of ^RUT (Russell 2000).

February 2018 • Technical Analysis of Stocks & Commodities • 49

 Figure 6: NEUROSHELL TRADER. This NeuroShell Trader chart shows the weekly
and daily percent price oscillator.
FIGURE 7: UPDATA. Here, the W&D PPO is applied to the ETF SPY in daily reso-
lution. Divergence with the underlying price action and indicator is shown with the
blue horizontal.
paramWeeklyLength1 = CreateParameter("Weekly
Length 1",60,2,300,20);
paramWeeklyLength2 = CreateParameter("Weekly 800+ indicators. Simply select new indicator from the insert
Length 2",130,2,300,20); menu and use the indicator wizard to set up the following
} indicators:

protected override void Execute() WM: Multiply( Divide( Subtract( ExpAvg(Close, 60),
{ ExpAvg(Close, 130) ), ExpAvg(Close, 130) ),100)
var RDM = RelativeDailyPPO.
Series(Close,paramDailyLength1. DM: Multiply( Divide( Subtract( ExpAvg(Close, 12),
ValueInt,paramDailyLength2.ValueInt, ExpAvg(Close, 26) ), ExpAvg(Close, 130) ),100)
paramWeeklyLength1.
ValueInt,paramWeeklyLength2.ValueInt); WM+DM: Add2( WM, DM )
var WM = WeeklyPPO.
Series(Close,paramWeeklyLength1.
ValueInt,paramWeeklyLength2.ValueInt); Users of NeuroShell Trader can go to the Stocks & Com-
modities section of the NeuroShell Trader free technical
HideVolume(); LineStyle solid = LineStyle.Solid; support website to download a copy of this or any previous
ChartPane paneWDPPO = CreatePane( Traders’ Tips.
40,true,true ); A sample chart is shown in Figure 6.

—Marge Sherald, Ward Systems Group, Inc.
PlotSeries( paneWDPPO,RDM,Color.
301 662-7950, sales@wardsystems.com
FromArgb(255,0,100,0),LineStyle.Solid,2 );
PlotSeries( paneWDPPO,WM,Color. www.neuroshell.com
FromArgb(255,0,0,0),LineStyle.Solid,2 );
DrawHorzLine( paneWDPPO,0,Color.
Blue,LineStyle.Solid,1 );
}
} F UPDATA: FEBRUARY 2018 TRADERS’ TIPS
} CODE
—Eugene (Gene Geren), Wealth-Lab team This month’s Traders’ Tip is based on the article by Vitali
MS123, LLC Apirine in this issue, “Weekly & Daily Percentage Price Os-
www.wealth-lab.com cillator.”
In the article, Apirine proposes refinements to traditional
daily and weekly timeframed oscillators constructed from
different-period exponential averages, summing them to
produce an oscillator that highlights divergences with price
F NEUROSHELL TRADER: FEBRUARY 2018 action in a clearer way.
TRADERS’ TIPS CODE The Updata code based on this article is in the Updata li-
The weekly and daily percent price oscillator brary and may be downloaded by clicking the custom menu
described by Vitali Apirine in his article in this issue can and indicator library. Those who cannot access the library
be easily implemented with a few of NeuroShell Trader’s due to a firewall may paste the code shown here (which
50 • February 2018 • Technical Analysis of Stocks & Commodities
you can copy from the Stocks & Commodities website at
www.traders.com in the Traders’ Tips section) into the Up-
data custom editor and save it.
A sample chart is shown in Figure 7.

PARAMETER "Period 1" #PERIOD1=60

PARAMETER "Period 2" #PERIOD2=130
PARAMETER "Period 3" #PERIOD3=12
PARAMETER "Period 4" #PERIOD4=12
NAME "W&D PPO" ""
@WM=0
@DM=0
FOR #CURDATE=0 TO #LASTDATE Figure 8: Quantacula. This screenshot shows how to add the weekly and daily
PPO indicator extension from the Quantacula.com website.
@WM=100*(EAVE(#PERIOD1)-EAVE(#PERIOD2))/
EAVE(#PERIOD2)
@DM=100*(EAVE(#PERIOD3)-EAVE(#PERIOD4))/
EAVE(#PERIOD2)
@PLOT=@WM+@DM
NEXT

—Updata support team

support@updata.co.uk
www.updata.co.uk

F Quantacula STUDIO: FEBRUARY 2018 TRADERS’ TIPS

CODE
We’ve implemented the weekly and daily PPO indicators that
are discussed in “Weekly & Daily Percentage Price Oscillator”
Figure 9: Quantacula. In this example chart, WPPO is used to indicate up-
by Vitali Apirine in this issue as a free extension in Quantacula trends and downtrends.
Studio and the Quantacula website.
If you want to use the indicators when building models on
the Quantacula website, simply locate the extension in the {
Market Place, and press the add button (Figure 8). wppo = new WPPO(bars.Close, 60, 130);
You can also install the extension onto your computer if dppo = new DPPO(bars.Close, 12, 26, 130);
wdppo = new WDPPO(bars.Close, 12, 26, 60, 130);
you are using Quantacula Studio. Click the install link on
Plot(wppo);
the product’s page to install the extension The next time you Plot(dppo);
open Quantacula Studio, you will see three new indicators in Plot(wdppo);
your indicator list: WPPO, DPPO, and W+DPPO. Use these }
indicators as you would any other—drag and drop them onto
//determine trend and set background color
charts, use them in building block conditions, and in your
public override void Execute(BarHistory bars, int idx)
C# coded models. Figure 9 demonstrates a model that uses {
WPPO to identify uptrends and downtrends. bool uptrend = ConsecUp.Calculate(idx, wppo, 1) >= 4;
bool downtrend = ConsecDown.Calculate(idx, wppo, 1)
Quantacula CODE >= 4;
using QuantaculaBacktest; if (uptrend)
using QuantaculaCore; SetBackgroundColor(idx, Color.FromArgb(220, 255,
using QuantaculaIndicators; 220));
using System.Drawing; else if (downtrend)
using WandDPPO; SetBackgroundColor(idx, Color.FromArgb(255, 220,
220));
namespace Quantacula else
{ SetBackgroundColor(idx, Color.FromArgb(220, 220,
public class MyModel : UserModelBase 220));
{ }
//create indicators and other objects here, this is
executed prior to the main trading loop //declare private variables below
public override void Initialize(BarHistory bars) WPPO wppo;

February 2018 • Technical Analysis of Stocks & Commodities • 51

 DPPO dppo;
WDPPO wdppo;
}
}

—Dion Kurczek, Quantacula

info@quantacula.com
www.quantacula.com

F AIQ: FEBRUARY 2018 TRADERS’ TIPS CODE

The AIQ code based on Vitali Apirine’s article
in this issue, “Weekly & Daily Percentage Price Figure 10: AIQ. Here, the daily & weekly PPO is displayed on a chart of the
Oscillator,” is provided at www.TradersEdgeSystems.com/ NDX.
traderstips.htm.
Figure 10 shows the daily and weekly PPO indicator on a
chart of the Nasdaq 100 index (NDX) from 2015 to 2017.

!WEEKLY & DAILY PPO

!Author: Vitali Apirine, TASC Feb 2018

!Coded by: Richard Denning 12/17/17
!www.TradersEdgeSystems.com

!INPUTS:
S is 12.
L is 26.

EMA1 is expavg([Close],S).
EMA2 is expavg([Close],L).
EMA3 is expavg([Close],S*5).
EMA4 is expavg([Close],L*5).
DM is (EMA1 - EMA2)/EMA4*100.
WM is (EMA3 - EMA4)/EMA4*100. Figure 11: AMIBROKER. Here is a daily chart of the Russell 2000 (upper pane)
WD_PPO is WM + DM. with a WM-PPO chart in the lower pane, reproducing a chart from Vitali Apirine’s
article in this issue.
Again, the code and EDS file can be downloaded from
www.TradersEdgeSystems.com/traderstips.htm. The code is
also displayed at Traders.com in the Traders’ Tips section.
—Richard Denning wm = 100 * ( EMA( C, l1 ) - EMA( C, l2 ) ) / EMA( C, l2 ) ;
dm = 100 * ( EMA( C, l3 ) - EMA( C, l4 ) ) / EMA( C, l2 );
info@TradersEdgeSystems.com
for AIQ Systems
Plot( wm, "WM"+_PARAM_VALUES(), colorREd );
Plot( wm+dm, "WM+DM", colorGreen );
Plot( 0, "", colorBlue, styleNoLabel );

A sample chart is shown in Figure 11.

F AMIBROKER: FEBRUARY 2018 TRADERS’ TIPS CODE
In “Weekly & Daily Percentage Price Oscillator” in this issue,
author Vitali Apirine presents an EMA-based price oscillator.
The code listing shown below contains a ready-to-use formula
for AmiBroker. To adjust the parameters, right-click on the
chart and select parameters from the context menu.
AmiBroker code
l1 = Param("Length1", 60, 1, 100 );
l2 = Param("Length2", 130, 1, 100 );
l3 = Param("Length3", 12, 1, 100 );
l4 = Param("Length4", 26, 1, 100 );
52 • February 2018 • Technical Analysis of Stocks & Commodities
—Tomasz Janeczko, AmiBroker.com
www.amibroker.com
F MICROSOFT EXCEL: FEBRUARY 2018 TRADERS’ TIPS
CODE
In “Weekly & Daily Percentage Price Oscillator” in this issue,
author Vitali Apirine builds on the two MACD series that he
discussed in his December 2017 S&C article, “Weekly & Daily
MACD.” He does this by normalizing them into self-relative
percentages using the slowest EMA as the divisor in common.
FIGURE 12: EXCEL. Here, you can see the similarity in shape between the D&W PPO and the D&W MACD.

This normalizes the scale of PPO values across periods of
strong trends and sideways movements.
The resulting W&D PPO chart is very similar to the W&D
MACD chart, as can be seen in Apirine’s Figure 2, which I
have replicated in Figure 12 here. This similarity is clearly
visible over relatively short intervals.
When plotted over longer periods, the PPO vertical span
of values is fairly constant. On the other hand, the MACD
vertical span is sensitive to long-term up and down trends,
as seen in the article’s Figure 3 of the S&P 500. That S&P
500 chart is rather massive, so I found CASY to illustrate the
same point more compactly here in my Figure 13.
Zooming in to the left portion of the chart where the
MACD was a bit muddy in Aprine’s Figure 2 and letting
the MACD chart self-scale to use all of the available ver-
tical space, we can once again see the pattern similarity
(Figure 14). Note that the PPO scale does not change in this
instance.
In his article in this issue, Apirine improves on the MACD.
The strength of the PPO is the vertical scale consistency over
time, which means visibility.
The rules developed in his December 2017 article on
W&D MACD to interpret the relative positions of the indi-
cator lines can be carried forward to the relative positions
of the PPO indictors. Adding to that, he also brought out a
couple of refinements in this article. One such refinement
is using the PPO indicators to compare the relative perfor-
mance of a pair of tradable assets.
The spreadsheet file for this Traders’ Tip can be down-
loaded from www.traders.com in the Traders’ Tips area. To

FIGURE 13: EXCEL. Over longer periods, the pattern similarity is still there but the MACD vertical scale can be quite variable and make portions of the MACD pattern dif-
ficult to discern, as seen in the left portion of this chart.

February 2018 • Technical Analysis of Stocks & Commodities • 53

 FIGURE 14: EXCEL. Here, I’ve zoomed in and used a shorter timespan to illustrate the similarity in the MACD when viewed at the finer scale.

successfully download it, follow these steps:

• Right-click on the Excel file link, then

• Select “save target as” or “save as” to place a copy of the
spreadsheet file on your hard drive.

—Ron McAllister
Excel and VBA programmer
rpmac_xltt@sprynet.com

F TRADERSSTUDIO: FEBRUARY 2018

TRADERS’ TIPS CODE Figure 15: TRADERSSTUDIO. Here, the daily & weekly PPO is displayed on a
The TradersStudio code based on Vitali
chart of the S&P 500 futures contract (SP). White line = WD_PPO, yellow line =
weekly PPO.
Apirine’s article in this issue, “Weekly & Daily Percentage
Price Oscillator,” is provided at www.TradersEdgeSystems.
com/traderstips.htm as well as at the Stocks & Commodities 'Dim WM As BarArray
website at www.traders.com in the Traders’ Tips section. DM = (EMA1-EMA2)/EMA4*100
Figure 15 shows the daily and weekly PPO indicator on WM = (EMA3-EMA4)/EMA4*100
a TradersStudio chart of the S&P 500 futures contract (SP) WD_PPO = WM + DM
End Function
starting in 2007. '--------------------------------------
'indicator plot
'WEEKLY & DAILY PPO Sub WD_PPO_IND(len1,len2)
'Author: Vitali Apirine, TASC Feb 2017 Dim WM As BarArray
'Coded by: Richard Denning 12/20/17 Dim myPPO As BarArray
'www.TradersEdgeSystems.com myPPO = WD_PPO(len1,len2,WM)
plot1(myPPO)
Function WD_PPO(len1,len2,byref WM) plot2 (WM)
Dim EMA1 As BarArray End Sub
Dim EMA2 As BarArray '--------------------------------------
Dim EMA3 As BarArray
Dim EMA4 As BarArray
—Richard Denning
EMA1 = XAverage(C,len1)
EMA2 = XAverage(C,len2) info@TradersEdgeSystems.com
EMA3 = XAverage(C,len1*5) for TradersStudio
EMA4 = XAverage(C,len2*5)
Dim DM As BarArray

54 • February 2018 • Technical Analysis of Stocks & Commodities

 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner, where she also works as a
broker. She has written four books on futures and options trading, with the latest
being a new edition of her book A Trader’s First Book On Commodities (third
edition, October 2017) as well as Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free subscrip-
tion, visit www.DeCarleyTrading.com. To submit a question, email her at info@
carleygarnertrading.com or via www.DeCarleyTrading.com. Selected questions Carley Garner
will appear in a future issue of S&C.

SEASONAL PATTERN TRADING PLAYS?
How can seasonal analysis help com-
modity traders?
Most commodities fluctuate with the
help of annual price patterns. These pat-
terns can often be explained by growing
cycles, annual economic transactions
such as taxes and weather, and even
holidays. Proponents of the practice of
seasonal analysis suggest that traders
can benefit from being aware of these
annual cycles because it enhances their
ability to speculate effectively, but op-
ponents of the idea suggest seasonal
information is known by the majority
of market participants and, therefore, is
always incorporated into current market
pricing. In other words, traders will be
inclined to go long ahead of what is
normally a bullish time of year; thus,
the price increase could occur early as
speculators get positioned, leaving those
who acted at a slower pace with a “dog”
of a trade.
I’ve found seasonal analysis to be help-
ful in predicting future price movements
more often than not, but like anything
else, it isn’t fail-safe. In my opinion,
commodity market analysis should in-
tegrate seasonal analysis with an array
of other types of market research such
as technical, market composition (COT
Report), and fundamental analysis—
with weighting priority in that order.
With all of that said, it cannot hurt to
be aware of, and react accordingly to,
annual price patterns that tend to play
out in most years.
For instance, the grains (namely soy-
beans and corn) often find some sort of
harvest low in October, but sometimes
that low occurs later in the year. Never-
theless, traders who deem grain prices
to be cheap in the third quarter of the
year might find an edge in establish-
ing position trades in anticipation of a
recovery going into the spring. On most
years, this is a great strategy. Of course,
this type of seasonal application takes
patience and is best employed with the
use of a well-hedged strategy. In other
words, simply going long futures prob-
ably isn’t the best course of action. After
all, most traders have limited patience
and restricted margin money. Thus, put-
ting together a low margin position with
lasting power makes sense.
Traders should try to
avoid falling into the
complacency trap of
thinking that because
a pattern has occurred
80% of the time
throughout history it
will necessarily do so
this year.
We like the idea of doing this sort of
thing using covered calls with at-the-
money (ATM) strike prices (buy the
underlying futures contract, then sell
a call option against it), constructing a
bull call spread with a naked leg (going
long an ATM call option, then selling an
out-of-the-money (OTM) call option and
an OTM put option to pay for it), or if
options are cheaply priced, it might make
sense to simply go long March, May, or
July call options. The odds of grains be-
ing higher in the spring or summer than
they are in the latter part of the previous
February 2018
year are attractive.
Of course, there are other factors
driving grain prices independent of
seasonal tendencies such as currency
market fluctuations, weather, and prod-
uct demand. These factors create a lot
of noise in regard to a market’s ability
to follow a known seasonal pattern,
but again, the guidance that seasonal
analysis offers is helpful for most years.
With that said, it is important to note that
years in which markets trade counter to
their seasonal tendency generally see the
countertrend move take place in a volatile
and unforgiving manner. Consequently,
traders should try to avoid falling into
the complacency trap of thinking that
because a pattern has occurred 80%
of the time throughout history it will
necessarily do so this year.
Those looking to use seasonal patterns
to get more aggressive and on shorter
timeframes might look to trade seasonal
services such as MRCI (Moore Research
Center Inc.). They offer subscribers
data-mined futures contract seasonal
patterns that range in time horizon from
a week to several weeks. Because of the
short-term nature, traders tend to play
them with outright futures rather than
option spreads. However, they also of-
fer similar patterns for seasonal futures
spreads based on patterns their software
has identified.
In conclusion, we don’t advocate trad-
ing solely based on seasonal statistics, but
we certainly don’t recommend ignoring
them either. Trading commodities is a
complex process; being aware of recur-
ring patterns is an important piece to
the puzzle.
• Technical Analysis of Stocks & Commodities • 55
 CHARTPATTERN SEMINAR, APRIL 21
ChartPattern.com will host a seminar
on April 21, 2018 in Miami, FL, led by
technical stock analyst, chart pattern spe-
cialist, world-record trader, and longtime
newsletter publisher Dan Zanger.
Topics on the agenda for the morning
portion of the day-long seminar include:
earnings and how to read them properly
for momentum trading and investing;
shares outstanding and how they relate to
the movement of stocks; group strength
and rotation with seasonal factors; and
an overview of chart patterns. Topics on
the agenda for the afternoon portion of
the seminar include: using trendlines;
chart patterns for swing trading and for
reversals; understanding daily bars; how
to play gaps; how to spot weakness in
stocks before they break down; and how
to spot momentum stocks before they
move. The event will end with a Q&A
plus charts of interest.
Cost is $2,495 per person (early bird
special: $2,295 through January 30,
2018). Previous attendees can receive a
$100 discount.
www.chartpattern.com, 800-901-2500 or
818-716-5575, office@chartpattern.com
Bitcoin Futures Launch AT CME
The CME Group derivatives market-
place announced that it had self-certified
the initial listing of its bitcoin futures
contract with a scheduled launch of De-
cember 18, 2017. CME stated it worked
with the CFTC and market participants
to design a regulated offering, seeking
to provide investors with transparency,
price discovery, and risk-transfer capa-
bilities. It further stated that despite the
careful preparation to list it, it still rec-
ognizes that bitcoin is a new, uncharted
market that will continue to evolve and
56 • February 2018 • Technical Analysis of Stocks & Commodities
that the marketplace may need to evolve
with it. The new bitcoin futures contract
is subject to various risk management
controls, including an initial margin of
35% at launch; position and intraday
price limits; and a number of other risk
and credit controls that are already in
place for all CME Group products.
The new bitcoin contract will be listed
on the CME Globex electronic trading
platform and for submission for clearing
via CME ClearPort. The contract will be
cash-settled, based on the CME CF Bit-
coin Reference Rate (BRR) which serves
as a once-a-day reference rate of the US
dollar price of bitcoin. Since November
2016, CME Group and Crypto Facilities
Ltd. have calculated and published the
BRR, which aggregates the trade flow
of major bitcoin spot exchanges during
a calculation window into the US dollar
price of one bitcoin as of 4:00 pm Lon-
don time. The BRR is designed around
the IOSCO Principles For Financial
Benchmarks. Bitstamp, GDAX, itBit,
and Kraken are the constituent exchanges
that currently contribute the pricing data
for calculating the BRR.
cmegroup.com/bitcoinfutures
Bitcoin Futures Launch at CBOE
The CBOE launched bitcoin futures
(XBT) trading in December 2017, with
Monday, December 11, as the first full
day of trading. The CBOE stated it
anticipates that trading will undergo a
slow build over time, as with any new
futures product. XBT futures quotes
are available on the XBT webpage at
www.cboe.com/xbt, which displays a
table that features delayed XBT futures
quotes including expiration, last trade,
price change, high trade, low trade,
settlement, and volume. Various data
vendors also plan to carry XBT quotes,
including Thomson, Bloomberg, CQG
and Factset. XBT futures trade on CBOE
Futures Exchange (CFE) under the ticker
symbol XBT and are cash-settled futures
contracts based on the Gemini Trust
Company’s auction price for bitcoin,
denominated in US dollars. The contract
multiplier for the XBT futures contract is
one bitcoin. Initially listing the January,
February, and March contract months,
additional XBT futures data will be
available on the Market Data section of
the CFE website at: http://cfe.cboe.com/
market-data/market-data-main.
CBOE.com
TradeStation to Support Trading
of CBOE’s Bitcoin Futures
TradeStation, a Monex Group company
and online broker-dealer and futures
commission merchant, announced that
eligible futures clients can now trade the
new bitcoin futures contract offered by
CBOE Global Markets, traded under the
ticker symbol XBT on the Cboe Futures
Exchange (CFE).
With trading properties similar to
index futures contracts, listed bitcoin
futures offer traders a speculative or
hedging instrument based on bitcoin
prices. To maximize transparency and
real-time replicability, the XBT futures
are a cash-settled contract based on a
US-dollar-denominated auction price.
CBOE states that building critical
mass in an entirely new market is es-
sential for its development and thus
welcomes firms such as TradeStation,
an online retail FCM, to participate
early on to help spur the maturation of
the crypto space.
The steep rise in bitcoin prices in
the past year coupled with the entry of
CFTC-regulated exchanges like CBOE
and CME into the cryptocurrency
markets has generated intense interest
among active traders and speculators.
TradeStation states it seeks to offer
futures traders the tools to help them
navigate these emerging markets.
TradeStation.com
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February 2018 • Technical Analysis of Stocks & Commodities • 57
 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
S&P 500 E-Mini (Mar ’18) GBLX 3.7 11.3 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>>
10-Year T-Note (Mar ’18) CBOT 0.9 10.7 6 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Russell 2000 E-Mini (Mar ’18) GBLX 1.6 4 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
5-Year T-Note (Mar ’18) CBOT 0.6 10.1 10 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra T-Bond (Mar ’18) CBOT 2.5 13.5 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Mar ’18) CBOT 2 11.1 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Feb ’18) NYMEX 3.9 7.1 2 •••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Mar ’18) GBLX 3.8 9.4 1 •••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Mar ’18) CBOT 0.2 7.2 12 ••••••••••••••••••••••••••••
Euro FX (Mar ’18) CME 1.5 11.7 4 •••••••••••••••••••••••
Eurodollar (Dec ’18) CME 0.1 4.4 15 •••••••••••••••••••
Gold (Feb ’18) COMEX 3.9 21.9 3 •••••••••••••••••••
Ultra 10-Year T-Note (Mar ’18) CBOT 1.1 9.3 5 ••••••••••••••••••
Dow Indu 30 E-Mini (Mar ’18) CBOTM 3 7.8 1 •••••••••••••••
High Grade Copper (Mar ’18) COMEX 3.9 9.8 2 ••••••••••
Natural Gas (Feb ’18) NYMEX 9 18.7 5 ••••••••••
ULSD NY Harbor (Feb ’18) NYMEX 4 7.2 2 ••••••••••
Corn (Mar ’18) CBOT 4.1 15.2 15 •••••••••
Gasoline RBOB (Feb ’18) NYMEX 4.5 9.3 2 ••••••••
Japanese Yen (Mar ’18) CME 2.2 15.6 4 ••••••••
S&P Midcap E-Mini (Mar ’18) GBLX 3.5 9.5 1 ••••••••
Sugar #11 (Mar ’18) ICEUS 6.4 10 7 ••••••••
Silver (Mar ’18) COMEX 7 23.7 3 •••••••
Soybeans (Mar ’18) CBOT 3.8 14.9 6 •••••••
British Pound (Mar ’18) CME 2.4 12.8 4 ••••••
Wheat (Mar ’18) CBOT 4.9 10.6 7 ••••••
Coffee (Mar ’18) ICEUS 5 10 3 ••••
Live Cattle (Feb ’18) CME 3.5 8.5 4 ••••
Cocoa (Mar ’18) ICEUS 6.6 8.5 5 •••
Hard Red Wheat (Mar ’18) KCBT 4.7 8.5 6 •••
Mexican Peso (Mar ’18) CME 4.7 13.6 8 •••
Soybean Meal (Mar ’18) CBOT 4.1 11.7 6 ••• CBOT Chicago Board of Trade, Division of CME
Swiss Franc (Mar ’18) CME 2.4 11.9 3 ••• CFE CBOE Futures Exchange
30-Day Fed Funds (Jan ’18) CBOT 0.1 4.2 13 •• CME Chicago Mercantile Exchange
Australian Dollar (Mar ’18) CME 1.8 16 8 •• COMEX Commodity Exchange, Inc. CME Group
Canadian Dollar (Mar ’18) CME 1.5 12.1 7 •• GBLX Chicago Mercantile Exchange - Globex
Cotton #2 (Mar ’18) ICEUS 5.8 21.9 7 •• ICE-EU Intercontinental Exchange-Futures - Europe
Palladium (Mar ’18) NYMEX 8.6 15.4 1 •• ICE-US Intercontinental Exchange-Futures - US
Soybean Oil (Mar ’18) CBOT 4 17.2 15 •• KCBT Kansas City Board of Trade
Crude Oil Brent (F) (Feb ’18) NYMEX 3.9 6.8 2 • MGEX Minneapolis Grain Exchange
Feeder Cattle (Mar ’18) CME 4.4 6.9 2 • NYMEX New York Mercantile Exchange
Lean Hogs (Feb ’18) CME 4.8 11.9 6 •
New Zealand Dollar (Mar ’18) CME 2.1 16.3 8 •
Platinum (Jan ’18) NYMEX 3.8 9.6 4 •
S&P GSCI (Jan ’18) CME 4.1 11.2 2 • 1802
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).

58 • February 2018 • Technical Analysis of Stocks & Commodities

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LINKS
You can find a wealth of information on the
Internet for nearly any subject imaginable, Product Company
including investing, trading, and the financial 1. FreeStockCharts.com Worden Brothers, Inc.
markets. You can even find a good amount on
technical analysis. 2. interactivebrokers.com Interactive Brokers
Each month in Stocks & Commodities’
Traders’ Resource, we present a listing for 3. ChartPattern.com ChartPattern.com
different categories of products and services
related to trading, all to aid our readers in 4. ablesys.com AbleSys Corporation
their pursuit of trading. This month, we focus on the topic of online
trading services.
5. StockCharts.com StockCharts.com, Inc.
We contacted companies that offer services to traders over the 6. Traders.com Advantage Technical Analysis, Inc.
Internet as well as financial website developers and asked them to
fill out an online survey form to describe their Internet site. At our 7. Working-Money.com Technical Analysis, Inc.
website in the Traders’ Resource area of Traders.com, you’ll find a
database of the data we collected. 8. eSignal.com eSignal / Interactive Data
The listed online services may offer charting, price quotes, and
financial news and information; 9. eSignal Learning eSignal / Interactive Data
others offer a more specialized
service that may be useful to
10. QCharts eSignal / Interactive Data
investors and traders. Features These are the 10 online trading services viewed most often on the Traders’ Resource
may include stock screening, ar- website, where each company is listed in order of clicks received. This is not an editorial
ticles, discussion forums, online rating or ranking. For more information on specific products and services, try checking
support, and more. store.Traders.com for archived S&C product reviews.

Traders’ Resource
at traders.com
In addition to the online trading
services listing at Traders.com,
you’ll also find listings of other
trading-related products and
services such as brokerages, data
services, courses and seminars, software, publications, trading systems,
and more. We hope this will help you learn about products to help in your
trading endeavors.
Just click on the Traders’ Resource link from Traders.com and follow
the online trading services category link, or use the search feature to find
products or services with specific attributes in this or other categories.

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.

February 2018 • Technical Analysis of Stocks & Commodities • 59

 It’s Perfectly Logical

Your Intuition’s Role In

Trading Decisions
We’ve all been taught that sometimes you must trust your The irrational mind

instincts, but should you let your portfolio be guided by your
intuition? Find out what the intersection of behavioral finance
and evolutionary psychology has to say about it.
by Robert Reifert
HERQURIS/SHUTTERSTOCK
The phenomenon of trusting our instincts to make investment
decisions can be explained by concepts found in behavioral
finance and evolutionary psychology. Though these fields may
not be related, a great deal of behavioral finance has been
found to run parallel to the ideas in evolutionary psychol-

It’s
human nature to celebrate achievements.
When we earn positive returns on our invest-
ments, we boast about them. But we never Behavioral finance studies
speak of our investment losses.
Conventional thinking views the financial how our minds and behavior
market as a collection of investors acting on relate to market movements,
rational and informed financial decisions. However, a closer while evolutionary psychology
look will reveal that most of those decisions are based on feel- attempts to explain much of
ings rather than on rationality. Anyone can have an intuition
about a stock, but how much can that intuition be trusted? our behavior.
The market is made up of millions of investors acting on their
instincts, which has been hardwired into their brains.
60 • February 2018 • Technical Analysis of Stocks & Commodities
 TRADING PSYCHOLOGY

ogy. Behavioral finance studies how our minds and behavior

relate to market movements, while evolutionary psychology
attempts to explain much of our behavior. The human brain is
wired to perform under physical risk, which it does well. Our
The brain can play tricks on
sympathetic nervous system stimulates our stress response, you when it’s in charge of your
which results in our “fight or flight” response. But that same investment instincts.
brain can play tricks on you when it’s in charge of your in-
vestment instincts.
Look at what happened during the dot-com bubble. The late
1990s saw excessive financial speculation driven primarily Minding your mind
by the technology and telecommunications sector. Investors The reality is our hardwired instincts tend to override logic
became overconfident as was evident with the excessive trading and rationality when we confront the emotional outcomes
volume in the markets, specifically in the technology sector. associated with the loss or gain of an investment. But how
Personal computer use was rising, telecom and technology do we stop ourselves from making the same mistakes over
firms were building broadband infrastructure, and the world- and over again? If we’re aware of our biases and instincts,
wide web was becoming more sophisticated. Overconfidence we can begin to take a more objective view of our decisions.
in the market led investors to overlook price/earnings ratios, Because our minds don’t recognize our cognitive errors as
relying instead on the promise of future technology and in- mistakes, we must be continually conscious of what we’re
novation. They invested in initial public offerings, startup doing and why we’re doing it.
companies, and other volatile markets. Lured by the promise A good place to start is to recognize that our mind can never
of gains and riches, investors became so excited with the idea tell us what the market is going to do. Once you start getting
of becoming part of the trend that they were willing to pay anxious about buying or selling a stock, ask yourself what
almost anything. kind of tricks your mind is playing on you. You don’t want
And when technology shares started plunging, do you your instincts controlling your trading decisions.
think investors sold out? Most likely not. There is a com-
mon tendency for investors to hold onto losing shares Robert Reifert is a personal investor and small business
in the hope that they at least break even. That’s our way owner from New York. After receiving his MBA from Hofstra
of not acknowledging our initial mistake of investing in University in 2015, he and his four partners started Ocuso-
them. But we also tend to sell winning stocks too soon. cial, an online marketing company. He can be reached at
Although corrections are common in a bull market, our RobertLReifert@gmail.com.
instincts kick in and we act on our fear of perceived loss.
We end up selling in the trough of a bull market instead
of at the peak. Suffering from these cognitive errors, we
tend to buy high and sell low, which is the opposite of the
adage “buy low, sell high.” The US market as a whole in
1998 was trending upward for most of the year and faced
a correction of about 20% within a six-week period. This
correction led many to sell too soon, resulting in missing
out on the year’s overall gain of 28.6%. For them, emotion
and fear kicked in, forcing them to act on irrational notions
without any evidence to support those feelings.

Sneak preview...
The V-Trade, part 1
by Sylvain Vervoort
In this first part of a new article series, we’ll
be introduced to a trading system that takes
into account some basic technical analysis
techniques, money management, and trading
techniques.
An Alternative Charting Technique Recursive Median Filters
by Marco Alves by John F. Ehlers
We’re all familiar with the basic types of When it comes to trading, recursive median
charts, but here’s one you may not have come filters may sound over the top. But here’s a
across—roller & strip. And no, it’s not a painting way to use it that’s similar to an exponential
technique. What is it and how can you use it? moving average.
We’ll find out.
…Coming soon!

February 2018 • Technical Analysis of Stocks & Commodities • 61


The following selection of book descriptions represents a
sampling of recent book releases in the investing field. Books
described here may be from some of the major book publish-
ers as well as some independent book publishers. These
are not critical reviews or editorial evaluations, but rather a
brief look at the book marketplace to help keep readers up
to date on new or recent book offerings.
Conquering The Seven Faces Of Risk:
Automated Momentum Strategies That
Avoid Bear Markets Empower Fearless
Retirement Planning (258 pages, $67.50
hardcover, 2017, ISBN 978-1543913750)
by Scott M. Juds, published by Fin Tech
Press. This book starts by identifying “the
seven faces of risk,” which include single-
stock risk, market volatility, bear markets
and crashes, momentum loss, backtesting
deception, late strategy signals, and retire-
ment savings shortfalls. The author notes that the last is the biggest
of them for most investors. He also states that this problem cannot
be addressed by the classic diversification approach—rather, the
author presents it as an investment return problem, and that he
intends to shake up the way we’ve thought about risk. He argues
that outdated, oversimplistic risk models not only fail to treat mo-
mentum as the multifaceted problem it is, but also fail to consider
fundamental signal processing methods that reduce the “random
walk” part of the signal and improve the probability of making better
investment choices.
The book segues into analysis of the problems and notes that
the financial regulatory agencies FINRA and the SEC provide nei-
ther a definition nor a measurement of risk, which the author finds
troubling since he believes wealth managers could then be held
to an undefined standard during risk audits of client portfolios. To
help address these problems, the book introduces a set of tools.
One is a measure called “relative risk” based on a consensus set
of industry-standard definitions that enable “risk” category portfo-
lios to be modeled, quantified, and used as reference standards
in assessing and defending the risk performance of any portfolio.
Further, mathematics from the cross-disciplinary fields of informa-
tion theory and electronic signal processing (such as that used in
WiFi, cell phones, and digital TV) is put to momentum trading to
form temporal portfolio theory, explained as an extension of modern
portfolio theory, providing a means to deal with risk through “risk
avoidance” as opposed to “risk dilution” (diversification).
Finally, the book employs these principles and tools in example
strategies and portfolios that are designed to allow anyone to be
able to implement and manage with a few trades per year. The book
is illustrated with more than 300 color images and charts. Juds is
the founder, president, and CEO of SumGrowth Strategies, and
the developer of SectorSurfer (for individuals) and AlphaDroid (for
financial advisors). He has spoken to over 50 investment groups in
the past several years.
http://www.sumgrowth.com/FinTechPress/Conquering-the-Seven-
Faces-of-Risk.aspx
62 • February 2018 • Technical Analysis of Stocks & Commodities
Trading With Ichimoku: A Practical Guide To Low-Risk Ichimoku
Strategies (214 pages, £31.49 paperback, £17.99 ebook, July 2017,
ISBN(s): 9780857196156/9780857196163) by Karen Péloille, pub-
lished by Harriman House. The ichimoku kinko hyo trading indicator
can be employed across all timeframes. Once you have learned the
subtleties of the method and understand
its unique system of validating price move-
ments, it can improve your trading. Trading
With Ichimoku is designed to be a practical
handbook explaining the different elements
of the ichimoku system of chart reading,
from the description of each of its five lines
to their interpretation within a wider process
of trading analysis. Even though there are
only five lines to look at on ichimoku charts,
the information provided by these charts
is more than enough to achieve a detailed
and broad view of market and what the price action reveals. Split
into three parts, part 1 is devoted to the theoretical description of
the various components making up ichimoku, while part 2 explains
how to trade with ichimoku kinko hyo through several examples in
various timeframes. Part 3 introduces trading methods that combine
classical trading tools with ichimoku kinko hyo. Explanations and
examples are illustrated throughout with detailed color charts.
www.harriman-house.com
Top Hedge Fund Investors: Stories, Strategies, and Advice
(222 pages, $60 hardcover/$39.99 ebook, October 2017, ISBN
978-0-470-50129-0) by Cathleen M. Rittereiser and Lawrence E.
Kochard, published by Wiley. This book is
for those who may be interested in plac-
ing money with hedge funds or those just
curious. Investing in hedge funds requires
sophisticated knowledge, understanding,
skill, access, and experience. The book
profiles hedge fund investors who place
billions of dollars in hedge funds, and
they share their philosophies, strategies,
and advice. Individuals and institutions,
whether they are new to hedge funds or
need to improve, may find the stories in
this book about successful hedge fund investors helpful. Histori-
cally portrayed as risky investment funds for the very wealthy run
by swashbuckling traders, the authors state that hedge funds are
simply an investment vehicle designed to generate superior returns
and reduce an investor’s overall portfolio risk. Although many funds
have underperformed or collapsed, especially since the financial
crisis of 2008, hedge funds as a whole have provided acceptable
returns while reducing risks, the authors state, and that savvy
institutions have invested in hedge funds for years. Hedge funds
are a large force in the markets. They always seem to be a source
of fascination for the media, legislators, and investors, mostly due
to misunderstanding, according to these authors.
www.wiley.com
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