Interview: Dr.

Mircea Dologa – Success with Modern Technical Analysis

May 2011

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Opportunities Using
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Myth and Reality Market Myths

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TRADERS´ EDITORIAL
Talker or Trader?
Do you know what it feels like when someone wants to talk
you into buying something? Silly question – who does not?
In today’s consumer society, someone is trying to sell you
something at practically every corner. Most of the time we find
out a little later that we have no real need whatsoever of the
product or service we have just paid for, which means that we
have made a losing trade.
What I am driving at, though, is to draw your attention
to those people who are trying to foist their opinions on
you. Here we virtually have a market of its own with supply
surely exceeding demand – so over time prices charged for
opinions ought to fall since people are gradually going to lose
interest. However, this is not meant to be all about someone
demanding money for voicing their opinion of a certain
stock. Many people more or less “sell” their different ways of
05/2011 www.tradersonline-mag.com
justifying certain actions they have taken – only to drive home
their alleged brilliance to others once they happen to have
had success with their “buy low, sell high” strategy. So it is all
about being right rather than about profit, which is a familiar
tune but then we all know that certain things never change.
Now what are you going to do when you meet someone
who serves up their success stories like a short order cook
serves up fish and chips? Do you think that people who
presents themselves well are also good traders? Or would
you rather think that you are simply being kept in the dark
about all those losing trades? After all, it is the traders who are
introverts that are often the most successful.
I will tell you something that is based on empirical data:
The more brilliant anyone presents themself, the stronger the
probability of something being fishy about the whole thing. Of
2
On a different note: TRADERS´ comes
to you free of charge. This is possible
because of the support of our sponsors
and advertisers. So please take a good
look at their messages and help them
develop their business. Moreover, we are
looking forward to your feedback. This
is the only way to improve our magazine
constantly. Please write to feedback@
tradersonline-mag.com.
course there are exceptions, but on average I consider this to
be true. Most people are either talkers or traders – at least in
terms of their success.
So the next time you have the feeling that you are facing a
Hoover salesperson, do not hesitate to ask them about some
of their trading statistics. The subsequent reaction will tell you
whether you are dealing with a talker or a trader. Words count
for nothing among traders. So make sure that you put your
money where your mouth is.
Good Trading
Lothar Albert
 4
TRADERS´ CONTENT

05/2011 May COVERSTORY

Hedge Funds – Myth and Reality

Hedge funds employ the smartest
people of the financial industry
Taking a Punt
on Penny Shares
STRATEGIES

Low Price Means Low Risk

whose strategies sometimes
achieve enormous profits. Overall,
hedge funds are hard to assess. Does It Pay to Hold
Thus, we will show you what Positions Overnight?
hedge funds are like in reality and Statistically Dissecting
where the most persistent myths Market Myths
can be found.

INSIGHTS Capitalising on
Continuation Patterns
The Trend Is Your Friend
20 INSIGHTS
Stop Missing Trades!
Discipline Yourself
to Exploit Your Edge
The Precision
Trading Psychology
for the Novice Trader Momentum Strategy
Maximise Your Returns
by Trading Market Flow
All That Glitters
Interview with John Netto:
“Why Gold Will Continue to BASICS
Outperform the Market”
Can You Have It Both Ways?
COVERSTORY Stop Missing Trades!
How to Spot Trading
Trading with Limited or No
Risk and Unlimited Potential

Hedge Funds – Myth and Reality Opportunities Using Correlations

in the Forex Market Good Things Come

44 STRATEGIES
Precision Momentum Strategy
TOOLS
in Small Packages
Small Caps Can Offer Higher
Returns if You Learn to
Mitigate the Risks
New Products
From Intelligence Assessment
Bookmark to Technical Analysis
Spearman Indicator – Part 2

Softwarereview
Beware the “Continuation Trade”
How to Avoid the
Webreview Temptation to Re-enter

PEOPLE

64 PEOPLE
Dr. Mircea Dologa 16 INSIGHTS
Discipline Yourself 61 BASICS
Beware the “Continuation Trade“
Dr. Mircea Dologa
Success with Modern
Technical Analysis

05/2011 www.tradersonline-mag.com
 5
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Editors Prof. Dr. Guenther Dahlmann-Resing, Karsten
This makes our content very different from any other market magazines. We are not interested in giving people Gore, Johann Gorol, Marko Graenitz, Theresa
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 TRADERS´ COVERSTORY
What Is a Hedge Fund?
The easiest way to explain the
term is by including it in the
alternative-investment segment.
Unlike the usual investment
forms like stock and bond
funds, special strategies and
combinations of different asset
classes are used here.
In other words, alternative
investments are products that
are not only based on „normal“
equity and bond portfolios.
Why should you be limited as
fund managers to stocks and
Hedge Funds – bonds? After all, there are other
markets available (currencies,
commodities, real estate, credit),
Myth and Reality and instruments such as futures,
options and other derivatives.
This makes it possible for
completely new risk-return
For most people, hedge funds are a closed book. Nevertheless, opinions profiles to be generated – for
of the industry have become increasingly polarised in recent years. Hedge example, it is possible to benefit
funds employ the smartest people in the financial industry whose strategies from falling prices or a higher or
sometimes achieve enormous profits. However, what is quite admirable lower volatility. Some products
on the one hand, has, on the other hand, also produced bankruptcies and are offered on a market-neutral
fraud. Overall, hedge funds are hard to assess for the vast majority of people, basis, so that their performance
especially because of the recent – rather one-sided – political debate. That is is practically independent of,
why we would like to explain to you in our cover story what hedge funds are for example, developments on
like in reality and where the most persistent myths can be found. the stock market. Institutional
investors in particular have long
appreciated this.
05/2011 www.tradersonline-mag.com
Hedge funds are the best-
known form of alternative
investments. Others include,
for example, private equity or
managed futures.
Why “Hedge”?
The hedge fund universe is
very large with a wide variety
of investment strategies and
time horizons. Typically, hedge
funds involve using leverage and
the benefits of long and short
positions in order to participate
in uptrends and downtrends on
various markets and to secure
(“hedge”) certain positions.
Originally this hedging served to
give the fund its name. In 1949,
it was Alfred Winslow Jones who
created the very first version
of today‘s long/short strategy
by short selling assets. Today,
however, other goals are being
pursued as well such as a low
dependence on the stock market,
which is why over time the term
“hedge fund” has moved away
from its original meaning.
The World of Absolute Return
The most important basic idea
in the hedge fund business is
6
absolute return. This means that
ultimately a positive absolute
return should be generated,
regardless of conditions on
capital markets. In short, the
target return is higher than zero
or higher in practice than the
money-market interest rate or a
comparable benchmark.
In contrast, the prevailing view
among traditional fund managers
is the idea of the relative return –
“as long as I am better than the
benchmark, never mind profit or
loss.” For a traditional German-
stock fund, the benchmark – i.e.
the “target” or the reference
standard against which the
fund manager’s performance is
measured – would be the DAX,
for example.
The advantage of the absolute-
return concept is that the
fluctuations in the performance
of the fund are reduced. A
disadvantage is the relatively
weaker performance during
periods in which the reference
market (i.e. the DAX, for example)
records massive price gains.
It is different with the concept
of relative return: Here the
average returns and fluctuation
 TRADERS´ COVERSTORY
Marko Graenitz
Marko studied Business
Administration with Majors
in Finance and Controlling.
He is a freelance editor and
financial journalist. He is
also working on his Doctoral
dissertation in the field of
momentum trading. Momentum
is one of the few methods
scientifically proven to deliver
above-average returns.
Contact:
momentum.trading@web.de
05/2011 www.tradersonline-mag.com
levels of the fund are about the
same as those of the reference
market. Thus, an equity fund
manager who loses just 45 per
cent in a bear market of minus 50
per cent, can consider himself to
be “good”. Since this argument
is a tough sell with institutional
investors, the absolute-return
concept is gaining more and
more acceptance as the
qualitatively better concept.
Being independent of the market
is increasingly key.
The most important group
of investors for hedge funds
are institutional investors such
as pension funds, insurance
companies and foundations.
By now, more and more
wealthy individuals are among
the investors. Due to the high
institutional interest, it is crucial
how the return achieved is to
be taxed, which in turn causes
the vast majority of hedge funds
to relocate in tax havens like
the Cayman Islands. Moreover,
constraints on any feasible
investment policy are less
restrictive there. For private
investors, hedge funds below
a certain minimum investment
are difficult to access, or only
via special structures such as
certificates or ETFs.
The Myths
After this introduction to the
world of hedge funds, we want
to turn to the many myths
7
surrounding this topic. The
following list is far from complete,
but for a better overview we have
limited ourselves to the ten most
important points.
1) Hedge Funds Trigger Crises.
Whenever something goes wrong
in the world, hedge funds are
the first suspects. There are
some scientific studies that have
searched for such a link – and
they have not found any. The last
serious crisis was not triggered
by hedge funds, even if that is
what the media would have us
believe. The root cause of the
financial crisis was excessive
lending to non-creditworthy
borrowers in the US, and those
involved in inflating this excess F1) Annual Returns of Different Asset Classes
were clearly the large investment
banks. The fact that some major
hedge funds like Paulson & Co.
predicted a collapse in house
prices and therefore were able to
benefit handsomely from it, can
be attributed to their accurate
market and risk assessments. In
addition, such counter-cyclical
strategies have rather reduced
the housing-market bubble.
During the European sovereign- This shows the annual returns of different investments by decades and
over the entire period from 1970 to 2009 (to the right). The amounts
debt crisis, hedge funds were correspond to total returns (reinvestment without tax).
* 1970-1989 Leveraged Capital Holdings of Banque Privée Edmond
again regarded as scapegoats. de Rothschild, 1990-2009 HFRI Fund of Funds Composite Index;
They were alleged to have ** 1970-1989: Total returns for US stocks are GFD estimates, 1990-
2009: S&P 500 TR Index via Bloomberg; *** 1970-1979: Total returns
triggered the crisis in Greece. for US corporate bonds are GFD estimates, 1980-2009: BarCap US
Those who believe that also Aggregate TR Index of Barclays Capital via Bloomberg; **** HFRI Fund
Weighted Composite Index.
believe in the big bad wolf. Years
Source: Ineichen Research and Management, Banque Privée Edmond
ago, studies already showed that de Rothschild, Bloomberg, Global Financial Data (GFD)
such a link does not exist. Only
 TRADERS´ COVERSTORY
when the fundamental flaws were
created – be they the valuation of
the British pound kept artificially
high in 1992, the overheated real
estate market in 2007 or the near-
collapse of Greece in 2010 – is it
worth speculating on them. In a
way, this is how the whole “game”
ever comes to an end.
However, it was in ancient
Rome that sometimes the bearer
of bad news was slain. And that
does not seem to have changed
since then, as is shown elsewhere
by the debate about the ban on
short sales.
2) Hedge Funds Are among the
Riskiest Forms of Investment.
Since the collapse of hedge fund
Long-Term Capital Management
(LTCM) in 1998, “risky” has been
the first thing that occurs to
most respondents when asked
about hedge funds. However,
this admittedly serious damage
to their reputation constitutes a
false reflection of reality. Think
about how many large companies
have already gone bankrupt – and
how risky therefore stocks must
be, and their bonds, too. And
think of the states and cities that
have gone bust in the past and
might do so again soon, which
means that supposedly secure
government bonds are by no
means safe either.
This comparison does not
mean that hedge funds are
risk-free – individual funds in
05/2011 www.tradersonline-mag.com
particular may well carry a
substantial risk just as a single
stock does even if it represents
a rock-solid company. But in
the end traditional investments
are just as risky as alternative
ones – if not riskier. After all,
hedge funds can use a variety of
instruments and thus profit from
different market phases, which
traditional funds often cannot or
only to a small extent. In addition,
the proportion of debt used in
the real world is much lower than
one might suspect. Not even
every fifth hedge fund today has
a leverage of more than two. The
former lions of the capital market
are therefore now more like
bunnies in terms of risk tolerance.
Especially funds of hedge funds
are attractive in terms of risk
since the risk is spread there over
a number of additional funds.
3) Hedge Funds Are Locusts.
Hedge funds suffer from the
continued negative press. This
is shown by the unflattering
nickname of „locust“ which
banishes the guild of financial
investors to the realm of insects
and flat sleazebags. But even
long before the financial crisis,
the approach used by those who
came to be known as corporate
raiders was very much frowned
upon. A familiar example is the
role of Richard Gere who in the
film “Pretty Woman” at least
initially played the part of the
corporate raider cannibalising
a company and then selling its
parts.
However, this type of hedge
fund or financial investor is not
representative of today’s real
world. Surely there are more or
less “friendly” financial investors,
because ultimately the whole
thing is a business. But let us be
honest: In a functioning company
with capable management,
revamping that company would
not make any sense. In most
cases, financial investors work
amicably – either in a consulting
or decision-making capacity – to
solve problems.
4) Hedge Funds Are at
least Ethically Questionable.
First, it must be said that
obviously the meaning of
“ethical” always is in the eye of
the beholder. The bulk of hedge
funds use inefficiencies or
statistically significant situations
to their advantage, usually
achieving attractive risk-adjusted
returns. One consequence is that
there are fewer anomalies, which
in turn leads to better functioning
markets.
As an addition to one’s
portfolio, hedge funds are a clear
diversification gain due to their
low average correlation with other
asset classes. The risk is spread
more and the portfolio stabilised
– which is clearly ethical in the
sense of the fund’s responsibility
8
to its investors, for example, hedge funds on portfolios, they
a pension fund or insurance also create benefits elsewhere by
company. So we turn the tables investing in various asset classes
and say that a non-investment in and thus financing projects such
hedge funds may be unethical. as in the private equity area. The
Besides the positive effects of list also includes illiquid assets to
The Strategies
The world of hedge funds can be divided into four categories, which we will briefly introduce
here. Some strategies can be considered to be privatised versions of ideas that have been
used on the trading floors of investment banks until their employees have done so as
independent traders.
(1) Equity Hedge
These strategies cover the combined long and short approaches, mainly in equities and
the corresponding derivatives. Sub-strategies include Equity Market Neutral (almost market
neutral between long and short positions), Short Bias (focusing on short positions) and Multi
Strategy (parallel use of quantitative-technical and fundamental approaches).
(2) Relative Value
Relative Value strategies are based on a collection of financial instruments and their relative
value to each other. Fundamental and/or quantitative approaches are used. An example from
the fixed income area is Convertible Arbitrage (taking advantage of price differences between
convertible bonds and equities). Other Relative Value strategies include Volatility (long and
short strategies in implied volatility) and Real Estate (exploiting valuation differences between
direct or indirect real estate investments).
(3) Event Driven
Here the bets are on stocks that are currently in certain special situations or soon could be, for
example acquisitions, restructuring, refinancing difficulties and so on. Sub-strategies include
Activist (buying more shares, and influencing the management), Distressed Restructuring
(participation in companies threatened by insolvency), and Merger Arbitrage (profiting from
price movements in potential and announced acquisitions).
(4) Global Macro
This is the “royal league” of hedge fund strategies. Macroeconomic developments are
considered that can even be implemented with a huge investment volume (many strategies
have virtually no capacity limit). With Global Macro, attention is paid to the underlying economic
data as well as their impact on stocks, bonds and commodities. Here, both discretionary and
systematic strategies can be used. Among the sub-strategies, a distinction is made between
the different asset classes, and there is also a Multi-Strategy version.
 TRADERS´ COVERSTORY
which capital will thus be made
available – that they do not, of
course, do so without thinking of
collecting an illiquidity premium
should be clear.
5) Hedge Fund Is Hedge Fund.
Time and again there are
reports of THE hedge funds.
Such a generalisation is not
very helpful. There are many
different strategies in the
hedge fund universe. Most of
these approaches are largely
independent of each other (low
correlation), or even behave
contrarily (negative correlation).
Therefore, at least the rough
segment or the strategy group
is to be studied before one can
meaningfully evaluate the profile
of any hedge fund.
6) Hedge Funds Are Opaque.
Since hedge funds are not
(must not be) marketed publicly,
the details of most strategies
are not known to the public.
Substantial positions on specific
dates are usually disclosed to
investors – and since these are,
as a rule, institutional investors,
they keep a close eye on proper
reporting. Especially after the
financial crisis and one or the
other case of fraud, the relevant
criteria have continued to
increase transparency. However,
a successful hedge fund will
have no interest in voluntarily
9
disclosing its positions to all
its competitors. This principle
applies in much the same way
to large asset managers and
proprietary trading firms (prop
desks). Especially for short
positions, it could be dangerous
if the competition is in the know –
an arbitrary short squeeze could
not be ruled out, especially in
illiquid securities. Therefore, it
is also difficult to find out how
individual funds do their actual
trading and what positions they
have of what size. As a result of
all this, hedge funds appear to F2) Risk/Return Analysis (1994-2010)
be opaque to the non-investing
public, as regards the details
of their strategy. But this is not
a negative point, but simply an
integral part of risk management.

Fund of Hedge Funds (FoHF) 7) Hedge Funds

Charge High Fees.
It is true that hedge funds are
Alexander Ineichen
not exactly cheap. After all,
Ineichen Research and Management
the best hedge fund managers
Funds of hedge funds on average have higher fees than single hedge
are the biggest earners in
funds, since the fund of funds management must be paid as an additio- the entire financial industry,
nal level of administration. On the other hand, spreading the risk means and the money has got to
less risk, which is similar to having several stocks in your portfolio rather come from somewhere. Most
than just a single stock. Despite the higher fees, FoHF have in the past managers charge a two per cent Since 1994, the highest returns have been generated with Global
Macro strategies, followed by Event Driven and Equity Long/Short.
done reasonably well, compared to a traditional stock-index invest- administrative fee per year and It can clearly be seen that these strategies have achieved a higher
ment. Hedge fund expert Alexander Ineichen illustrates the historical return in comparison to the S&P 500, while showing a lower range of
a 20 per cent performance fee. fluctuation at the same time! The latter is indicated as annualised return
development by way of a simple example: “An investment of 100 dollars in FoHF made on 1
January 1970 has grown to 9585 dollars by the end of February 2010. If, however, you had
The latter will only be charged if volatility and reflects the risk of each form of investment. Besides the
three above-mentioned strategies, there are many other hedge fund
invested that money in a diversified portfolio of US stocks, you would today have, depending the return is above the respective styles that have beaten a classic equity investment by a mile in terms
on the assumption, between 4318 dollars (all dividends reinvested untaxed) and 1209 dollars benchmark. This standard of their risk/return ratio. The pure short strategies (Dedicated Short)
are an exception, but as an addition to a portfolio they will improve the
(excluding dividends) respectively. A 100 dollar investment in a diversified portfolio of US bonds structure is also known as “2/20”. latter’s performance in bear market phases.
would have been worth around 2300 dollars.” It should be noted here that besides the lower Those who can afford to do Source: Dow Jones, Credit Suisse H1 2010
returns, a stock investment has also suffered higher intermediate drawdowns. so boast of a correspondingly Hedge Fund Industry Review, July 2010
good past performance (track

05/2011 www.tradersonline-mag.com
 TRADERS´ COVERSTORY
record), obviously charge
more. The best example is the
notorious Medallion Fund of the
well-established creative hotbed
of hedge funds, Renaissance
Technologies, where a whopping
five per cent administrative and
44 (!) per cent performance fee
are charged. However, investors
would scramble to jump on the
bandwagon if the fund had not
already been closed.
Compared to the front-end
loads and management fees
of some traditional long-only
mutual funds, hedge funds are
still relatively attractive. Especially
when you consider that a
traditional manager, on average,
does not generate any additional
value when measured against
the benchmark! Moreover, hedge
fund managers usually have
invested very heavily in their
own funds (commitment to their
own product) and profit twice –
but only if they are successful!
However, such a commitment is
not found among many traditional
fund managers, which does not
exactly inspire confidence in the
performance of the manager.
8) Only the Best
Minds Have Need Apply.
There are several strategies in
the quantitative field that are
highly complex. A good example
10
is Renaissance Technologies.
If you want to be hired there,
you should definitely have a
PhD in mathematics or physics.
The vast majority of strategies,
however, can be understood and
implemented even by a person F3) HFRI Fund of Funds Composite Index
with an average education. That
will not happen without making
a lot of effort, but at least you do
not have to be the MacGyver of
the industry to prove yourself.
Basically, as is the case with
most companies, the team
and its composition are a key
component of long-term success.
More often than not, it is not the
false or a non-optimal trading The chart shows the performance of the HFRI Fund of Funds Composite
Index, a popular index of funds of hedge funds. It is easy to see that
strategy that causes the fund there was a quick recovery from setbacks in the past. By contrast,
the slump in 2008 was severe at minus 22.2 per cent. However, much
to fail, but factors on the legal- worse did the stock market with a maximum slump more than twice as
structural level or lack of contacts deep (minus 57 per cent for the S&P 500).

Managed Futures (CTAs) with investors. The upshot is that Source: Ineichen Research and Management, Bloomberg
the assets under management
never cross the critical threshold
Sol Waksman
and the fund turns into a “damp
Founder and President of BarclayHedge
squib”. F4) HFRI Fund Weighted Composite Index
Managed futures are a special class of alternative investments, also
known as Commodity Trading Advisors (CTAs). CTAs systematically 9) Hedge Funds Have
pursue quantitative strategies in the global futures, options or forex Discovered the Holy Grail.
markets. They cover a broad spectrum of markets with the majority of Hedge funds are not advertised
them trading on the basis of following long-term or short-term trends, publicly, so that most people
which means that they are very similar to hedge funds. Managed do not get to know a lot about
futures strategies are frequently shown via so-called “managed ac-
the industry. So when there is
counts” in which the investor does not transfer his assets to the manager – that is also the main
difference between them and hedge funds. The benefits of the asset class are summarised by
a lot of talk in the media about
Sol Waksman, founder and president of the Alternative Investment Database BarclayHedge, executives with billion-dollar
as follows: “Based on the index performance over more than 30 years, CTAs have proven time earnings, there must be a
and again to be of real benefit to investors, the reason being that a portfolio can be improved by secret – or so people assume. Here you can see the HFRI Fund Weighted Composite Index, which in
contrast to the index in Figure 3 depicts the weighted performance of
adding these non-correlated asset classes.” In other words, if you are invested in ten different Or there are even conspiracy many individual hedge funds. It is easy to see that in the first half of
2010 the average hedge fund is almost back to its historic highs again.
equities, the eleventh one will hardly reduce the risk-return ratio – Managed futures, though, will theories suspecting the Holy Grail The long-term development since 1990 speaks for itself as well.
because they develop independently (uncorrelated), smoothing the performance curve.
among the few “insiders” of the Source: Ineichen Research and Management, Bloomberg
financial industry. The fact of the

05/2011 www.tradersonline-mag.com
 TRADERS´ COVERSTORY
11
matter, however, is that so many making any mistakes, especially it does not look so good. Small
strategies are used in the hedge in risk management. This is funds often especially struggle to
fund universe of about 9000 similar to the so-called “Losers survive and attract the urgently
funds that someone is bound to Game” in Charles D. Ellis’s (1975) needed investors to exceed a
achieve the great coup quite by which referred to traditional critical size – after all, some costs
accident. Some funds are also so funds: One should not focus on need to be covered initially before
good because they have either winning, but on not losing. So the fund actually earns money. F5) Barclay CTA Index
found a inefficiency and take if there is a Holy Grail, this is it: It is the same as in any other
advantage of this, or because Find a rock-solid, statistically business – let us use the film
they are simply faster than others significant profitable strategy, industry as an example: There are
(data processing and/or order start a hedge fund, convince 100 few Brad Pitts and Angelina Jolies,
routing). investors to invest one million but thousands of unknown and
The large number of hedge dollars each and then make no perhaps at least equally talented
funds and the strong competition mistakes, if all possible. actors who have not attracted
for the best strategies have enough audiences, though. So
resulted in the achievable 10) Hedge Funds Are the right contacts can be so much
surpluses (the Alphas) Easy to Make Money with. more important for success than In Figure 5 you can see the historical development of the Barclay
CTA Index, which shows the development of a $1000 investment on
decreasing. The issue today is Well, it is not quite as easy as that. the performance of one’s strategy! a monthly basis. The ratio of average return and maximum drawdown
easily eclipses that of any equity market.
less about digging up the most The top-of-the-pyramid managers
brilliant trades, but rather about make a great deal of money, but Closed Hedge Funds Source: www.barclayhedge.com
using a solid strategy and not at the other end of the food chain, Most hedge fund strategies have
a capacity limit. For this reason,
the best funds in the world are
A Myth Is a Reality: The Renaissance Medallion Fund often not available for new or T1) The Best-Paid Hedge Fund Managers
additional investments.
The reason for the capacity Name Hedge Fund Earnings 2009 in Billions Dollar
The Medallion Fund is the “perpetual motion” of the hedge fund industry in terms of performance. David Tepper Appaloosa Management 4,0
Since 1989 an average of 35 per cent annual return has been made – after costs! This puts
limit is easy to understand: Each
strategy is ultimately based on an George Soros Soros Fund Management 3,3
the management in a position to charge correspondingly high fees: The management fee is
anomaly in the pricing or a high James Simons Renaissance Technologies 2,5
five per cent a year, while the performance fee amounts to 44 per cent (compared to the 2/20
industry standard). What the strategy exactly looks like is, of course, not known. Allegedly, statistical probability of success John Paulson Paulson & Co. 2,3
instruments include commodity futures and government bonds. Perhaps Renaissance boss of each setup. If the fund is too Steven Cohen SAC Capital 1,4
and mastermind James Simons, one of the best-paid hedge fund managers in the world (see large, either the lever used will Carl Icahn Icahn Associates 1,3
Table 1), will disclose his strategy one day. As the fund – for reasons of capacity – is closed Edward Lampert ESL Investment 1,3
be reduced, which diminishes
anyway to the undoubtedly interested vast majority of investors, one can only marvel and Kenneth Griffin Citadel Investment Group 0,9
watch. Those invested include only the employees and a few “chosen ones”.
the potential profits, or a stronger
influence of the market by one’s John Arnold Centaurus Energy 0,9
In Rachel and William Ziemba’s book “Scenarios for Risk Management and Global Investment
Phillip Falcone Harbinger Capital Partners 0,8
Strategies“, the fund’s performance figures are disclosed (until 2005). At that point in time, the own transactions must be
fund had recorded only 17 losing months and not a single losing year over a period of 148 months. accepted (market impact). Both A new earnings record in the hedge-fund industry was set by David Tepper in 2009: Speculating
on an early, all-or-nothing bet on a rebound in financial stocks, his fund achieved a performance of
And in the last few years the fund has continued its upward trend. In 2008 alone, the fund gained factors ultimately have a negative 130 per cent, causing him to earn a total of four billion dollars through the fees collected and the
a whopping 80 per cent and in 2009, another 39 per cent. So it is a reality and no myth that a effect on the achievable surplus profit on the shares he himself held in the fund. The previous record holder was John Paulson, who
in 2007 earned a whopping 3.7 billion dollars by betting against the US housing market.
benchmark can be exceeded continuously for a long time – you need “only” the right strategy.
compared to the benchmark, Source: www.finalternatives.com, www.absolutereturn-alpha.com
which –conversely – is bad again

05/2011 www.tradersonline-mag.com
 TRADERS´ COVERSTORY
for the existing investors, but also fee is charged for the extra returns depends, among other
for the management – after all, the revenue. The “ability” of a hedge things, on its size (assets under
partly considerable performance fund to achieve consistent excess management, AUM for short). The
more specific and short-term the
strategy and the less liquid the
George Soros‘s Quantum Fund markets on which the fund trades,
the faster the capacity limit is
reached. In addition to the closing
Until 1992, the now world-famous hedge fund manager George Soros had remained rather
unknown. Only his legendary bet against the British pound, which – after liquidating his positions
for new assets, it is also possible
– brought him a profit of an estimated one billion dollars within a few days, made him known to for portions of the investment
the public. The fund’s strategy is such that it can be included in the Global Macro group. Soros money to be returned to the
assumed that the pound had been overvalued with the venerable Bank of England defending investors.
it. Using a short position of around ten billion pounds, which he built up vis-à-vis other strong
European currencies, he finally forced the Bank to give up its fight – the volume was simply Bankruptcies and Bad Apples
too high for the central bank to continue to counter this through interventions. That caused
The worst bankruptcies in history
the dam to burst and the pound depreciated massively, which brought the hedge fund its
huge profit. Subsequently, Britain abandoned its fixed exchange rate peg for good. So Soros
did not just happen “by accident”,
had only slightly “accelerated” this development. but were primarily caused by
the excessive use of leverage.
There are parallels here to many
private traders who may have had
a good strategy, but ultimately
The LTCM Disaster – the Hunter Becomes the Hunted entered too large positions and
then ruined their account in a
losing streak. It is somewhat
At the end of 1997, LTCM, with assets of 129 billion dollars, was significantly larger than all
others in its industry. At the same time, its equity was around 4.5 billion dollars resulting
reassuring and sobering at the
in a leverage of about 28 on its balance sheet. Primarily, strategies from the Fixed-Income same time that even a billion-
Arbitrage group were used, for example convergence trades. In the wake of the currency dollar hedge fund controlled by
crisis in Russia and the subsequent flight to safety, conditions changed in the autumn of Nobel laureates has imploded
1998 leading to liquidity shortages. Moreover, correlations between the different markets because of this fundamental
increased (as they often do in times of crisis), all of which exceeded the limit assumptions mistake. We are talking about
of risk management. Due to the lack of liquidity, it became increasingly difficult to exit the
Long-Term Capital Management,
trades. The fund’s equity melted away and they looked for fresh money. Initial rumours about
problems at LTCM began circulating, worsening the situation. So when the position size and
LTCM for short. The fund
the potential exit strategy for the trades became known on the market, LTCM no longer was collapsed in 1998, dragging down
in control of the action on the markets, but was instead acted upon – the hunter became the nearly half the world economy.
hunted, as it were. Other market participants tried to profit from the problems at LTCM by Of course, there were also
increasing the already high losses through suitable positions. While in view of the systemic risk cases of fraud, but we do not
and the fear of a chain reaction a bankruptcy was averted by a combined rescue operation, want to go into detail here. In
many investors ultimately had to suffer massive losses. The brightest brains of science and
purely statistical terms, the high
the best managers in the real world of trading together succeeded in really messing things
up, triggering one of the worst disaster in financial history.
number of hedge funds alone
seems to suggest that these will
always include some bad apples.
05/2011 www.tradersonline-mag.com
Typical scams are pyramid
schemes (Ponzi schemes),
incorrect performance data,
incorrect information about the
fund, false documents and theft
of investors‘ money to finance an
excessive lifestyle.
Specific business risks are
posed by the management – for
example, if key people leave,
the strategy is changed or
approaches are “tested” outside
core competencies. This is to
point out that the market or the
particular strategy are not the
only risks. The detailed inspection
of a hedge fund (due diligence)
is therefore one of the most
important steps for institutional
investors prior to entrusting the
fund with their money.
Conclusion and Outlook
Any investment with positive
returns, low volatility and the
lowest possible correlation to
other markets will improve an
existing portfolio. This is exactly
what is offered by alternative
investments like hedge funds, so
their low public popularity is in no
way representative of their quality.
It is therefore safe to assume that
hedge funds will also continue to
establish themselves.
Just as stock markets have
collapsed and the market has
survived this, hedge funds will not
be any different. Incidentally, most
of them are by no means “too big
to fail”, in contrast to the big banks!
12
It is to be hoped that regulators
will make hedge funds more open
to retail investors and that there
will be a more objective debate
about the various strategies. The
strong interest alone on the part
of institutional investors should be
reason enough for private investors
to care for alternative investments.
As the past has shown, hedge
funds and CTAs have been able
to achieve much better results
over long periods of time than
other forms of investment. In
addition to the attractive returns,
the relatively low drawdowns in
particular should be mentioned in
this context.
Last but not least, retail
investors should learn a lesson
from the hedge fund managers
who sometimes pursue very
similar strategies – except in a
big way. From this perspective,
valuable ideas for improving one’s
own trading can be collected. And
because we count hedge funds
among the best trading advisers
that there are, we will analyse in
one of our next few editions the
methods used by professionals
and show a way of how to adjust
your trading to the basic principles
of hedge funds – and use this
professional approach to eliminate
the main reasons for a failure of
your trading career.
 13
TRADERS´ NEWS

RTS Realtime Systems to Open First Office in India

Patak Trading Partners Is Searching for Talented Traders
RTS Realtime Systems Group announced that it is preparing to open
its first office in India with a sales and support staff in Mumbai to Patak Trading Partners, LLC and its new recruiting division, TopStepTrader, are
service a growing client base in the country. RTS offers Indian trading making the allure of a career in trading attainable for recent college graduates
and brokerage firms the ability to connect to India’s major exchanges, and experienced traders alike. TopstepTrader is an international scouting agency
including the Multi Commodity Exchange of India Ltd. (MCX), the currently seeking the best and brightest futures trading talent.
National Commodity & Derivatives Exchange Limited (NCDEX), the The TopstepTrader recruitment process utilises a one-of-a-kind program, the
National Stock Exchange of India Limited (NSE), the Bombay Stock Exchange Ltd. (BSE) and the recently launched United Combine, to evaluate and monitor recruit’s trading performance in a real-time,
Stock Exchange of India Ltd. (USE). The firm’s algorithmic trading solutions, RTD Tango and RTD Tango Trader, help market live market simulation. The Combine provides a
participants trade in multiple asset classes (equities, options, futures and FX) as well as capture opportunities across risk-free way for traders to gain experience
marketplaces and manage their risk. in the trading industry and test their
Last June, RTS teamed up with the Association of National Exchanges Members of India (ANMI) in an educational initiative trading strategies under live, real-time
to increase the knowledge and use of algorithmic trading solutions among professional traders in India. The effort included a market conditions all while being
series of workshops on how to strategically and efficiently use algorithmic trading. scouted by proprietary trading firms
Source: www.rtsgroup.net and equity backers.
For those just learning to trade,
TopstepTrader offers one- and
Derivatives: OTC or Exchange-Traded – Good, Bad or Indifferent? four-week training sessions. The
Combine provides recruits the
By moving OTC derivatives to exchanges or Swap Execution Facilities (SEF), regulators are making it easier to trade these opportunity to develop their trading
exotic instruments. Swaps have traditionally traded over the counter between consenting adults. The market had little over- techniques as they trade with
sight; it was managed by large dealers, cleared bilaterally and had little transparency. Then came the credit crisis. OTC real-time, live market data on a
derivatives – namely swaps – were blamed for everything bad in the world. Then, a year ago, the (US)Dodd-Frank financial professional trading platform.
reform bill was passed and we were given a new set of derivatives rules that either will clean up the market or send the world TopstepTrader also provides
spiraling off the deep end. The truth is probably somewhere in between. each recruit in the Combine
The crux of the derivatives regulation is the requirements that standardised swaps be centrally cleared and traded on a Swap training program access to
Execution Facility, or SEF. This moves swaps from bilateral agreements between bank and client to centrally cleared products a live interactive trader’s
where credit risk is no longer bank-held, but is centralized in a clearinghouse where daily margin is managed. Once clearing forum, pre-market morning
is in place, customers no longer are locked into a single dealer, long and short positions can be netted, and SEFs can begin reports, and the ‘TsT Live
to match buyers and sellers without having to worry about the credit lines of each counterparty or dealer. This will begin the Squawk Radio' broadcast
migration of the swaps business from a principal-based OTC market toward an agency-based bid/offer SEF market. It will open daily from the Chicago trading room floor.
up the market to new participants, create greater pricing transparency and end the dealers' stranglehold on the market. For those looking to trade with a more competitive edge, TopstepTrader offers a
Despite intentions, however, all of this effort may actually make the market more risky rather than less risky. This can occur variety of unique trading Challenges. These Challenges allow traders to compete
in two possible ways. First, because the regulators have not mandated a single clearing solution, clearing competition could against one another for the chance to win monetary prizes. TopstepTrader gives
reduce margin rates and risk controls. The second concern is more macro in nature – if credit swaps were partially blamed for challengers the tools to compete so they can see how they rank against their
the demise of Bear, Lehman and others, and currency swaps were blamed for Greece's woes, then perhaps these products peers and prove who is the top trader.
are not suitable for the average individual or even institutional investor. But by standardising these products, creating a clearing Source: www.pataktradingpartners.com
mechanism and increasing transparency, we have actually made these products easier to trade. Is that really what we want?
Source: http://advancedtrading.com/derivatives/229400689, written by Larry Tabb

05/2011 www.tradersonline-mag.com
 14
TRADERS´ NEWS

Commodity Futures Investing Launches Global Series of Events
Commodity Futures Investing Community (CFIC) has announced the launch of
its global series of Commodity Futures Investing events. This series of events is
focused on educating and empowering investors with practical knowledge and
resources to take maximal advantage of opportunities in the global commodity
futures and options markets. The events are planned for multiple locations in
North America, South America, Europe and Asia in the upcoming months. Each
event features conference, seminars and exhibition.
Source: www.commodityfuturesinvesting.com
Alphacet Moves into Asian Markets
Alphacet, Inc., announced that Shidan Capital, a Singapore-
based hedge fund, has selected Alphacet Discovery to build,
backtest, and deploy quantitative financial Models. Shidan
said it had selected Discovery for its ease of use and ability
to handle data from all asset classes, including equity index
futures and foreign exchange and were drawn to Discovery’s
drag-and-drop interface and trade visualization features.
Source: www.alphacet.com
CQG Announces Global
Connectivity with NinjaTrader
CQG announced its collaboration with NinjaTrader
to allow global connectivity between their
systems. The collaboration gives traders using
the NinjaTrader 7 platform the ability to connect
to CQG's network exclusively for AMP Global
Clearing. In addition to providing access to CQG's
trading gateways and market data through this
integration with NinjaTrader, CQG provides pre-
trade risk capability, exchange compliance, and
exchange reporting.
Source: www.cqg.com

PFGBEST Chooses Equinix for Proximity Hosting

PFGBEST, a global financial services and technology firm, and Equinix, a provider
of global data center services, announced that PFGBEST has selected Equinix
to host its Typhoon direct market access solution for foreign exchange trading.
PFGBEST is relocating its proprietary liquidity aggregation and order routing
system to Equinix’s New York International Business Exchange to improve order
routing performance and reduce latencies.
Typhoon is a strict, no-dealing-desk environment, which ensures client orders
are matched to the best available prices. Typhoon is a dynamic liquidity
provisioning solution that
can be tailored to meet
the trading demands of all
client types. Typhoon can
be accessed through all of
the PFGBEST electronic trading applications, including both proprietary platforms
and direct API products. PFGBEST inaugurated Typhoon and began distributing
the capability to its FX client base in 2009, and dollar volume through the system
has increased some 30 per cent month over month since then. PFGBEST created
Typhoon as part of a strategy to create and own technologies so that clients are
never at the mercy of vendors or third party providers. PFGBEST has also taken
the development of Typhoon and applied it to precious metals dealers for its
affiliate, PFG Precious Metals, Inc.
Source: www.pfgbest.com
Equity Expense Ratios down in 2010: ICI
Mutual fund investors in 2010 paid lower average expense ratios in stock funds,
but bond fund expense ratios remained unchanged, according to an annual ICI
report on fund fees and expenses. The expense ratio is a fund’s total annual
expenses expressed as a percentage of a fund’s net assets. The ICI study shows
that the asset-weighted average expense ratio for stock funds fell from 86 basis
points in 2009 to 84 basis points in 2010. The asset-weighted average expense
ratio for bond funds stayed the same, at 64 basis points. A basis point is one
one-hundredth of a percentage point; 100 basis points equal one per cent.
Source: www.ici.org
RJ O’Brien Is Selected for Managed Futures Platform
ICS (Integrated Capital Solutions) Traders has selected RJ O’Brien as the trade
execution and clearing firm for the managed futures investment platform it launched
in 2010. The new offering helps investment advisors and investors create managed
futures portfolios to fit within their risk tolerance and investment goals with virtually
zero correlation to traditional asset classes.
Source: www.integratedcapitalsolutions.com

05/2011 www.tradersonline-mag.com
 advfntraders-450mmx280mm.pdf 17/01/2011 11:43:10

CM

MY

CY

CMY

K

TRADERS´ INSIGHTS
Uncover Your Edge: the Secret
to Trading Outperformance
One of the key traits of a novice
trader who performs consistently
well is an ability to participate
in the market when he has an
edge; to pick those fights that
he thinks he can win. A key
priority then is to devote time and
effort to developing your own
edge. You should look to spend
extended time observing and
interacting with the markets with
a view to identifying techniques,
approaches, trade-types, times
of day, price areas and most
importantly market behaviour
that you confidently believe will
provide regular and frequent profit
opportunities with quantifiable,
limited risk. You should, over time,
Trading Psychology for the Novice Trader develop a toolbox from which you
can effectively select the optimum
Discipline Yourself trade for the prevailing market
behaviour.
This is what day traders, acting
to Exploit Your Edge as locals, refer to as an edge and
it varies from trader to trader. In
fact, it is this bespoke nature of
your edge that means that you
The unequivocal objective of any aspiring trader taking their first, tentative can profit from the markets on an
steps in the global financial markets should be to establish a trading approach ongoing basis, develop a long-
that performs consistently well. Your ability to establish, maintain and then term career and, by extension,
regularly enhance your trading approach, which in turn enables you to develop why many systematic approaches
a career as a trader, is directly correlated to your consistency. Synonymous are prone to short-term success
with this performance consistency is a trading approach that emphasises but medium/long-term failure.
control and effective decision making at times of extreme emotional and
market pressure; all too common at the moment given the macro-headwinds Ineffective Involvement
we currently face. Can Be an Expensive Lesson
However, even with a valid edge
identified, you are still competing
05/2011 www.tradersonline-mag.com
in global financial markets against
other participants who have the
financial muscle to move markets
significantly, with no concern
for your open positions (e.g.
Central Banks, Primary Dealers,
hedge funds, pension funds).
Commonly, novice traders dive-in
to such aggressive conditions,
attracted by the “potential”
reward such behaviour allegedly
affords. But, in such instances, if
you can remain on the sidelines,
or with sufficient experience
effectively align yourself with
these larger players, rather
than challenge them head-on,
then your chances of achieving
exceptional consistency are
dramatically improved. Your
ability to implement effectively
the tool box of trades you have
developed will be much greater.
Furthermore, the ability of
novice traders to trade effectively
on the basis of their identified
edge is dramatically reduced at
times of exceptional volatility.
Such market volatility can be
prevalent at the cash market
open/close and is most apparent
in and around economic
data releases with the U.S.
Employment Situation report
(commonly referred to as Non-
Farm Payrolls) one of the prime
examples. Headline-grabbing
economic indicators such as
this attract much misguided
attention in the mainstream
trading media. Novice traders are
16
quick to pick-up on this attention
and make the assumption,
understandably enough,
that trading such events is a
prerequisite to trading success.
Nothing could be further from the
truth. There is usually an inherent
tendency for inexperienced
traders to jump into the market
at the first sign of volatility,
what is commonly referred to
as the flashing light syndrome
(FLS); a tendency that flies in
the face of what is in your own
best interest. Logic dictates that
the identification of setups and
conditions that are consistent
with your pre-defined edge is
much more precarious during
times of high market volatility.
As a result, the most effective
approach you can take to this
particular release – and the
majority of other volatile periods –
is to aggressively execute trades
from your toolbox in advance
of their release, where you can
clearly identify and exploit your
edge, and to avoid trading at the
time of the releases themselves.
The Importance
of Self-Discipline
At the heart of the success of
this highly effective approach
to maximising your edge is
your individual discipline in
the face of seemingly high
profit opportunities. Only with
the repeated practice of self-
enforced discipline does this

TRADERS´´ INSIGHTS
TRADERS
David Dukes
David is Head of Training at
Futex, a leading UK-based
Prop Trading & Investment
House with over 70
professional traders. David
is responsible for the training
and mentoring of traders and
his commitment to providing
new recruits with the highest
quality of training.
Contact: www.futex.co.uk
05/2011 www.tradersonline-mag.com
tendency dissipate; for those
of you that are not prepared to
address this issue, the tendency
never disappears and the much
sought after consistency remains
elusive. So, how do you enforce
this discipline in the face of
such temptation? Well, for some
fortunate souls the ability to be
disciplined in front of the trading
screens is an innate ability, albeit
such traders are exceptionally
rare.
For the rest of us, one
powerful technique used by
even the most experienced
Proprietary Traders is to commit
to paper, in the form of a trading
diary, a daily trading plan
with clearly defined goals and
objectives. Having the discipline
to sit down before the markets
open and structure your trading
day is essential to you avoiding
succumbing to the flashing
light syndrome. You want to
encourage your effective trading
instincts to come to the fore
during market hours, and by
planning effectively before you
begin, you remove the need to
decide in the heat of the battle
when, how and why you should
be involved. For example, the
decision to trade upon the
release of an economic indicator
or in the immediate run-up to
the 9pm futures market close
should not be a spur of the
moment one for novice traders.
Rather, these strategic decisions
17
should be made in advance,
with clarity of mind, purpose
and objectivity. Only with this
approach will you empower your
trading edge.
Conclusion
Trading in a manner that
generates consistent
profitability is an
insurmountable challenge
for many aspiring traders.
The skills required to achieve
consistent performance are
broad and the attainment of
sufficient high-quality, relevant
experience difficult when such
experience does not always
result in making money at
the beginning of your career.
However, by resiliently pursuing
the identification of your
individual edge, having the self-
discipline to plan in advance F1) DAX Futures (FDAX) 5-Minute
your daily approach and stick
to it, and by executing trades
according to both this plan
and your edge, you will tip the
balance firmly in your favour.
Results do not come quickly in
trading and if they do, they tend
not to last. A disciplined trading
approach is an investment in
your future and you will reap
enduring, consistent rewards
if you have the strength of
character to implement it. DAX futures tumbled 51.5 ticks in the 5-minute period following
the release of the December ’10 U.S. Employment Situation report.
Inexperienced traders tend to jump into such volatility – that is called
the flashing light syndrome (FLS).
Source: www.tradesignalonline.com

TRADERS´ INSIGHTS
TRADERS´: Is it not too late to
join the gold party?
John Netto: The important thing
to remember is that gains in gold
are relative and when taken from
a historical perspective, there is
room to the upside. Historically,
many other markets have risen at
much faster rates. For example,
gold‘s run in the 1970‘s saw a
gain of 2300%, while gold now
is up only about 500% from
its 2000 lows. With this past
momentum in perspective, a
move to $2000 in the next 18
months is feasible. Supporting
factors are a continuation of the
current uptrend, the geopolitical
risk premium especially with the
Middle East and Japan, emerging
market appetite for the metal, and
apparent reluctance of the Fed to
raise rates and protect the dollar.
What is perhaps more
Interview with John Netto: “Why Gold Will Continue to Outperform the Market” important for traders is the fact
that the market is always looking
All That Glitters to find the most efficient price.
And that means volatility, which
spells opportunity for traders.
Traders and investors across the globe flocked to gold during the financial crisis in the flight to quality trade. And TRADERS´: How do you view
gold continued to steam ahead as an inflation hedge as the market anticipated the inflation that would be caused by the influence of emerging
massive government stimulus packages. Almost two years later, gold is still on a tear. Whether the rationale is a bet against markets on the gold trade?
currency devaluation or increasing demand from emerging markets like India, the more pressing question for traders is will John Netto: Emerging markets
it continue? We ask veteran trader and President of One Shot One Kill Trading John Netto what his view is for gold. and economies like India and
05/2011 www.tradersonline-mag.com
18
China, whose cultures have a
strong appetite for gold, are
playing a major role in the
continued appreciation of the
price of the metal. But it is not
only a story of aggregate retail
purchases. On the level of
economic policy implementation,
emerging economic powers are
stockpiling gold to strengthen
their currencies on the world
stage. The backing of the metal is
essential to maintaining support
value and lending credibility.
TRADERS´: For the retail trader
looking to become active in
gold, what is the best way to
enter the gold market?
John Netto: For traders or
investors who want to stick to the
cash markets, the GLD and GDX
Exchange Traded Funds (ETFs)
are great ways to build exposure
to gold and gold stocks. To
those traders and investors who
have a different risk profile, there
are a number of ways to utilise
futures contacts to get into the
gold market. Futures traders
can choose between liquid
and popular gold contracts like
COMEX gold or LIFFE mini gold.
Traders should make it a policy
to keep global gold contracts on

TRADERS´ INSIGHTS
their radars, as many geopolitical
events that can significantly
impact metals prices occur off
hours.
TRADERS´: How do you feel
that the GLD ETF is affecting
the global supply and demand
dynamics?
John Netto: The GLD ETF has
been an extremely positive
development. The GLD is the
benchmark, traded on US
markets but there are a number
of other liquid international
alternatives, like Xetra-Gold,
traded on Deutsche Boerse’s
Xetra trading platform.
The important contribution
of these ETFs is that they
provide central pools of liquidity.
And once critical liquidity is
established in a particular market,
it feeds on itself, thus creating
even deeper markets. By nature
of its depth and accessibility,
especially the GLD has had a
huge impact on all players in the
game.
TRADERS´: In comparison with
the entire precious metals
complex, how do you view
gold’s relative value?
John Netto: Metals are not
homogenous products and
each one is unique in its appeal,
industrial applications and its
supply. While we have seen a
general correlation between
gold, silver, copper, platinum,
05/2011 www.tradersonline-mag.com
and palladium, they all react
differently to geopolitical and
economic drivers that change on
a day-to-day basis.
I would argue that the current
developments in Japan and
the Middle East are set to drive
prices of most metals, especially
gold, to new heights. Geopolitical
uncertainly and reconstruction
efforts should have net positive
impact on price.
TRADERS´: The gold/silver
ratio has been in the spotlight
recently. What is your
prognosis?
John Netto: The gold/silver ratio
has fallen from 84/1 (meaning one
ounce of gold can buy 84 ounces
of silver) during the 2008 financial
crisis to the 39 level where it is
now. This is a pretty extreme
move, but I expect a continuation
of this powerful downtrend to the
35-36 level. From this point in
time, I anticipate the ratio to hit
support and hang around those
levels for a consolidation period.
TRADERS´: And for traders
looking to enter the physical
commodities market
in general, do you see
alternatives? How does gold
stack up with other contracts?
John Netto: For traders looking to
enter the physical commodities
markets, I recommend looking for
liquid products as a starting point
for a few reasons. When market
19
dislocations occur, as we saw
in 1994 (Hurricane Greenspan), F1) Gold ETF (XAGI) vs. Gold Mining Stocks
1998 (burst of Long Term Capital
Management), 2000 (tech bubble
bursting), and 2008 (Financial
crisis), even products with a safe
haven perspective can often
suffer from a lack of liquidity and
succumb to short term selling.
For those taking a core position in
the metals space, understanding
this short-term phenomenon is
critical to success and proper
position sizing.
For example, using metals as
a complimentary, non-correlated
asset class which captures the
broader macro theme is a great This chart demonstrates how the price of spot gold (red bars) has
outperformed gold mining stocks (blue bars) in 2011.
way to dampen volatility in your Source: CQG, Inc.
portfolio. We have seen a great
deal of play in the energy space
as well. While a number of hedge
funds and traders that own gold, F2) Gold/Silver Ratio
also are active in the distillates,
the two markets are vastly
different and are controlled by a
unique set of drivers. Keeping on
top of geopolitical risk drivers and
interest rate differentials between
currencies can help understand
the sentiment pushing these and
other commodities markets in
general.
This interview was conducted
by Stephanie Hammer
(hammerkrabbe@me.com).
This chart depicts the falling ratio of gold to silver, showing that the price
of silver has appreciated more quickly than gold, especially since 2010.
Source: CQG, Inc.
How to Spot Trading Opportunities Using Correlations in the Forex Market

Stop Missing Trades!

How many times have you flipped to a chart only to see a move that has just taken
place and you think to yourself, “darn, missed another one”? For many traders,
adhering to strict reward/risk principles prevent them from taking trades that may
have already traveled too far from support or resistance as the risk may be too
great. Missing trading opportunities is a common problem and can sometimes be
more frustrating than losing trades. It gets in your psyche and festers, invoking all
of the “woulda, coulda, shoulda” feelings traders are prone to have. Well there is a
way to mitigate these feelings, and it involves the use of basic correlation analysis.
 22
TRADERS´ INSIGHTS

F1) Weekly Correlations AUD/USD and EUR/USD

Correlation Analysis gives a more stable reading of

Simply put, correlations in the the correlation, as the longer a
market are relationships that correlation holds up, the more
one security has to another. reliable it will be. A correlation
These instruments can be of better than .8 (either positive
positively correlated, which or negative) is said to be a
means that they tend to trade high degree. As you can see
in the same direction, or they from table 1, the EUR/USD Here you can see a diagram of the high correlation between EUR/USD
and AUD/USD.
can be negatively correlated, and AUD/USD correlation has Source: www.mataf.net
which means that they tend to been highlighted and has a high
Michael Conlon trade in the opposite direction. correlation of .859.
A correlation of ‘1’ is a perfect
Michael Conlon brings to correlation, meaning that two The Set-Up T1) Weekly Forex Correlations 3/15-3/21
FXEDU over twelve years of securities trade exactly the same. Many traders who awoke to
trading experience. He started A correlation of ‘-1’ means that the US trading session on 3/17 AUD/ EUR/ EUR/ GBP/ NZD/ USD/ USD/ USD/
USD JPY USD USD USD CAD CHF JPY
his financial career at Merrill two securities trade perfectly were disappointed to learn that AUD/USD 100.0 2.5 85.9 85.4 91.0 -87.6 -93.2 -80.5
Lynch, and then moved to opposite to one another. EUR/USD had begun to climb EUR/JPY 2.5 100.0 92.7 3.7 -4.1 -21.2 12.3 42.1
Donaldson, Lufkin, Jenrette There are many free online higher and some of those EUR/USD 85.9 32.7 100.0 88.6 77.9 -74.6 -84.4 -71.5
(DLJ), before running a trading services that will show you traders had determined that GBP/USD 85.4 3.7 88.6 100.0 81.0 -72.6 -91.7 -82.6
desk at an internet trading various correlation tables, so you the reward/risk ratio was not NZD/USD 91.0 -4.1 77.9 81.0 100.0 -73.2 -83.1 -77.8
firm that is now part of TD can determine whether or not ideal to enter the trade (see USD/CAD -87.6 -21.2 -74.6 -72.6 -73.2 100.0 77.8 55.9
Ameritrade. Since that time, certain currency pairs are highly Figure 2). USD/CHF -93.2 12.3 -84.4 -91.7 -83.1 77.8 100.0 90.4
he has been an independent correlated or not. The closer you However, many savvy traders USD/JPY -80.5 42.1 -71.5 -82.6 -77.8 55.9 90.4 100.0
trader for over ten years. can get to either extreme is ideal. were able to look toward AUD/ The values in the table represent the various correlations of currency pairs to one another,
multiplied by 100 for easier viewing. As you can see, EUR/USD and AUD/USD have a high degree
Using the weekly timeframe USD, which was trading lower at of positive correlation. If you think about it, this makes sense as both pairs are based on USD.
Source: www.mataf.net
(see Figure 1 and Table 1 ) the same time that EUR/USD was

05/2011 www.tradersonline-mag.com
 23
TRADERS´ INSIGHTS

rising (see Figure 3) as a possible patterns. In this example, there Conclusion

candidate to buy. were three possible scenarios to
A quick check of the news consider: that EUR/USD could
conveyed that there was no reverse and begin trading lower
reason specific to Australia that to fall more in line with the price
would cause weakness, so this action on AUD/USD; AUD/USD
presented an ideal situation to could reverse and begin trading
use a correlation play. higher to join EUR/USD; or a
combination of both.
How It Works Because EUR/USD was the
One of the reasons correlation more dominant pair (it had gone
trades work so well is because up more than AUD/USD had gone
they tend to be mean reversion down), the correct play was to
plays. What this means is buy AUD/USD.
that when two pairs that are As you can see from Figure
highly correlated are not 3, AUD/USD did indeed play
trading similarly, there is a high catch-up and actually made a
probability that at some point greater move from that point than
they will revert back to usual EUR/USD.
Rather than fretting over missed
trades or taking on more risk than F2) Hourly Chart of EUR/USD 3/15-3/21
you would like, it is always better
to do a quick analysis of other
highly correlated pairs to determine
if something is not behaving as
you might expect. There are times
that a temporary misalignment
of correlation due to variety of
factors can present tremendous
potential for traders to not only take
advantage of moves they may have
missed, but also to potentially find
even better, lower risk opportunities.
This chart shows the price action of EUR/USD which began to climb
higher on 3/17 from the beginning of the European trading session
throughout the US trading session.
Source: www.tradesignalonline.com

F3) Hourly Chart of AUD/USD 3/15-3/21

TRADERS´ is a premier publisher of trading magazines for
the financial markets. Our vision is to offer an international
platform for industry professionals and serious traders alike.

Freelance Authors
Your Point Of Entry To
Finance and Media Industry Ideally you should be a practical trader and have considerable knowledge of technical
analysis and all the related subjects like risk and money management, trading
software, trading systems and trading psychology. You will work from home, on your
Please send your own time-schedule and submit articles at specified deadlines.
This chart shows the price action of AUD/USD, which on 3/17 was
application via e-mail to: moving lower as EUR/USD was moving higher, setting up a correlation
play. AUD/USD finally catches up to the EUR/USD move roughly
jobs@traders-mag.com twelve hours later!

www.traders-mag.com Source: www.tradesignalonline.com

05/2011 www.tradersonline-mag.com
 Help Us Help the Earthquake Victims

Top Traders Speak on Behalf of the Earthquake Victims

Following the devastating earthquakes on March 11th and 22nd, the people of New Zealand and Japan are obviously in great need. In cooperation with Nick McDonald, founder of Trade with
Precision, we have established a special donation program to actively help those affected by this terrible disaster: The Online Trading Symposium.

TRADERS´ INSIGHTS
The Birth of an Idea
Following the first severe
earthquake in Christchurch, New
Zealand, legendary trader Nick
McDonald and his good friend
Lothar Albert, Publisher and Editor
in Chief of TRADERS´, devised
a way to set up a fundraising
program which would raise
significant amounts of money in
order to help the victims directly.
Online Trading Symposium
Said and done. With the Online
Trading Symposium, well known
international traders are holding
seminars and lectures live, online
and free of charge, of course.
Both Mr McDonald and Mr Albert
would like to encourage as many
participants and viewers as
possible to make a donation to
this very good cause.
The earthquake in Japan on
11 March with all of its terrifying
consequences (tsunami,
aftershocks and a looming
nuclear catastrophe), has proved
even worse than the one in
New Zealand and Mr McDonald
and Mr Albert have expanded
the donation programme since
then to aid the victims in Japan
as well. All donations are
transferred directly to the Red
Cross in New Zealand and Japan
where they are needed sorely.
05/2011 www.tradersonline-mag.com
It goes without saying that all
employees, presenters as well
as banks, brokers, publishers
associated with the project as
well as the initiators themselves
are contributing their time and
skills voluntarily and without
compensation.
The Program
The Trading Symposium hosts
a webinar from a trading expert
every weekday from Monday
16th May right through to Friday
17th June. Sessions are held
at 4pm ET unless otherwise
specified. Why 4pm ET? We
have participants from all around
the world and this time slot we
believe represents maximum
exposure for the major centres.
In the webinars, you will have
the opportunity to see some of
the most successful professional
traders present their trading
approaches. They will work
with you to improve your own
trading by teaching you the most
important principles of trading.
All this, and much more – all
completely free of charge.
Here is a brief excerpt from our
list of presenting traders:
• Larry Williams
• Linda Bradford Raschke
• Tom Hougaard
25
• Nick McDonald
• Jack Schwager
• Steve Ward
This is a great programme
that allows you to improve your
trading and learn a lot. Our only
request of you is to take heart
and make a meaningful donation
to the earthquake victims in
Japan and New Zealand. Every
cent counts – that is our promise
to you.
A detailed schedule will soon
be posted on the website www.
tradingsymposium.com.
Conclusion
With the Online Trading
Symposium by Nick McDonald
and Lothar Albert, everyone
walks away a winner. Webinar
and lecture participants and
viewers have the chance to learn,
free of charge, from the best in
the industry and can show their
appreciation by donating. This
programme allows presenters to
instruct numerous traders and
makes the donation campaign
possible in the first place.
And finally, the earthquake
victims will hopefully get the
necessary support that they
need at such a terrible time. All
infomation can be found on
www.tradingsymposium.com.

TRADERS´ TOOLS
Dow Jones Indexes announced
that it now had a new country
classification system that will
apply to all countries covered
in its major index families.
Countries included in the
indexes will be researched
and assessed according
to a predefined framework
built around the needs of
international portfolio investors
in three broad categories:
market and regulatory
structure, trading environment,
and operational efficiency.
Assessments of the countries
will be monitored on an ongoing
basis. A public announcement of
classification changes, if any, will
be made in September of each
year with a minimum of six month´
notice. More information can be
found at www.djindexes.com
Patsystems has been selected
as the key technology provider
for the newly established
Vietnam Commodity Exchange
(VNE). VNE will initially trade in
steel, rubber, and coffee, and
provide an additional financial
tool for producers and traders
to protect themselves against
price fluctuation risks. VNE will
utilise Patsystems’ complete
exchange solution when it
launches early in 2012. This
will include Patsystems’ trade
matching engine, clearing and
05/2011 www.tradersonline-mag.com
settlement platform, pretrade
risk management module, and
the front-end execution platform.
Dow Jones Indexes
For additional details, please visit
www.vnx.com.vn
CGQ, Inc., and the
JohannesburgStockExchange
(JSE) announced that they made
JSE market data available to
CQG customers. JSE is the
most recent addition to CQG’s
list of market data sources and
the first exchange connection
in Africa. Real-time and
historical JSE market data is
available via CQG’s Integrated
client and CQGMobile. CQG’s
consolidated market datafeed
is delivered via Internet, private
line, or custom-engineered
solutions. More information can
be found on www.cqg.com
New features, new name and a
new website. With the release
of version 6.0 the chart and
analysis software Tradesignal
Standard Edition is getting
a new image and a new
name: Tradesignal Online
Terminal. The latest version
offers a new appearance
along with additional options
and functionality. Many new
help options now make the
creation of single indicators
and trade systems with the
Equilla script even easier. Also
new are multidimensional
arrays, development of Point
& Figure charts with different
Boxsize-Modi and the option to
replace Inline Instruments with
Inputs, so that the modification
of indicators and trade systems
can be implemented along with
the individual creation of entire
portfolios. Tradesignal Online
Tradesignal Online
Terminal is high performance
chart and analysis software,
that is offered in a complete
package with a realtime-push-
market coverage. It is a problem
free and cost effective control
NYSE Liffe U.S.
based trading system for private
traders. Tradesignal Online
Terminal offers an extensive
number of chart types, indicators
and trading system modules, a
market scanner, an integrated risk
and money management module
and a trading portfolio, which
facilitate the monitoring of entire
portfolios. For more information
and a 14 day free trial, go to
http://terminal.tradesignalonline.
com
NYSE Liffe U.S., the U.S.
futures exchange of NYSE
Euronext (NYX), announced
the immediate availability of
2-year, 5-year and 10-year
U.S. Treasury futures along
with U.S. Bond and Ultra Bond
futures contracts. These products
complement the successful
26
Eurodollar
PR
N DU
contract that
EW C
O
debuted on
March 21 with
TS
189,484 contracts
traded on NYSE Liffe
U.S. in the first week. By
utilising the revolutionary
new clearinghouse, New York
Portfolio Clearing (NYPC),
customers trading any of these
interest rate futures products
will benefit from the combined
value of trading on NYSE Liffe
U.S. coupled with the “one-pot”
margining power of NYPC.
Interest-rate futures traded on
NYSE Liffe U.S. will benefit from
the unique capital efficiencies
of NYPC’s ‘one-pot’ margining
which, for the first time ever,
assesses margin across fixed
income asset classes based
on the actual risk of a clearing
member’s portfolio. Additionally,
all U.S. Treasury futures traded
on NYSE Liffe U.S. will benefit
from an innovative, streamlined
delivery process allowing for
the seamless netting of futures
and cash securities. These
innovations provide unique
benefits to global futures
market participants by reducing
the cost, complexity and risk
inherent in the traditional trading
and clearing model. For more
information, please visit
www.nyse.com

TRADERS´ TOOLS
Exchange Traded Funds
BOOKREVIEW
A Concise Guide to ETFs
By Francis Groves
The progress of exchange traded
funds (ETFs) in the 21st century
has been impressive – they have
become an increasingly important
part of the investment spectrum.
As a result, it is key that investors
and those interested in the
financial markets have a working
knowledge of how these products
operate.
Exchange Traded Funds is
a new book from experienced
financial writer Francis Groves,
who is also author of Corporate
Actions – A Concise Guide. In
Exchange Traded Funds Groves
examines what ETFs are, how
they are constructed, how they
are regulated, the variety of asset
classes they cover and also some
practicalities involved with using
them, as well as giving thoughts
on the more advanced ways to
use ETFs in commodities and
leveraged products.
In basic terms, an exchange
traded fund is an investment fund
that tracks an index and can also
be traded as a stock. Groves’
main focus throughout the book
is on ETFs that track indices, as
these are the most important in
05/2011 www.tradersonline-mag.com
terms of their range, the amount
of money invested and also
the advantages they offer. The
products explored include ETFs
that track equities indices, fixed
interest securities, money markets,
currencies, credit markets,
property and commodity futures.
Exchange Traded Funds is
split up into three parts. Part
One, ‘ETF Basics’, takes a look
at ETFs in the context of older
forms of collective investments
and explores how they developed,
moving on to an overview of
equity indices, and finishing with
the construction methods for
ETFs. As Groves says: ‘Familiarity
with ETF construction methods is
important for understanding the
risks involved when investing in
ETFs’, and he goes through this in
detail in this section.
Part Two, ‘The ETF Universe’,
examines the other main asset
classes that are covered by ETF
investing, aside from equities,
these being fixed-income
securities, cash, currencies,
credit and property. Groves looks
at each asset class in detail,
examining exactly what ETFs that
27
BOOKREVIEW
track these asset classes are
doing and how they operate.
Exchange Traded Commodities
(ETCs) are then dealt with in
a separate chapter, before
the discussion moves on to
more advanced ETFs, such as
leveraged, short, or active ETFs.
At every turn, Groves offers
impressive detail, including both Title: Exchange Traded Funds
the risks and benefits of each of Subtitle: A Concise Guide to ETFs
these advanced ETF products. Author: Francis Groves
The final part of the book, ISBN: 9781906659141
‘Investing in ETFs’, looks at the Price: £34.99
practicalities of buying ETFs Publisher: Harriman House
and how to find out more about
individual funds. Groves examines About the author:
Francis Groves studied modern history at
how ETFs can be used, such as the London School of Economics and has
diversification into equities in other many years of experience working for legal
and financial publishers including, Reuters,
regions or industries, when and the Financial Times and Butterworths. He has
how often to trade ETFs, as well written on overseas property investment and
created financial literacy training materials.
as details on regulation, custody The interaction of politics and finance is a
particular interest for him. Francis continues to
and taxation. A useful glossary enjoy reading history. Other spare time pursuits
follows, as well as a reference list include walking and exploring new walks.
of all the major ETF providers.
Overall, Exchange Traded Funds
is a valuable introduction to this
important topic.
 28
TRADERS´ TOOLS

SOFTWAREREVIEW
F1) Trading without Boundaries

Trade Without Boundaries

iPhorex
The foreign exchange market (forex) is one of the largest financial markets in the
world, logging an estimated $4 trillion in daily turnover in 2010. It is also one of
the fastest paced. Because currency values are constantly changing, even novice
traders soon learn the importance of having current and reliable data. But to get
such data, traders have traditionally had to remain in locations with high-speed The iPhorex portfolio of mobile trading applications empowers forex
traders to trade wherever, whenever, and however they want.
internet connections. Seeking to free up traders to make deals on the go, iPhorex
has developed a forex trading app for the iPhone, iPod touch, and iPad. Source: www.iphorex.com

iPhorex: Forex Trading constant access to a desktop

anywhere, anytime
The iPhorex app empowers users
to trade wherever, whenever,
and however they want, using
information that is updated
continuously, second by second.
This full-featured trading software
feeds forex traders live charts
and live market rates for any
conceivable pairing of foreign
currencies. Armed with this
information, traders can trade in
real time through several leading
broker institutions. All of the app’s
functionality is available to users
on the iPhone, iPod touch, or
iPad; the only difference for the
user will be the size of the screen.
or notebook computer, but also F2) Live Charts
expands their opportunities
for trading. Because forex is a
decentralised global marketplace,
traders have an extended trading
period each week. A trader
located in New York can start
trading at 5.00 p.m. Eastern
Time on Sunday when the New
Zealand markets open, and trade
around the clock until 5.00 p.m.
Eastern Time on Friday. With
accurate information and real-
time trading opportunities at their
fingertips on an iPhone, traders Live Charts let users view live price movement so they can analyse
data, visualise trends, and use online indicators that lead to better
can enhance their chances of decisions and help mitigate risk. The Live Chart display shows real-
time market values for any selected currency pair. Using the multi-
finding deals they want to make touch functionality of iPhone and iPad, users can instantly see the
– whether they are in an office, delta between any two points.

iPhorex not only frees up at home, or on a long flight that Source: www.iphorex.com
traders from having to maintain provides wireless internet access.

05/2011 www.tradersonline-mag.com

TRADERS´ TOOLS
Traders gain instant mobile
access to world markets, along
with features that include:
• Real-time trading capabilities
• Real-time alerts and indicators
• Live FX price feeds
• Live, continuously updated
charts
• The ability to pair any two
currencies
• A real-time calendar of
economic events
• A real-time currency strength
index between all major
currency pairs
• A stock ticker of major financial
indices
Trading Tools at the Fingertips
When traders open iPhorex,
they have immediate access to a
powerful forex trading platform
and can view the global forex
outlook. From there, they can
tap the screen to access their
accounts, initiate trades, and
check their portfolios.
Live global indices run across
the top of the trading platform.
Just below the indices are live
market price feeds. Users can
choose to see live rates in grid or
list view.
Below the live rates, users
can see buy and sell market
rates for currency pairs. iPhorex
updates these rates after even
the slightest fluctuation in the
exchange rate. Traders can
arrange currency pairs and save
05/2011 www.tradersonline-mag.com
them in the “favourite” setting,
so that these pairs will be visible
every time the app opens.
At the bottom of the screen,
users can simply tap to view
positions, closed and pending
orders, calendar, alerts, and
strength index. They can also
tap Account at any point to
view up-to-date realised and
un-realised gain or loss. By
getting immediate access to
information about what the
market is doing now, traders can
act quickly and avoid missing
opportunities.
Real-Time, One-Click Trading
iPhorex’s most powerful tool is its
real-time forex trading function.
Users can benefit from one-click
execution on market and limit
orders. They can also set stop
loss and profit targets in advance.
Because iPhorex requires little
Internet bandwidth – a maximum
of 0.075MB per minute – it allows
traders to execute trades almost
instantly.
Schedule Alerts
In a rapidly changing global
marketplace, forex traders hate to
miss trade opportunities. iPhorex
lets traders set alerts that keep
them posted on the specific
opportunities they have been
monitoring most closely.
With iPhorex, traders can set
an alert for any currency pair
at a target rate. When the pair
29
hits the set target rate, iPhorex
will send an alert to the trader’s
email as well as to the trading
partner‘s email. It also sends a
push notification to the trader’s
designated mobile device. Using
these alerts, traders can restore
work/life balance while still
keeping up with the market.
F3) Live Rates
Live Charts
Forex traders rely on timely
information as they evaluate
trading opportunities. iPhorex’s
real-time interactive charts are
designed to help users become
better traders, regardless of their
strategy or experience level.
Live Charts let users view live
price movement so they can
analyse data, visualise trends,
and use online indicators that
lead to better decisions and help
mitigate risk. The Live Chart
display shows real-time market
values for any selected currency
pair and can be viewed in a Line
or Candlestick chart. It shows the
general price movement from one
closing point to the next over the
selected time frame.
Using the multi-touch
functionality of iPhone and iPad,
users can instantly see the delta
between any two points. They
can use the horizontal bar on
the candlestick chart to see
the support and resistance. In iPhorex lets forex traders see live rates for any currency pair. By getting
immediate access to information about what the market is doing now,
addition, live thumbnail chart traders can act quickly and avoid missing opportunities.
snapshots help users spot Source: www.iphorex.com
trends.

TRADERS´ TOOLS
Strength Calculator
Forex traders must take many
factors into account as they
assess the relative strength of
one particular currency. For
example, simply determining that
the U.S. dollar gained against the
Euro last week does not tell the
whole story. What if the dollar
also depreciated against the
Australian dollar and Canadian
dollar?
The iPhorex Strength Calculator
lets traders assess the strength
of each of eight major currencies
(Euro, U.S. dollar, British pound,
Swiss franc, Australian dollar,
New Zealand dollar, Japanese
yen, and Canadian dollar) against
all of the other major currencies
collectively. Rather than simply
looking at currency pairings in
isolation, traders can gain a much
more complete and insightful
picture of the strength of a
currency.
Calendar
Even minor fluctuations in the
world’s economic and political
climate can cause noticeable
swings in the relative values of
the world’s currencies. By getting
the latest information about retail
and home sales, nonfarm payrolls
(NFP), and monthly interest rate
announcements, forex investors
can make smarter decisions
about the relative strength
of each country’s economy.
iPhorex’s Calendar function
05/2011 www.tradersonline-mag.com
gives traders detailed, up-to-
date information on economic
events that may affect their
trading decisions, and is live
24/7. This calendar is powered
by Econoday, a service that is
designed to deliver economic
announcements and up-to-the-
minute event updates – including
data and analysis – directly to
iPhones or Blackberry devices in
local time.
Portfolio
With the iPhorex portfolio, traders
can see their account balance,
orders, and positions in one single
view. From there, they can easily
manage their orders and positions,
get access to their closed
positions, and see their profit and
loss for each trade. Using this
information, traders can fine-tune
their investment strategies and
assess their overall returns.
Installation, Pricing,
and Compatibility
iPhorex is available as a
download from the iTunes Store
for $0.99. The app requires iOS
2.0 or later, and is compatible
with iPhone, iPod touch, and
iPad. To trade on iPhorex, users
will need to maintain an account
with one of the company’s
partner brokers.
Conclusion
Strictly speaking, iPhorex does
not fill an unmet need in the
30
marketplace; other forex trading
solutions do exist for iOS.
iPhorex’s main differentiator
appears to be its “all live, all
the time” information and
functionality. In a notoriously
volatile market where fortunes
can be lost in seconds, traders
can benefit from getting real- F4) Real-Time Trading
time rates and charts, and from
executing trades with absolutely
no delay. Another clear benefit is
that iPhorex allows traders to pair
any two currencies from around
the globe.
Like any brand-new app,
iPhorex will have to prove
itself in terms of reliability
and usability. The company’s
leadership will also need to
respond quickly to feature
requests and implement a
feasible upgrade schedule. But
iPhorex appears to be going to
market with a clean, intuitive first
offering. If iPhorex catches on,
users will immediately clamour
for versions of iPhorex that work
on other technology, such as
Mac desktop computers and
Android mobile devices. The
CEO of iPhorex has assured us
that both of these formats will
be delivered to market in the
second quarter of 2011; the Mac
desktop version will be available
through the Mac app store.
iPhorex lets traders execute trades almost instantly. Users can benefit
from one-click execution on market and limit orders. They can also set
stop loss and profit targets in advance.
Source: www.iphorex.com
 Get Top Trading Experts’ Best Strategies to Trade More Profitably

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TRADERS´ TOOLS
WEBREVIEW
NewsEdge v8
Get an Edge in Your Trading
There are traders, and there are traders with an edge! What is their Edge? Maybe they use NewsEdge v8 to fuel their news-based trading strategies. While other services
offer news, NewsEdge v8 works to stream personalised, filtered news with ultra-low latency. When you are the first to know then you have the edge.
What Is NewsEdge v8?
NewsEdge v8 (http://bit.ly/eBU1SS)
delivers distilled real-time scrolling
news and alerts rapidly and
efficiently to the desktop. Traders
use NewsEdge v8 to stay on top
of the companies, industries, and
situations they monitor each day.
Filtered news streams into the
product with near-zero latency, and
highly customised functionality
notifies you when news breaks.
Traders stay on top of market-
moving events, government
regulation, industry announcements
and other factors affecting the
markets – as it happens.
Sources of Information
News-based trading strategies
depend on news you can trust.
05/2011 www.tradersonline-mag.com
NewsEdge v8 delivers all the
major press release services,
financial newswires and other
critical sources of information.
NewsEdge v8 supports over
3500 sources of information
from premier providers such
as Briefing.com, Business
Wire, Dow Jones, Deutsche
Presseagentur, FlyOnTheWall,
GlobeNewswire, Market News
International, Midnight Trader, PR
Newswire, RNS, and more. Our
catalog of supported information
sources is constantly expanding.
Advanced features, such as
WebLinks, allow traders to
instantly augment results from
company news searches with
information from top-name web
sites and blogs.
Alert Options
The NewsEdge v8 interface
offers traders total flexibility in
customising the application’s
display. Each NewsEdge v8
subscription begins with a
package that will show all
news available. But time is a
scarce commodity and Acquire
Media knows that browsing
news headlines is not efficient.
NewsEdge v8 provides a trader-
friendly way to set up alerts
using a convenient wizard-like
approach. Traders simply add
keywords or phrases, identify
relevant subjects, or use ticker
symbols to produce a filtered
feed of news that matters.
Importantly, traders can have
any number of alerts running
32
independently or collectively.
Audio and visual signals
associated with an alert enhance
the trader’s effectiveness. Traders
who are busy working in other
applications are alerted when
a news event comes across
the wire by way of a flashing
headline, a pop-up window, or
an audio clip that plays. With
integrated filtering and alerting,
NewsEdge v8 works behind-the-
scenes to focus traders on the
news that warrants their attention.
Relevance and Impact
NewsEdge v8 is designed to
recognise the varying degrees
with which key words or other
alert criteria may be relevant to a
story. For example, an alert might

TRADERS´ TOOLS
be set to recognise headlines
about a particular company. But a
story about a possible acquisition
involving the company is certainly
more relevant than a story
covering a local sponsorship
event. Both stories mention
the company but one is more
relevant. Alerts able to make this
distinction are easy to create.
NewsEdge v8 lets you make
relevancy decisions with its
custom relevance indicator.
NewsEdge algorithms take trader
feedback into consideration,
applying a mathematical
weighting factor that determines
how relevant any story is to
the alert criteria. Traders set
relevance thresholds based on
the results they are interested
in receiving. This has proven
especially useful when there are
anticipated major news events
for a company that normally
receives a lot of ordinary news
mentions. Empowering traders
to distinguish noteworthy
news items from the everyday
noise makes NewsEdge v8 an
intelligent trading assistant.
Hand in hand with identifying
highly relevant news articles,
determining which articles
are likely to have significant
market impact is another unique
capability NewsEdge v8 offers
traders. To reduce the time
involved in split-second decision
making, NewsEdge v8 calculates
a custom impact rating for each
05/2011 www.tradersonline-mag.com
filtered story. Acquire Media’s
proprietary algorithms determine
how the contents of a news
article relate to its alert criteria
(keywords, phrases, industries,
companies, etc) – producing an
impact rating that gives traders
an ability to gauge whether the
news in the article is likely to
impact market activity, measured
and displayed on a convenient
percentage scale. You can
react faster and with greater
confidence.
Advanced Functionality
Every element in NewsEdge
v8 is highly customisable. This
allows traders to integrate the
product’s benefits into their
personal style and workflow
with ease. Single window or
multiple window displays help
traders manage their screen
real estate effectively. Keyword
highlighting calls attention to the
context of each occurrence. In
addition, traders can also choose
to highlight additional words or
phrases in their results. The result
is quicker, more certain reading –
which producers faster and better
decisions.
NewsEdge v8 offers a unique
WebLink feature. WebLink does
just that – it links seamlessly
to any web site, using a ticker
symbol to obtain relevant
information from a public or
subscription site. For example,
if a trader enters MSFT in the
33
search box and has previously
enabled the NASDAQ WebLink, F1) Alerts Headline Viewer – Merged View
all the latest news for Microsoft
is returned into NewsEdge v8
and a second window opens
displaying the NASDAQ Web-
based tear-sheet for Microsoft.
NewsEdge v8 provides several
pre-defined WebLinks but
traders can enable their own
preferred sources. Traders
using multiple sources to track
and monitor their companies
find this feature a real time-
saver. With one click, users Figure 1 shows an example of multiple running alerts in a single-viewer.
In this example, colours are used to differentiate the results for each
get all the news and all their alert. Traders can easily follow the important news without taking up
valuable screen real estate.
preferred site information
simultaneously. Source: NewsEdge v8
Conclusion
NewsEdge v8 is uniquely trader- F2) Alert Builder
friendly, rich in trading-relevant
functionality, and tuned to the
demands of real-time trading. It is
ideal for traders or anyone whose
job demands access to real-time
news. Based upon its success
as a desktop application, Acquire
Media has also developed a
NewsEdge v8 API that allows
integration into customer
proprietary systems. In today’s
trading environment, this service
could help you stay on top of
what is happening and may even
translate into developing a true
news edge.
Figure 2 shows how easily traders set up alerts. In this example, the
alert is for Forex News and will use the NewsEdge v8 subject codes
for both Currency and Foreign Exchange Trading to filter news results.
Source: Source: NewsEdge v8

Why Trade Penny Shares?
A lot has been written over the
years about the attractions
of owning low-priced “penny
shares”. The argument is that
elephants do not gallop; so you
are unlikely to get a multi-bagging
return on Apple shares when they
are priced at more than 300 (as in
Figure 1) whereas you could have
achieved a massive 35-bagging
capital appreciation if you had
bought those same shares priced
at just ten as recently as 2004.
Why Not Trade Penny Shares?
All is not rosy in the penny
shares garden. We have all
received spam emails that pump
supposedly sure-fire penny
34
stocks so that the original holders
can dump them just a few days
later – thereby sinking the price
just after we have jumped on
board.
Even without those
shenanigans, low-priced shares
are notoriously volatile, which
is particularly problematic for
traditional ‘investors’. If you invest
£10,000 in a penny share that
loses 50 per cent of its value
(as easily it might) you have lost
£5000, and if it goes bust (which
is a real possibility) you have lost
the full £10,000. Ouch!
The fact that your stock pick
was priced at an apparently low
10p-per-share when you bought
in, rather than a much higher

T1) Current Penny Shares

AEA TECH PHYSIOMICS
ARK THERAPEUTICS PHYTOPHARM
BERKELEY MINERAL PLUS MARKET GROUP
CERAMIC FUELS PROVEXIS
DOMINION PETROLEUM REAL ESTATE OPPORTUNITIES
EMPYREAN ENERGY ROXI PETROLEUM
FORTE EXPLORATION SEDA BARCELONA
HYDRODEC GROUP SPORT MEDIA GROUP
INMOBILIARIA COLONIAL TEN ALPS
Low Price Means Low Risk? INNOVATION GROUP UNIQ
LIGHTHOUSE GROUP URBAS

Taking a Punt on Penny Shares

NICHE GROUP VIALOGY
OPTARE VICTORIA OIL & GAS
OXFORD BIOMEDICA XTRACT
PENDRAGON YELL
When it comes to trading highly-speculative highly-volatile “penny shares”, traders have an advantage over traditional Table 1 shows 30 current stocks which are available for purchase at a price of less than ten thereby offering a
risk of no more than £10 on a £1-per-point spread bet.
investors. When trading on a per-point basis, Low Price can mean Low Risk.

TRADERS´ STRATEGIES
Tony Loton
Tony Loton is a prolific
trading and investment
writer, and author of the book
“Stop Orders” published by
Harriman House. You can
reach him via his Position
Trading web site at www.
lotontech.com/positiontrading.
05/2011 www.tradersonline-mag.com
1000p-per-share, does not help
the traditional investor at all. 50
per cent of £10,000 is £5,000 and
zero per cent of £10,000 is £0
whatever the price you invested
at. So naturally you would feel
much safer being invested in a
1000p-per-share blue chip stock
that does not (usually) fall by 50%
or more on a whim.
Low Price Can Mean Low Risk
As just illustrated, for an investor,
low price does not mean low risk;
quite the opposite, in fact. But for
a £££s-per-point spread bettor or
other trader the opposite may be
true. A low price can mean low
risk.
A £10-per-point spread bet
on a 10p share risks only £100
compared with a much higher
£10,000 risk for a £10-per-point
bet on a 1000p stock. The point
being made here is that on a
£££s-per-point basis you can test
the water by starting small in a
way that you cannot when making
a traditional investment. Just try
investing as little as £100 in a
conventional brokerage account,
and see how your investment
registers an immediate paper
loss of 10% (or more) merely as a
result of the transaction charges.
So investing on a £££s-per-
point basis on a low-priced stock
can be particularly attractive, but
you can take this £££-per-point
risk minimisation technique too
far, which leads us to...
35
Meaningful Stakes
On 25 January 2011, shares in
Swedish ‘search’ company Eniro
apparently 50-bagged in a single F1) Apple Share Price 2004-2011
day. It turned out that this price
jump was the result of a 50-for-1
share consolidation. But it might
have got you thinking. If the share
price did rise 50-fold in a single
day, from 0.6 to 30, what would be
the point of a puny £1-per-point
spread bet that nets you just £30?
In Max Gunther’s book “The
Zurich Axioms“, Minor Axiom 1
is “Always play for meaningful
stakes”. If you stake just £100 and
you are lucky enough to double Figure 1 shows the progression of Apple Inc. stock; from penny share
to 35-bagger in just seven years.
your money then, well, you are
still poor. But consider this: Source: www.tradesignalonline.com
En route from ten to 350 Apple
shares doubled not once but
approximately five times. When
the price doubled from ten to 20
you could have neutralised your Strategy Snapshot
original risk with a stop order
placed at break-even, thereby
Strategy name: Penny Share Punts
freeing up your original risk Strategy type: Big Gains from Small Stakes
capital so that you can pyramid Time horizon: Medium to long-term
an additional position – thereby Setup: Identify a low-priced stock
doubling your stake – for no more Entry: Immediately subject to money management
than your original risk. Do this criteria
as many times as you like as the Stop-Loss: None initially, later trailed to lock-
in profits
price heads higher and higher.
Take Profit: Either via trailing stop or on a
You will not be ‘fully invested’ multi-bagging gain
to the tune of – let us say a risk- Trailing-Stop: Not until price has at least doubled
equivalent £10,000 – until your Exit: As ‘Take Profit’
stellar stock has become a now- Risk and Money Management: £1-per-point bet with no stop order to risk
stable (you hope) 1000p-per-share just £10 (1%) on each candidate in a £1000
blue chip. account; scaled up for larger accounts
Average number of signals: Not a signal-driven strategy
If your penny share pick does
shoot up to the moon, there

TRADERS´ STRATEGIES
should be plenty of opportunities
to pyramid your stake (for no
greater risk) along the way. On
the other hand, if it heads to
ground zero soon after purchase,
your initial risk was such that you
did not have much to lose. And if
it fifty-bags your initial tiny stake
in a day, so what? We should fear
a big loss more than we fear a
missed big profit.
When it comes to initial position
sizing, you need to start with a
stake that is at least meaningful
with respect to your overall money
management criteria. Shares of
penny stock Physiomics were
priced at about 0.5 on 9 March this
year, which would have equated to
05/2011 www.tradersonline-mag.com
a risk of just 50p on a token £1-per-
point spread bet. Such a bet would
be entirely risk free, but totally
pointless. If you allow yourself a 1
per cent risk-per-trade in £10,000
trading account, then on an ultra-
low-priced share like this one you
should probably be starting at
£200-per-point.
Nurture and Prune
Another good reason to start
with small stakes is to diversify
your trading funds as much as
possible, and this is particularly
important in the context of these
hit-or-miss penny shares. Only
by investing in many such stocks
can we be assured that we have
invested in the future winners.
A few of your penny stock
picks will succeed but many
will fail, and the key is to cast
out many seeds – by spreading
your trading funds across many
exploratory positions as possible
– before nurturing the winners
(by pyramiding) and ditching the
losers. You will start small in each
position, nurture it if it performs
well and prune it from your
portfolio if goes the wrong way.
Stop Orders
When first buying into a penny
share you are expecting it to be
volatile; possibly very volatile.
A tight stop order will be no
use to you at all, but this does
not matter because your small
initial position size assures a
low risk even in the absence of
a protective stop order. In this
strategy the role of the stop order
is therefore to lock in profits
and neutralise risks on existing
positions so as to free up risk
capital for pyramiding additional
profit-generating positions.
Penny Share Prospects
You might wonder how many
penny share prospects there
actually are. On 21 March 2011
a cursory trawl of the London
markets revealed at least thirty
stocks available for purchase at
36
a price of less than ten thereby
offering a risk of no more than
£10 on a £1-per-point spread bet
(see Table 1).
Following the financial crisis
and recession, many of those
stocks are still trading at multi-
year historic lows, so – if
the previous high prices are
anything to go by – some of
them might just be ripe for a
big rise. Very big! These are not
recommendations, but for a very
low risk initial bet they might just
be worth a penny share punt.
Statistically Dissecting Market Myths

Does It Pay to Hold Positions Overnight?

There is a jungle of rule of thumbs when it comes to market behaviour and how stocks tend to behave in different markets. An interesting
example of this is how Larry Connors and Cesar Alvarez in their book “Short Term Trading Strategies That Work” explain how it always pays
to hold positions overnight. While William J. O’Neil claims this depend on the markets overall trend and explains how: “In bear markets, stocks
usually open strong and close weak. In bull markets, they tend to open weak and close strong”. Who is right? Does it pay to hold positions
overnight? And if so, is this a universal rule as Connors and Alvarez claims, or is it dependent on market directions as O’Neil advocate?

TRADERS´ STRATEGIES
Øystein Nerva
Øystein Nerva studied
economic and finance at
University of Nordland in
Norway, where he obtained a
master degree in finance and
wrote a master thesis about
technical analysis. He works
as an equity sales trader and
still uses technical analysis
as the main decision criteria
when trading, in combination
with fundamental input from
analysts. Nerva lives in Oslo,
Norway. His contact is:
oystein.nerva@tradingmill.com
05/2011 www.tradersonline-mag.com
Two Opposing Strategies
In order to find the answer to
this I study the SPDR S&P 500
SPY as I consider this ETF a
good (and tradable) mirror of
the average movement of S&P
500 stocks. I am analysing the
period from 2007 throughout
February 2011 which consist
of 1046 trading days, and will
compare the following two trading
strategies:
• The Intraday Strategy: You buy
the market on the open and get
out at the close, avoiding any
overnight risk.
• The Overnight Strategy: You
buy the market at the close
one day and sell it on the open
the next. With this strategy
you have no opportunity of
protecting yourself from any
overnight risk, and you will
never own the ETF during
trading hours.
If Connors and Alvarez are
right, the overnight strategy
38
F1) Bull and Bear Markets in the Test Period
always outperforms the intraday
strategy. However, if William
J. O’Neil is right, the overnight
strategy should outperform the
intraday strategy in bear markets
and vice versa for bull markets.
A bull market in this study is
engaged with the occurrence of a The chart shows the test period from January 2007 until March 2011
with bull and bear markets as defined in the study. It is a bull market
“golden cross” where the 50 day when the purple SMA(200) is below the blue SMA(50), and it is a bear
market when SMA(50) is below SMA(200). During the test period we
simple moving average crosses observe 632 trading days in bull markets and 414 days in bear markets
above the 200 day simple moving Source: www.tradesignalonline.com
average (SMA50>SMA200). The
bull market ends when the bear
market starts. The bear market
is set off with a “death cross”
where the SMA50 crosses below F2) Q-Q Plot
SMA200. The chart in Figure
1 illustrates the bull and bear
markets during the period.
Risk Management
As you either exposed in the
market during trading hour with The screenshot above shows the data samples distribution in a Q-Q
Plot from SPSS, a statistical software. From the left you can see
the intraday strategy or while the respectively the data from the whole period, the bull markets and the
bear markets. Do you see how the tails on all three samples are uneven
markets closed with the overnight as all of them have more observations in the top right corner than they
strategy – it is difficult to reduce the do on the lower left corner? This tells us that the data is not normal
distributed which in turn prevent us from using averages to assess an
strategies risk with stop loss levels. expected value. With distributions like this it is better to use median.
The overnight strategy cannot be Source: www.spss.com
stopped out as the stocks are

TRADERS´ STRATEGIES
not traded when you own it, and
if you were to use a stop loss
on the intraday strategy the two
strategies could not be compared
to each other. Because of this,we
do not consider risk management
in this study, but still advocate risk
management as a vital part of any
trader’s mind frame.
Averages Do Not Tell It All
Glancing at the data for the bull
markets, the overnight strategy
generates .034 per cent as
average excess
return compared to
the intraday strategy.
In bear markets on
the other hand, the
intraday strategy
actually beats the
overnight strategy
with an average of
.033 per cent. This
observation does
not cohere with the
theory claiming the overnight
strategy always outperforms the
intraday strategy, and it is the
exact opposite of O’Neil’s theory.
This being said, a thorough
look at the data reveals that
the samples are not normally
distributed, which tells us, the
results above cannot be trusted.
You can see the data distribution
in the SPSS Q-Q Plot in Figure 2.
Treating the Data Right
With no normality in the data
samples, median is a better
05/2011 www.tradersonline-mag.com
estimate than averages. To test
the data’s median I use a non-
parametric sign test in Minitab.
In contrast to Connors and
Alvarez hypothesis, the Minitab
results in Table 1 shows how
the median for the overnight
strategy’s excess return is
negative considering the whole
period as one. Furthermore,
the P column shows that your
probability for excess return
using the overnight strategy
without considering the
With no normality in
the data samples,
median is a better
estimate than averages.
markets trend, is about the
same as landing heads when
flipping a coin (43 per cent (1
- .05737).
The table also shows how
you in bear markets will have an
edge using the overnight strategy
with an excess return median of
.076 per cent. When the 200 day
moving average is above the 50
day moving average you have
83 per cent chance (1 - .1752) of
achieving a higher price the next
morning compared to the close
today.
39
In bull markets we see the
opposite effect. When you see
the 200 day moving average T1) Sign Test of Median
below the 50 day you will get
better paid with the intraday N N* Below Equal Above P Median
strategy. In bull markets you have Excess_ReturnOS_testperiod 1046 0 524 3 519 0,5737 -0,005
86 per cent chance of obtaining Excess_ReturnOS_Bearmrk 414 631 197 0 217 0,1752 0,076
a higher price on the close today, Excess_ReturnOS_Bullmrk 632 414 327 3 302 0,8501 -0,036
compared to waiting until the next Sign test of median = 0,00000 versus > 0,00000
morning. The table shows the result from Minitab’s sign test of median. The column far to the right shows
median as the percentage return you can expect the overnight strategy to outperform the intraday
strategy with in each of the three periods. The “P” column can be considered the probability of a
wrong study; the same way as subtracting the P value from 1 gives you the probability of a positive
Conclusion excess return with the overnight strategy vs. the intraday strategy. The columns labeled “Below”,
These statistical results shows “Equal”, and “Above” inform you how often the overnight strategy generated below, equal or above
zero in excess return compared to the intraday strategy in the test period.
that stocks really do tend to
open strong and
close weak in bear
markets, just as
they in bull markets Strategy Snapshot
will open weak and
close strong. This is
Strategy type: Comparison of two strategies
coherent with O’Neil’s Strategy 1: Only owning the stock intraday (you buy at open and
theory. sell at close)
Furthermore, it
is clear that none
Strategy 2: Only owning the stock overnight (you buy at close
and sell at open the next morning). The goal is to find
of these strategies out if one of the two strategies will outperform the
gives the trader other, and if so – is the result dependent on
the overall market trend?
any significant edge if you use
Time horizon: One day / one night
them without any regard for Setup: When the SMA(200) is above the SMA(50) the
the overall trend, hence what overnight strategy is better than the intraday
Connors and Alvarez writes in strategy, and vice versa when the SMA(50) is above
their otherwise excellent book the SMA(200)
seems misleading. Entry: All entry’s are on either the opening call for the
To sum it up, in bear markets intraday strategy or on the closing call for the
overnight strategy
you should make sure to sell
Exit: All exits are on either the closing call for the intraday
stocks at mornings and buy strategy or on the opening call for the overnight
stocks at afternoons and vice strategy
versa for bull markets. Average hit rate: In bull markets, the intraday strategy has 86%
probability of outperforming overnight. While in bear
markets the overnight strategy has 83% probability
of outperforming the intraday strategy
 Trends
Technical analysts seek to identify
and capitalise on patterns, or
tendencies, in stock charts,
and of particular interest is the
tendency of stocks to continue
trends, either up or down. Stocks
that have broken out (or down in
the case of shorts) go through
periods of consolidation ahead
of the next move, and identifying
these consolidations and key
entry points can optimise the
chance of winning trades.
This strategy is built on the
assumption that, as the adage
goes, the trend is your friend and
that pauses in trends will usually
resolve in continuations of those
The Trend Is Your Friend – and Pauses in Trends Will usually Resolve in Continuations trends. This, of course, requires
that these pauses, for the most

Capitalising on Continuation Patterns part, are sideways, in the form of

triangles, flags, etc, and that the
stock price remains range-bound,
building pressure ahead of the
Trending stocks tend to breakout and then pause, or consolidate, ahead of continued price appreciation. Setting entry next release.
points just above resistance can enable traders to capitalise on breakouts while avoid entry should the stock linger An example of this is an
sideways or break down. Identifying those continuations and setting proper entry levels is the subject of this article. ascending triangle pattern,
as seen in the MGM Resorts
International (MGM) chart from

TRADERS´ STRATEGIES
Sinisa Persich
Sinisa Persich is author of
TraderHR (www.traderhr.
com), a destination point for
traders around the world
who use its daily, small-cap,
swing trade set-ups to yield
profits in both up and down
markets. Persich has a B.A.
in electrical engineering from
the Faculty of Engineering
Rijeka, Croatia.
05/2011 www.tradersonline-mag.com
mid-December 2010 (Figure 1).
MGM had been consolidating out
of a big upmove that had taken
it from nine in late August 2010
to nearly 13 3/4 in mid-October,
a more than 50 per cent move.
It tested its key 13.80 resistance
level a couple of times since
October, but could not break
through, with the stock each
time retracing to a new higher
low. This created the ascending
triangle pattern whose upper
horizontal trend line – the key
13.80 resistance level – appeared
ready to be broken as the lower
line angled toward it.
Buy Stops
While the ascension of the
triangle suggested the stock was
poised to break out, there was,
of course, no guarantee. So,
rather than anticipate and risk the
stock backing off or continuing
sideways, forcing us to hold
longer than we would like, we set
a “buy stop” price at 13.85, just
above the resistance line, in order
to be positioned should the stock
break out. MGM, in fact, did hit
13.85, and accelerated to our
target of 14.80 the very next day.
In another example of a bullish
consolidation, Developers
Diversified Realty (DDR) narrowed
nicely for three months in a
symmetrical triangle, converging
towards the apex (Figure 2). As
the stock edged up towards the
top of the narrowing channel, we
42
put in an 11.55 buy stop order,
just above the top of the upper
trendline. The stock proceeded
to explode from there in early F1) Ascending Triangle
October into our 12.71 target area.
The use of buy stops is a
critical component of a strategy
such as ours that capitalises on
continuation patterns. A buy stop
is an order to enter a trade at a
price above where the stock is
currently. It enables traders to
wait for the stock to come “up”
to the buy price as evidence of
continued momentum.
In our strategy, we use the
hours after market close to study Figure 1 shows an ascending triangle pattern in the chart of MGM
Resorts International (MGM), with a series of higher lows, an example
the day’s patterns and prepare of a price pattern poised to continue its trend, which MGM proceeded
what is called Buy Stop Limit to do.
Orders before the next trading Source: www.tradesignalonline.com
session. This involves setting a
buy stop just above the previous
day’s high, as well as setting a
limit, or maximum entry, price. F2) Symmetrical Triangle
The use of a limit price avoids
chasing a stock should it gap
up too high. Conversely, short
trades use Sell Stop Limit Orders,
setting entry points below
previous day lows.
Our Buy Stop Limit Orders are
day orders, and thus if the stock
opens below the buy stop price
and fails to reach it during the
session, the trade is cancelled.
Sometimes the trade set-up is
reinitiated for the following or Figure 2 shows another example of a bullish consolidation, using the
chart of Developers Diversified Realty (DDR). The pattern narrowed
subsequent sessions, but often a towards the apex of the triangle, a point at which it was set to resolve
in one direction or another.
new, more promising chart set-up
is selected for the next day, as Source: www.tradesignalonline.com
a failure to meet the expected

TRADERS´ STRATEGIES
breakout often results in a
dissolution of the upward pressure.
Stop Losses
We also cancel trades if the stock
opens above the limit price, as
a retracement from there back
to the buy stop price is a move
in the opposite direction (and
our strategy looks to capitalise
on momentum, not bottom-fish).
Likewise, if the stock moves
below the stop loss
price before hitting
the buy stop, we
cancel the trade There are many times
because of the
break in momentum these trends do
not move our way.
and because any
snapback from there
up to the buy stop
would be considered
too quick a move and subject to
additional consolidation.
A recent chart on McGraw-Hill
(MHP) shows how an ascending
triangle just like MGM can
sometimes fail to follow through
as expected, and how our
strategy works to avoid entering
a bad trade (Figure 3). MHP had
been making higher lows since
late November 2010, narrowing
towards its upper trendline
resistance just below 39.15.
Setting our buy stop at 39.15 in
a pre-open order in early March,
we were positioned in case of
a breakout, but also protected
when the stock failed its third
test of that level. The stock
05/2011 www.tradersonline-mag.com
dropped below our stop loss
price, cancelling out our trade.
No harm, no foul, and the capital
that would have been tied up or
lost in the trade was free to use
the next day in another bullish
continuation pattern.
We set the stop losses in our
trade orders mostly in the range
of 3-5 per cent below entry. If
the position is filled and moves
lower, we are protected. If the
position advances, we raise the
stop. When a stock rises 1 per
cent above its entry prices, stops
are moved to 0.2 per cent above
entry to lock in a profit. Targets
are 4-12 per cent above entry,
and usually follow the direction
of the ascending trendline, such
as the 14.80 level in the MGM
example. Using this strategy, for
every ten trades, 2-3 stocks tend
to continue their trend, yielding a
10-12 per cent gain, while other
picks are exited at a small 0.2 per
cent gain to 2-3 per cent loss.
Position Size
One additional risk
management strategy we use
43
is determining the number
of shares. We determine the
number of shares for a trade
through a formula that ensures
that no more than 1 per cent of F3) Failure to Resolve Higher
the account level is risked in a
trade. The formula is 1 per cent
of the account level divided by
the difference between entry
price and stop loss price.
For example, with a $30,000
account and a trade with a
$0.50 difference
between entry
and stop loss, the
number of shares
would be 300 (1
per cent of 30,000) Figure 3 shows the importance of buy stops. As McGraw-Hill (MHP)’s
pattern fails to resolve in a continuation of the uptrend, no entry is
divided by 0.50 – made, as price does not reach the buy stop and instead falls below the
stop and the trade is cancelled.
which comes to 600
shares. If stopped Source: www.tradesignalonline.com
out for a $0.50 loss,
the loss is no more than 1 per
cent ($300) of account value.
Strategy Snapshot
Conclusion
Our strategy plays the trend, Strategy name: Trading Continuation Patterns
but through the use of buy Strategy type: Trend Following
stops we maximise our Time horizon: Daily Chart
chance of entering a trade Setup: Stock price must trade above previous day’s
on a breakout with the trend high, but not above limit price, for trade to fill.
resolving in our favour. There Entry: Buy-stop limit order (sell-stop limit order on
are many times these trends shorts)
Stop-Loss: 3-5% below entry
do not move our way, but most Take Profit: Raise stop to 0.2% above entry when stock
often the trade is cancelled by reaches 1% above entry
then and we are safe to trade Trailing-Stop: Not used
another day. Exit: Target (4-12% above entry price) or stop
Risk and Money Management: 1% of account risked per trade
Average number of signals: 1 per day
Average return per month: Total return averages 10% per month

TRADERS´ STRATEGIES
The FX Market at a Glance
Whether you are a day trader
who enjoys the fast paced action
of trading micro trends forming
on the lower timeframes or you
prefer the more relaxed approach
of swing trading the higher
timeframes then the FX market
is for you. Access to this market
has never been easier with
numerous trading vehicles such
as Contracts for Difference, Spot
FX, Spread Betting or Currency
Futures been extremely popular
avenues of choice. As a trader,
you should utilise a great strategy
that has a positive expectancy
and yields a high reward to risk to
essentially siphon small amounts
of cash (comparative to the size
of the market) into your trading
account on a daily, weekly and
monthly basis.
The sheer size of the FX Market
Maximise Your Returns by Trading Market Flow is its defining characteristic where
the enormity offers ‘newbie’
The Precision traders the possibility of ‘hiding’
from the ‘professionals,’ who
would be picking them off easily in
Momentum Strategy a less volatile market. The notion
that market makers run stops is
nonsense as the weight of capital
required to force the market in a
The Foreign Exchange market is the largest market in existence; in fact, it dwarfs desired direction to run a couple
all the other global stock markets, commodity and other derivative markets of stops would be possessed only
combined! There is phenomenal opportunity for the astute trader looking to by a select few institutions and
speculate on the long lasting trends that often form in this market. These trends central banks – even then, long-
are market flow, all that is required to capitalise from this momentum is a great term manipulation of this market
strategy and the will to succeed. is practically impossible by a
single player. The result is market
transparency. Whether you are
05/2011 www.tradersonline-mag.com
a seasoned pro or a novice just
commencing your career in the
business there is opportunity for
us all!
Do You really Need a Strategy?
To achieve long-term success
which can best be described
as the ability to make money
consistently over time, you need
to have a structured approach
to trading the markets. This
approach would include a
strategy/strategies and a money
and risk management plan.
Anything short of this would be
tantamount to careless gambling!
Employing a good strategy has
numerous advantages:
a) The benefit of making money
over a large sample set of
trades.
b) Removes common
psychological issues that would
otherwise plague your trading
regimen.
c) Removes the importance of
picking winners and the blow
to the ego suffered by having
losing trades.
d) Periods of drawdown occur in
every strategy, accept this as
fact and move on.
Therefore you need to find an
edge in the market, formulate a
strategy around that edge and
trade it flawlessly every time to
ensure that you maximise your
profits.
44
The Precision
Momentum Strategy
The flow of the FX market,
as indeed any volatile market
with high volume, causes price
to trend over time and this
movement is not in a straight line
but a series of waves as depicted
in Figure 1. The beginning of
a wave in a trend offers the
lowest risk and highest reward
opportunity to enter that trend.
Trading against a trend, or
counter-trend trading, is an act
of standing in front of market
flow which is a higher risk trading
style. As a result the majority of
the strategies we trade are with
market flow.
It is the primary job of a trend
trader to establish the nature of
the market trend by analysing
the peaks and troughs, the highs
and lows of price. The Precision
Momentum strategy is a trend
following strategy and thus the
first major tenet is trading in the
direction of the trend.
Trend Analysis
By studying price action you can
get a good indication of what
price is most likely going to do
next. You do not need to know for
certain what price will do next to
make money from trading – leave
predictions to the analysts and
focus on keeping the probabilities
in your favour.
Price action will be in one of
three states at any given time;

TRADERS´´ STRATEGIES
TRADERS
Ryan Schofield
Ryan Schofield studied
Geomatical Engineering and
has been trading full time
since the beginning of 2007.
He heads up the London
education arm of www.
tradewithprecision.com where
he provides trading education
for Trade With Precision’s
retail and corporate clients.
05/2011 www.tradersonline-mag.com
up trending, down trending or
not trending. It is that simple!
When price is making higher
highs and higher lows it is said
to be in an uptrend and you
should be looking for a suitable
low risk entry to join that trend.
When price is making a series of
lower highs and lower lows as in
Figure 1 then your bias should be
bearish and suitable short entries
sort. The last state, not trending,
is where price cannot seem to
find a direction and thus wanders
sideways across the chart. When
this occurs, trend traders have
their feet up whilst reading a
good book, keeping out of the
market!
You may be thinking that if it
were this simple then why is not
everyone trading? Trends are the
analysis tool that most traders
take for granted, and therefore fail
to become a master and never
quite understand them fully. This
is because a market will be in
one of the three states on every
timeframe, from the monthly
down to the one minute chart!
Multiple Timeframes
‘The whole is more than the sum
of its parts,’ a quote by Aristotle
best sums up the use of multiple
timeframes as we need to make
our trading decisions based on
as much information and as many
technical factors as possible. This
improves the overall expectancy
of our strategy and maximises
45
the equity curve. It is therefore
an extremely good practise to
assess more than one timeframe
when trading, so much so that
this forms the second tenet of the
Precision Momentum strategy.
A trade must be setting up on
at least two timeframes with the
trigger taken off the higher of the
two timeframes as clearly shown
in Figure 2. The reason for this
is the higher timeframe charts
usually contain less market noise
than the lower timeframes as
each bar or candle constitutes
more price action and is therefore
more reliable.
Once you have established the
trend on two or more timeframes,
then it is useful to assess
whether there is suitable trading
opportunity presenting itself by
assessing the strength of the
trend. To do this you would study F1) Long-term Trend
the Moving Averages.
Moving Averages (MAs)
These dynamic levels of
equilibrium are useful as they
smooth out short-, medium- and
long-term fluctuations in price –
thus removing market noise. The
medium- and long-term MAs are
the 50 and 200 period, simple
moving averages which indicate
the maturity of a trend. As price
moves in one direction over an Momentum to the downside clearly depicted by the strong bearish
trend that is established on the weekly chart of USD/CHF. Price is
extended period of time, these making a series of lower highs and lower lowss and as it does so the
moving averages follow suit indicating the strength of the trend.
MAs will start to follow suit, as
in Figure 1. The short-term 10 Source: www.tradesignalonline.com
and 20 period, simple moving

TRADERS´ STRATEGIES
averages are the quickest to react
to a change in market flow. The
optimum geometry of the four
MAs is when they are all trending
in the same direction as price,
fanning with space in between.
The short-term MAs are also
a powerful indication of where
equilibrium is located within a
trend and hence where price will
pull back to before continuing in
the direction of the overall trend.
The area or zone between them
is known as the buy zone in an
uptrend and the sell zone in a
down trend. The third tenet of the
Precision Momentum strategy is
that we only look to trade if there
is a suitable set up within the buy
zone or the sell zone.
Notice I used the term ‘suitable
setup’ which refers to the overall
viability of a trade based on
where we enter and exit a trade.
This is defined purely by the
candle or bar that occurs within
the buy or sell zone, as it defines
our trade risk.
Risk Less to Make More
Trading is a game of probabilities,
with every trade decision you
have to ask yourself; ‘what are
the probabilities of this trade
reaching my profit targets over
my stop loss?’ You do not know
for certain, no one does, however
if the answer to that question is
positive then you should set up
the trade in anticipation of the
trade reaching your objectives.
05/2011 www.tradersonline-mag.com
It is possible to improve the
probabilities of a successful
outcome by ensuring that the risk
on the trade is as low as possible.
The benefit of this is your first
profit target at 1:1 is closer to
your entry which increases the
probabilities that it will be hit than
if it were further away.
Now I do not intend for you to
set your stop loss five pips away
from your entry and hope for the
best. No! The risk on the trade is
defined by the bar or candle that
signals the trade. The smaller this
candle the better, not only from a
risk point of view, but due to the
fact that small candles represent
indecision in the market whereas
large ones represent the ‘muppet
show!’ Successful traders usually
trade when there is indecision
as the rewards are the greatest.
The forth tenet of the Precision
Momentum strategy is that a
trade signal is given when price
pulls back into the buy/sell zone
on two or more timeframes
and a small candle forms in the
direction of the trend on the
higher timeframe. Therefore you
require a bearish trigger candle in
a down trend and a bullish candle
in an uptrend.
Precise Entry,
Stop Loss and Target
To recap so far, as soon as you
have the following ingredients
set up: A strong trend, good MA
geometry with price in the buy/
46
sell zone on two timeframes, a
small trigger candle forming on
the higher timeframe then you are F2) Multiple Timeframes
ready to take action and enter the
trade on your broker platform.
Looking at Figures 3 and 4, a
short trade is setting up on the
daily chart, with an entry as price
breaks the bottom of the bearish
trigger candle. The actual sell
price is the extreme low of the
trigger candle less one pip (do
not forget to include the spread
which is broker specific). The
stop loss will usually be one pip Multiple timeframes showing price in a clear down trend and having
pulled back into the declining moving averages on both charts before
above the high of the candle the next possible leg down. The daily chart (on the left) is making a
series of lower highs and lower lows. The lower timeframe, the 4 hour
however in this case the extreme chart (on the right) has been up trending, however as soon as a lower
high is slightly above the top of high is made (at A) and the higher low (at B) is broken to the downside
then there is a strong possibility that price is set to continue in the
the trigger candle. Therefore the direction of the higher timeframe trend. As price continues down (at C)
stop loss price will be one pip a short trade is entered on the higher time frame chart.
above the extreme and again do Source: www.tradesignalonline.com
not forget to add the spread. The
difference between your entry
price and your stop loss price is F3) The Setup
termed your trade risk.
The next question you need
to ask yourself is what is my
position size going to be; in other
words if this trade does not work
then how much of my capital
will I lose? The answer should
not be more than one per cent
of your entire trading capital
which ensures that if and when a
period of draw down does occur
you do not lose too much! This
process is called risk and money Price pulls back into prior support which now acts as resistance with
small candles forming which signals that there is a high probability that
management. price will roll over and the down trend will resume. The trigger candle,
marked, is a small bearish candle which defines the risk of the trade. As
Now that you have your entry, price starts to break the low of this candle the short trade will be triggered.
stop and position size you would Source: www.tradesignalonline.com
need to locate your profit take
 47
TRADERS´ STRATEGIES

levels. As a general rule of thumb, order is triggered on your broker possess these skills. Should the
it is wise to always take some platform then all that there is results prove viable, then go live
of your profit off the table at 1:1 left to do is sit back and let the using as little risk as possible.
(price has moved in your favour strategy play itself out. It is important to reemphasise
equivalent to your original risk). that trading is just a game of
The reason for this is purely that How to Own this Strategy? probabilities and the less you
there is a higher probability of The best way to own a strategy get caught up in attempting to
the trade hitting 1:1 then it has of for yourself is to run the numbers ‘hit home runs’ or pick the big
it hitting 2:1 or 3:1. These latter by testing it on a simulator winners the more enjoyable and
profit targets would be located at or practise account first, or profitable trading becomes.
two times and three times your better still code it and run it as The outcome of this particular
trade risk. As soon as the entry an automated strategy if you example (see Figure 4) was
positive as price continued to
hit all profit targets in just a few
Strategy Snapshot days.
As you gain more and more
experience using the strategy
Strategy name: Precison Momentum Strategy
Strategy type: Trend following
you will most likely start to make
Time horizon: Weekly, Daily, 480, 240, 120, 60, 15min; Intra Day (Index it your own by making subtle
Futures: 5, 2, 1min) changes here and there as you
Setup: Enter Long if strong uptrend on two timeframes with seek to perfect the rules to
price in buy zone on both charts (zone is defined as area suit your trading style. This is
between 10 & 20 simple moving averages), small bullish perfectly normal however if this
candlestick in zone on higher timeframe defines risk. Enter
process if not kept to a minimum F4) The Entry, Stop Loss and Outcome
Short if strong downtrend on two timeframes with price in
sell zone on both charts, small bearish candlestick in zone
then over time the strategy will
on higher timeframe defines risk. morph into one that does not
Entry: Long: 1 pip plus spread above the high of the trigger candle; resemble the original at all!
Short: 1 pip plus spread below the low of the trigger candle In closing, it is useful to note
Stop-Loss: Long: 1 pip plus spread below the low of the trigger candle; that this strategy has been
Short: 1 pip plus spread above the high of the trigger applied on numerous liquid asset
candle
classes on various timeframes.
Take Profit: First target at 1:1, Second at 2:1 and Third at 3:1.
Trailing-Stop: A discretionary trail stop on the the final portion can be
It has yielded positive results as
used: Long: Trail stop as price makes a new high to new the principle tenet of this strategy
swing low, trailing as price makes every new cycle higher; is the fact that it signals low risk
Short: Trail stop as price makes a new low to new swing entries into strong trends as price
high, trailing as price makes every new cycle lower continues on its never ending
Risk and Money Management: Risk no more than 1% of trading capital on a single trade quest to find equilibrium. The outcome of this trade was a positive one as price continued on
Average number of signals: Market specific to hit all profit targets. However, the fact that this trade was financially
successful is irrelevant, what is important is to trade the rules of the
Average hit rate/profit strategy flawlessly each and every time.
to loss/return per month: Dependant on trading frequency, timeframe and market as
it is a discretionary strategy Source: www.tradesignalonline.com

05/2011 www.tradersonline-mag.com
 introducing a social network...
for technical analysts

myMTA network.mta.org

Connect with other industry professionals worldwide! myMTA is a private, members-only social network for
technical analysts. Access to myMTA is free for members of the Market Technicians Association and offers the
ability to establish unlimited connections with other members through detailed search criteria, topic-specific
discussion forums, private messaging functionality, and extensive member profiles.

TRADERS´ BASICS
Trading with Limited or No Risk and Unlimited Potential
Can You Have Risk Management
Many traders are highly
concerned with reducing their
It Both Ways? risk, and/or getting out when their
positions turn against them. The
normal method for doing this is
to use a stop order. In his various
There is no such thing as risk-free trading. However, you can books, William O’Neal advocates
limit the time during which you are willing to accept this getting out after an 8-10 per
risk without limiting your profits. This is done by using cent loss. Many other authors of
both stocks and options, in combination with trading books also suggest this
a trading plan that uses the Trader’s approach.
Trick Entry. This is adequate, except for two
details never mentioned in most
books: the first is that you do not
know when the 8-10 per cent is
going to happen; the second is
that the price can gap over your
8-10 per cent stop, causing you
to exit with a greater loss than
planned.
However, there is a way to
know exactly when to exit,
and how much of a loss you
are willing to accept. More
importantly, the stock can gap as
much as it wants, but you would
lose only the predetermined
amount you decided upon when
you entered the position.
Protective Put or Call
The Protective Put or Call is a
synthetic options strategy that
allows you to have predetermined
risk and unlimited growth
05/2011 www.tradersonline-mag.com
49
potential. A Protective Put is
used for a bullish position, and
a Protective Call is used for a
bearish position. The following
example shows Protective Puts.
A good Protective Put position is
usually one that limits your risk
to about 6 per cent. This strategy
positions you at least 2-4 per
cent better than would using the
conventional wisdom of an 8-10
per cent stop.
Additionally, there is a method
for entering a Protective Put
with very little, and sometimes
negative, risk. You enter it
using the Trader’s Trick Entry
(TTE), using the principles of
the Law of Charts (see www.
tradingeducators.com). In the
following example, our entry
uses a Ross Hook (RH) chart
formation with the TTE (see
Figure 1).
Trading is never without risk,
but the length of time for which
you accept that risk is under your
control. When you are able to
control events, the probability of
your making a profit increases
dramatically. The question is, how
do you use the Law of Charts to
create negative risk more quickly,
without any additional risk when
entering the position? Assume
the following:

TRADERS´´ BASICS
TRADERS
Jim Augustine
Jim Augustine started trading
in 1987. He is a successful
stock option trader, educator,
and mentor. He has been a
trading coach and a
corporate trainer. Jim teaches
the Stock and Stock Option
Seminar, the Law of Charts
Flash Card classes, Incentive
Stock Option Seminar, and is
a private coach for
www.tradingeducators.com.
He can be reached at Jim@
tradingeducators.com.
05/2011 www.tradersonline-mag.com
50
• Stock/ETF price = $50 more than six per cent. That
Put strike price is $60 and six would be the same risk as if you
months out had entered the Protective Put
• The $60 Put premium is $13.80, directly. To make up the $3.80,
creating a 6 per cent ($3.80) you will use a combination of
risk on capital Options and Stock to reduce your
• 7-Day Average Trading Range risk to near zero or less.
(ATR) is 1.50 First, you need to determine
the Law of Charts’ formation with
Examining our situation using which to enter. The preference
100 shares, we have: would be to enter a position with
momentum. Therefore, look for a
If we use the traditional Ross Hook in a trend, and select
8-10% stop loss: your entry point according to the
Cost of Stock/ETF $5000 Law of Charts.
Stop Risk (10%) $ 500 As mentioned above, there is
Downside Gap no such thing as risk-free trading.
Open Risk $ ??? However, the amount of time
Total risk unknown for which you accept that risk
is your decision. The total time
If we use the Protective Put: to execute this entry strategy
Cost of Stock/ETF $5000 will be one day. During that day,
Cost of Put $1380 you employ the traditional stop
Total Cost $6380 methodology for your positions. F1) Traders’ Trick Entry (TTE) Set Up
Put Sell Rights $6000 However, since you will enter
Total Risk $ 380 the positions after the market
Downside Gap opens, there is no chance of your
Open Risk $0 experiencing a gap down on the
Total risk guaranteed $ 380 open.
The second step is to divide
From the initial entry, the the risk amount of $3.80 into
Protective Put limits our risk a portion for the stock and
without any potential for a portion for the options you
additional risk. will use. You will then employ
a technique like the double or
Options and Stocks Combined triple ETF to gain an advantage.
How do you reduce the risk For a double advantage, buy a TTE set up showing the Ross Hook (RH) and the TTE entry point. The
Ross Hook forms as subsequent prices fail to reach a new high within
even more? With the above long Call for each 100 shares the trend. The Traders’ Trick Entry is defined as the first higher high
occuring after the Ross Hook. In Figure 1, TTE marks the entry price
parameters, you would have to of stock purchased. For a triple level.
make up $3.80 upon entering advantage, buy two long Call Source: Trade Navigator
the position, without risking contracts. Buying long Calls

TRADERS´ BASICS
requires less margin than does
selling short puts. Our allocation
for the triple advantage will be:
Stock/ETF risk = $1.80
Long Call Risk = $1.00 x 2 =
$2.00
Total Allocated Risk = 3.80
These are the stops you will
use for the stock and two option
contracts when you enter them
according to the Law of Charts
and TTE methodology. In this
manner, you are risking the same
amount as if you entered the
Protective Put directly. Do not get
greedy, you just want to reduce
your risk.
The third step is to place
contingent orders to enter the
stock and two option contracts
with stops of $1.80 and $1.00
respectively. Be sure to select
an option with a delta of 75 or
greater. It will not take much
movement to get close to a
negative risk Protective Put with
this set up, as it is very likely to
occur within one day.
The 7-Day ATR (Average True
Range) is 1.50; its significance is
how much you can expect the
stock/ETF to move in one day.
Do not expect to get 100 per cent
of the movement: 70 per cent
is good, and 80 per cent is very
good. This is what you should be
looking for as your decision point
to exit the Long Call options and
enter the Protective Put.
05/2011 www.tradersonline-mag.com
51
Stock Increase of the Call. Doing nothing requires
of approximately $1.20 the stock to rise $10.70 before
Option increase of you have any profit.
approximately $0.75 x 2 $1.50 There is a third and more
Decrease in $60 effective trade: sell a Bear Call
Put of approximately $ 0.40 Spread at or above the Protective
Total Advantage $3.10 Put strike price.
Protective Put Risk Total Current Risk $ .70
Cost of Stock/ETF $5000 Sell Bear Call
Cost of Put $1380 for at least $ .70
Total Cost $6380 Total Position Risk $0
Put Sell Rights $6000 % Total Risk 0%
Total Risk $ 380
Downside Gap The advantage of using a
Open Risk $0 Bear Call Spread instead of
Total risk guaranteed $ 380 the Covered Call is that you
TTE Strategy $ -310 participate in the appreciation of
Total Risk $ 70 the stock when it rises beyond
% Risk 1.1% the $75 strike price of the short
Call. The worst you can do is 0
Bear Call Spread per cent return, and the best is
Can and does this work? Yes it unlimited. However, as the expiry
does, but you have to have your date approaches you will have to
plan in place before you jump into make a decision to sell the long
the market. You must have your Call to take your profits.
plan in place before you enter the
trade. Selling Puts
There is one more step to Other methodologies for adding
this trade, and that is how to profits include selling Puts when
set yourself up for unlimited the stock/ETF is rising, taking
upside potential. This is a bullish small profits. When the stock Info
strategy, and the two simplest is falling, selling the stock and
methods are to do nothing and buying it back at a lower price Bear Call Spread: Buy Out of the Money (OTM) Call Options
just let the stock appreciate, or to provides the same return as and sell the same number of At the Money (ATM) Call Options
sell a Call at or above the strike short selling, but without the of the same expiration month.
price of the Put. risk. Covered Call: Buy 100 shares of stock, and sell one Out of the
Money (OTM) or At the Money (ATM) Call Option.
These are very effective and
The Law of Charts and the Traders Trick Entry: Trading entry
profitable strategies. However, techniques developed by Joe Ross and www.tradingeducators.
selling a Call will remove you from com, designed to take advantage of market dynamics.
any profits above the strike price
Small Caps Can Offer Higher Returns if You Learn to Mitigate the Risks

Good Things Come in Small Packages

Smaller companies offer greater potential for growth, meaning small caps are a popular hunting ground among equity investors. Higher risk,
however, is the price you pay for the potential for higher return. We consider how the dangers can be minimised as you search for the next
stockmarket star.

TRADERS´´ BASICS
TRADERS
Jessica Furseth
Jessica Furseth is a London-
based investment journalist
specialising in the technology,
telecommunications and
renewable energy sectors.
For contact details, see:
www.jessicafurseth.word-
press.com
05/2011 www.tradersonline-mag.com
Investing in small caps can be
a shortcut to higher returns,
as these are often younger
companies experiencing more
rapid rates of growth than their
mature stockmarket counterparts.
This potential for reward is,
however, offset with a higher rate
of risk, as small companies come
with a unique set of potential
pitfalls, which you need to be
aware of.
A small cap is a company with
a small market capitalisation –
exactly how small is a matter for
debate, but this article will focus
on companies with a market cap
of less than £200 million. This is
at the lower end of the traditional
definition, but the potential for
return will increase the smaller
the market cap at the time of
your initial investment. Some of
the companies mentioned in this
article are start-ups, some of
which are still loss-making, and it
is up to you whether you want to
take on the added risk of buying
into not-yet-profitable companies.
If the answer to that is no, there
are still plenty of cash-generative
small caps to choose from.
Growth Potential
All mega-caps started out small,
meaning it is possible your
chosen fledgling could one day
look back at a similar trajectory.
To assess whether your stock has
the potential to deliver this kind of
53
growth, first consider these five
factors.
Product Demand
In order for a small company to
grow, it needs to produce goods
or services for which there is
a prospect for significant, and
consistently rising, demand.
Consider the business offerings
and why the customer base
would grow. This can be because
the product is better than the
competition, or because the
company has identified new
markets in other industries or
geographies. Take fibre optics
technology group Gooch &
Housego (GHH:AIM), whose
many products include critical
components for broadband
cables. On 20 November 2010
the company said its order books
stood at record levels, which F1) AFC Energy (AFC:AIM)
corresponds with increased
global investments into data and
telecoms networks.
Niche Offerings
Sometimes a small company
will come along with a brilliant
product with the potential of
blowing the competition out of
the water. Be mindful of the fact
that customers can be sluggish
to change, even if it is for the
better – but if the product delivers Share price performance for AFC Energy, 1 January to 31 December
2010.
significant benefits they will
eventually snap to. Regulatory Source: www.advfn.com
change will sometimes force

TRADERS´ BASICS
customers’ hands; Software
Radio Technology (SRT:AIM) is
the leading manufacturer of a
shipping tracking technology that
has become mandatory in most
international waters. This led to
increased orders, which in turn
ensured that the group reached
profitability in the six months to
20 September 2010.
Big Brother Support
Mature companies will often
look to upstarts as a means
of adding new technologies
to their portfolio. A takeover
is one option, but this will
curb the minnow’s prospects
in the broader market so the
bigger fish will often choose
to provide support in other
ways. This includes buying
a minority stake, placing an
experienced executive on the
small cap’s board, or entering
into a development agreement.
Healthcare technology tiddler
Toumaz (TMZ:AIM) has for several
years been working extensively
with Imagination Technologies
(IMG:LSE), the world-leading
graphics technology group – both
parties enjoying each other’s
expertise in the overlapping area
of internet connectivity.
Change at the Top
Whereas a large company
has several legs to stand on,
a small cap will often rely on
a small number of products
05/2011 www.tradersonline-mag.com
or customers. This will usually
lead to some turbulence, but
an experienced management
can go a long way to steady the
operations. After having proven
herself at Computer Software
Group and Kewill (KWL:LSE), Vin
Murria took over the reigns at
Advanced Computer Software
(ASW:AIM) in 2008, and initiated
a takeover mandate for the
healthcare software group.
Getting in on the Ground
The IPO (initial public offering)
market has yet to recover fully
from the recession; looking at
floats from the past year shows
most market newcomers are
already profitable when making
their market debut. This means
investors lose out on the initial
growth spurt, but the investment
carries less risk. Asian data
centre operator CSF Group
(CSFG:AIM) was admitted to AIM,
London’s junior market, on 22
March 2010, already sitting pretty
with one-third of the Malaysian
datacentre market. The group
raised £28 million at the flotation,
pledging to use this to further
growth, and shares gained 39%
in the following six months.
Risk Factors
Smaller operations mean a
narrower scope for growth, and
less leeway if something goes
wrong. As a small cap investor
you need to be tolerant of a
54
certain amount of share price
volatility, but there are some
warning signs that even a risk-
tolerant punter may want to heed.
Not all small caps are giants
in the making: sometimes a
company is small because its
market is small. This could
obviously change if the company
decides to do something new,
either through an acquisition
or by applying its know-how to
new markets. BATM Advanced
Communications (BVC:LSE) took
its expertise in wireless network
components and applied it to the
healthcare sector; in December
2008 BATM announced its first
supply contract to a medical
equipment manufacturer.
A small cap can sometimes
be the shadow of a once-great
company fallen on hard times,
as was the case for oil explorer
Ramco. In September 2009
the group decided to change F2) Blinkx (BLNX:AIM)
tactics and divert its attention to
renewable energy, and renamed
itself SeaEnergy (SEA:AIM).
Its focus is now the offshore
wind industry, which executive
chairman Steve Remp has
described as ‘the next North
Sea adventure’. The group
has leveraged its expertise in
deepwater drilling to participate
in offshore wind development.
Reorganisation of company
activities may be a good move Share price performance for Blinkx, 1 January to 31 December 2010.
for a company whose current Source: www.advfn.com
methods are no longer working,

TRADERS´ BASICS
but as always when trying new
things: it may not work.
Experienced managers will
often take on a small cap as a
vehicle to repeat past successes.
Andrew Cochran took over
Dominion Petroleum (DPL:AIM)
in November 2009, after he
had seen his former company,
Salamander Energy (SMDR:LSE),
grow from a start-up
to a constituent
of London’s FTSE
250 index. There Investing in small caps
is, however, no
guarantee history can be a shortcut
will repeat itself, as
industries change and to higher returns.
new technologies and
competitors come
along.
Hype and Reality
An entrepreneurial spirit, and
the feeling that you are part
of building something, is an
attraction for many small cap
investors. Whereas statements
from the largest companies on
the market may focus on pension
debts or sluggish growth.
Small caps will, if you are lucky,
offer plenty of excitement. The
managers are often passionate
about what the company is trying
to achieve, and if you are looking
to areas such as cleantech, there
may even be social benefits to
company practices.
The danger here is how easy
it can be to get attached to your
05/2011 www.tradersonline-mag.com
small cap, which can turn you
blind to signs of trouble. A game-
changing new product will not
necessarily become successful,
as people and businesses can
be slow to accept change. Even
if something is ‘cool’ there is
pricing to consider; technology
group Eleksen learned the
hard way how electronic
controllers made of fabric
are not on top of everyone’s
wish list. Eleksen, once hailed
as a rising star following its
April 2006 stockmarket float,
was suspended from AIM in
October 2007 before going into
administration.
The excitement surrounding
growth companies can
sometimes cause share price
frenzy, but keep an eye on the
fundamentals of the company to
make sure you do not buy in at
a price completely out of touch
with reality. It is, however, difficult
to judge the value of potential,
which is part of the stockmarket’s
function.
This time last year, shares in
British cleantech start-up AFC
Energy (AFC:AIM) reflected the
fact that although the technology
was highly compelling, the
company had practically no
revenues. This changed when
the company announced, on
4 October 2010, that it had
signed a binding letter of intent
to participate in the creation of
high-efficiency fuel cell power
stations in the UK. If
successful, this would
mean utility-scale
power generation
with near-zero carbon
emissions, at a price
point competitive with
fossil fuels. Reflecting
the project’s
potential, shares
jumped 68 per cent in the month
after the announcement. A quick
reality check will, however, remind
you that the technology remains
untested, much can go wrong,
and it will take several years for
anything to be completed.
Case Study: Blinkx (BLNX:AIM)
Every investor dreams of picking a
small cap that goes on to become
a stockmarket giant. Online
fashion retailer Asos (ASC:AIM)
floated on AIM in 2000 with a
market cap of £12.3 million, and
only ten years later it is worth over
£1 billion. Aided by the spread
of home internet, the company’s
gamble on online retail has paid
off. Shares did, however, dip after
the company joined the market,
spending two years below the 20p
IPO price, before starting their
stratospheric rise.
It can take a little time for a
growth story to come good, in
other words, and this was also
proven to investors in video
search technology group Blinkx
(BLNX:AIM). The share price had
been dragging along the bottom
for over two years before Blinkx,
on 19 May 2010, announced it
had reached profitability at the
EBITDA-level (earnings before
interest, tax, depreciation and
amortisation) for the second half
of its financial year. The stock
surged on the news, up 288 per
cent in the next three months, as
the technology innovator proved
it could monetise its ideas.
Those who had been following
the company ahead of this
announcement might be forgiven
for being slightly baffled at this
sudden popularity spurt. What
Blinkx announced last May was
pretty much in line with what
had been indicated for months.
However, Blinkx was a risky
stock, as it was a relatively
new company with a not-yet-
proven business model. The
company’s operations were
also less than straightforward: a
software programme that could
make sense of non-structured
data such as video and sound,
used to make money by pairing
videos with relevant advertising.
Making money from online ads is
55
notoriously difficult – so why did
Blinkx succeed?
• Blinkx had product demand:
corporations are keen to get
maximum return on investment
for advertising; Blinkx enabled
them to reach those customers
who would be most interested
in hearing the message.
• Blinkx had unique offerings:
the company’s technology is
the best on the market. This
meant the group could maintain
its prices during the recession,
when others had to offer
discounts.
• Blinkx had big brother
support: Blinkx is a spin-out
of Autonomy (AU.:LSE), the
UK-based software company
that is the world leader in
meaning-based computing.
Autonomy retains a 13.7 per
cent shareholding.
Also, Blinkx had been diversifying
its business by approaching
a broad range of customers
and industries, entering into
collaborations with more mature
companies such as Microsoft
and Sky News. Coupled with
the group’s steady statements
on earnings, customer wins and
pricing power in the years before,
Blinkx showed a solid trajectory.
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Spearman Indicator – Part 2

From Intelligence
Assessment to Technical Analysis
In the first part, we discussed the concept behind the Spearman indicator: the rank correlation coefficient (ρ). We have
seen that values of ρ close to +1 and -1 point to very strong uptrends and downtrends respectively. Trendless periods
are associated with a rank correlation coefficient slightly above or below zero. This final part of the series will discuss the
Spearman indicator, a straightforward byproduct of the rank correlation coefficient.

TRADERS´´ BASICS
TRADERS
Dan Valcu
Dan Valcu is a private trader,
Certified Financial Technician
(CFTe), Board Member of the
International Federation of
Technical Analysis (IFTA) and
Founder and technical analysis
consultant with Educofin
Ltd. He may be contacted at
ta@educofin.com. For more
information, please visit
www.educofin.com.
05/2011 www.tradersonline-mag.com
How Is the
Spearman Indicator Used?
Figure 1 shows the German DAX
index on a daily chart together
with the Spearman indicator with
a period of ten days.
Being an oscillator, the
Spearman Indicator runs back
and forth between -100 (strong
downtrend) and +100 (strong
uptrend). A value of zero indicates
a consolidation, lack of trend
for the past N days, where N is
the period chosen. Due to the
short-term period used in this
case, the indicator can very
precisely pinpoint minor peaks
and valleys for the index. Lows
of the indicator around -50
announce a continuation of the
current trend. Crossovers above
and below zero are signals for
taking long and short positions in
the market respectively. Trends
with a Spearman indicator above
+50 and below -50 have better
odds to continue in their defined
direction.
If we look at the current
rally which exasperates many
market players, we notice a very
high value of 97.57 out of 100
possible. This means that during
the selected ten days (31/01/11-
11/02/11) the rank correlation
was very high, indicating that
the uptrend was very strong with
higher closing prices almost
everyday. A perfect score of
+100 would mean an extremely
overextended DAX with very
58
high probabilities for a top there.
Traders are waiting for this setup.
Another interesting observation
on this chart is the evolution
of Spearman indicator above
-50 since the start of the rally
in September 2010. The only
exception was a hiccup with a
negative bias between the end
of December and the start of F1) DAX with Spearman Indicator
January 2011.
Moving Average
One way to smooth out any data
series and generate more reliable
signals is to apply a moving
average (MA). Figure 2 shows
the same index, this time with a
moving average applied to the
oscillator.
If we look only at the average, Figure 1 shows the German DAX and the Spearman indicator on a
daily chart. Extreme values of the indicator identify strong trends and
we see how it better follows price potential exhaustion points.
excursions between tops and Source: www.amibroker.com
bottoms. As always, there is a
lag between the extremes of the
indicator and average but this
is the price paid when applying F2) DAX with Spearman Indicator and MA
any sort of average. Crossovers
between the Spearman indicator
and its average suggest buy and
sell entry points.
There are several whipsaws
due to the short-term picture
under consideration here (a
period of ten days with a three-
day simple average). The position
of the indicator above its average
points to a short-term bullish Here you can see the same chart as in Figure 1 but supplemented by
a moving average (red) which removes noise and improves trading.
trend for the German market,
but it is overextended due to Source: www.amibroker.com
oscillator’s very high value.

TRADERS´ BASICS
Higher Timeframes
Another way to get a less noisy
picture is to switch to higher
timeframes. For this purpose,
we add weekly and monthly
timeframes as in Figure 3.
The best picture is on the
monthly chart where the
Spearman indicator points with
precision to tops and bottoms of
the DAX. Following this oscillator,
investors would have enjoyed a
nice ride from June 2009 when the
oscillator went above its -50 level.
The weekly perspective also looks
fine, although the index had some
rough sailing in 2009 and 2010.
The vertical fine line on all
charts in Figure 3 points to
February 25, 2009 when the
Spearman indicator on the daily
chart recorded an extreme low
value of -95.57 suggesting a
possible exhaustion. To verify this,
we checked the other two higher
timeframes for the (approximate)
same condition. The weekly
picture shows a moderate value
of -63.63 indicating additional
room to fall. But the monthly chart
records a Spearman indicator at
-93.93, in the same oversold class
as the daily one. The DAX was
close to a major low because of
the deep oversold condition of the
oscillator on the monthly chart.
On the other hand, the weekly
picture indicates a delay for the
big low. How can we translate
these somewhat conflicting
signals?
05/2011 www.tradersonline-mag.com
On the daily chart, the oscillator
is expected to go up and down to
allow the weekly Spearman value
to hit lower and more confident
values of a major low. This is
exactly what happened during the
first two weeks of March 2009
when the oscillator also generated
a positive divergence as a leading
indication for future price action.
The rest is now history. On
11/2/2011, the Spearman indicator
had the following values: 97.57
(daily), 79.39 (weekly), and 92.72
(monthly). They suggest a similar
setting as the one just explained,
but reversed. Again, time will tell.
Ichimoku
Normalised oscillators vary
inside ranges such as {0, +100},
{-50, +50} or {-100, +100}. The
extreme values are in many cases
associated with resistance and
support. A technique suitable to
use with the Spearman indicator
is Ichimoku charting.
Before looking closer into this,
here is a short review of the basic
(and sufficient) Ichimoku rules:
• Rule 1: Bullish trend when
closing price is above the cloud.
• Rule 2: Bearish when closing
price is below the cloud.
• Rule 3: Confusion/consolidation
when closing prices float inside
the cloud.
• Rule 4: The cloud acts as
resistance when closing prices
are below it.
59
• Rule 5: The cloud acts as
support when closing prices
are above it.
Figure 4 shows a weekly
Ichimoku chart for Infineon
Technologies (IFX) associated
with a ten-day Spearman
indicator.
Our goal is to confirm price F3) DAX with Multiple Timeframes
movements on the Ichimoku
chart using this oscillator. A
weekly bearish signal (Rule 2)
is issued on 2/11/2007 with the
oscillator at -76.96. This is an
oversold condition with very
poor probabilities for the price
to get back through the cloud.
Downtrend is confirmed. Later,
in September 2008 and many
percentage points down, IFX Figure 3 shows the German DAX, the Spearman indicator, and triple
timeframes. If you are looking for major tops or bottoms, use multiple
attempts to enter the cloud but timeframes.
fails (Rule 4) with an oscillator Source: www.amibroker.com
value at over 80, more exactly
84.24.
The next close above the
cloud is recorded on 9/9/2009. F4) Infineon with Spearman and Ichimoku
The Spearman oscillator is at
87.87 suggesting resistance.
Prices move sidewise until a new
close above the cloud occurs
on 18/12/2009 with Spearman
oscillator very close to zero. We
consider this second attempt as
a strong positive confirmation for
the break above the cloud and
into blue skies. On 10/09/2010 IFX
had a close encounter with the Use Spearman oscillator to confirm important price action on Ichimoku
charts.
cloud but the oversold condition
(Spearman at -87.87) proved to be Source: www.amibroker.com
a confirmation of the cloud acting

TRADERS´ BASICS
as support (Rule 5). IFX was set
for new highs.
Divergences
The last chart shown in Figure 5
focuses on weekly divergences
between the oscillator and price.
The positive ones are marked in
green while negative divergences
are displayed in red. The positive
divergence between 10/2008
and beginning on 03/2009
points correctly to the start of
the current market recovery
which continues to this day.
Closer to us, a potential negative
divergence raises flags about a
price top. Odds are high that this
will happen.
www.tradersonline-mag.com
05/2011 www.tradersonline-mag.com
Conclusion
The Spearman indicator is an
oscillator based on a statistical
measurement dating back to the
beginning of the 20th century,
and described technically as
the Spearman rank correlation
coefficient (ρ).
The rank correlation coefficient
was used in this article to build a
new technical analysis indicator:
Spearman indicator, an oscillator
with an excursion between -100
and +100. As with any oscillator,
the signal generation technique
is the same: thresholds (in this
case -100, -50, 0, +50, +100),
crossings with moving averages,
multiple timeframes, and
60
divergences. Of these methods,
the most powerful one is the
use of the oscillator in multiple
timeframes to detect major highs
or lows.
Due to the original concept
behind it, the Spearman
indicator opens a door for future
use of data ranking for wider
market analysis. The use of the
Spearman indicator will serve to
be a useful and effective tool for
any level of trading, as it adds
analytical insight to discover and
follow the right side of the trend.
F5) Infineon with Spearman and Divergences
Divergences, especially on higher timeframes, are reliable indicators
for future price action. Here green divergences are positive, red
divergences are negative.
Source: www.amibroker.com

One of the most common
mistakes, which not only did I
used to be guilty of, but many
of my trading friends as well
as students in various classes,
is what I have coined “the
continuation trade.” What is the
continuation trade, you ask? Let
me present this scenario and you
tell me if it sounds familiar…
What Is the
Continuation Trade?
You notice that a stock (or
Currency Pair, Futures Contract,
etc...) has been hitting resistance
over and over before finally
breaking through. You enter a
trade long with a logical location
for your target and stop. You
monitor the trade – watching as it
moves in your favour. You then see
that the position is approaching
your target, does not quite hit it
How to Avoid the Temptation to Re-enter and then moves away from it. The
temptation would then be to do
Beware the what? Of course – you exit.
Why exit? Because you did not
want to ‘give back’ too much of
“Continuation Trade” your profits. You then sit back,
feeling somewhat relieved that
you were able to have locked in
most of your profits. Then you
When you have been trading long enough and spent time with other traders, you notice that many people notice that the former position
make the same mistakes over and over. You will also find that mistakes you may have made or continue is moving back toward your
to make which you thought unique, are in fact quite common. It reminds me of an old saying: “there is original target. What do you do?
nothing new under the sun.” Of course, you go ahead and
re-enter it. Why? Because you do
not want to ‘miss out.’ “I knew it
was going there,” you rationalise
to yourself – watching as it moves
05/2011 www.tradersonline-mag.com
61
in your favour for a few seconds
– and then what? Of course, it
goes against you. Hopefully you
at least had a stop in place, but
more than likely, most people in
this position will just enter, hope
it goes to their target, and if it
does not – they will hold on until
it finally does get there...or they
become insolvent. “There is no
way I can get out now – I have
given back way too much of my
profits,” you tell yourself as it
continues to go against you.
That, my friends, is what I call a
continuation trade. Let us review
what happened: you entered a
trade based on a logical reason,
you placed your stop and target
in logical locations – and then
watched as the position went in
your favour. As it began to go
against you, you panicked, closed
the position, only then to observe
it going back toward your target.
You re-entered the trade, thinking
in effect, that when you did that it
was merely a continuation of the
trade you were in previously.
The reality is this: once
you close out a position, any
subsequent position is not simply
re-entering the old position – it is
a brand new position and should
be treated as such. What does
that mean?
You have to re-evalutate the
new trade and determine if the
same reasons which existed for
you to enter the trade originally
still exist…in other words, this

TRADERS´ BASICS
Eric Waddell
Eric Waddell has been
trading for over ten years and
teaches with Online Trading
Academy. He has developed
various strategies in the
equities and Forex markets,
which he has shared with
students in various parts of
the world. Eric truly considers
it an honor to instruct with
Online Trading Academy and
encourages his students to
stay in touch with him.
05/2011 www.tradersonline-mag.com
is a brand new trade…not a
continuation of the previous
trade. There is also the distinct
possibility that the brand new
trade probably does not meet
your minimum risk:reward
anyway. Many times, in those
instances, when I would commit
this error, my risk:reward was at
best 1:1. Not the most ideal odds.
In most cases, it was even less
than that. This is why I always
come back to the role which
psychology plays in our trading.
The psychological component is
paramount to our trading success
and is the least considered angle
of trading and one which most
new traders in particular overlook.
Why did you close out the trade
and then re-enter? Was there
a clear, logical, business-type
rationale for getting back in?
Notice I used the word ‘business-
type’ rationale. We have to treat
trading like a business. Did you
make a sound business decision
when you re-entered the trade?
Chances are, it was more of an
emotional reason than anything
else.
How to Avoid
All right, so now that you are
familiar with what a continuation
trade is, what can you do to
overcome the desire to succumb
to this temptress? I would
recommend a couple of things.
First, manage the trade through
the use of moving your stops –
62
either a trailing stop – or using
an analysis indicator, such as
parabolic SAR to assist in where
to move your stop. The question
always is, how much should I
make the trail? What guideline
should I use? Well, I would never
use an arbitrary number, such as
a day trader always having a .15
trail on his equity positions for
example, regardless of the trade.
Such arbitrary stops rarely work
on a consistent basis and is one
of the main reasons why traders
cease using stops and claim that
they do not work.
Using the Average True Range
If anything, I would suggest
experimenting with ATR (Average
True Range) and using it as a
guideline to assist in how much to
set your trail. The main drawback
to a trailing stop is that markets
rarely just go straight up or
straight down, they will generally
zig zag or stair-step one direction
or another. Some traders swear
by them. However, I always
recommend trying out several
things and seeing for yourself
which option is consistently the
most successful.
When deciding how much to
set your trail, choose the ATR
of the time frame which is most
relevant to your trading style. For
example, it would not be wise to
use the daily ATR as a guideline
for your trail if you are a day
trader placing dozens of trades

TRADERS´ BASICS
per day. You would probably
consider one of the minute time
frames, such as the 15 minute
or 3 minute, for example. It all
depends on your trading style
and risk tolerance.
Without going into too much
depth on the parabolic SAR, it
is an indicator which uses price
and time to assist in where to
move your stop. Actually, the true
intent of the parabolic SAR is to
stop and reverse your position –
meaning that if used exclusively,
you would, in essence, always
be in the market. Like many
indicators, however, it works best
in a trending market. Can you
imagine using parabolic SAR in
a sideways market and getting
chopped up – or chasing your
tail, as I like to say.
Example Trade
In the example (Figure 1), we can
see that had you entered this trade
on U.S. Steel (X) short at $55.15
as a day trade, placed a ‘hard’
stop and then moved the stop as
it went in your favour based on the
parabolic SAR, your stop would
have eventually been moved to
$53.70. Eventually, X traded as
high as $53.71 after you moved
your ‘parabolic’ stop and you were
closed out of the position. In this
example, the use of the parabolic
SAR indicator would have assisted
you in where to move your stop
– in other words, how to manage
your trade.
05/2011 www.tradersonline-mag.com
Now, of course, your initial
target may have been reached
long before the parabolic stop
removed you from the trade, but
again, the key is to manage the
trade as opposed to just sitting
back after your entry and hoping
it works out. Which makes more
sense? Additionally, the use
of this method may help you
to avoid a continuation trade.
(Disclaimer: No indicator or
method is infallible. Parabolic
SAR was invented by Welles
Wilder and we could easily
spend much of this magazine
discussing it. Please research
the indicator and paper trade
with it as a potential guideline for
moving your stops. Many trading
platforms offer it as an option).
The previous examples – of
using a trailing stop based on
ATR and parabolic SAR – are
only two methods of managing
your trades. I could also include
moving your stops based on
moving average crossovers or a
host of other indicators. The point
is, if you are actively managing
the trade by moving your stop as
opposed to simply keeping your
finger on the trigger ready to exit
at any moment, you are more
likely to avoid the continuation
trade and consequently having
your day ruined.
Remember, the whole point
is that the continuation trade is
actually not a continuation of
your previous trade but is an
63
entirely new trade altogether
and should be treated as such.
Once you have exited a position,
the subsequent position is not a
continuation of the previous trade
to be entered because you did
all the analysis prior to getting in
the first time: it is a whole new
trade which requires evaluation
just as you would have done had
you never traded this position to
begin with.
Conclusion
If you still find yourself
having difficulty avoiding the
continuation trade, then try this:
once you have closed out a
position, either step away from
the computer for a little while or
else replace the security with a
different symbol so as to avoid
the temptation to re-enter. What
really helped me is finally asking
myself why I was doing this
occasionally and I came to the
conclusion that it stemmed from
my innate desire to capture every
last penny (or PIP, as I trade Forex F1) U.S. Steel (X)
as well) out of the trade. Realising
that buying at the exact bottom
and selling at the exact top is not
realistic on every trade anyway –
why even be concerned about it?
Just take your profits – through
the management of the trade –
and wait for the next opportunity.
Shorted X at $55.15 and then based stop off the Parabolic SAR.
Source: www.tradestation.com
 64

Dr. Mircea Dologa

Success with Modern
Technical Analysis
Dr. Mircea Dologa is a very conscientious and well educated trader: When the former physicist, doctor, and CEO decided
to become a full-time trader in 1992 he attended many seminars all around the world and read hundreds of trading books.
Moreover, Mr Dologa is a Commodity Trading Advisor (CTA) and a registered member of the National Futures Association
(NFA). More than 20 years ago, he developed his own strategy: the Integrated Pitchfork Technique. It is a combination of Dr
Alan Hall’s Andrews Pitchfork Technique and state-of-the-art trading tools like Elliott Waves, Floor Pivots, or Jenkins Circles.
His goal is to find low-risk high-probability trades. He described this concept in detail in his three books “Integrated Pitchfork
Analysis“ volume 1 to 3, and in a great number of articles which he regularly publishes in renowned trading magazines, and on
his website www.pitchforktrader.com. In our interview, Mr Dologa talks about his long way to a successful trader, the meaning
of psychology and risk and money management, as well as his Pitchfork Analysis.

TRADERS´: Can you please tell
us a little bit about your life?
Dr. Mircea Dologa: As a young
man, in high school I always
wanted to be a physicist. I very
much enjoyed mathematics and
physics, and as I was growing
up I had dreams of one day
winning the Nobel Prize. Well,
life has certainly turned out
differently, even if I did graduate
from the Cooper Union School
of Engineering and Science in
New York City with a Bachelor of
Science in Theoretical Physics.
But later I found out that working
as an engineer in a nuclear power
plant all my life, did not really
fit into my plans– in spite of the
good money.
So I decided take up the life
of a student again, and become
a physician. After obtaining a
Doctorate in Medicine from
the Paris School of Medicine,
I worked as a physician for a
couple of years and finally landed
in the pharmaceutical industry. I
was happy to say good bye to my
72 hour hospital work week and
started an almost normal 35-hour
week routine.
I performed fewer medical
calls, but I got more involved in
the commercial, marketing and
financial parts of this industry.
Sponsored by my employer, I
attended MBA courses in finance
and business management at
the University of South Carolina
in Columbia and at the French
School of Business and Finance
(HEC Paris France). After holding
the positions of Medical Director
and later as General Manager
at various institutions, I finally
decided in 1992, to focus
exclusively on investments and

04/2011 www.tradersonline-mag.com
05/2010

TRADERS´ PEOPLE
trading and since then I have
remained devoted to financial
markets.
My Nobel Prize dreams have
disappeared but, in exchange,
the virus of trading infected me
and my life took off like a US
Navy jet from the deck of an
aircraft carrier in favour of a much
more exciting and captivating
everyday occupation. Since then
I work more or less, the same 72
weekly hours I did as a physician,
but this time I do not feel the
fatigue, and in the
evening when I go to
bed, I can hardly fall
asleep immediately. I
keep thinking that in a
few hours I will wake
up and start another
wonderful day.
TRADERS´: How did you get in
touch with the markets ?
Dr. Mircea Dologa: To be exact
on September 4, 1987, in Paris,
France. I remember exactly
because I had just got off a
24-hour call as a duty physician
in the Emergency Department
of Bichat Hospital in Paris, and
I went to my bank, to withdraw
some money for the upcoming
weekend. At that time, we were
not so used to credit cards.
While there I said hello to my
personal banker– a nice and
efficient young lady – who told
me that she would like to have a
word with me. Then she started
05/2011 www.tradersonline-mag.com
talking enthusiastically about
the “privatisation” of some
French state-owned companies;
they seem to be tremendously
profitable financial operations, but
there was just one impediment:
The new shares were limited to
a specific quantity per buyer. So
I did my best to gather all the
family members I could, including
my grandfather and grandmother,
and I finally got seven people.
Needless to say that the
operation was very profitable and
Watch your wallet!
I forgot to mention that I did not
even need any capital because
the bank loaned us the entire
amount for a 72 hours period, just
enough time to subscribe and
then quickly sell.
TRADERS´: How long did it take
you to become successful?
Dr. Mircea Dologa: This
“privatisation” event, introduced
me to the power of investing,
and later on, to real time trading.
I did some quick thinking: If it
was that easy, why should I not
try to learn it myself, even if I
have to learn the hard way? So I
spent numerous daily hours – at
the weekends as well – studying
inter-markets analysis, investing
tens of thousands in books,
seminars in the States and
video-cassettes – CDs were not
available in those times, the lot.
The first net profitable results
came after three years of hard
labour, but it did come, and the
outcome was worthwhile. It is
very important to know that in
order to get quicker results, it
is indispensable that the novice
trader follows the following
learning sequence of modules:
basics of trading, trading
strategies, money
and risk management
and the psychology
of trading. Once
these have been
learned, a second
learning sequence
needs to be accomplished;
the trader should assiduously
perform virtual trading, followed
up by real time trading of small
tick value markets, like the E-Mini
Dow. After attaining profitability
for a period of 15 days in a row,
which might seem long for some
novice traders – careful, I am not
saying 100 per cent profitable
intraday trades – then, the trader
is ready for the “Big Bang” of the
trading life – the real time trading
of any financial instrument.
This approach might seem
somewhat exaggerated for some
inexperienced traders, but my
experience from more than ten
years has thought me the value of
psychology and money and risk
management. Watch your wallet!
Without capital, there is no trade,
and there is neither trading nor
investing. The trader will become
a dead duck.
I was lucky that studying
medicine in Paris and theoretical
physics in New York exposed me
the science of epistemology – the
method of learning by knowledge
blocks. I have applied this
method continuously since then,
and years later I transmitted it on
to my students.
TRADERS´: Would you
comment a little more about
epistemology?
Dr. Mircea Dologa: Epistemology
always has the last word.
Developed around 1856, the
Webster’s Collegiate Dictionary
(2002) explains that it was initially:
“used for the study of nature and
grounds of knowledge especially
with reference to its limits and
validity”. Throughout the years,
epistemology has become the
science of learning, building
the foundation for assimilating
knowledge as well as depicting
that knowledge‘s limits and its
validity.
Even if you are a lucky
fellow, and have discovered
either by your own study or
through mentorship, the most
consistent and symbiotic
trading technique, there
remains the problem of
assimilating and practicing it.
65
This method of building
knowledge blocks, similar to
modules, is used whenever a
student undertakes any kind of
study, he/she strives to assimilate
modules of learning in such a way
that the process is performed
rapidly and easily. Secondly, we
disambiguate these modules for
immediate memory retention and
applicability.
The methodology used to
explain the concepts is simplified
in such a way that the novice can
understand it efficiently without
prior knowledge.
We make full usage of this
method throughout our entire
lives, including trading, teaching
and academic work. I sincerely
believe that this learning
methodology should be taught
starting with high schools, and
then at the university level.
TRADERS´: Were there any
specific stumbling blocks
on your way to becoming a
successful trader?
Dr. Mircea Dologa: Well. Thanks
for the question. It is hard to
imagine all the stumbling blocks
one can encounter. But I will try
to list just a few that I ran into.
First of all, some colleagues used
to tell me that in order to know
yourself, you have to trade. Then,
you will be amazed to find out
what kind of person you really
are under your skin. But once you
have made the right diagnosis
 66
TRADERS´ PEOPLE

and learned what kind of person
you really are, one is on his/
her way to adapt the personality
to the various indispensable
requirements of trading. It takes
a lot of hard work to reach the
professional level by way of the
labyrinth of the learning curve.
Secondly, we should talk
about what personality traits
are indispensable in making an
excellent trader: perseverance,
patience, mastering impulsive
behaviour, giving-up some of
one’s strong-held beliefs, training
oneself to the feel and practice
of routines and specificlly paying
attention to details. As you might
guess, the list can be very long.
The trader who is not capable of
changing, creating or re-inventing
these traits will have a very
difficult journey, in the process of
beating the learning curve.
Thirdly, I should mention that
one‘s own profession – other
than that of trader – may or may
not influence the learning curve
and the practice of trading. I do
not know about other physicians,
but my previous training helped
me a lot. Medicine taught me
how to deal with the huge
volume of information, which
has to be sorted out when a
diagnosis is made. We learnt
to gather evidence for multiple
diagnostic possibilities, and then
to progressively eliminate the less
probable ones until you are left
with the most probable one. Once
this step has been reached, we
face a crucial decision: if it is a
vital diagnostic, then the physician
must be sure that it is the right
one. Otherwise, the patient will
be lost. In trading, the diagnostic
environment is replaced with
the trading scenario, and the
list of diagnostic elements is
replaced by fundamental and
technical elements, which are
indispensable for the decision
making process.
TRADERS´: You mentioned that
you did attend many training
courses. Did you have a
mentor, as well?
Dr. Mircea Dologa: Unfortunately,
I never had a mentor. At that
juncture I thought that I did not
need one because I considered
myself a self-educated person.
After all these years, I realised I
was wrong. I could have saved
a lot of time and money if I had
had someone who could have
mentored me.
TRADERS´: Why do you
consider mentorship so
important today?
Dr. Mircea Dologa: This topic
goes even deeper than it might
seem. It is directly related to
learning guidance. It goes
something like this: “How do I
become a consistently profitable
Trader?”
In order to be successful in
trading you need to do one of two
things:
1. Either, break the learning
curve by yourself which takes
a lot of time, money and very
frequently, the trader will not be
able to grasp alone, correctly
and methodically, the principles
of money management and
the psychological aspects of
trading. Together these aspects
make up more than 90 per cent
of the act of trading.

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05/2011 www.tradersonline-mag.com

TRADERS´ PEOPLE
2. Or do this with the assistance
of a mentor; which takes far
less time, but your money side
will be more visible because
you spend it in a shorter period
of time.
Another thing is that most
novices are not even aware of
how much fraud there is in the
trader training and education
business. Traders call it snake
oil. But there are many ways to
efficiently avoid it. Mainly you
need to look at the credentials of
these people.
If they are not registered
with the National Futures
Association (NFA) at http://
www.nfa.futures.org, regulated
by the US Government, and do
not have the title of Commodity
Trading Adviser (CTA), they
cannot legally advise anybody in
Futures trading without risking
fines and possible jail terms.
The mentor should also be a
successful trader not just an
adviser and educator. He/she
also needs to keep up to date in
new trading techniques, so he/
she can continue to strive for
improved consistency. This is
best done by publishing research
work on successful strategies
and techniques in well known,
serious technical periodicals like
TRADERS´ magazine, if you do
not mind the plug.
Otherwise look for membership
and recognition from valid
05/2011 www.tradersonline-mag.com
professional associations such
as the Market Technicians
Association (MTA) one
professional organisation, which
maintains high standards of
teaching the science of Technical
Analysis.
TRADERS´: What weaknesses
and strengths do you have as a
trader?
Dr. Mircea Dologa: The
weaknesses of a trader can bring
him down, if he/she does not
correct them as soon as they
reveal themselves.
As for me, in the
beginning, I used
to go over some
topics very fast,
believing that there
were not relevant
to the performance
of my trade output.
For instance, I tried
to shortcut the psychological
aspects of trading. I thought
that medical school would have
prepared me well enough in this
field. But I was wrong. I found
out to my own detriment that
the psychology of trading is a
separate branch of psychology,
and that it needs to be seriously
studied and understood in a
detailed, well applied practical
manner. In my opinion, which
I suppose is similar to that of
many trading colleagues, the
psychological aspect is the most
important one in the process of
becoming a consistent, profitable
trader.
One of the strengths I have
acquired – again, from the
medical school period – is to
plan and take care of details. I
learned to take the entire picture
into consideration and then
break it down in parts – modules,
so to say – and only then take
a harmonised decision. For
example: “Never trade short
on the 60 minute chart, if your
daily and weekly charts are up
sloping!”
The psychology
aspect is the most
important one.
TRADERS´: What does
“harmonised decisions” mean?
Dr. Mircea Dologa: By
harmonised decisions I mean,
to check the global picture and
current issues before you perform
the action. As an example, one
can consider the case of multiple
times frames. Do not ever take
a trade on an operational time
frame – let us say 15 minutes –
before you detect the dominant
trend on the weekly and daily
charts. This will remind you
throughout the day, not to trade
against the trend. Believe me, this
harmonised attitude will not only
save you a lot of money, but will
substantially improve your Profit
& Loss Statement. Lee Iaccoca,
the veteran chairman of Chrysler
Corporation always preached
“Think global and act local!”
TRADERS´: Can you tell us
more about the psychological
component? Why is it that so
important?
Dr. Mircea Dologa: Psychology
is the continuous process of
fuelling the decisional tree in a
trader’s mind, which
is indispensable to
the performance of
the trade outcome.
The crucial question
is: How can a trend
following trader enter
his trades earlier than
the first third of the
trend? He cannot
because he was not trained to do
so. In order to enter at the trend’s
inception during the first swing,
the trader should get familiar with
many other more sophisticated
elements that do not belong to
classic Technical Analysis but
rather to its modern version; he/
she should be aware of Gann
stealthy levels, Gann main levels
(G1 through G4), Jenkins True
Trend Lines (JTTL), Elliott and
Wolfe Waves and so on. After
training in all these elements,
and after they become everyday
routines, intuition will knock at the
67
trader’s door, and the trader will
be able to enter the trend in its
first tenth, not in its first third.
Speaking about the
psychological aspects of trading,
“trigger-shy” syndrome is a
classic example. It occurs when
the trader tries to make a trade;
but even when he/she has the
willingness to enter, the power
to execute the trade is missing.
This behaviour is somewhere
between mental inaction close to
paralysis and shyness. It seems
that something is restraining
him/her. The willingness comes
from the fact that consciously
the trader believes that he/she is
ready to trade and get rich quick,
but the sub-conscious does not
agree and blocks this euphoria.
It seems that there is an internal
conflict between the two “I”s
or should I say “I” and “Me”?
One is protecting the other…
to put it bluntly, it is a sort of
psychological stop loss triggered
by common sense.
In order overcome this
syndrome, the trader has to have
a very strong personality, and first
be able to understand the cause
and then, secondly to take the
right approach in getting rid of it
by himself/herself; otherwise he/
she would need some outside
help. The aetiology or causes
of this syndrome are numerous:
insufficient time spent acquiring
knowledge, insufficient capital,
possible psychological instability,
 TRADERS´ PEOPLE
fear of immediate danger, fear of
loosing and getting wiped out,
and many others.
TRADERS´: What kind of trader
do you consider yourself?
Dr. Mircea Dologa: I consider
myself a pure intraday trader.
I do not like to sleep with the
market. I decided a long time
ago that this is not for me. I even
tried out staying in a position
several days, but after a couple
of weeks of doing Profit/Loss
statement statistics, I found out
that I was not losing, or making
any money. So my enthusiasm
vanished for that kind of trading
approach. Besides, intraday
trading pays everyday at the end
of the day.
TRADERS´: What time frames
do you use?
Dr. Mircea Dologa: As an intraday
trader, I always use the 15, the
30, or the 60 minute timeframes
for the operational side. The
longer timeframes – the weekly
and daily – are used just once a
day, in pre-market, to get a feel
for the dominant trend, which will
remind me throughout the day,
not to trade against the trend. Do
not buck the market, if you do not
want to become a cold duck.
The lower time frames – 5 or
even 3 minute – are only used to
pinpoint the entry and the exit,
based on volume – which fuels
the market.
05/2011 www.tradersonline-mag.com
TRADERS´: How would
you describe your trading
approach?
Dr. Mircea Dologa: My trading
approach is primarily based
on a method that I created
more than 20 years ago: the
Integrated Pitchfork Analysis. I
discovered this technique while
I was searching for a trading
approach that would mainly work
in sideways markets but that
would also efficiently perform in
trending markets.
Roger W. Babson and Dr
Alan H. Andrews created
and developed the Pitchfork
Analysis, and this technique
can be naturally applied, with
the same degree of efficiency,
to both these types of markets.
Some established professionals
consider it “the ultimate tool to
identify the current vibration of
market trends”.
In order to facilitate the
quest for the low-risk high-
probability trades, I had to push
the limits of this 20th century
trading technique even further
so I developed what I call the
Integrated Pitchfork Analysis
concept.
The results are just amazing,
exceeding my highest
expectations. It gives the trader
a real trading edge: market
direction, high probability of
revealing optimal targets, stop
loss indications and also the
reversal levels.
TRADERS´: Could you please
explain the concept of your
Integrated Pitchfork Analysis
more precisely.
Dr. Mircea Dologa: The essence
of Pitchfork Analysis – used for
trending but sideways markets
as well – resides in its median
line (ML) with its acolytes: UML
(upper median line), LML (lower
median line), WL (warning lines),
etc. The median line is the main
component of a pitchfork’s
framework, not only for linking
the anchor (P0 pivot) to the
midpoint of the P1-P2. Pivots
swing but also constitute a
foundation guideline for drawing
Become a Member of the Online
its associated lines.
The median line’s main role
Trading Academy Community
is to ascertain the market price.
Dr Alan Hall Andrews taught his
students that most of the time,
price returns to the median line.
Thus, it becomes the minimum
price objective.
The median line can also play
the role of a symmetry axis
• Get access to free online courses.
meaning that the market flow will
be equidistant above or below the • Enjoy free education and market commentary from Online Trading
median line. Academy’s master instructors.
Being the most important
components of the pitchfork, • Plus get full access to our financial education center packed with helpful
the median lines (ML, UML & information about trading and investing.
LML) are also a powerful tool in • And best of all registration is FREE!
optimally depicting market flow,
thus identifying the dominant
trend. The tool is even more To register go to
efficient when market flow www.tradingacademy.com/membershipoffer
remains within the pitchfork’s
main body, delineated by the
THE WORLD’S MOST TRUSTED NAME IN PROFESSIONAL TRADER EDUCATION™
SINCE 1997

TRADERS´ PEOPLE
upper and lower median lines and
then it bursts out.
When price approaches the
median line, or any important
resistance or support lines, it
behaves in one of the following
ways:
• A test and bounce, thus
performing a reversal (a top
Pivot is built).
• A test and re-test.
• A zoom and test with or without
re-test.
• A zooming through – well
exceeding the ML.
• A violent piercing.
• Or a narrow range, which will
prepare the market flow for the
next price outburst.
In our more than 20 year quest
for the most profitable trading
techniques, we discovered
the extraordinary synergy that
occurs among the pitchforks as
a tool and other state-of-the-
art tools. Thus, the Integrated
Pitchfork Analysis was born. We
have created and developed this
technique for detecting the low-
risk-high probability trades, well
ahead of the crowd. The use of
this tool gives the trader a real
professional edge.
As we all know, market price
evolves in a time-price ethereal
(intangible) space. In order
to be consistent, common
sense teaches us that both
parameters should be routinely
05/2011 www.tradersonline-mag.com
and concomitantly taken into
consideration, in order to,
at least, double the trade’s
probability. And our technique
is one of the rarest, which uses
both elements: time and price.
Let us look at an example
for the Integrated Pitchfork
Analysis (Figure 1). The DAX
Future 15 minute chart illustrates
the decision taking process
where both types of analysis
were used: the classic and the
modern Technical Analysis (TA).
In our example, the classic TA
contributes with its filled down
gap, swing trend lines and the
double triangles (the first triangle
is defined by the distance BD and
AE, the second triangle is defined
by the two dotted red lines right
in the chart).
The modern TA is expressed
by our Integrated Pitchfork
Analysis. It pushes the analysis
limits even further towards higher
probability of trading outcomes.
The Contextual Pitchfork of this
trading scenario is constructed
from its pivotal anchor (P0) and
the Pivots P1 and P2. As we
can observe, the median line
drawn from the anchor through
the midpoint of the P1-P2 swing
was tested several times. When
the market stopped right under
the ML and closed below it
on September 17th, the trader
is ready for a reversal. He/
she opens a short trade at the
termination of the Sub-Wave (w5)
69
of the Wave W(5) (the terminal of
the expanding triangle).
The Elliott Waves impulsive
pattern with its Waves and Sub-
Waves informs us that the trend
is in its last phase – Wave W(5) –
and is now prone for an imminent
reversal. A trend reversal is also
confirmed by the coincidence of
time and price. Gann already said
that the trend would reverse most
of the time in that moment. This
is illustrated at the termination
of the Elliott Wave W(2) and the
beginning of Wave W(3) at point
P2, where the market flow made
an abrupt reversal on September
15th due to the strong confluence
(5587 key level) formed by:
• The 50 per cent retracement
of the Wave W(2) over W(1) is
reached; W(2) = 0,50 x W(1).
• The 61.8 per cent retracement F1) Integrated Pitchfork Analysis
level of the down-gap of P0 is
reached.
• The 38.2 per cent time relation
of W(2) to W(1) is reached;
W(2) = 0,382 x W(1).
TRADERS´: What instruments
do you trade?
Dr. Mircea Dologa: My favourite
trading instruments are mostly
located on the Futures markets:
DAX, S&P 500, Russell 2000, main
currencies, especially the EUR/ In the 15 minute chart of the DAX Future, P0, P1, and P2 build a
contextual Pitchfork. Price and time are meeting at P2 that leads to a
USD pair, SPI 200, and others. reversal. The median line of the Pitchfork is tested several times. As
the price closes right below the median line, a reversal is probable.
TRADERS´: How many set-ups Source: www.esignal.com
do you use?

TRADERS´ PEOPLE
Dr. Mircea Dologa: I do not
consider trading approaches
through the number of set-ups.
Please let me explain. Every
market exhibits its own behaviour;
and every time period has its
own personality. Neither of them
remain constant through the
week.
Moreover, a EUR/USD Monday
morning trading period can be
quite different from that of the
DAX Future. For instance the
DAX Future has two probable
high momentum periods – in the
morning and afternoon, after 3:30
pm CET (Central European Time)
at the S&P 500 opening.
In order to gather the most
from this approach, the trader
needs to adapt one of his
numerous techniques to the
idiosyncrasies, not only of the
market traded but also of each
time-of-the-day interval. All this
is valid under two conditions:
use a common decision tree and
have an exacerbated fluency of
the optimal set-up to be instantly
applied to a specific trading
situation, whenever that occurs
whether it be at opening, post
opening or pre-close.
In order to give you a precise
answer to your question, I can
mention that I describe many
set-ups within the 1224 pages
of my books. If I want to be
more exact, what they all have
in common is the decision tree
and the evaluated momentum
05/2011 www.tradersonline-mag.com
degree based on three principles:
directional or non-directional
approach, support or/and
resistance approach and the
volatility approach.
TRADERS´: Please introduce
the three principles of your set-
ups more exactly.
Dr. Mircea Dologa: The directional
trading approach is closely
related to early detection of the
trend. As I said earlier, most
traders are able to enter a trend
no earlier than in its first third. As
a trader using modern Technical
Analysis you can enter the trade
much earlier: in trend’s first tenth
time lapse.
The non-directional trading
approach is relevant for trading
sideways markets, which
occur much more frequent
than trending markets. This is
always impossible to do with
classic Technical Analysis, but
its modern equivilent does it
easily, using Wyckoff’s analysis
based on his three fundamental
laws: the law of supply and
demand, the law of cause and
effect and the law of effort versus
result. It all comes to a more
profound analysis of rectangles,
but not only their formation,
and composition, but also their
extensions – an ideal manner
with which to find multiple trading
targets.
The support and resistance
trading approach is a classic
70
method. In spite of this, the
modern Technical Analysis can
provide far more numerous
and many more important key
levels – resistance or support
–, beyond those signalled by
classic Technical Analysis. We
will mention just a few of them:
hidden Gann levels, floor Pivots,
Gann levels issued out of Gann’s
square of nine and main levels
(G1 to G4) and so on.
Last but not least the volatility
trading approach uses the
Average True Range (ATR) tool
or the dual Bollinger Bands
technique.
I will show you an example for
the directional approach (Figure
2). In the DAX Future 240 minute
chart, I combine classic and F2) Directional Approach
modern TA such as in Figure 1.
The classic TA contributes here
with its 500 EMA (Exponential
Moving Average), ready to stop
the market’s fall. The Stochastics
indicator (blue and green line)
signals the continuation of the
downward move, as long as
its upward fluctuations do not
exceed the 60 per cent level. The
fall is smooth, organised, well
encapsulated by the Stochastics
channeling. In the 240 minute chart of the DAX Future, you can see an upper and
a lower chart. In the upper chart, there is a Moving Average over 500
The modern TA, expressed by periods which could stop the fall of the market. P0, P1, and P2 build
a local Pitchfork whose median line is tested for several times. In the
our Integrated Pitchfork Analysis, lower chart, there is the Stochastic indicator (blue and green line) that
pushes the analysis limits even indicates a continuation of the down trend. As the market stops at the
confluence zone around 5400, we have two possible scenarios: Either
further towards higher probability it can fall below the confluence zone (probably) or it can break through
for trading decisions. The local it (improbably).
Pitchfork – describing the most Source: www.esignal.com
current market flow – of this

TRADERS´ PEOPLE
trading scene was constructed
from its pivotal anchor (P0), and
the Pivots P1 and P2. As we can
see, the median line drawn from
the anchor through the midpoint
of the P1-P2 swing was tested
several times. This is a warranty
that the pitchfork was well drawn
and that it will optimally describe
the down-sloping market flow.
The market stopped here,
probably temporarily, at the
confluence zone – around 5400
round number key level, formed
by the 500 EMA, lower warning
line WL-2 and the first upper
parallel to the trigger line of the
pitchfork. Line WL-2 results from
the distance between the median
line and its parallel through P1;
this distance removed is doubled
(WL-1) and triple (W-L-2).
We have here two scenarios:
First – the most probable –
the market will strongly break
through the 5400 confluence
zone; second, the market flow
will bounce on it. The former
scenario is ideal for a short trade
with a tight stop loss, just a few
ticks above the WL-2. The latter
up-sloping scenario should also
be considered – just in case –
it being represented by a long
trade, with an entry just above the
last low (around 5455) and a stop
loss just below it.
TRADERS´: You mentioned the
extraordinary synergy between
the Pitchfork tool and other
05/2011 www.tradersonline-mag.com
state-of-the-art tools. Can you
please show us such a tool?
Dr. Mircea Dologa: Here is an
example for the Jenkins tools, or
rather for his Harmonised Circles
& Angles in the monthly chart of
the Australian Dollar (Figure 3). I
combine the classic and modern
TA once again.
The classic TA is disclosed by
the price Fibonacci ratio lines.
They clearly show the 92-cluster
zone. The modern TA, expressed
by Jenkins’ Harmonised Circles
& Angles technique, again
pushes the analysis limits
even further, towards higher
probability of making positive
trading decisions.
The construction of this circular
and angular structure started with
the first circle on November 2006
and is based on the symmetry
and on the harmonic vibration
of the market flow. In spite of
this apparent visual complexity,
once that you are familiarised
with the drawing principles, you
will see that it is really not that
complicated.
We can easily see that
the impact on the classic TA
cluster zone has been greatly
emphasised by the occurrence
of a confluence formed by this
cluster plus the 45° angle, the
oblique tangential line (TL) of the
upper and right quadrant circles
and the horizontal tangent at
the 9077 key level of the right
quadrant circle.
72
The revelation of this
confluence dramatically
increased the probability of a
short trade with a tight stop loss,
just a few ticks above the zone,
but only after the reversal pattern
has occurred. If the confluence
zone – mind the volume – does
not halt the current full-steam
momentum, then we are inclined
to perform a long trade with an
entry just above the zone with a
stop loss below it.
TRADERS´: What does your
stop strategy look like?
Dr. Mircea Dologa: Every
trade must have its stop loss
and its target(s). For my stop
management, I use the so-called
“Three Pawn Technique”, which
is a “to be or not to be” trade F3) Jenkins’ Harmonised Circles & Angles
situation or a “to make or not”
entry decision. This progressive
order technique consists of three
steps:
• Step 1: Find the most optimal
entry of various mechanisms
and place the first order.
• Step 2: Scrutinise for the best
stop loss location – and then
immediately enter a stop order,
right after the entry order was In the monthly chart of the Australian Dollar Future, you can see
different Fibonacci ratio lines which result from the illustrated total
executed. This will be the price range. The upper right cluster zone around the 0.9200-mark is
supplemented by three components: the intersection out of the 45°
second order. line, the tangent on both Jenkins circles, and the horizontal tangent on
the right circle. Thus, the probability for a successful short trade rises
in that area, especially if a confirming reversal pattern occurs.
• Step 3: Find the most
appropriate logical profit Source: www.esignal.com
objective and then calculate

TRADERS´ PEOPLE
the optimal Reward/Risk ratio
(RRR). This will be the third
order, right after the stop loss
order is on broker’s waiting list.
Most of the time, these three
progressive trading orders,
labelled the Three-Pawn
Technique, are pre-arranged the
moment when the trade decision
is made. It is vital for capital
preservation’s sake, that once
they are established,
they should never
be changed. Due to
the reliability and the
automatism of this
technique, we named
it the automatic
trading mode. It
is one of the best
remedies for “trigger-
shy” trading syndrome.
If only two orders are pre-
arranged, we are in a semi-
automatic mode. If the three
orders are not pre-arranged, we
are simply in a manual mode.
As for the exact location of the
stop loss we always locate it at
the proximity of a technical level
and we fix the stop loss 2-4 ticks
away. We never use percentages
like other folks do.
TRADERS´: You mentioned that
risk and money management
play a major role in your
trading. Why?
Dr. Mircea Dologa: Would you
go to the supermarket without
05/2011 www.tradersonline-mag.com
knowing exactly how much cash
you have got in your pocket?
Every supermarket buyer does
not spend more than he/she has
on him/her. What if you had a
fixed monthly allowance for food
and you went to the supermarket
four times a month? You would
not be surprised to find out that
every person knows exactly the
amount he/she spends every
week. Otherwise the money
We are only looking
for low-risk high-
probability trades.
would run out and the person
would run out of cash before the
end of the month.
The same thing happens
with well-trained traders when
they have opted for the Gann
approach of money and risk
management:
• Divide total capital in ten
equal parts to be used for ten
opportunities.
• If less than ten, then divide the
total capital by that number.
• Do not take any trade by risking
a $1 for a $1. Always enter the
trade with a minimum risk of
$1 for a probable reward of
at least $2.5! We seldom take
trades to take 2 to 2.5 RRR
and then only if they have
high probability. Do not forget
that our first goal is capital
preservation. There is always
another opportunity, but only
if you are still in possession of
your capital. We are not looking
to make spectacular goals. We
are only looking for low-risk
high-probability trades.
• Do not forget that you are
the Chief Executive
Officer of your own
economic entity – the
investing or trading
mechanism and the
performance of your
capital is on your
shoulders alone.
Follow the rules, if
you do not want to
become a cold duck. And when
you fail you are the only one to
be blamed.
TRADERS´: What was your
worst draw down?
Dr. Mircea Dologa: It happen
many years ago. It was $3500
for a single day! Do you want to
guess why? I did not follow the
stop loss rule. I was flooded away
by the psychological impact of a
huge selling climax and simply
made the error of not having a
stop loss in place.
TRADERS´: And your biggest
winner?
Dr. Mircea Dologa: A couple of
thousands of euros, when Angela
Merkel was elected Chancellor
of Germany for the first time, in
2005. Nobody expected that a
woman from East Germany could
become a chancellor, even if
she did have a PhD in Physics.
Well, the market sank over the
weekend by more than 100 per
cent of the usual daily Average
True Range. It took six days for
the market to fill the entire 120
points down-gap, and I milked it
every day of the week.
TRADERS´: How do you handle
emotions?
Dr. Mircea Dologa: A professional
trader has few emotions. Many
readers may be surprised to
hear this, but we will mention
the word confidence… and
they will understand it rather
quickly. Nothing can be done
without it. No trader will use
a trading strategy without
having full confidence in its
efficiency. But it is hard work
to acquire confidence. It takes
many months, even years to
get acquainted with the optimal
tools that you have tested and
re-tested and which are prone
to give the best trading results.
Confidence is a rare friend that
once acquired, will assist the
trader day-after-day. Would you
be surprised if I told you that
confidence is based on trials,
routines and rituals? Of course,
not! It is the only way to get
73
experience and to get to the next
step along the learning curve.
Whenever you have to take a
hard decision, you are reassured
because you knew the odds
beforehand and because you
have seen that before. And
anyway… the loss was planned
and you cannot lose more than
“tiny bits”. After a losing streak or,
on the contrary, a huge profitable
trade, one should have the same
frame of mind: tranquillity, free of
anguish and ready to start all over
again. Your attitude is based on
the confidence you have in your
store of experience.
Keep in mind that slumps
and joys are two indispensable
emotions that are frequently a
part of the trading process. Being
under pressure should never
change this attitude. At the end,
there will be always a new day,
and the sun will rise again. But
keep one thing in mind: Preserve
your trading capital by holding
to the rules concerning the “tiny
bits” stop losses.
So, as you can see, the
foundation of learning and trading
consists of three parameters: the
psychological aspect, risk and
money management and trading
strategy in this precise order,
with the first two representing the
majority of that foundation.
 The World’s Leading Traders...
Mark Douglas Author of Trading in the Zone Larry Williams Elite Futures Trader and Bestselling Author Linda Bradford Raschke Market Wizard & Hedge Fund Manager
Jack Schwager Author of Market Larry Pesavento Hedge Fund Trader Nick McDonald Founder tradewithprecision.com & tradingsymposium.com
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 75
TRADERS´ TOOLS

SEMINARS

Date Seminar Firm Location Website

29.04.2011 Client Trading Afternoon CMC Markets Dublin www.cmcmarkets.ie
30.04.2011 Trade with Precision – Free 5 Hr Workshop CMC Markets Auckland www.cmcmarkets.co.nz
02.05.2011 Live Trading con Profste CMC Markets Milano www.cmcmarkets.it
04.05.2011 Stock Market Training WIN Investing Southampton www.wininvesting.co.uk
05.05.2011 WhichWayToday LIVE Trading Workshop WhichWayToday London www.whichwaytoday.com
05.05.2011 Cómo diseñar un Sistema de Trading CMC Markets Madrid www.cmcmarkets.es
05.05.2011 Identificatori di Trend e pattern di prezzo esplosivi CMC Markets Milano www.cmcmarkets.it
05.05.2011 Stock Market Training WIN Investing Portsmouth www.wininvesting.co.uk
07.05.2011 Stock Market Training WIN Investing Manchester www.wininvesting.co.uk
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10.05.2011 Stock Market Training WIN Investing York www.wininvesting.co.uk
14.05.2011 Trading the World's Financial Markets Gann Management Ltd Cheshire www.gann.co.uk
14.05.2011 Stock Market Training WIN Investing Heathrow www.wininvesting.co.uk
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18.05.2011 Stock Market Seminar Knowledge To Action Ltd. Belfast www.knowledgetoaction.co.uk
21.05.2011 Stock Market Training WIN Investing Ipswich www.wininvesting.co.uk
23.05.2011 Stock Market Training WIN Investing Derby www.wininvesting.co.uk
25.05.2011 Trading the World's Financial Markets Gann Management Ltd London www.gann.co.uk
01.06.2011 Stock Market Training WIN Investing Reading www.wininvesting.co.uk

05/2011 www.tradersonline-mag.com

TRADERS´ COLUMN
Follow the Trend
In the past decade, fuel prices
have increased significantly
worldwide. Do we now have to
stay informed regularly about the
political situation in the Middle
East? Do owners of buildings
Daniel Haase with oil-fired central heating have
to ask whether that coveted
Daniel Haase was born on commodity is running short in
17th February 1976 in the Saudi Arabia or whether the
East German city of Malchin, Chinese will buy up everything?
Mecklenburg. As early as 1990 Do motorists worldwide have to
he first acquired shares and be forced to adjust their driving
was a successful participant behaviour by a UN edict? I think
in several competitive stock- not.
market simulation games. To Only the sustained, significant
this day, he has never lost his increase in fuel prices at the local
enthusiasm for the stock market petrol pump was sufficient to
that had been inspired by those send an important message to
early successes. millions of consumers: Change
Contact: info@haaseundewert.de your driving behaviour! The
price changes caused by the
05/2011 www.tradersonline-mag.com
free interplay of supply and
demand provide those directly
affected and observers with
information about how they
can adjust their behaviour in
economically sensible ways.
Friedrich August von Hayek, one
of the great liberal thinkers of
the 20th century, refers to this as
the „marvel of the price
system.“
The intellectuals’
alternative is to entrust
a body of experts with
the task of setting prices.
From 1945 to 1990,
this was practised on a large
scale by the Eastern European
economies. This economic
dogma found its musical
expression in the East German
communist song „The Party, the
Party is always right“.
But within the centre of
today‘s supposedly capitalistic
economic system beats a
socialist heart. When it comes
to our monetary system – of all
systems –, we rely on central
committees, usually composed
of many honourable older
men and a few token women,
who justify their existence by
claiming that they make smarter
decisions on money matters
than the market does. The
track record of such bodies is
consistently disappointing at
best and catastrophic at worst,
and in my opinion, there is not
a single reason to hope that any
centralised monetary policy will
produce better results.
When it comes to analysing
capital markets, these two
opposing schools of thought
are again at work: The basic
assumption of the centralist side
is that it is possible to gather
sufficient fundamental information
on which to make wide-ranging
investment decisions. The
charting side, on the other
hand, focuses on observing
and interpreting current price
changes. Here, the importance of
one‘s opinion is viewed with more
caution – with any errors being
swiftly exposed by the market.
The danger in fundamental
analysis is often to overestimate
one’s own power of judgment
as well as the value of the
information gathered, and to
underestimate the significance of
the unknown.
Invariably, fundamental
analyses can only consider the
knowledge of a limited number
of people. The more time
investors spend proving that they
are smarter than the market,
the more they are emotionally
attached to their decisions.
This carries the risk of making
commitments which are too
large and of holding on to losing
positions for too long. Luck only
increases the risk for the future
because the question of gain
or loss thus becomes primarily
a question of honour, with
76
monetary considerations taking
a back seat. As demonstrated
above, this may result in
catastrophic irrecoverable losses.
Those, however, who
consistently follow the trend
evidenced by charting attach less
importance to their own personal
knowledge and rather attempt
to use the knowledge of all the
market participants. Since we
place great importance on what
is unknown in the first place, we
accept our errors and correcting
our wrong decisions is not tainted
by a sense of personal defeat.
Trend following is by no means
error-free, but when applied to a
broad universe of stocks, it can
help avoid large losses ruining
one’s entire portfolio.
If financial history teaches us
anything, it is that the difficult
task is not acquiring a fortune
but holding on it for a long time.
The trend-following strategy
developed by Gerd Ewert and
myself is, therefore, less designed
for traders who want to be the
most aggressive bulls in the
market. We prefer to be among
those bulls that will still be hard
at pasture and may continue to
graze even after the next post-
slaughter feast. On that note,
follow the trend and be aware of
the limits of your knowledge.