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Interview: Ralph Acampora – Godfather of Technical Analysis P. 72
Your Personal Trading Coach
Nr. 08, August 2013 | www.tradersonline-mag.com
Trading withSeasonalitiesOpportunities for Profit in
August with the EUR/USD
and Gold P. 20
How to Enter aTrade Before theBig Move StartsThe Volatility-Breakout
Strategy P. 56
Trading According to Plan P. 6
Strategies to Give Youan Edge in the Markets
N e w S e r i e s :
T h e T r a d i n g
J o u r n a l
P. 6 4
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EDITORIAL
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The Grass is Always Greener on the Other Side ...
Lothar AlbertEditor-in-chief and publisher
» A house with a garden is a nice thing – if it weren’t for the neighbour ’s lawn. It just
so happens that the lat ter somehow is always greener than your own. And if it is not
the colour of the lawn, then it is the size of the house. Or i t is the neighbour’s car
that ’s more expensi ve. Or his wi fe is more beauti ful.
You will have noticed by now what I‘m driving at . Sometimes it jus t looks as though
other people are simply better off and you are the only one to lose out. This is a
feeling that may also surface in trading, especially when you communicate with
other traders via social media. After all, that is where everybody posts their trades
and opinions, which means that they keep track – more or less consciously – of
how those positions might have developed. And soon enough, you’ll find yourself
just focussing on other people’s winning trades – the classic “the-grass-is-greener
on-the-ot her-side“ syndrome. Any examples? Sure, I have three of them right here,
and you can follow up each of them with this sentence: “And I‘ve lost out again“:
• “Trader X was right to go long on EUR/ USD, he’s already 50 pips ahead now.“
• “Trader Y’s third successive short with gold that is way in the black.“
• “Trader Z has again managed to enter just prior to the big move.“
You know what? These thoughts are just nonsense and nothing but a product of your
imagination since you’re having a bad day and keep thinking negatively. So you don’t
have to feel sorry for yourself. The grass is not greener on the other side. Or maybe
just for the odd day or week when there is more sunshine there or your lawn happens to be waterlogged – figuratively speaking. But don’t let that impress you. Long term, the
grass will still be growing best if you consistently deal with all the necessary work that is
required. The others also have bad days and may have to struggle with problems you know
nothing about. Stop seeing only what others have, and make sure that you also see what
they don’t have. All of a sudden, your own lawn will then look a whole lot better.
You have decided on a very specific trading style and that’s what you will need to
keep focussing on. On good days and bad. And by the way, that’s no different from
the way i t is with your home, car, and wife. «
Good Trading
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TABLE OF CONTENTS
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6
TABLE OF CONTENTSAugust 2013
72
News
Find the latest notes and
announcements from around the worldof trading in our “News“ section.
28 New Products
The Latest Trading Technology
30 Web Review
www.kitco.com
34 Software Review
MetaTrader Trading Signals
36 Software Review
VectorBull and ForexBull
40 Book Review
“Kathleen Brooks on Forex“
by Kathleen Brooks
42 Appview
Trading Diary-App
TOOLS
INSIGHTS
COVERSTORY
14 New US-Dollar Indices
Jose M. Piñeiro introduces several US dollar indices that have
been created with the goal of finding the most accurate and
representative valuation of the US dollar.
18 What Investors Need to Know about Japan
Clem Chambers argues that inflation and the Bank of Japan
point towards the country’s economic decline.
20 Trading Seasonalities – Part 2
We show a short idea for EUR/USD and a long idea for gold.
22 China International Online Trading Expo 2013
The CIOTEXPO is the largest forex and options trading expo in
China and Asia. It will take place on 13th and 14th September.
6 Trading According to Plan
To trade systematically means much more than just placing
stops or following chart signals. For a trading plan to work in thelong term it requires us to know our own edge when competing
with other market participants. In this article, pro trader Simon
Betschinger shows how specific trading strategies can be
derived from a theory about the functioning of the markets.
Traders can use those as ideas for their own trading plan.
24
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TABLE OF CONTENTS
5
Publisher
Lothar Albert
Subscription Service
www.traders-mag.com;www.tradersonline-mag.com;
abo@traders-mag.com; Tel: +49 (0) 931 4 5226-15
Address of Editorial and Advertising Department
Barbarastrasse 31a, 97074 Wuerzburg
Editor-in-Chief
Lothar Albert
Editors
Prof. Dr. Guenther Dahlmann-Resing, Corinne
Endrich, Marko Graenitz, L ena Hirnickel,
Sandra Kahle, Nadine von Malek, Rodman
Moore, Stefan Rauch, Katja Reinhardt, Karin
Seidl, Bjoern Sommersacher, Tina Wagemann,Christine Weissenberger
Articles
Cesar Alvarez, Simon Betschinger, Thomas
Bopp, Steve Burns, Clem Chambers, Richard
Chignell, Larry Connors, Alexander Mantel, Azeez
Mustapha, Keyur Panchal, David Pieper, Jose M.
Piñeiro, Norman Welz
Pictures
www.fotolia.com
Price data
www.captimizer.de; www.esignal.com; www.
metaquotes.net; www.metastock.com; www.tradesignalonline.com; www.tradestation.com
ISSN
1612-9415
Disclosure
The information in TRADERS´ is intended for
educational purposes only. It is not meant to
recommend, promote or in any way imply the
effectiveness of any trading system, strategy or
approach. Traders are advised to do their own
research and testing to determine the validity
of a trading idea. Trading and investing carry
a high level of risk. Past performance does not
guarantee future results.
© 2013 TRADERS´ media GmbH, Barbarastr. 31a,
D-97074 Wuerzburg, Germany
BASICS
STRATEGIES
60 The Psychology of Trading – Part 2
In part 2, Norman Welz explains among other things how the
egoistic brain works and why successful trading requires a
change in personality.
64 Trading Journal
Thomas Bopp presents a call-write trade in the FTSE-100.
66 Part 2: The Trader’s Technical Arsenal Mustapha Azeez discusses the ADX, the ATR, and the
Awesome Oscillator (AO); as they work in the Meta Trader,
which continues to increase in popularity.
46 Part 3: The Long Pullbacks Strategy
Larry Connors and Cesar Alvarez introduce one of the most
robust quantified equity pullback strategies published. This is a
strategy which will likely become a go-to strategy for you.
52 The Self-Hedging Strategy
Options can be applied as an alternative to direct investment
with their leverage, though, being used to limit risk rather than
increasing it. Alexander Mantel shows how it works.
56 The Volatility Breakout Strategy
David Pieper shows how you can open a position with the help
of the historical volatility before a big move starts.
70 The Pro’s Process
Part 11: Gregory W. Harmon
72 Ralph Acampora –
Father of Technical Analysis
Ralph Acampora is a living legend
among technical analysis with almost
50 years of market experience. In our
interview, he explains how to correctly
interpret the constant recurring cycles
in the markets.
PEOPLE
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COVERSTORY
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Strategies to Give You an Edge in the Markets
How do you actually trade according to plan? Trading systematically means far more than merely setting stop prices or
following technical chart signals. For a trading plan to work long term, it is necessary to know and consistently exploit your
own edge when competing with other market participants. Professional trader Simon Betschinger shows us in this article
how a theory about the workings of financial markets will first lead to specific trading strategies which can subsequently be
integrated into a complete trading plan.
Trading According to Plan
» This article is divided into two parts:
1. Recognising your trading edge
2. Suitable strategies for your trading plan
Part 1: Recognise Your Trading Edge
The Scramble for Yield
There is never-ending competition in financial markets
between intelligent and financially strong players all of
whom share the single goal of making money. If we want
to give these people a face – and we are exaggerating a bit
here – then it is the most talented mathematicians from
Princeton who, together with the smartest physicists
from Stanford and top-tier Harvard graduates, gatheredin the trading department of an investment bank or hedge
fund, devoting all their creative willpower to solving the
financial-market puzzle. This competition is bound to lead
to the profitability of recurring trading patterns being
destroyed. The following example explains why this is.
Suppose a classic breakout to a 20-day high had a positive
expected value. In that case, financially strong market
participants would position themselves right before the
breakout signal and sell their shares again as soon as
the actual signal is triggered and other traders jump on
the bandwagon. Sooner or later, this race for yield will
destroy any profitable trading pattern emerging from the
data series. Anyone who claims that the opposite is true
should be able to come up with appropriate trading results
to prove their point, otherwise such a claim will, soon
enough be debunked as a simple lack of understanding.
Random-Walk Markets
The consequences of this competition are obvious. If we
tried to trade one of the major markets such as EUR/USD
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COVERSTORY
8
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personal edge here. Each profitable
pattern that one might find via
backtests and infinite attempts at
optimising a system, is subject to a
half life that is less than the time it
would take a system trader to really
work profitably with such a pattern.
So when it comes to trading an
index or a currency pair, you will be
competing in undoubtedly efficient
markets and Eugene Fama’s famous
conclusion that we are dealing with
a random walk here, proves true.
Disambiguation: The random-walk
theory says that the courses of stock
prices only can be described by
random processes.
Why You Still Have a Chance
The one way of winning the game is
to shift the competition to situations
that are not covered by all the
statisticians with their sophisticated software systems.
The first move is headed towards equity markets, which
resemble a zoom-in on details. You’ll be leaving the level
of anonymity and will raise the curtain on a play thatincludes a wide variety of characters who breathe life
into the stock market. No computer program in the world
can make a judgment on whether,
for example, the latest Samsung
Galaxy phone has the potential for
competing with the iPhone. However,
human beings can. They can form an
opinion and wait for situations where
the market and their own opinion
are in complete sync. This means
that the stock is developing exactly
according to its own price scenario.
These are the moments where you
should be following the trends
in an aggressive and determined
manner. The second move is to trade
whenever the trading algorithms of
statistical traders pause to adapt to
new circumstances. That is the case,
for example, right after any explosive
news that suspends all the statisticalrules of behaviour in one fell swoop.
Or whenever prices move away from
the statistical norm.
It’s not often that candles are formed completely outside the Bollinger bands. This is frequently an indication
that there is an unjustified exaggeration and a backlash is imminent.
Source: www.traderfox.de
F1) Lonely Warrior Signal
If right at the star t of trading there is selling pressure in the market and significant price losses have occurredin advance, this is often an indication of irrational and emotional behaviour on the part of other market
participants.
Source: www.traderfox.de
F2) Expansion Down Gap
on the basis of chart patterns without taking into account
any additional information, we might as well be competing
against Usain Bolt in the 100-metre dash. Our chances
of success are the same in either case. Throughout theworld, the most powerful financial-market players are
busy studying the EUR/USD. There is no such thing as a
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COVERSTORY
9
Being Thrown off Balance
Analysts are good at evaluating long-standing business
models. However, their judgment is regularly flawed
when it comes to capturing disruptive changes. Whenever
the financial markets are hit by new information that
describes a drastic change – be it, in the simplest of
cases, significant changes in sales and earnings forecasts
– market equilibrium will be upset for a short period of
time. The chains that had made it a slave of the market
will be cast off the stock. The new equilibrium will not be
found immediately. There will be rapid price movements
and a perceptible sense of general uncertainty. It may
take several weeks for the stock to be revaluated and
the laws of capital-market theory to be applicable again.
Such sudden changes in the calculation bases are an
opportunity for attentive traders who want to gain an
advantage.
Let’s stay with the stock markets. Even stocks with
market valuations in the billions are not yet subject to a
hundred per cent market efficiency where each player
and each individual decision vanishes in the statistical
background noise made by thousands of decision-making
processes. In individual stocks, the fundamental data-
based decision of a fund or large investor to stock up on
positions may lead to noticeable price changes. A stock’s
relevant information base is also much wider than, forexample, in the case of an index. The euphoric coverage of
a revolutionary technology may lure thousands of traders
into the stocks of a particular sector. No computer is
capable of recognising the complexity
inherent in the fact that it is sometimes
many small traders who fall victim
to a fallacy. Astute traders are quite
capable of doing just that – and that’s
exactly why they have an edge over
statistical traders. By reading stock-
market reports the former realise, for
example, that an expansion 52-week
high was triggered by nothing but
unrealistic expectations. And at that
very moment, the risk/reward profile
will shift away from the expected
value of a roulette game towards an
edge that can be exploited for a short
period of time.
What Makes the BestTraders so Successful?
It’s one thing to make money in
the markets, it’s another thing
to comprehend why. We know traders who are very
successful but who find it infinitely difficult to explain
their strategy. It has taken the writer of this article a long
time to understand exactly what his edge is. For most of
the trading day you sit in front of the ticker and spend
your time watching prices. The trigger for a trade is then
usually a well-known behavioural pattern that you can
eventually narrow down and describe. Traders arrive at
experiential data by observing recurrent patterns and
learning what happens subsequently. If this pattern then
occurs again, the experiential data can be accessed and
implemented.
A pattern may be much more than just a technical
chart formation. It may include a huge amount of
information such as corporate development, developing
news, overall market situation, currency movements, and
so on. And this results in what accounts for successful
trading: Actually, as a trader you will just wait for patterns
that you know inside and out to be working well. In the
simplest of cases, such a pattern is, for example, a new
52-week high, a simple trend-following signal. It does not
work throughout the entire year, but does an excellent
job on an estimated 20 per cent of all trading days. For
practical trading, that means analysing whether follow-
up purchases are increasingly made after new highs
or whether the breakout movement peters out. If thebottom line is that there is market sentiment that rewards
breakouts to new highs with further price gains, you will
buy this pattern as a trader. If not, you just won’t.
A momentum high break is the break of a distinctive point in the chart, which is the focus of many traders.
Source: www.traderfox.de
F3) Momentum High
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COVERSTORY
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How Profitable Signals Keep Destroying Themselves
The profitability of patterns in the stock markets is subject
to an evolutionary process that follows the rules of the
efficient markets hypothesis. It starts with a pattern
achieving an excess return in a conspicuous manner.
For example, breakouts to new highs are accompanied
by strong follow-up profits. This excess return will be
observed by more and more market participants who
then begin to trade this pattern. Initially, this may even
enhance profitability, but eventually the trend will be
reversed.
There are two adjustment processes here. First, too
many traders who want to achieve short term gains, have
opened positions upon the emergence of the pattern.
The excess return starts to shrink and the gains that have
been made on the basis of this pattern will be realised
even earlier. Secondly, some market participants will
very soon identify the trigger for the pattern marking the
beginning of the excess-return phase. Market participants
will then naturally anticipate this signal in advance, that is
systematically accumulate a stock one per cent before the
breakout to a 52-week high only to sell the shares again
immediately. This evolutionary behaviour pattern of chart
signals and more complex trading patterns explains, on
the one hand, the nature of eff icient markets. On the other
hand, it serves to open a door: Those who are the first tounderstand which trading patterns are currently working
well, can use this knowledge edge for a short period of
time to systematically trade patterns with a temporary
excess return before other market participants anticipate
and destroy such.
Insights for the Trading Plan
The profitability of trading patterns is comparable to an
evolutionary process. You need to have the opportunity
to conduct a statistical evaluation that can first clearly
identify patterns and, secondly, immediately alert you
as soon as a positive expected value is developing. The
trading patterns that are evaluated need to represent
distinctive situations from which significant changes
have emerged in the past.
Part 2: Suitable Strategies for Your Trading Plan
Lonely Warrior (Short Version)
This trading signal has a history that is easy to remember.
A warrior who has strayed too far from his own lines, at
some point finds himself alone and abandoned in enemy
territory and sees his chances of surviving the enemy
attack on his own dwindle rapidly. He has no choice but
to let himself fall back until his own troops have caught
up with him again.
Applied to the stock markets, the enemy territory
is defined as the price territory outside the Bollingerbands. The Bollinger bands do an excellent job here to
indicate whether prices move abnormally high or low.
The signal “Lonely Warrior” requires
that a complete candle was formed
above the Bollinger bands or – this
is the second version of the signal
– that 90 per cent of a candle with a
trading range of more than three per
cent was formed above the Bollinger
bands. This candle is then the lonely
warrior that the trading signal owes
its name to.
The short position will be opened
the following day, once prices have
fallen below the day’s low of the
“Lonely Warrior” candle. This risk
tolerance for the trading position
should be set at a relatively narrow
range between two and four per cent.
If a stock continues to rise despite
this strong overbought condition,that usually indicates a systematic
accumulation, which could possibly
have fundamental reasons.
An expansion 52-week high is no ordinary 52-week high. It is a high that was formed in the wake of a strong
short term price expansion.
Source: www.traderfox.de
F4) Expansion 52-Week High
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COVERSTORY
11
Exact Rules Governing the Lonely Warrior Short Signal
1. Yesterday a complete candle was formed above the
Bollinger bands. Alternatively, a candle was formed
with a trading range of more than three per cent with
90 per cent of the prices being outside the Bollinger
bands.
2. The signal trigger is yesterday’s daily low. Once the
price falls below the low, a short position will be
opened.
3. The trade has a stop with a small risk tolerance of two
to four per cent.
Expansion Down Gap (Long Version)
Emotions are rarely a good counsel when making trading
decisions. In other words, if a wild herd of panicky market
players give away their shares, that will be the right time
to enter. Panic is an emotion that needs to mature on
the stock market. It is like a good meal that only reaches
its full flavour after a long period of simmering. At the
beginning of a price panic there are usually moderate
losses. These will then be more severe, and at some point
there will be a double-digit loss on the books within very
few days, which makes shareholders incredibly nervous
and causes them to make irrational decisions. In terms
of our signal, the irrational decision is the unlimited saleright at the start of trading.
Translated into technical analysis, this results in the
criterion that the share price must
have fallen sharply within a short
period of time. More precisely, the
prerequisite for the expansion down
gap signal is that the price loss of
the last five trading days is greater
than three ATRs. If this downward-
movement criterion is met, one will
have to wait and see whether there
is a supply overhang right at the
opening of the next trading day or
whether there is a down gap. Such
a supply overhang could be an
important indication of emotions,
that is irrational actions. That will
be the right time to open a long
position. Prior to that, it is absolutely
necessary for the news ticker to
be checked. If there is any badnews such as a profit warning, for
example, it will be better to refrain
from opening a position.
Exact Rules Governing the Expansion Down Gap Long Signal
1. On the last five trading days, the stock’s share price
lost more than three ATRs.
2. Today, a supply overhang weighs on the stock right at
the opening. The stock opens with a loss of more than
1.5 per cent.
3. If there isn’t any extremely bad news (for example
hefty profit warning), a long position will be entered
immediately after the opening.
4. The long position is given a risk tolerance of two to
four per cent.
Momentum High Break (Long Version)
There are certain points in a chart that almost every trader
keeps an eye on. These certainly include the local highs
or local lows that are V-shaped. Many traders place their
stops at such prominent points or buy pro-cyclically into
a position – quite in the spirit of the classical literature on
such charts. Any experienced trader will often have had
the experience of prices just once – for a tiny fraction of
time – taking out such a point as described above only
to then move in the opposite direction. This kind of price
behaviour is no accident. It is the outcome of a market
process that lets as many market participants as possible
go the way of the worst pain.“Place stop-loss orders!” That’s what everybody
keeps preaching all day long – in stock-market magazines,
For quite a while, the electric cars made by Tesla Motors were taken seriously by German car manufacturers.
But independent test repor ts confirmed Tesla’s enormous range of up to 500 kilometres. After Tesla Motors
then announced that sales of its Model S had been well above expectations, there was no stopping the stock.Incidentally, Tesla Motors sold more of its Model S cars in the first quarter of this year than Daimler did with
its S-Class.
Source: www.traderfox.de
F5) Pivotal News Point at Tesla Motors
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COVERSTORY
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in broker webinars, and in trading literature. Of course,
minimising risk is a core component of successful trading.
In practical reality, wrongly placed stop-loss orders are
the main reason why many traders are unsuccessful.
Those who set their stop prices in such a way that they
are triggered by the everyday, random price noise, might
as well go to the casino. Whoever places their stop-loss
orders at distinctive points in the chart which virtually
all traders are watching, is playing the part of a herring
just waiting to be eaten by a shark on the prowl. After
all, it is as plain as day that hedge funds or institutional
traders will start testing a distinctive point in the chart if
it can be assumed that that will be followed right away by
automated and unlimited orders.
The “momentum high” chart pattern is defined as
a local high that stands out, V-shaped, from the price
performance. To ensure the V-shape, it is assumed that
in the five days prior to the momentum high, there was
an increase of at least 2.5 ATRs and in the five days after
the momentum, prices must have fallen by at least two
ATRs. If such a momentum high is broken, there is the
signal “high momentum break” there. It is not a signal
that should trigger an automatic trading reflex in a trader.
Rather, it is a stock screening which provides interesting
charts and prompts you to get to the bottom of the cause
of the price movement. If the price increase leading to the
momentum high break was triggered by good corporate
news, the signal should rather be traded long. If, however,
the price increase is purely driven by recommendations,
industry strength or traders, a counter-cyclical positioning
is a good choice.
Real-time hit rates also are a good guide in determining
whether the market currently favours cyclical breaks.
Exact Rules Governing the Momentum High Break
1. A momentum high was formed in the last eight
weeks. There will be such a “high” if in the five days
prior to the “high” an increase of at least 2.5 ATRs
occurred and in the five days after it there has been a
price slump of at least two ATRs.
2. Today this momentum high is broken.
Expansion 52-Week High
A new 52-week high is the
standard signal of every trend-
following trader – and rightly sobecause there is no doubt that it
shows that the bullish forces in the
corresponding stock are strong.
Any stock whose value goes up
dramatically, is bound to go from
one 52-week high to another 52-
week high in its inexorable upward
movement. A trivial insight? Not
necessarily, if one draws the right
conclusion. Anybody watching all
stocks on a daily basis that have
advanced to a new 52-week high,
can be sure to have all the future
hot stocks (those whose prices
keep soaring) on their radar. It is
important now to identify those
stocks where the new high might
be the technical precursor of a
fundamental revaluation process
– much like prior to a tsunami the
water will recede once more beforeforming that big towering wave.
The “expansion 52-week high”
is no ordinary 52-week high but
Real-time hit rates are a tool that informs traders about which signals currently work well on the market.
Source: www.traderfox.de
F6) Real-Time Hit Rates
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COVERSTORY
13
one that is accompanied by strong price momentum.
We are looking for situations in the chart that show a
strong rally momentum in the immediate run-up to a
new 52-week high. It is as though the chart is screaming,
“Look here, there is something happening here.” If
screened for on a daily basis, the chart pattern only
occurs for a small number of stocks. These are the
ones that are worth doing more in-depth research on.
In particular, the question should be raised whether
the strong momentum is triggered by pivotal news or
a euphoric sentiment in a particular sector. In the latter
case, counter-cyclical positioning might be promising.
If corporate news was published, downright forcing a
revaluation potential, a long position will be the logical
conclusion.
Exact Rules Governing the Expansion 52-Week High
1. Today, a new 52-week high is reached.
2. The price increase for one day is greater than 1.4
ATRs. Or: The price increase since two days ago is
greater than 2.4 ATRs. Or: The price increase since
three days ago is greater than three ATRs.
Pivotal News Point
Contrary to all the nonsensical claims usually made bymarket players worldwide who have just been taught
a bitter lesson by Mr Market, stock quotes have, in the
long run, always something to do with the fundamental
development of the company. Share prices will follow
the trend of corporate profits, and from a long term
perspective market values originate on a par with
increased profitability. It is no coincidence that many
strong upward trends are initiated after the publication
of company news.
Whenever breaking news is thrown into the market
system, this sets into motion a chain of decision-making
processes to be engaged in by market players. Will the
new realities match our own expectations? If not, trades
will be made. An increase in the earnings forecasts,
for example, may lead to an investment-fund analyst
presenting his new target-price prediction at a meeting
and the decision being made to build a significant position
in the double-digit millions.
Whenever the new realities emerging after pivotal
news pulverise long-held opinions and ideas, the
capital-market players are deprived of their calculationbases. People and, more importantly, management
structures in companies are such that opinions that have
long been voiced cannot be revised overnight. When
Apple’s iPhone was launched and the first gigantic
sales successes were achieved, most analysts probably
suspected that Nokia’s days were numbered for the time
being. But virtually no analyst dared at the time to utter
this insight immediately. It takes time for new realities
to be accepted. This is shown in the stock markets in
periods of strong outperformance or underperformance
of shares following pivotal news.
The Exact Rules Governing the Pivotal News Point
1. Today, a news item is published that at a stroke
throws out the existing calculation bases regarding
the future profits of a company and outlines a
new development path that in this shape has not
previously been considered possible by most marketparticipants. The first price after publication of the
news is the pivotal news point.
2. Buying starts immediately after the publication of the
pivotal news.
Your Next Few Steps
You should take the time to think at length about whether,
objectively speaking, you have an edge in the markets,
and if so, what exactly it is. In the long term, this criterion
is the basic prerequisite for success in the stock market.
Thereafter, make a trading plan in which you explain your
strategy in detail and respond to all contingencies in the
form of scenarios — how to proceed when you are winning
and how do you act in the event of a loss, what to do with
surprising news, and what if there is a sudden market
crash? Anything can happen in the markets, and you need
to have a ready answer to everything. Otherwise, there is
a danger of you having to respond at short notice, deciding
emotionally, and making exactly the wrong decision in
the heat of the moment (which other traders who are
better prepared will benefit from). Professional marketparticipants have worked intensively ahead of time to be
prepared for all eventualities and when it matters know
just what to do – and so should you. «
Simon Betschinger
Mr Simon Betschinger holds a master’s degree ineconomics and has been trading since 1998. He is apartner and founder of TraderFox GmbH (ww w.trader-
fox.de), a real-time stock-market software program forthe systematic trading by chart patterns. In addition,he trades with a real-money portfolio on the tradingportal Master Traders (www.mastertraders.de).
simon.betschinger@mastertraders.de
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Which Index Should Traders Use?
INSIGHTS
14
www.tradersonline-mag.com08.2013
New US-Dollar IndicesDetermining a fair valuation for the US dollar, or any other currency, has proven to be a difficult task. Several US dollar indices have
been created with the goal of finding the most accurate and representative valuation of the US dollar. However, considering the many
international currencies competing in the global marketplace, dollar indices appear to disregard an important piece of the puzzle.
» The global consumer-based society is accustomed
to using a base currency for all transactions. People
instinctively use their domestic currency unless they are
frequent travellers or engaged in international commerce.
The same denominator is being used, automatically
making life much easier. Apples never have to be
compared to oranges.
However, currencies also change in value. That value
is determined in the foreign exchange (forex) market,
which allows, for instance, a comparison of the euro to
the dollar. The Euro-Dollar could rise in value but how
would one answer the following question: Is the Euro
strengthening or is the US dollar weakening?
The two main variables for formulating a dollar index
are the selection of currencies and the weights assigned
to each. The standard US Dollar Index, also known by itsticker symbol USDX, has been in use since March 1973
when created by US commodity exchange operator
IntercontinentalExchange (ICE). The USDX measures
the value of the US dollar against a basket of six foreign
currencies (euro, Japanese yen, pound sterling, Canadian
dollar, Swedish krona, and Swiss franc). Unlike two of the
more recently-created dollar indices, the USDX is heavily
skewed towards the value of the euro. The weight given to
each currency was derived from their share of US foreign
trade back in the 1970s. This index has only been updated
once, in 1999, when the euro was adopted. Several
European currencies were replaced by the single currency,
which now has a 57.6 per cent weight on the index.
The IC E takes pride in the stability of the index despite
having maintained the same trade-weights over the
years. The USDX matches relatively close to the Federal
Reserve’s own Trade Weighted U.S. Dollar Index, leading
the ICE to argue that trade flows are not a major driver
of the Dollar Index. The USDX allowed traders to usethe index for trading purposes whereas the Fed’s index
was an ‘after-the-fact’ index based on annually changing
trade weights.
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Trade-Weighted vs. Equal-Weighted
The creation of new indices in recent years has mostly
resulted out of a need to give greater weight to other
currencies. Although the euro and the dollar account
for most of the trading volumes in the currency market,
a heavily euro-weighted index may leave out some very
valuable information. Such an index does not reveal what
currency is the driving force behind the index. For example,
a rising US Dollar Index does not reveal whether it is driven
by a rising US dollar, a falling euro, or a combination of
both. Giving more weight to other currencies in the ‘basket’
could help investors figure out whether the US dollar is
really driving the change in the US dollar index.
The feeling that the USDX was outdated has led the
CME and Dow Jones to unveil their new dollar index in
June of 2010. They created the Dow Jones CME FX$INDEX
as the basis of a new futures contract. Compared to the
USDX, this index replaced the Swedish krona with the
Australian dollar and assigned dif ferent weights to reflect
the most frequently traded CME currency futures and the
“current economic realities as indicated by the Fed’s data
on world trade.”
Nonetheless, the Dow Jones CME FX$INDEX is also
heavily skewed to the euro. Four of the eleven futures
contracts that make up the index are based on the euro,
which in itself has a larger standard contract size. Theinvesting community may have remained unsatisfied
as dollar indices with equal weighting for currency pairs
later emerged.
The Creation of Equal-Weighted Dollar Indices
The Dow Jones FXCM Dollar Index created in 2011
appears to be an attempt to find a solution to the dilemma
of finding a better measure for the US dollar. This index
measures the US dollar against an equal-weighted basket
of the four most traded currencies: the euro, pound, yen,
and Australian dollar. As such, each has a 25 per cent
weight. When traded against the US dollar, these are the
four most liquid currency pairs in the world.
The creators of this index claim that it was formulated
to address the major shortcomings of the older USDX and
was intended to be more relevant, tradable, and easier
to use than existing dollar indices. However, this index
may be oversimplified as it leaves out many important
currencies.
In June of 2012, FTSE and Cürex Group decided to
launch their own index, claiming there was a need fora new USD index that incorporates China’s renminbi
currency as it becomes more prominent in global trade.
Their FTSE Curex USD G8 Index was aimed at providingSources: research.stlouisfed.org, cnbc.com, wsj.com, finance.google.com
F1) Comparison of US Dollar Indices (First Half of 2013)
a more even measure of the US dollar relative to the
rest of the world by including “over 90 per cent of USA’s
international relationships and a more representative
benchmark.” This equal-weighted index includes eight
currencies, the Australian dollar, Canadian dollar, Swiss
franc, Chinese renminbi, the euro, the Sterling pound, the
Japanese yen, and the New Zealand dollar.
Finally, an index was created that reflects an emerging
currency. However, there is the problem of China’s
currency not being a free-floating currency.
Wall Street Journal Dollar Index: A Volume-Weighted Index
Just one month later, the Wall Street Journal announced
its own Dollar Index “to provide a more precise measure
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INSIGHTS
16
www.tradersonline-mag.com08.2013
commonly-used benchmark to measure the dollar has
not emerged.
Example of Dollar Index Shortcomings
By looking at recent trends in the US dollar, one can make
a comparison between commonly-used US dollar indices
and the performance of the US dollar to other currencies.
From April to mid-June, three major US dollar trends
can be detected. In the first trend, from April 1st to May
1st, the US dollar was bearish versus most currencies,
with a few exceptions. This was followed by a period
of remarkable US dollar strength from May 1st to May
22nd across all currencies, developed and emerging
alike. Standard US dollar indices did a fairly good job of
reflecting those trends.
The third period presents a discrepancy. That
period was characterised by strong dollar strength
versus emerging currencies and weakness versus the
majors. However, the US dollar indices very closely
match the dollar weakness seen in the majors and
disregard the emerging country currencies. This
discrepancy is visible in the chart. The red-shaded
lines represent dollar weakness versus the majors
and the green-shaded lines represent dollar strength
versus emerging currencies. The black lines, which
represent the dollar indices, should be somewherecloser to the middle. However, they are closely tied to
the red lines.
The shortcoming of the
dollar indices is that they lack
any indications of dollar strength,
although the dollar was remarkably
strong versus emerging currencies.
Conclusions
A broader dollar index would have
helped capture the dollar strength
that was not reflected on the popular
indices. Emerging markets play an
important and growing role in the
global market; however, they have
yet to make any substantial impact
on the commonly-used measures of
the US dollar.
As seen above, many dollar
indices have been created,
especially in recent years with anincreasingly globalised economy.
Although countless of variations
have been created, a popular broad
The third period presents a discrepancy. It was characterised by Dollar strength versus emerging currencies(green lines) and weakness versus the majors (red lines). However, the US Dollar indices (black lines) very
closely match the Dollar weakness seen in t he majors and disregard the emerging countr y currencies.
Source: www.fxmania.com
F2) Divergence of US Dollar Strength against Majors and Emerging Currencies
of the value of the U.S. dollar, an essential benchmark
for traders and corporate treasurers who need to discern
the true measure of investing abroad or domestically.”
They highlighted that their methodology sets it apart
from the rest by basing the weights of seven currencies
on forex trading volumes as reported by the Bank for
International Settlements. The use of trading volumes
aims at measuring the right relationship between
currencies.
Whether to use forex trading volume or international
trade data is debatable. By using forex trading volume,
the euro weighs about 41 per cent of the WSJ dollar
index compared to 57 per cent for the DXY. However,
this index may also be too skewed towards the euro
in a global economy where emerging markets have a
rising stake.
Exchange-Traded Funds Search for a Perfect Dollar Index
Many currency ETFs (exchange-traded funds) were
created in late 2007 ahead of the financial crisis to
capitalise on the growing role of emerging markets.
With the growth of the ETF market, many investment
banks tried to develop their own products that
tracked the performance of the US dollar versus other
currencies. Most of the time, however, these can be
divided into developed and emerging market funds.While there is an abundance of different combinations
and tradable products, a major reference or a
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INSIGHTS
17
Dollar Index Composition When Creators Tradable Volume
Trade-weighted US
Dollar index
Trade-weighted: many currencies based on international tradewith weights aligned according to US trade patterns and
adjusted annually. Weightings at Fed website:
www.federalreserve.gov/releases/H10/Weights
1998 (a newset of FX
indexes were
introduced)
Federal Reserve
No, after-the-fact index is
unsuitable for
trading purposes.
Not available
US Dollar Index (DXY)
Trade-weighted: 6 currencies based on international trade data in
1973. EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2%,
CHF 3.6%
1973Intercontinental
Exchange (ICE)
Yes, as a futures
contract on
the ICE. Also
available in ETFs,
options and
mutual funds.
1 contract
= $1000 x
Index value.
Approx.
daily futures
volume:
30,000
DowJonesFXCMDollarEqual-weighted: 4 currencies; EUR: 25%, GBP: 25%, JPY: 25%,
AUD: 25%2011
Dow Jones and
FXCM
Yes with online
forex broker
FXCM.
Not available
WSJ Dollar Index
(BUXX)
Volume-weighted based on trading volume measured by Bank
for International Settlements (BIS); 7 currencies: AUD, CAD, CHF,
EUR, GBP, JPY, SEK
July 2012Wall Street
Journal
No but creatorsdescribe it as
barometer for
futures traders
betting on the
direction of the
dollar.
Not available
Dow Jones CME Spot
FX$INDEX
Trade and volume weighted: 6 currencies; specifically, 10 Dow
Jones CME FX$INDEX futures reflect a basket of the following
numbers of contracts: 4 EuroF X; 2 Japanese Yen; 2 British Pound
1 Swiss Franc; 1 Canadian Dollar; 1 Australian Dollar.
This Index is calculated as the basket value divided by $10,000
Dow Jones CME FX$INDE X futures satisfied through the physical
delivery of 50K EUR; 2.5M JPY; 12.5K GBP; 12.500 CHF; 10K CAD;
and 10K AUD. Final settlement price based on settlements in thesix component currency futures.
June 2010The CME and
Dow Jones
Yes, as a futures
contract on the
CME.
Approx. 1
million in
total FX
futures
T1) Overview: Dollar Indices
Source: www.fxmania.com
dollar benchmark has not emerged. Some tools are not
commonly or publicly made available by data vendors.
Perhaps, the ‘right’ US index has not been developed yet.
While the main US dollar indices are fairly accurate
in measuring the direction of the US dollar, the timing
and the size of the moves can vary significantly. The
Federal Reserve’s broad trade-weighted dollar index is a
much more complete index as it includes 26 currencies,
all weighted according to trade data. In comparison to
the other indices, this index does a better job of valuing
the dollar because it includes a fairer representation of
emerging currencies, which play a growing role in the
global economy.
According to the International Monetary Fund’s (IMF)
World Economic Outlook, emerging economies’ share in
global output has increased from less than 20 per cent
in the early 1990s to more than 30 per cent measured at
market exchange rates. Accounting for differences in the
cost of living, that share is even greater and is expected
to surpass 50 per cent in 2013. Most US dollar indices
disregard an important part of the global economy in
measuring the value of the USD.
As can be seen on Figure 1, all indices follow the same
general direction. However, only the Fed’s index showed
the USD dollar reaching new annual highs in June. The
Fed’s index cannot be used for trading purposes because
it is an after-the-fact index that is re-balanced on an annual
basis using trade data. However, an index that includes
a better representation of emerging country currencies
would perform more closely with the Fed’s index.«
Jose M Piñeiro
Jose M Piñeiro started in the forex industryin 2002 as an Operations Specialist and thenCompliance Officer for FXCM in New York when
the online retail forex market was still getting offthe ground and expanding rapidly. He has spentthe last seven years working for Web FinancialGroup (WFG), based in Madrid. He is now forexanalyst for WFG’s forex website, f xmania.com.
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What Investors
Need to Know about Japan
When Shinzo Abe was elected as Prime Minister of Japan investors looked forward
to a new era of growth and recovery for the G8 nation, thanks to his heralded
Abecomics plan. Instead of stability investors are faced with fresh uncertainty.
Private investment guru Clem Chambers, CEO of ADVFN.com and author of “The
Death of Wealth: The Economic Downfall of the West” looks into Abemonics,
what went wrong and argues that inflation and the Bank of Japan point towards the
country’s economic decline.
Clem Chambers
Clem Chambers is CEO of ADVFN (www.advfn.com)and author of several books such as “101 Ways toPick Stock Market Winners” and “A Beginner‘s Guideto Value Investing“.
Most Likely Abe’s Economic Revolt Is Already Crushed
» Last month saw the likely death of Abenomics. It is not
a foregone conclusion but Prime Minister Shinzo Abe will
need to come out fighting in a very un-Japanese way to
save his program of national regeneration. In a few shortweeks he has gone from hero to zero.
Most likely, Abe will soon be the umpteenth one-year
Japanese leader in a line of political failure. Japanese
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19
politics is in hopeless gridlock because no politician
is able to break the gentle but profound decline. The
situation is very real. Within two generations the
Japanese population will collapse from 120 million to 60
million, underpinned and accelerated by the deflationary
policies of the Bank of Japan.
Japan would like to think of itself as a democracy,
but it isn’t. There are plenty of false democracies, such
as Iran where the dictator Khamenei rules the country. In
Japan the dictator is not a religious zealot but a financial
one, the BOJ.
The Real Power Behind the Japanese Economy
The Japanese Central Bank controls the long term
monetary policy of Japan and thereby the national
chequebook. It wields power as it see fit, which is starkly
against the wishes of the Diet, Japan’s parliament.
The BOJ policy is long term and based on
population collapse whilst, as always, democracy looks
towards growth. Democracy and central banking are
at loggerheads but the BOJ controls the money and
therefore trumps the people.
The strategy of managed decline through deflation
is based around the argument that the population isinevitably falling and continuing to age. This means that
to look after the old you necessarily have to make the
young carry the burden.
Inflation transfers resources from the old to the
young, deflation transfers resources from the young to
the old. Japan must have deflation.
The nation’s sovereign debt will be repaid by death
duties in due course, but Japan’s problems stem from
too large a population. Japan is a resource strapped
nation better suited to 60 million people. The government
cannot make people have children, but it can help look
after the old which is the duty of the nation. Deflation
achieves these goals. This is in diametric opposition to
the elected government.
The economic strategy of democracies is always the
same: inflation. Grow the country and its state through
economic expansion. Take resources from the old and
give to the young through inflation. The young are
economically active and should be boosted at the cost of
the economically passive. Growth and inflation solve all
debt problems in the end.Whilst the BOJ’s strategy is defensive, Abe’s
is attacking. Money talks though and Abe does not
control it. The BOJ strategy spectacularly won this
month as it crushed the Abenomic economic rebellion
by inaction and signalling. The Yen rallied and the
Nikkei crashed.
The Truth Behind the Figures
The crash of the Nikkei is probably the death knell for
Japan as a nation. Japanese demographics have already
rolled over into decline. The population is now falling and
humans do not breed well in captivity. The only way to
halt this collapse, or even slow it, is through economic
growth.
If Japan wants a 90 million population rather than
60 million, a figure less than one per cent of the world’s
population, it must slow its decline now. In ten years it
will be too late and it may end up with a population below
50 million by the end of the century.
The BOJ wants deflation as it sees this as the only
sure way to manage what it sees as the inevitable collapse
of the Japanese population. While it is independent of the
elected government, which is an enemy of its policy, it
is in control through its grip on the money supply and
nothing will shake it from its course. As such, Japan is
doomed.
You might imagine this is unheard of talk in Japan, butin reality many understand this political reality and have
done so for years. Japanese bureaucratic institutions
have a tradition of being overwhelmingly powerful.
Unwanted calls to action are met with passive aggression
and apologies of how difficult the task is.
Today, like the Europeans of pre-WWI, the Japanese
population is well ordered and drilled. They are prepared
to walk without question at the economic machine guns
because they are told to do so. The young are about to be
economically slaughtered on the altar of the BOJ’s policy
of decline. Abe has days to strike back to turn the fortunes
of Abenomics. The odds are low.
You will know if this is happening, not because you
will hear it in the press, because the Nikkei will rally
massively before the political news gets out.
Conclusion
A fight back is a long shot because the only way to
vanquish the BOJ is to take away its independence and
purge the institution. The elected representatives of
Japan simply do not have the will or strength to do this.Most likely Abe’s economic revolt is already crushed.
Like Ireland after the great famine, it may take centuries
to recover. «
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Trading Seasonalities
In our new section “Trading Seasonalities”, we are now starting to introduce trades to you that offer a potential tradingopportunity on the long or short side, based on seasonal and technical behaviour patterns. In this first article, we will be
considering two trading ideas for the month of August. Traders can implement these, using the respective futures or options
contracts. They may also trade the setups via the interbank market (for EUR/USD) or by using warrants, certificates or CFDs.
Part 1: Short Idea for EUR/USD and Long Idea for Gold
From 8th August, the EUR/USD will again be pointing to declining prices. Building a short position at this timecontinues to be supported by the activities of commercial market participants who are already net short (red
bars in the lower sub-graph). The position will be closed on 5th September.
Source: www.trackntrade.com
F1) Trading Idea EUR/USD December Contract Short » Trading Idea EUR/USD Future
After the US dollar the euro is the
most traded currency and is the
second most important reserve
currency next to the US dollar. A
seasonal opportunity on the short
side is offered by the EUR/USD on
8th August. With a holding period
until 5th September, traders can use
the last period of seasonal weakness
prior to things moving upwards
again later. While Forex traders can
be active directly in the interbank
market – even with a small position
size – futures are traded on the
Chicago Mercantile Exchange (CME).In the chart of the December contract
(Figure 1), an additional shoulder-
head-shoulder (SHS) pattern has
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formed. We have marked the
corresponding high points as well
as the valid neckline. As of August,
the seasonality points downwards,
which might coincide with a big sell
signal below the blue neckline. If that
was the case, this would amount to
a target price within a range of 117
points.
EUR/USD Trade Idea: Recent History
The duration of the holding period
can be identified by the area marked
green in Figure 1. The two inserted
lines show the December future’s
movement of the last three and five
years respectively. The average
profit of this bearish position was
196 ticks ($2460 per contract). The
highest profit ever achievable was
made in 2008. Back then, it was pos-
sible for a short position to be opened at 153.21 that was
closed more than ten points lower at 143 four weeks later.
This difference in points translates into $1250. The stop
should be placed 157 ticks ($1965) above the purchase
price and swiftly adjusted if the euro falls quickly.From early July, a short position will also be supported
by the Commitment of Traders (CoT) data (subchart below
the price in Figure 1). For the first time since February
2013, commercial market participants can be found
again on the short side. The red bars below the zero line
indicate that this group of investors sees the euro falling
against the dollar, causing them to position themselves
accordingly. An initial margin of $2475 is required, an
amount that, with a longer holding period, decreases to
the maintenance margin of $2250 per contract.
Gold Trade Idea: Recent History
A future on a troy ounce of gold certainly is in a class of
its own. In the case of this trading candidate, one point of
movement is tantamount to a gain or loss of 100 dollars.
Here, the initial margin is 8800 dollars, which will be 800
dollars less if the position is kept open for a longer period
of time. However, you may also switch to CFDs here or
trade the mini contract where one point only equals 38
dollars.
Trading Idea Gold Future
Since the market plunge in April, the troy ounce has lost
more than 400 dollars. If you entered a long position on
15th August with a holding period until 29th November,
you were able to make money every year in the last
ten years. Figure 2 shows the holding period of the
December contract to be traded. Since 2001, commercial
market participants had not been as bullish as they weremost recently. Back then, it was possible to see for the
last time that the red bar representing this group of
investors was in positive territory above the zero line for
the first time.
After opening the long position, there was an
average profit of 67 points, equalling 6700 dollars, while
the average loss was 45 points ($4500). In the years
2011 and 2008, the maximum loss amounted to 11,000
and 20,560 dollars respectively. This was followed by a
countermovement that just about led to a positive result.
Conclusion
Traders paying attention to seasonalities should take a
very close look at these two trading ideas prior to the
entry date in question. Ultimately, technical analysis
will then provide the crucial signal for the creation of the
position in question. «
The December 2013 contract on a troy ounce of gold is to be purchased on 15th August – with a holding
period until 29th November (area marked green). The average profit was 67 points with 45 points being
the level of risk.
Source: www.trackntrade.com
F2) Trading Idea December Contract Gold Long
On 8th and 15th August, you can find – in the forum of the
TRADERS´ website – one video analysis each of EUR/USD
and gold (www.tradersonline-mag.com/index.php/forum).
Video Update
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China InternationalOnline Trading Expo 2013
This year the third China International Online Trading Expo (CIOTEXPO) will take place on the 13th and 14th September at the
Shenzhen Grand Theatre in China. CIOTEXPO is the largest forex and options trading expo in China and Asia. The expo features a
wide range of exhibitions, conferences, an award presentation, exhibitor dinner as well as personal networking. The CIOTEXPO is
the get-together for traders, investors, brokers, financial providers and institutions to exchange ideas and information.
» The CIOTEXPO is the ideal place to meet professional
traders, brokers and others who are interested in forex
and options trading and discuss the latest trends in online
trading. CIOTEXPO is held twice a year. Exhibitors can find
new business partners in China and enlarge their customer
database quickly. Various possibilities during the expo can
help to promote the company brand and help it to benefit
from the effective networking, which reaches investors,
traders, advisers, financial solution providers and trading
brokers. Of course exhibitors get an insight of the cultural
differences in Chinese trading habits.
The exhibitors and sponsors this year include Alpari,
Ikon Group, IronFX, Instaforex, MIG Bank, Dukascopy
Bank, Interactive Brokers, Axitrader, Commexfx,
Tradency, PFSoft, MarketsPulse, Fxgrow and many
more. Along with others TRADERS´ magazine is a media
partner of CIOTEXPO. The expo expects to see more than
40 brokers and 5000 attendees. For 2013 the main issues
are technology innovation, trading education, tradingsignals, money management, binary options, social
trading, the booming online trading market in China
and forex regulations. At the expo renowned analysts,
experts, CEOs, media representatives both from home
and abroad will be sharing their ideas and experiences
with visitors.
CIOTEXPO is organised by the Eastpearl Group that was
established in 2010. The event management company promotes
financial services and economic development for traders,
investors, brokers and other professionals. It is now established
as one of the most dynamic and innovative event solutions
provider in the investment tradeshow arena. The Eastpearl
Group expedites the growth of the Chinese financial sector on
the international market and has been awarded several Best
Exhibition awards by the local exhibition association.
Apart from the CIOTEXPO, Eastpearl Group hosts
meetings, conferences and workshops in partnership
with local governments and financial associations and
helps overseas enterprises to show their products to
Chinese investors and vice versa.
Visitors and sponsors can get more information on
the official website www.ciotexpo.com or contact theorganiser by e-mail: darcylin@ciotexpo.com or by phone:
+86-755-36949770. Apart from that everyone can now
register on the website and get free entrance. «
13th and 14th Septemberat the Shenzen Grand Theatre in China
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INSIGHTS
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INSIGHTS – NEWS www.tradersonline-mag.com 06.2013
24
RTS Realtime Systems Group announced a number of
actions the firm has taken to further build on its growth
in Hong Kong and Mainland China. The steps include
the launch of a Chinese-language website and recent
establishment of a Shanghai office and expansion of itsstaff there. In Hong Kong, RTS has expanded into new
office space and initiated plans to move its data centre to
the Hong Kong Exchange (HKEx) co-location facility. The
firm will develop low latency gateways to capitalise on
HKEx’s new Orion initiatives and connect to its equities
and derivatives platform. The firm’s Hong Kong operation,
RTS Realtime Systems HK Limited, was exhibiting at LMEWeek Asia 2013 in Hong Kong in June.
Source: www.rtsgroup.net
On June 13, 2013 Utah-based Innovative Market Analysis
acquired the MetaStock technical analysis software line
from Thomson Reuters. Innovative Market Analysis will
continue distributing the MetaStock and MetaStock
Pro charting software packages to self-directed traders
worldwide. The day-to-day business and services will
remain the same including support, programming,
and developing the software as well as management of
customer accounts.
“One of the most important parts of the sale was
ensuring all MetaStock employees remained with the
company. We have a very veteran staff, averaging ten
years of employment with MetaStock,” said Scott Brown,
owner of Innovative Market Analysis. “What excites me
is the addition of programmers dedicated specifically
to MetaStock. We employ more MetaStock-specific
programmers now than the company has had in the last
15 years.”
MetaStock customers are already benefiting from the
addition of the programmers. MetaStock has started to
release bi-monthly service packs, which fix known bugs in
MetaStock. The programming team is close to completing
their first major project for MetaStock – returning the ability
to store data on the customer’s computer. This release willbe available in mid-August for all MetaStock customers.
Innovative Market Analysis’ acquisition also enables the
software to be more flexible to customer needs. “When
we were part of Thomson Reuters, we had to focus on
corporate partners needs first, and then retail customers,”
said Mr. Brown. “This acquisition allows us to explore
what our customers want and add it to MetaStock. There
are numerous possibilities under consideration to enhance
the product right now.”
Innovative Market Analysis will continue to have a working
relationship with Thomson Reuters. Thomson Reuters
METASTOCK HAS BEEN ACQUIRED BY INNOVATIVE MARKET ANALYSIS
RTS REALTIME SYSTEMS EXPANDS IN GREATER CHINA
Scoot Brown
DataLink and XENITH data will continue to power MetaStockand MetaStock Pro. On the institutional side, Thomson
Reuters clients will still use MetaStock Pro functionality in
Thomson Reuters’ flagship desktop Thomson Reuters Eikon.
Scott Brown, former MetaStock President, created
Innovative Market Analysis in order to obtain the MetaStock
software line and move it into a private business setting.
“I created Innovative Market Analysis because MetaStock
has great potential and I feel breaking away from Thomson
Reuters allows us to turn potential into reality,” said Mr.
Brown, owner of Innovative Market Analysis.
Source: www.metastock.com
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INSIGHTS – NEWS
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US MARKETS MAY FALL
When companies begin reporting
Q2 results, investors will look for
signs that profits can keep the bull
market going once the Federal
Reserve steps aside. The prognosis
is not good. Companies in the S&P
500 are expected to report overall
earnings growth of less than one
per cent. Excluding the financial
services industry, with projected
profit growth of 17 per cent,
overall earnings are expected to
decline by 2.4 per cent. In another
troubling sign, a record number
of companies have already issued
negative guidance for the quarter. Out of the 108 companies that have released forecasts, 87 have projected
earnings below consensus estimates. That’s the highest number since the data provider started keeping records
in 2006.
Source: www.money.cnn.com
“Non-bank financial firms” sounds like a non sequitur.
The idea of letting these kinds of financial “grey area”
firms, also known as NBFFs, continue to endanger the
global economic system is fast becoming a non-starter.
The US government’s Financial Stability Oversight
Council, and members Treasury Secretary Jacob Lew
and Federal Reserve Chairman Ben Bernanke, proposed
tightening oversight of NBFFs. If passed, the regulations
would name specific NBFFs as “systemically important”
to the financial system, and subject them to heightened
regulation. Specifically, the move would:
• Place such rms under Federal Reserve oversight;
• Require them to hold more capital in reserve
against potential losses;
• Require them to undergo financial stress tests
such as those that already apply to America’s
biggest banks;
• Obligate each regulated NBFF to prepare a “living
will” explaining how it will safely wind itself down
in the event it becomes insolvent, or otherwise too
weak to go on living.
Source: www.dailyfinance.com
REGULATORS WORRY NEXT FINANCIAL CRISIS WON’T BE CAUSED BY BANKS
Although gold prices dropped 23 per cent in the second
quarter, the appetite for gold still remains. Several factors
are structurally creating a natural floor in gold prices and
will continue to provide support. There are two factors that
will provide support to gold prices. The first factor is that,gold is being viewed as a currency rather than a commodity.
In fact, central banks account for a significant portion of
gold demand. Gold becomes a natural destination for
many players in the currency markets but also many retail
players who are interested in having some sort of security
in the currency space. The changing supply and demand
dynamics for gold is the second factor. Emerging markets
predominantly in Asia remain in the lead in terms of golddemand. Not only is gold culturally important in countries
like India, the uses of the precious metal is evolving.
Source: www.kitco.com
GOLD IS STILL AN ATTRACTIVE INVESTMENT TOOL
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Following the most recent shift “away” from a USD-
centric world (with the China-Australia direct currency
convertibility), it seems the possibility of China’s Yuan
as the next global reserve currency is getting closer. The
British, Germans, and now the Swiss (who just signed a
free-trade-agreement with China) are all actively vying to
become Europe’s Yuan trading hub as it seems the long
line of developments to internationalise the currency over
the past two years. The Chinese currency is well on its way
to becoming one of the future global reserve currencies.
Although, the USD is still the most commonly-used
currency for settling trade with China; from virtually zero
in 2010, the Yuan is used to settle over twelve per cent of
trading transactions now and is likely to increase further.
Source: www.zerohedge.com
Electric car maker Tesla Motors (TSLA) entered
the NASDAQ-100 Index on the 15th of June
having experienced surprisingly positive, throughthe roof figures during the last several months.
Simultaneously, Oracle`s (ORCL) shares have dropped
out of the index.Tesla most recently had a market
capitalisation of around 13 Billion dollars.
Source: www.globenewswire.com
Investors are becoming increasingly bullish about
the U.S. dollar in anticipation of a stronger economy
later this year. The newfound enthusiasm for the buck
follows a choppy period as investors prepare for the
Federal Reserve to eventually unwind its stimulus
program. Depending on how the economy performs,
the central bank could begin tapering its bond buying
program by the end of this year. The remarks sent the
dollar higher against its main trading partners as stocks
fell and bond yields rose. Although the Fed trimmed
its outlook for economic growth this year, traders seemed to take Bernanke’s comments as confirmation that therecovery is gaining momentum. At the same time, market volatility is expected to remain high for now, which
should help boost the dollar.
Source: www.money.cnn.com
EXPANDING CHINESE CURRENCY
TESLA MOTORS JOINS NASDAQ-100
DOLLAR GAINS STRENGTH
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“I’m a day trader. What can
MetaStock do for me?”
Loaded with real-time news & data, fundamentals, economic
reporting, analytics, and much more, MetaStock XENITHtm is quite
simply the most powerful platform available to the private trader.
MetaStock XENITH is a comprehensive and flexible system with
extremely powerful search capabilities and an impressive array of
options tools. Couple this with the MetaStock Pro PowerTools, and
you will wonder how you ever traded without it.
METASTOCK : Power to the Private Trader
Try MetaStock FREE for 30 days!
metastock.com/tradersezine
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News from the World of Technology
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPVIEW
New Products
Best Choice Software
» Barchart.com, Inc. announced that it is now connected
to NYSE Technologies’ SFTI® Network. NYSE
Technologies is the commercial technology division
of NYSE Euronext and provides broadly accessible,
comprehensive connectivity and transaction
capabilities, in addition to data and infrastructure
services for mission critical trading services. SFTI
stands for Secure Financial Transaction Infrastructure
and also offers ultra-low latency connection speeds
and huge bandwidth capabilities. With its connectivity
to SFTI, Barchart has access to virtually all North
American equities and derivatives markets, as well
as many international markets. The additional marketcentre coverage adds to the depth of Barchart’s
data feed division. Further, the strength of the SFTI
backbone enhances the level of resiliency Barchart can
provide to its clients. Additional details can be found at
www.barchart.com
» Best Choice Software, which offers seasonality-based
swing trading software, announced they had combined
forces with Estockoptiontrading to bring clients
daytrading software and training. The system trades one
selected stock for about an hour a day using proprietary
software. Members are trained to use the system to trade
consistently. Additional information can be found at
www.bestchoicedaytrader.com
» Ward Systems Group released ChaosHunter 4.0, a
stand-alone software tool designed to produce readable
formulas to model your numeric data for applications like
buy/sell signals, future value of time series, scientific,
business financial or sales data and many more. To use
ChaosHunter you have to enter text files or historical
data from spreadsheets or data feeds. Af ter that you can
choose between arithmetic and mathematical functions
that you want ChaosHunter to use. It then produces
numeric formulas that you can read, understand, utilise
and even sell outside of ChaosHunter. The Formula
Editor of ChaosHunter allows you to make changes andapply the model to your data file. Additionally, you have
the possibility to save several formulas as long as you
give them different names. They can be the formula you
created or a formula optimised by ChaosHunter. It is
possible to transfer the formulas to other popular trading
platforms, like NeuroShell, Interactive Brokers Trader
Workstation, TradeStation, Ninja Trader, Wealth-Lab Pro,
eSignal, Microsoft Excel. Additional information can be
found at www.chaoshunter.com
» Fidelity has released a Windows Phone 8 brokerage
app, offered through the online Windows Phone Store.
The mobile services and apps of Fidelity offer you access
to your accounts whenever and wherever you want. That
includes watching your portfolio, trading in your brokerage
account, making transactions, getting news, videos, real-
time quotes and charts. You can set up a watch list and
get access to stocks, options, ETFs and mutual funds. You
can pin individual securities directly to your home screen
using Live Tiles. Live Tiles update real-time and flip to
show relevant news stories, allowing you to make tradesquickly and easily. More information at www.fidelity.com
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Thomson Reuters
» Monitoring numerous open positions can be challenging
for even the most experienced of Forex traders. To
address this difficulty, MahiFX has created a new range
of platform trade viewing features and options to enable
customers to trade more simply and efficiently. The
newly designed Position Book/Aggregation button gives
traders the option to merge all open positions into easy to
monitor book. By selecting the merge to master function,
traders can feed all following trades of the same pair into
the master trade, giving a snapshot view of their overall
position. This is of particular benefit to traders who
employ a scalping trading strategy. The platform upgrade
also includes a ‘Book Change’ to cater to the preferences
of traders who like to be able to set up multiple books
and those traders who prefer a less cluttered interface.
To lessen any potential confusion for less experienced
traders, books are now only explicitly created and
removed by the trader, rather than automatically being
generated. Traders who do not wish to set up a trading
book can now choose to use the trade view completely
separate from the book view. For further information,please visit www.mahifx.com
» Thomson Reuters has launched a new analytics tool
on Thomson Reuters Eikon to help commodities traders
and analysts predict prices in major European power
markets. The new tool, Power Curve, uses innovative
visualisation techniques to enable traders and analysts
focused on European power markets to obtain real-
time, fundamental fair value assessments of the Nordic
and German power markets. This reduces time spent
on research and analysis, enabling financial markets
professionals to focus on higher-value tasks in the building
and monitoring of trading strategies. Germany and the
Nordics are two of the most liquid power markets in the
world. Power Curve on Thomson Reuters Eikon provides
commodities traders with an intuitive visual display of
Thomson Reuters Power Curve Model, combining power
supply data now available under REMIT (Regulation on
Energy Market Integrity and Transparency) with real-
time fuel prices, weather, available capacity information
and Thomson Reuters proprietary supply and demandmodels, to provide a fair value assessment of the Nordic
and German power markets. Additional details can be
found at www.thomsonreuters.com
» TipRanks announced an enhancement to its Financial
Accountability Engine, a free browser extension that
provides individual investors with information about
analysts who provide stock recommendations. When a
TipRanks user visits a financial website such as Yahoo!
Finance or Google Finance and searches for a stock
symbol, a TipRanks side tab provides instant access
to the three top-performing financial analysts’ stock
recommendations and the accuracy rates of analysts. In
addition, users can access news articles that reference
the analyst recommendations or that quote the analysts
on why they made those recommendations. For more
information, please visit www.tipranks.com
» Trading Technologies International (TT) announced
it will offer X_TRADER with bundled access to its 35
supported markets for a flat rate of $500 per month and
X_TRADER Pro for a reduced price of $1200 per month.In addition, X_TRADER will include synthetic order
functionality through its Synthetic Strategy Engine
(Synthetic SE), which was previously available only
with X_TRADER Pro. For more information, please go to
www.tradingtechnologies.com
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Get Updated with Detailed Information & Data for Commodities
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPVIEW
h t tp: / / w w w.ki tco.com
www.kitco.com
There are so many websites available which provide various kinds of information and data
for commodity markets especially bullions like gold, silver and platinum etc. In addition to
websites, some applications are also available for collecting detailed information such as
professional leading data, most at varying costs. These kinds of data sources can be costly
and/or difficult to find on the internet and /or are not reliable for full time traders. Here, we
look at www.kitco.com in order to analyse its usefulness to traders.
» Structure & Mode of Operation
Kitco.com is widely used by professional traders incollecting information and leading data. This site provides
the latest news and updates from various sources like
Reuters, Bloomberg, Mining Weekly, Kitco News and so
on. These are some of the most reliable sources which
provide market affecting news. Figure 1 shows kitco’shomepage, which displays the latest market news
reports, commentaries contributed by various traders,
and information from various press releases. Kitco not
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only provides information and data about the market,
but it also provides fundamental and technical analysis
from various well known international institutions such
as Standard Bank and Scotia Mocatta etc.
On the bottom of the homepage, you will see updated
data on currency pairs in Figure 1, which is sponsored
by one of the most reliable websites in trading: www.
forex.com. If we move to the right side of the homepage,
some small boxes can be seen. These include gold daily,
monthly and yearly updated charts so that traders can get
some fair idea about the performance of gold amongst
the other underlyings. This website is made for providing
data and information about bullions especially gold.
Precious Information
In the world of trading and investing, the market always
discounts news and information very quickly. Here,
timing in getting this information is very important.
Information, which is received after a major underlying
movement is worthless. So, professional traders need
this information very quickly so that they can take
positions as per their analysis. Furthermore, if we see
the first tab page in Figure 2, which deals with quotes
for all metals. This page contains the updated data for
precious metals in terms of New York spot price and
the world spot price. Difficult to obtain data such asXAU and gold rations as well as three major currency
fix prices for gold, silver, platinum and palladium in
USD, GBP and EUR is also displayed
here. On the left hand side in this
page, some boxes can be seen.
These boxes show the precious
metals updated charts, some major
leading market indicators and
major currency pairs with updated
data. This data is provided by www.
forex.com.
Technical charts for analysis
are also provided in the next tab
page. By clicking on the middle
of the page you will see an
interactive gold technical chart.
After clicking, a new web tab page
will be opened which will start a
java based platform and you will
see the gold interactive chart with
user friendly time horizons. On thatpage, important current market
related news, commentaries,
press releases and important
Figure 1 shows the homepage of www.kitco.com. Here, you will find data in
small boxes on the left side of the webpage in sequence. In the middle of the
page, you will find latest news and market updates, important commentariesand current exchange rates from various reliable sources.
Source: www.kitco.com
F1) Front Page
Figure 2 shows the “all metal quotes” tab page. Here, you will see all major bullion’s updated quotes and three
major currency fix prices.
Source: www.kitco.com
F2) All Metal Quotes
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Traders can check and discuss with others in the gold
forum tab page, where trader can read some general
thoughts and opinions of other traders, as well as ask
questions to the forum.
Reliable Sources of News and Reports
If we move further to the research reports from various
financial institutions, Figure 3 will give you the perfect
idea about how this looks. You can see and read
numerous in-depth research reports from various well
known financial research firms such as Standard Bank
and Scotia Mocatta etc. These reports are published on
a regular basis as international news and events come
out. Any trader will want to see the latest research before
execution of any trade or taking a position in bullion.Sometimes traders can not analyse some typical
information and data or analyse falsely which leads to
huge losses and a short term trading position turns in
to a long term investment position. Hence, sometimes
traders need to seek advice or opinions and data from
a professional commodity analyst for perfecting trades
and for confirming trends in any bullion is valuable.
Here, Kitco provides the latest research reports, traders
commentaries in the News and Reports tab. On the right
side of reports, a small box shows connection with the
underlying.
Conclusion
Kitco is the professional platform for bullion traders
– especially gold. The only drawback to this site is the
lack of auto refresh. Traders need to refresh whenever
they want fresh information and data. This site provides
updates, news, reports, data as well as analysis of bullion
for professional bullion traders. They no longer need
rely on costly and hard to find subscriptions for software
and financial websites. Android, ipad, Blackberry andWindows mobile users can also enjoy these services by
installing a Kitco software called Kcast on their mobile
devices. «
Figure 3 shows the news & reports page of Kitco, where you can see various
research reports from various financial institutions.
Source: www.kitco.com
F3) News & Reports
analysis is seen on the right hand side. You can see
technical charts not only for gold, but those for silver,
platinum and palladium as well. Historical charts are
also provided by clicking on the historical charts box.
Detailed lease rates or precious metals are shown after
clicking on the lease rate box. Here, traders will get
all data (forward rates, lease rates from various time
angles) regarding gold, silver, platinum and palladium.
The site provides updates, news, reports, data as wellas analysis of bullion for professional bullion traders.
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Many possibilities with Social Trading
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPVIEW
MetaTrader Trading Signals
More than seven million people use the MetaTrader 4 and MetaTrader 5 client terminals.
Now MetaQuotes has gone one step further by providing a signal-service to every user.
When implementing this feature to the terminals, the most important and most daunting
challenge was the security of all traders that use the ne MetaTrader Trading Signals
service. Any shortcoming could result in risks and losses for subscribers and providers.
» Testmode
During the development of the service the security
of the investor funds accounts was one of the most
critical issues within this complex task. That is why a
signal has to pass an obligatory one-month test period,
before it is available for paid subscription. During the
test period subscription is blocked and the provider
performs trading operations like making profits andbearing losses. Only after completing the one-month
period with a profit the signal can be subscribed to.
Loss-making signals remain in the test mode. Perhaps
they will show profit in the future, but until then they
cannot be subscribed to.
No Overtrading
An important feature of MetaTrader Trading Signals
is the absence of conflict of interest between
all participants. Signal providers receive a fixed
subscription fee regardless of the number of deals andprofits earned, so it does not make sense for them to
perform frequent small trades in order to receive more
commission fees or take too much risk trying to earn
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more. The incentive for the signals
provider is to show steady profits,
as this will attract more subscribers
and boost income. Users of
MetaTrader Trading Signals can
subscribe their trading account
directly to a signal provider in the
MetaTrader-platform. During the
subscription process the investors
can clearly designate a portion of
their deposit that is to be dedicated
to signal following. Furthermore
copying deals can be stopped as
soon as the deposit has dropped
below a certain level. For example,
it is possible to allocate only five
per cent of the deposit for signal
following to check how profitable
and reliable it is.
Another instrument to protect
the investor is the mechanism that one trading account
can only copy signals of one provider. This limitation
pursues the same goal – security of investors’ funds.
If a trading account is managed by several signals,they seriously overload the deposit and that may lead
to the rapid loss of funds. Besides, several trading
signals on one single account can conflict with each
other. For example, one signal may require entering
a short position with three lots,
while another one may demand
entering a long position with five
lots. Finally, traders can cancel the
automatic copying of deals at any
time disabling the copying system.
Signal providers are also
well protected. First, as already
mentioned, the access to signal
providers’ personal data is strictly
limited. Second, their trading
accounts are also secure, as they
only use an investor password in the
service. This allows them to connect
to their account in read-only mode
without the ability to perform
trading operations. Thus, signalsproviders may broadcast their
signals and make money without
taking risks.
Conclusion
MetaQuotes provides traders with the most secure solution
for social trading. End-users have appreciated it. Thousands
of traders have become signals providers and are alreadyoffering their trading signals on MetaTrader 4 and MetaTrader
5 terminals. Thousands of other traders have become their
subscribers thus gaining the opportunity to make money
on forex with little extra effort. «
In the above window a user can define risk-parameters to the subscribed signal and enable real-time trading.
Sourcee: www.metatrader.com
F1) Subscribe-Window in the MetaTrader Platform
A lot of systems passed the first month and could be subscribed to af ter taking an in-depth look.
Sourcee: www.metatrader.com
F2) Listing of All Available Signal Providers
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Automatic Trading Systems without Additional Cost
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPVIEW
VectorBull and ForexBull
The possibility of stock market analysis with the help of computer programs often adds considerable cost to a monthly
subscription. Software company Spring Techno in Bremen, Germany offers an attractive alternative – with their series
VectorBull and ForexBull. The two different versions are suitable for different users. All versions together offer trading system
modules that generate nearly 25,000 stock-, index-, commodity- and forex-signals – at no additional monthly cost.
» Functionality
VectorBull can be used with any kind of historical
price data while ForexBull is specialised on forex and
commodities. Both programs analyse the historical
price development of the chosen instrument and predict
the highest probable price development in the future
based on similarities in the price development of the
past. Different software providers already offer pattern
analysis, but whereas those often offer mainly candlestick
charts, Spring Techno chose a different way.
A current chart pattern for the price development
of a stock, for example, the relation of open, high, low
and close of the last few days, is generalised and then
searched for in the stocks’ historical database. Recurring
chart patterns show the behaviour of market participants
in certain market environments. This assumption is based
on behavioural psychology and has been confirmed
sufficiently in financial studies. Next the software
calculates the probability of occurrence (expressed as a
percentage) of the price tendency based on the number
of similar patterns found. VectorBull makes a preciseprognosis and determines the expected highs and lows
within a certain time period. The user can get a prognosis
for a day or for two to three weeks as well. However, the
longer the period of prognosis, the greater the possibility
of false signals.
Figure 1 shows the working screen with the analysis
of the Apple share in indicator mode. On the left is the
menu bar with all options to choose from. On the 10th of
June 2013 Apple’s share should fall with a probability of 68
per cent. You can find the details of the prognosis and the
formation that determined the result below the chart. On
this day the stock had a potential to 444.25 dollars followed
by a low at 433.68 dollars before closing at 437.11 dollars.
Of course we checked this. The daily high was at 449.08
dollars and the low at 436.80 dollars. The close of the stock
at 438.89 dollars was near the prognosis.
Installation and Possibility of Trial
VectorBull can be purchased for 499 euros or it can be
rented. Before buying, the user has the possibility to test
each version for a period of 14 days. You have to download
a seven MB-file from the website in order to install the
program. The installation is done once per version and if
you buy it you receive an unlock code – a user’s licenceincluding updates and data feed. The software needs an
internet connection, because the historical data will be
downloaded from the company server only when needed.
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Further cost only occurs with the
forex-version, if you want to follow
analysis and recommendations of
professional traders. If you want
to use the software on the road it
is possible to install it on several
devices, but you can only use one at
a time.
The Entry
The VectorBull version offers over 80
systems on German and American
stocks, forex, indices and futures
that are all based on a trading period
of two to five days. The systems
are no money printing machines
but suggestions for the individual
for further development and can be
used as signal providers as well.
Both, VectorBull and ForexBull,
can be started in indicator mode
or trading system mode. In the
indicator mode a chart is opened with one or more
prognosis that can be examined immediately. The time
frame of the prognosis is set in days and the chart with
the prognosis – bullish, bearish or neutral – is displayedafter a short time of calculation. In the trading system
mode the user is challenged. He can test more than
40,000 entry- and exit parameters with a system finder
for every single stock.
Each trading system can be saved as a scenario and can
be used in combination with hundreds of such scenarios
in different markets to generate orders accordingly. The
so-called “AutoTradeAdvisor” delivers the data that
should be set in the trading platform
– limit entry, position size, stop-loss
and profit target.
Apple in Trading System Mode
Whereas the indicator mode only
offers a prognosis without precise
entry- and exit rules, the trading
system mode is more complex. The
program calculates scenarios based
on the predefined usual rules like
entry/exit, position size and stop-loss
for every instrument with systemfinders that are only valid for this
title. After you have found a system
with positive expectancy value you
The working screen of VectorBull in indicator mode. If the software finds similarities in the past, it displays
the estimation as well as the particular formation below the price chart. Apple should fall the following day
and it did.
Source: www.vectorbull.com
F1) Working Screen VectorBull
The trading signals work in real time as well as in paper trading. The performance curve is based on signals
that were traded with real money on a client account.
Source: www.vectorbull.com
F2) System in Real Time
can compose every tradable universe of instruments and
the system will calculate daily signals.
Let’s focus on the Apple share. It has increased
over years. A trading system should be profitable aftera trend reversal to the downside. The holding period
will be five days. Therefore we used the trading system
mode of the program. The price development of Apple
was analysed and the program searched for formations.
Then the system finder searches ideal combinations of
a strategy in so-called “evidence mode”. That means
that signals are tested for two thirds of their history and
then you receive a list of all trading system data as a
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to the developer you could also trade it with less money
using CFDs. That shows that it is possible to earn money
with the scenarios and that they are not theoretical results.
Every user has the ability to create a scenario for each
of the 25,000 shares and to combine those to generate
trading orders. The developers also deliver, for example,
catalogues for sector-indices to analyse individual shares
within these sectors. Therefore a trading system is
possible that generates signals, for example, based on
the 30 DAX-shares or the shares in the NASDAQ100.
Furthermore, the user can create buying- and selling-
scenarios for all important commodity futures to build
call-write positions after the signal. Another feature is
the so-called “crystal-ball”. It is used to create a list that
shows if the particular day is bullish, bearish or neutral
for the chosen title based on the vector analysis. The
system predicts the next five days and in addition there
is a total prognosis including the evaluation of the trend
strength.
VectorBull-Realtime Offers Intraday-Prognosis
A completely different thing is the Vector-Bull-Realtime-
version. It might be the same name, but it is designed
for a completely different user group. In contrast to the
stock-edition the program does not generate entry- and
exit signals, but a prognosis line for the next 24 timeunits is created – based on a database of up to 15 years
of tick data. If you opt for the software to calculate in
the 4-hour chart, you will know what
may happen in the next 96 hours.
The smaller the time frame, the more
detailed the prognosis. Short term
traders could compare the 5-minute
chart with their own strategy and
trade positions accordingly. Here
as well are no additional costs after
purchasing, because Spring Techno
delivers the necessary realtime-
price-data for free. In total there are
60 DAX stocks, Dow Jones Index,
40 currency pairs and 25 indices,
futures and commodities.
We tested the software non-
stop and the price development
was predicted very well. But there
are difficulties if there is important
economic news. Figure 3 shows ablue prognosis-line in the 30-minute
chart for gold, EUR/USD, DAX-
future, crude oil and bund-future.
A blue prognosis line offers hints how the analysed instrument may develop if the price will develop similarto the past. T he chart shows the prognosis and the actual price development of five markets. T he line shows
96 time units.
Source: www.vectorbull.com
F3) Real-time Version for Daytraders
result. The software displayed 1121 profitable systems
out of 9521 calculations. We terminated early to avoid
over-optimisation. We search for a system that shows an
increasing equity curve even with the missing third of data
and sort it by the profit factor. The system recalculates and
updates the equity curve by the last third of the history
that was not included in the first calculation. Although
Apple showed considerable price loss in the recent
past, the price losses of the chosen system are limited.
According to the developer, the software learns with new
data and therefore the pattern analysis is adapted. The
trading system parameters of the system chosen are then
saved as a scenario and are only valid for the Apple stock.
This process has to be done once for each stock that
you want to add to your preferred trading universe. The
AutoTradeAdvisor checks the single scenarios and adds it
as an order for the user.
Trading Systems in Real Practice
Of course we asked if such scenarios could be traded
real time as well. Figure 2 is an example that clients of a
German broker have used on their own trading accounts
for over a year now. Spring Techno determined scenarios
of 14 US-stocks with a holding period of five days. The
result is impressive: The account size was 14,000 euros
and the risk per trade was 0.5 per cent at maximum. Itbegan at the beginning of 2012. The total performance
was 15 per cent or a total profit of 2100 euros. According
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The prognosis line was created on 24th June 2013. The
current price developments are displayed above the
prognosis line as a bar chart. Processed prognosis stay
in the chart and a new prognosis is generated after the
current bar is closed. The blue line often differs from the
price, but the trend is correct – therefore an update was
programmed in the last days to improve the relation of
the prognosis line to the actual price. And the analysis of
the prognosis and the current price is better. The price of
this intraday-software is 1295 euros, but it can be rented
as well.
ForexBull with Additions
Let us now take a look at ForexBull, a program that stands
out because of its considerable additions and that offers
analysis instruments only for currency pairs, commodities
and some interest- and stock indices. Trading systems
can be developed just like in the stock-version.
You will see what is offered in addition, if you use the
menu “tools”. Following is a list of additions to ForexBull:
• Correlation matrix that opposes all titles
• Overview of volatility with the daily movements of
the past twelve weeks
• Momentum-guard, that shows trends for six different
time frames • Table of the changes since the
beginning of the year, of the past
six months and of the current
week
• Economic calendar of the current
day
• Trading signals that use
movements of the trading night
to generate signals
• Seasonality indicator with
adjustable time frame
• ADX-list to show the strength of
a trend
Furthermore the ATR-
indicator, pivot-lines and a
regression channel, that is drawn
automatically, were added to the
chart module. Figure 4 shows
the overview of volatility of the
German DAX. Option traders cansee from this table when it is wise
to change to the seller- or buyer-
side whereas the daytrader learns
the daily range of fluctuation. Therefore he can place
the stop accordingly and avoid to be stopped out by a
random movement of the market.
An overview of signals offers recommendations
for the trading day. At 7 o’clock in the morning you can
download the so-called “Early-Bird-overview”. This table
concludes entry, direction and potential and shall offer
an advantage to the early-risers. This table, which should
provide a surplus value especially to the early birds,
combines entry, direction, and potential. Another novelty
of ForexBull: Users can exchange trading systems with
each other via a special menu.
Conclusion
The Vector-series of Spring Techno offers automatic
pattern recognition without additional cost – in contrast to
other charting programs. You can count on the accuracy
of the signals in the future, because the software is
continuously fed by the latest prices in all versions. In
the meantime brokers already offer the stock-version to
their clients to generate automatic signals for individual
instruments. We especially liked the real-time version,
because it is another tool for the daytrader to find better
entries. If you are interested you should test the dif ferent
software versions to see which one fits your trading
behaviour. «
ForexBull offers various tools that are not available in the stock-edition. The overview of volatility helpstraders to place stops correctly.
Source: www.vectorbull.com
F4) ForexBull Overview of Volatility
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Kathleen Brooks is UK and EMEA research director at Forex.
com based in London. She uses both fundamental and
technical methods in her analysis and often fuses the two to
get a complete picture of the market. Her philosophy of market
analysis is to break things down to their most simple parts andbuild from there. She is a regular contributor to Yahoo Finance,
Reuters Great Debate and she is often quoted in international
publications including the Wall Street Journal and the Financial
Times. She can be seen regularly on business TV including
CNBC, CNBC Arabia, Sky News Australia and the BBC. She
started her career in finance at BP where she worked first as
a business analyst in its trading division and then as a trading
analyst in its foreign exchange dealing room. Prior to joining
Forex.com she was a financial features writer for City A.M.
Kathleen holds an undergraduate degree in English Literature
and Classical Civilization from Trinity College Dublin, and a
Master’s of Science from The Graduate School of Journalism
at Columbia University in New York City.
About the Author
Kathleen Brooks on Forex
A Simple Approach to Trading Foreign ExchangeUsing Fundamental and Technical Analysisby Kathleen Brooks
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPVIEW
» This concise and well written beginner-level guide
to foreign exchange is something different, with the
author’s approach established at the outset to be the
fusion of fundamental and technical analysis. So often
diametrically opposed to each other, these techniques
are frequently used together by many successful traders,
but this does not seem to be written about very often.
Authors tend to advocate the use of one or the other
method. However, Kathleen Brooks is correct in arguing
they are complementary techniques.
Content
The first two parts of the book discuss fundamental and
then technical analysis. For each, the main news, data,
indicators and techniques that the author uses in her
trading are provided – including labour market surveys,
inflation data, GDP, Moving Averages and Ichimoku clouds.In Part C, real trading examples are provided to show
how fundamental and technical analysis are employed
together. Part D then shows how the author develops and
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Title: Kathleen Brooks on Forex
Subtitle: A Simple Approach to Trading Foreign Exchange
Using Fundamental and Technical Analysis
Authors: Kathleen Brooks
Pages: 140, Paperback
Price: £16.99
ISBN: 9780857192059
Publisher: Harriman House
Bibliography
engages trading strategy using effective risk management
techniques.
As you would expect from a book with the author’s
name in the title, this is a look at one FX trader’s personal
approach to the market. It is an illustration of one person’s
way of doing things – it does not claim to be definitive,
or state that you must do things this way, which is to its
credit, as there is no single correct method for trading.
However, it is by learning how other successful traders are
operating – and incorporating some aspects of what they
do into our trading – that we can improve our approach.
Conclusion
The two greatest assets of this book are its concise
length – it is accessible and clear – and that it shows
how someone from a background outside of economics
can still learn how to trade foreign exchange. It is highlyrecommended as a foundation for beginning forex
traders. It also provides food for thought for those who
have been trading for a while. «
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NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPVIEW
Trading Diary-App
The Trading Journal for Your iPadEvery trader who treats his activities at the stock markets as a business knows that keeping a trading
journal can have positive effects. Although it is not the most exciting task – it is worth it, because the
improvement of one’s performance is impossible without failure analysis. For those of us not so savvy
with Excel and its ilk, the trading diary app from Plum Square is a very convenient solution for keeping a
trading journal.
» Step 1: The Planning
After downloading and starting the application, a clearlystructured screen appears in the upper bar depicting the
three steps of keeping a trading journal. Before you start
it is recommended to determine all parameters for the
for risk- and money management. Thus you can enter the
account size as well as the risk per trade and the maximumdrawdown per month. After defining the basic conditions,
the first step requires the following data for a trade that
has to be typed in the area “plan”:
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• Ticker symbol
• Order type
• Entry price
• Initial stop-loss
• Profit target
The app automatically calculates the particular
position size, the potential profit as well as the risk-
reward ratio (RRR). A useful feature is the implementation
of graphics from the iPad’s picture gallery. The reason
for the entry is also very important. Thus the trader has
the possibility to put his trading plan into words. Even
weeks or months later you can understand the motivation
behind the precise trade.
Step 2: Entry and Exit
After executing the planned transaction you enter all
parameters of the entry like date, time, order type,
quantity and execution price in the area “trade”. Here
as well, the trader can insert charts as picture files andadd comments. Especially if the
stop-loss is trailed this is a good
way to add pictures or words to a
specific decision. After closing the
trade all necessary data is entered
again. The user also can enter the
daily high and low and then the
app calculates some kind of rating
for the exits and entries that is
displayed graphically elsewhere.
The trading diary then calculates
the result of the transaction and
offers the trader the ability to insert
charts or comments. Differences
between the planned and the actual
entry and exit are calculated and
displayed as well.
The selection-function in the
left area of the screen (see Figure
1), where you can sort all trades,
is very practical. For example,you can look at all open or closed
trades with one click. If the trader
wants to see only profitable trades
or only losing trades, this can be done with a single
click as well.
Step 3: The Analysis
A trading journal is only helpful if the trades entered
are analysed regularly. This is where the area “review”
comes into play. Here you can analyse and evaluate
closed trades. It makes sense to answer questions such
as:
• Did you execute the trade according to plan?
• Did you make mistakes? If yes, which mistakes?
• How do you feel af ter the exit?
• What can you do to improve your trading in the future?
Another interesting feature is the reminder function
which is adjustable. Eight weeks after the analysis the
trader is reminded to perform a “follow-up”-analysis. The
idea: After a certain time period, the trader can evaluate his
own trading behaviour more objectively than immediately
In the area “trade” all parameters concerning the entry and the exit of a transaction are entered. The user has
the possibility to insert comments and charts.
Source: www.plumsquare.com
F1) Entry and the Exit
A trading journal is only helpful if the
entered trades are analysed regularly.
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after the exit – furthermore you can
see how the price developed after the
exit, and based on this information
the trader can gain more valuable
information for the improvement of
his trading behaviour.
Equity Curve in the Twinkling of an Eye
This trading diary app is easy to use
– the input of the data as well as the
output of the data. This is especially
apparent during the quantitative
analysis of your own trades. If you
are not a pro excel user and you do
not want to calculate manually, but
you want to receive hard facts about
your trading nonetheless, you will
love the app for its statistics- and
equity-curve functions.
Figure 2 shows the graphic
display of the equity curve. You
can choose different time periodsand therefore you can measure the
current as well as the medium and
long term trading success based on
portfolio development. The best and
worst trade is displayed as well as
winners and the losers. If you click
on a data point the precise relevant
data of the trade is displayed and
you can activate the particular input
screen with another click – therefore
you can look at, for example, outlier
trades very effectively and quickly.
That is as good as it can be.
Facts, Facts, Facts
If you want to take a look at the key
figures of your trading performance
instead of your equity curve, you
can find further display options in
the “statistics” area which offers the
following information:
• Winners versus losers (%)
• Overall results
The function “statistics” offers a detailed view of the performance parameters: A ll important key figures as
well as ratings of the entry and the exit are displayed here.
Source: www.plumsquare.com
F3) Overview of Key Figures
In the area “results” the trader finds the equity curve as well as other statistics – for example hit rate, RRR
or holding period.
Source: www.plumsquare.com
F2) Equity Curve
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• Average winning trade
(absolute)
• Average losing trade (absolute)
• Average result per trade
(absolute)
• Average risk-reward ratio
• Average holding period
It is also possible to divide key
figures in long and short trades. This
can deliver valuable information for
improving your trading behaviour.
The app offers the possibility
to export the data as csv-file for
readers who are interested in further
processing the data with a spread
sheet program. Another highlight
of this app is the diary-function as
shown in Figure 4. The user can
sort by criteria such as trading
instrument, results, entry- and exit
rating or date.
Conclusion
The trading diary app from Plum Square is a powerful and
easy-to-use tool for everybody who wants to document
and analyse their trades directly on the iPad. The risk- and
The flexible data base function enables an easy and quick sorting of all parameters of a trade.
Source: www.plumsquare.com
F4) Diary Function
money-management function helps to stick to the risk
limit and offers valuable services calculating position
size. At a price of 159.99 EUR, the app seems expensive at
first glance, but if you look at the extent of functions and
features the price is justified. Thumbs up! «
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Connors Research Trading Strategy Series – Part 3
The Long Pullbacks Strategy
Pullback trading is one of the most popular forms of trading amongst traders. The good news is that when it is
done correctly it can be very lucrative. The not so good news is that over the past two decades there has been
a proliferation of pullback strategies which have been published that have little to no edge at all. In this article,
we will share with you a strategy which was first published in 2005 and continues to show positive quantified
test results heading into 2013. As a whole, you have here one of the most robust quantified equity pullback
strategies published and this is a strategy which will likely become a go-to strategy for you. As in Part 1 and 2
of this series (TRADERS´ June and July 2013), slippage and commission were not used in the testing.
» The strategy described in this article was formerly
known as the 5x5x5 Portfolio Method because it bought
stocks which closed five per cent below their 5-day
Moving Average (MA) on a limit five per cent below the
close and exited above the 5-period MA. Since that time
we have expanded this strategy further to include multiple
Moving Averages as entry and exit triggers, along with
multiple levels of pullbacks, with multiple levels of intra-
day pullbacks. Then we looked at various exits points to
allow for even more flexibility in your trading.
What Is a Pullback?
A pullback is a security which has moved higher and then
because of profit taking (and numerous other reasons)
sells-off in price. Some traders trade pullbacks intra-day
or on longer time frames but the majority trade them on
daily bars identifying stocks that they feel have pulled
back too far and will likely regain their upward trend.
There are numerous ways to identify pullbacks
ranging from simply eye-balling a chart all the way up to
using indicators such as Fibonacci numbers. Even though
these techniques work for some traders, what we want
to do is to be more precise. We want exact rules in place
and we want to see robust quantifed test results from
2001 to 2011 (our test period). We also want to see thestrategy showing solid test results in the majority if not
all of the many combinations of parameters that we are
testing on. This way you as a trader can then customise
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the strategy to fit best into your daily
trading plan.
When trading short term
pullbacks, the best results occur
when you hold the position for at
least a few days. Often stocks pull
back sharply and snap back strongly.
There is no way of knowing ahead of
time how far that upward move will
be so having exit rules in place ahead
of time which allow for the rally to
play out is the best way to trade.
Long Pullbacks: The Rules
The Long Pullbacks Strategy rules
are simple and precise:
1. The stock must be above $5 per
share and close above its 200-
day simple Moving Average.
This signifies it’s in a longer term
uptrend.
2. The stock’s average daily volume
over the past 21 days (one trading
month) must be at least 250,000
shares per day. This assures weare in liquid stocks.
3. The stock’s 100-day historical
volatility is above 30.
4. The stock’s 10-day Average
Directional Index (ADX) is above
30.
5. The stock has closed down two
or more days in a row.
6. Today the stock must close at least X per cent (X = 4,
5 or 6 %) below its Y-period Moving Average (Y = 4, 5,
or 6). This will be clearer once you see the examples.
7. If the above rules are met, buy the stock tomorrow on
a further intra-day limit Z per cent below yesterday’s
closing price (Z = 4 % - 10 %).
8. Exit the position when it closes above its 3-period
simple Moving Average, exiting at the closing price.
We also show the test results exiting the same day,
on the first up close, and using 2-period RSI exits (the
goal here is to empower you with as many choices as
possible).
Let us now go deeper into Rules 6 to 8. Rule 6 is there
to identify the pullback. A stock that closes far below its
short term Moving Average is a good short term pullback.
At point 1, MAKO closes down two days in a row and more than five per cent below its 4-period Moving
Average. The next day, we look to buy on a limit order seven per cent below today’s close (point 2). At point
3, the stock moves sharply higher and closes with its 2-period RSI above 70. This is the signal to lock in your
gains on the close.
Source: www.tradestation.com
F1) Pullback Trade Example
1
2
3
3 4 5 8 9 10
30.00
22.00
23.00
24.00
25.00
26.00
27.0 0
28.00
29.00
70.00RSI
Rule 7 makes everything gel. Whereas most pullback
methods may have small edges, this rule assures that the
pullback is even deeper and because it is occurring intra-
day it is often accompanied by a lot of fear or even panic.
This panic creates the opportunity (behavioural finance is
quantified here).
Rule 8 assures that we have an exit in place. We state
this quite often because it is a pet peeve. Everyone likes to
tell you when to get into a stock. Few tell you when to get
out and even fewer have quantified, structured, disciplined
exit rules. Rule 8 gives you the exact parameters to exit
backed by a decade of historical results.
Examples
Let us look at a chart example. In Figure 1, MAKO Surgical
(MAKO) was trading above its 200-day Moving Average and
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two per cent per trade. This includes all trades. It is the
number of winning trades times their average gain minus
the losing trades times their average loss divided by the
total trades. So, if the system has a total of 100 trades and
60 per cent make two per cent on average and 40 per cent
lose one per cent on average you have 120 per cent minus
40 per cent divided by 100. In this example the average
gain per trade is 0.80 per cent.
We now look at the top 20 returns per variation of The
Long Pullbacks Strategy (Table 1). These are the returns
for the eleven year period 2001 to 2011. The gains and
edges have been substantial, especially for the largest
intra-day pullbacks; those which have pulled back eight
and ten per cent.
The first column shows the number of trades that
triggered during that period of time. To assume a fill was
made in the testing the stock had to trade at least one
cent under its limit price (it need to trade through the
simulated order).
Column 2 shows you the average
gain per trade (the average edge) of
all trades. As we just mentioned 0.5 to
two per cent are considered excellent.
In the Long Pullbacks strategy, the top
20 variations all have edges above
5.70 per cent per trade!Column 4 is the percentage of
trades which were profitable. Most
traders like to get to 55 to 60 per cent
correct. The majority of the top 20
variations here are above 75 per cent
correct.
Column 6 is the Moving Average
used. We ran this test using a 4-, 5-,
and 6-day simple Moving Averages.
As you can see, all are valid.
Column 7 is the percentage
distance the stock closed under its
Moving Average. We used four per
cent below the MA, five per cent
below the MA, and six per cent
below the MA. Again, as you can see,
all are valid.
Column 8 is the percentage
distance from the close that the limit
order is placed. So if a stock qualifies
as a set-up the night before, youplace in your limit order the next
morning. We tested four, five, six,
seven, eight, nine, and ten per cent.
had historical volatility and ADX readings above 30. We use
a 4-period MA (for parameter X), a close at least five per cent
below the MA (for Y), and a buy limit order seven per cent
below the previous day’s close (for Z). This is what happened:
• Point 1: MAKO closes down two days in a row and
more than five per cent below its 4-period Moving
Average. The next day, we will look to buy on a limit
order seven per cent below today’s close.
• Point 2: The stock sells off more than seven per cent
from the previous day’s close and a Long Pullbacks
signal is triggered.
• Point 3: MAKO moves sharply higher and closes with its
2-period RSI above 70. Lock in your gains on the close.
Test Results
When traders ask what is a good edge (meaning the
average gain per trade) on a short term basis, meaning
under a week, the rule of thumb is 0.5 per cent up to
These are the best 2 0 setups based on average profit for the eleven year period 2001 to 2011. The gains andedges have been substantial, especially for the largest intraday pullbacks; those which have pulled back eight
and ten per cent.
Source: Connors, L./Alvarez, C., “The Long Pullbacks Strategy”, Connors Research, LLC, 2012
No. of
Trades
Avg. %
Profit
Avg. Trading
Days Held% Winners
Exit
Methodology
MA
LengthStretch
Limit
Entry %
808 6.75% 6.24 75.62% RSI2>70 6 6% 10%
751 6.55% 6.35 74.17% RSI2>70 5 6% 10%
948 6.41% 6.26 74.89% RSI2>70 5 5% 10%
632 6.35% 6.48 73.42% RSI2>70 4 6% 10%
1071 6.27% 6.18 75.54% RSI2>70 6 6% 9%
1016 6.20% 6.22 75.00% RSI2>70 6 5% 10%
829 6.19% 6.34 74.19% RSI2>70 4 6% 9%
982 6.14% 6.30 74,34% RSI2>70 5 6% 9%
638 6.12% 3.66 77.27% RSI2>50 4 6% 10%
757 6.06% 3.67 76.62% RSI2>50 5 6% 10%
816 6.03% 3.64 77.08% RSI2>50 6 6% 10%1261 6.00% 6.20 75.42% RSI2>70 5 5% 9%
839 5.99% 3.53 77.12% RSI2>50 4 6% 9%
865 5.91% 6.43 72.95% RSI2>70 4 5% 10%
955 5.88% 3.59 77.17% RSI2>50 5 5% 10%
1215 5.87% 6.22 74.73% RSI2>70 5 4% 10%
1245 5.85% 6.18 75.10% RSI2>70 6 4% 10%
1350 5.84% 6.13 75.41% RSI2>70 6 5% 9%
994 5.79% 3.54 76.86% RSI2>50 5 6% 9%
1086 5.73% 3.49 77.81% RSI2>50 6 6% 9%
T1) Top 20 Strategies Based on Average Profit
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Strategy name: Pullback Trading
Strategy type: Countertrend Long
Time horizon: Day- and Swing Trading, holding period 1-7 days
Setup:
Price > $5, Close > MA (200), average daily volume
(21) > 1,000,000, historic volatility > 30, ADX(10)
> 30, 2 down closes in a row, close X% below
Y-period MA (X, Y: 4, 5, 6)
Entry:
Buy the stock on the open tomorrow if setup is met
on a fur ther intraday-limit Z% below yesterday’s
close
Stop-loss: None; use of options recommended
Take profit:RSI(2) > 70, RSI(2) > 50, Close > MA(3), first up
close, intraday exit
Trailing stop: –
Risk and money
management:
1-2% risk per trade as a percentage of trading
capital
Average hit rate: 61.19%-78.29%
Average trade: 1.61%-6.75%
Strategy SnapshotIt should come as no surprise that the higher the
limit order, the greater the fear, and the greater the
edge. Larger limit orders get filled less often, especially
in low volatility, quiet markets but tend to thrive in high
volatility markets where fear is the greatest. When you
decide which variation to use for your own trading you
may want to adjust the size of the pullback to reflect the
current market conditions. In low volatility markets, you
may want to look at six, seven, or eight per cent. In high
volatility markets nine and ten per cent may be the most
appropriate.
Please note though that these tests here do not
differentiate between market conditions. Each individual
variation assumed these were the rules you used no
matter what the year was. It simulated all trades for
eleven years and as you can see the edges have been
extremely large.
In Table 2 we see the 20 highest performing variations
sorted by per cent correct. The
numbers are extremely high with
the 20th best performing variation
on a per cent correct basis coming
in at 77.12 per cent all the way up
to the best coming in at 78.29 per
cent. A common theme again is
the size of today’s limit order. Thelarger the limit order, the greater the
performance.
The Role of Exits
Different exits will give different test
results. The first place traders look is
the size of the edge and use the exit
that provides the greatest edge. But
another factor is how long you want
to tie your money up. RSI 70 exits
often give the highest edges but tie
the money up the longest.
Three-day exits and especially
first-up-close exits often show (on
average) smaller edges but get out
of positions quicker, lessening the
overnight risk. The Long Pullbacks
strategy is extremely robust and it
was created to allow every trader to
decide for themselves which entry
and exit variations they want to usebased upon their own personal style
of trading. Table 3 shows the top 20
test results for each exit type.
In Table 2 we see the 20 highest performing variations sorted by per cent correct. The numbers are extremely
high with the 20th best per forming variation on a per cent cor rect basis coming in at 77.12 per cent all the wayup to the best coming in at 78.29 per cent . A common theme again is the size of today’s limit order. The larger the
limit order, the greater the per formance.
Source: Connors, L./Alvarez, C., “The Long Pullbacks Strategy”, Connors Research, LLC, 2012
No. of
Trades
Avg. %
Profit
Avg. Trading
Days Held% Winners
Exit
Methodology
MA
LengthStretch
Limit
Entry %
820 5.55% 2.49 78.29% C>MA3 6 6% 10%
1092 5.24% 2.41 78.11% C>MA3 6 6% 9%
959 5.40% 2.47 78.10% C>MA3 5 5% 10%
1276 5.56% 3.46 77.98% RSI2>50 5 5% 9%
1282 5.06% 2.41 77.85% C>MA3 5 5% 9%
1086 5.73% 3.49 77.81% RSI2>50 6 6% 9%
1679 4.95% 3.39 77.67% RSI2>50 5 5% 8%
1430 5.16% 3.41 77.55% RSI2>50 6 6% 8%
1284 4.55% 1.66 77.49% Up Close 5 5% 9%
960 4.84% 1.71 77.40% Up Close 5 5% 10%
839 4.82% 1.66 77.35% Up Close 6 6% 9%
823 4.97% 1.70 77.28% Up Close 6 6% 10%1096 4.67% 1.65 77.28% Up Close 6 6% 9%
638 6.12% 3.66 77.27% RSI2>50 6 6% 10%
638 5.48% 2.50 77.27% C>MA3 6 6% 10%
759 5.48% 2.51 77.21% C>MA3 6 6% 10%
1924 4.79% 3.35 77.18% RSI2>50 6 6% 7%
855 5.88% 3.59 77.17% RSI2>50 5 5% 10%
839 5.99% 3.53 77.12% RSI2>50 6 6% 9%
638 4.92% 1.73 77.12% Up Close 6 6% 10%
T2) Top 20 Strategies Based on Per Cent Winners
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not like to hang onto positions too
long, this exit serves its purpose.
2. Close above the 3-period MA
We like this exit. It does a nice job
between balancing getting quickly
out of a position, with good average
gains per trade, especially for the top
variations.
3. RSI 50 Exit
This exits a position on the close
when the stock closes above its
2-period RSI reading of 50. With this
exit we begin seeing larger average
gains per trade and slightly longer
holding periods.
4. RSI 70 Exit
This exits a position on the close when
the stock closes above its 2-period
RSI reading of 70. Here’s we see the
largest edges. Historically holding a
position for a few extra days was well
rewarded by providing the largest
Long Pullbacks edges, especially using
nine and ten per cent limit orders.
5. Intraday Exit This means exiting the position on the close of the
same day they were entered. The edges with Long
Pullbacks on an intra-day basis are not as large as
they are when holding positions overnight but they
have healthy intra-day edges and these edges are
significantly higher than most day traders are used to
having. Most day traders are very happy with 0.25 to
0.50 per cent edges per trade. The top Long Pullback
Strategy variations go far beyond that. The edges
range from above 1.61 per cent per trade all the way
up to 1.87 per cent gain per trade. «
Laurence Connors
Larry Connors is the chairman and founder ofConnors Research. He is also the founder ofTradingMarkets.com which has been providing
traders with cutting edge trading research forover a decade now. He has over 30 years in thefinancial markets industry. His opinions have beenfeatured in the Wall Street Journal, Bloomberg,Dow Jones, & many others. For over 15 years, Lar ryConnors and now Connors Research has providedthe highest-quality, data-driven research on tradingfor individual investors, hedge funds, proprietarytrading firms, and bank trading desks around theworld. He has also recently co-authored a new bookof statistically-backed trading strategies called“How Markets Really Work, 2nd Ed.”
Cesar Alvarez
Cesar Alvarez is Director of Research and Managing Partner of Connors Research aswell as a private trader. He also co-authored several books on trading including “HowMarkets Really Work, 2nd Ed.” and “Short Term Trading Strategies That Work.”
Connors Research is a financial markets research company.
It owns a proprietary core database of over 8.4 million
equity trades – a unique, hand-groomed repository of
data on short term market behaviour that underlies all of
its products. Connors Research continually adds to and
improves this data, and uses it to create model-driven,
quantitatively validated trading methodologies aimed at
giving traders a professional edge.
Connors Research
Table 3 for each exit type shows the setups with the highest average profit. Traders should use the exit
strategy that best fits into their daily trading plan.
Source: Connors, L./Alvarez, C., “The Long Pullbacks Strategy”, Connors Research, LLC, 2012
T3) Top 3 of Each Exi t Type (Based on Average Prot)
No. of
Trades
Avg. %
Profit
Avg. Trading
Days Held
% WinnersExit
Methodology
MA
Length
StretchLimit
Entry %823 4.97% 1.70 77.28% Up Close 6 6% 10%
638 4.92% 1.73 77.12% Up Close 4 6% 10%
960 4.84% 1.71 77.40% Up Close 5 5% 10%
820 5.55% 2.49 78.29% C>MA3 6 6% 10%
638 5.48% 2.50 77.27% C>MA3 4 6% 10%
759 5.48% 2.51 77.21% C>MA3 5 6% 10%
638 6.12% 3.66 77.27% RSI2>50 4 6% 10%
757 6.06% 3.67 76.62% RSI2>50 5 6% 10%
816 6.03% 3.64 77.08% RSI2>50 6 6% 10%
808 6.75% 6.24 75.62% RSI2>70 6 6% 10%
751 6.55% 6.35 74.17% RSI2>70 5 6% 10%
948 6.41% 6.26 74.89% RSI2>70 5 5% 10%
977 1.87% 0 63.05% Day Trade 4 5% 10%
1,069 1.84% 0 64.27% Day Trade 4 5% 10%
850 1.84% 0 64.12% Day Trade 5 6% 10%
1. Up Close
The average gain per trade is lower than what we
have seen up to now. But the length of time in the
trade is extremely short. For those traders who do
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The Self-Hedging Strategy
More often than not, private investors use the leverage effect of options or warrants for speculative rather than hedging purposes.
The classic way of using puts to hedge long positions and calls to hedge short positions is known to most investors. However, using
options to manage risk may also be done by simply using them as an alternative to direct investment with their leverage, though,
being used to limit risk rather than increasing it. Read for yourself how such a position does its “own hedging”, as it were.
» Some Basics
For the sake of simplicity, there is often no distinction
made in this article between options and their securitised
version, warrants. However, you should know the
following: While options are traded on futures exchanges
like the Eurex, warrants are products issued by banks that
can also be traded on conventional stock markets. While
it is the contract size that needs to be paid attention to in
the case of options, the exchange ratio is similarly relevant
to warrants. The leverage effect of options is caused by
the smaller amount of capital used when compared to a
direct investment. On the one hand, this leverage can be
used for speculative purposes, in which case investors
invest the entire earmarked amount in options on the
underlying asset rather than in the underlying.On the other hand, the leverage effect can also be
used to reduce the capital you invest, that is your risk.
Imagine buying only as many options as the number
of underlying instruments that you could buy with the
amount earmarked. You would then participate just
as much in the performance of the underlying as you
would if you had invested the full amount directly in the
underlying, but could invest the free balance elsewhere
while significantly limiting your risk of loss in the position.
Using put options for a short position allows you to avoid
any potentially unlimited risk of loss that would exist if
the underlying asset were to be sold short.
Examples
The following examples are designed first to illustrate the
strategy of using the leverage effect of options to reduce
your risk – compared to the purchase or short sale of the
underlying asset – rather than increasing it (versions 1aand 2a). This is followed by that strategy being compared
to a hedged direct investment in the underlying or a
short sale of the underlying (versions 1b and 2b). The
How to Trade Options Effectively
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illustration is simplified by fees, commissions, and any
potential borrowing costs being disregarded.
Version 1a: Purchase of Call Options Instead of the
Underlying Asset
If you want to invest €5000 in adidas shares, for example,
you could buy 60 shares for that amount of money at a
price of €82.90. However, if instead you were to invest
the amount in call warrants on adidas with a 13-month
term and at a €65 base price, this would enable you to
purchase up to 2488 warrants at €2.01 each and an
exchange ratio of 1/10. So buying the warrants would
allow you to participate in the performance of up to 248
adidas shares, even though those €5000 would actually
enable you to buy just 60 shares.
Now if you only bought as many warrants as would
match the number of shares that you could buy with that
amount, you would reduce your risk by using the leverage
effect. So in that case you would buy only 600 warrants
at the exchange ratio of 1/10 and have the opportunity to
participate in the performance of 60 adidas shares, even
though you have only used €1206 instead of €5000. This
includes a premium of about three per cent per year. The
benefits are obvious: You can only lose €1206 instead of
€5000 and have the remaining €3794 available for other
investments to spread your capital more widely.
Version 1b: Purchase of the Underlying While Using Put
Options to Secure Your Position
The classic use of options is securing a position in the
underlying. So the amount of €5000 would initially be
invested here directly in the underlying, which means that
60 adidas shares would be bought at a price of €82.90. At
the same time, this long position would be secured by 600
put warrants at the exchange rate of 1/10. A put warrant
with a strike price of €82, that is at the money, costs €0.85,
which means that the hedging costs €510 for a period of
13 months. This represents a premium of approximately
ten per cent a year. However, price losses of less than €82
would be secured. So the maximum amount you will risk
is 60 x €0.90 (equivalent to €82.90 purchase price - €82
base price) + €510 (cost of the put options). So altogether
you could lose a maximum of €564, but a total of about
5500 euros would be tied up, namely the underlying
investment and options.
Version 2a: Purchase of Put Options Instead of ShortSale of the Underlying
If you anticipate falling prices, you could buy 600
put warrants at the exchange ratio of 1/10 instead of
Using the sample positions, the table shows profits and losses of the different
versions for the implementation of a long expectation at different stock prices
at the maturity of the options. Each position was created at a share price of
82.90 EUR.
Share price at maturity Direct Investment Version 1a Version 1b
50 EUR -1974 EUR -1206 EUR -564 EUR
82.9 EUR 0 EUR -132 EUR -510 EUR
110 EUR 1626 EUR 1494 EUR 1116 EUR
T1) Expectation: adidas to rise
Using the sample positions, the table shows profits and losses of the different
versions for the implementation of a short expectation at different stock prices
at the maturity of the options. Each position was created at a share price of
82.90 EUR.
Share price at maturity Short Selling Version 2a Version 2b
50 EUR 1974 EUR 1758 EUR 1452 EUR
82.9 EUR 0 EUR -216 EUR -468 EUR
110 EUR -1626 EUR -1242 EUR -468 EUR
T2) Expectation: adidas to fall
short-selling 60 adidas shares. At a base price of 100
euros, the options are far in the money and the buyer’s
premium is correspondingly low, about three per cent
a year. So at an exercise price of €2.07 you would only
invest €1242 and benefit from the price slump of 60
adidas share for a period of 13 months without being
exposed to the unlimited risk of loss of a short sale of
the shares.
Version 2b: Short Sale of the Underlying Asset While
Using Call Options for Hedging Purposes
In the classic version, a short position of 60 adidas shares
would be entered at a sale price of €82.90 and hedged
with call options. A call warrant with a strike price of €82,
that is minimally in the money – at an exchange ratio
of 1/10 – costs €0.87. 600 call warrants are required to
hedge the short position for 13 months, which means that
hedging will cost 522 euros, representing a premium of
approximately ten per cent a year. Losses incurred by the
short position at share prices of more than €82 would be
secured. So the maximum amount being risked will be€522 (cost of call options) - 60 x €0.90 (corresponding to
a sale price of €82.90 - a base price of €82). Overall, you
could lose a maximum of €468 here.
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lower premium for the versions 1a and 2a is “bought”
by the options used being relatively far in the money.
While this effectively causes more capital to be risked
than is the case in the hedging-version options, there
is still far less capital invested than in the case of a
direct exposure to the underlying. Tables 1 and 2 show,
how each of the versions develops in various scenarios
when compared to a direct investment. For the sake of
simplicity, the tables are invariably based on the end of
the term of the options.
Conclusion
Basically, many investors are familiar with the possibility
of achieving a limitation of risk by combining a position
in the underlying with a hedging position in options on
this underlying. The purpose of this article, however, was
to prove that it is also possible for any risk to be limited
by exclusively investing in options – as an alternative to
the exposure in the underlying. The only prerequisite is
that the leverage effect of the options not be exploited
for speculative use, but – in keeping with leverage – for
reducing the capital invested. Compared to the direct
investment in the underlying – if necessary, combined
with hedging options – significantly less capital will
be tied up. The remaining free capital can be investedelsewhere. Indirectly, this diversification will lead to a
further risk reduction. Compared to the classic version of
using options to hedge a position in the underlying asset,
that strategy appears to be attractive. Instead of having to
make another hedging transaction alongside the original
trade, solely investing in options as an alternative to
direct investment already offers a “built-in” self-defence
– and does so at much lower cost and with less capital
tied up than is the case with hedging using at the money
options.
However, it should be kept in mind that in the
strategy presented by versions 1a and 2a more capital
will be risked than in the classic hedging model –
despite less capital being tied up. This is what traders
need to pay attention to in their risk management. In
addition, investors will have to forgo possible dividend
payments that will not materialise in a sole investment
in options without any investment in the underlying
existing alongside it. As with any investment in options,
it should, of course, be kept in mind that, unlike the
direct investment, this is a long term investment. So fora trade to be successful, the targeted performance of
the underlying needs to be achieved within the term of
the options. «
Alexander Mantel
Mr Mantel is a lawyer who has been studying
the financial markets since the age of 17. Whilethe focus of his interest is on derivative productsand new developments in the financial industry,he is always open to any interesting challenges.
finanzlabor@gmx.de
Strategy Name: Self-hedging strategy
Investment Universe:All underlying assets for which options or
warrants are available
Trade Direction:Both long (with call options) and short positions
(with put options) possible
Time Horizon: Predominantly medium to long term
Setup:
First, a determination is made what amount ofthe underlying asset would be bought or sold
with a direct investment. Instead of opening the
position in the underlying, only so many options
are purchased as is necessary to have the
desired amount of the underlying
Entry:
Depending on personal approach, various
technical signals or even fundamental criteria
may play a role
Position Size:
Position size according to the amount of the
underlying to be covered; contract size or
exchange ratio of the options should be paid
attention to
Exit:Maturity of the options or previous liquidation of
the position when target price was reachedRisk and Money
Management:
Maximum loss is limited to the option price,
conduct risk management accordingly
Strategy Snapshot
Comparison
Versions 1a and 2a are characterised by low financing
costs in the form of a premium. They also have the
advantage of only one position being required to
be opened. The versions 1b and 2b correspond to
the classical hedging model. So they consist of two
positions – the direct investment and the hedging
position made up of options, which ties up additional
capital. Another drawback is that the cost, that is the
premium of the hedging position made up of at the
money options amounting to approximately ten per cent
a year, will lead to an unfavourable shift of the break-
even point since that premium is higher. So the price of
the underlying needs to move far more in the direction
wanted than is the case with versions 1a and 2a in orderfor the position to enter the profit zone. However, the
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The Volatility-Breakout Strategy
The cyclical progress of the volatility of financial markets plays
an important role for every trader. Especially the change of
phases of low movements (low volatility) to phases of strong and
unpredictable movements (high volatility) offers good possibilitiesto active market participants for opening positions. Of course it
is necessary to have a systematic approach to recognise such
situations. The historical volatility ratio can be of great help.
How to Enter a Trade Before the Big Move Starts
David Pieper
David Pieper is a CIIA and has been interested instock markets since the end of the Nineties. Heconcentrates on trading with CFDs and is a freelance author.
david.pieper@traders-mag.com
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» The historical volatility measures the fluctuations of
an underlying stock within a certain period of time.
It provides information about the past fluctuations
based on the statistical value standard deviation,
where the fluctuation of a price around an average
value is measured. There will be extreme deviations
now and again to the upside or to the downside that
predict a reversal movement – a concept that is used
with the Bollinger bands. The glance in the rear-view
mirror alone offers no advantage for the trader – only
if you compare the current volatility, for example over
ten periods, with the long term “usual” volatility over
for example 100 days, you can make a statement, if
a stock is in a phase of unusually high respectively
low volatility. It is interesting to compare the two
periods of volatility to define clearly, what “high” or
“low” means. An established indicator is the so-called
“historical volatility ratio”, short HVR.
Step 1: Identify Low Volatility Ratios
This HVR key figure is especially
useful to determine short term
breakouts of volatility and
therefore it is the basis for a
trading strategy. We measure the
historical volatility of two different
periods and calculate it as a
quotient. If the short term volatility
differs strongly from the long
term volatility, the indicator will
increase or decrease considerably.
A strong increase of the volatility
ratio shows that the trading
ranges of the current periods are
considerably larger than those
measured over a longer period
of time. A strong decrease of this
ratio signalises the calming of the
trading ranges. The latter signalshall be the basis of our trading
strategy. A value of 0.5 or smaller
is in general a good threshold.
The historical volatility ratio shows the relation of the current volatility (ten days) to the long term volatility(100 days). If the indicator reaches a value of 0.5 it is a signal for an imminent breakout. From the end of April
to the beginning of May 2013 there were three signals for long trades (see marks).
Source: www.tradesignalonline.com
F1) DAX Hourly Chart with HRV (10/100)
Historical volatility – which means the realised volatility of
the past days and weeks – is measured in two different
time frames and calculated as quotient. If the short term
volatility differs considerably from the long term volatility,
the indicator will increase or decrease considerably. Our
strategy is implemented if a strong decrease of the ratio
signals a slow-down of the trading ranges.
Historical Volatility Ratio (HVR)
That means the current volatility is half of the long-
term volatility – a good sign that price dynamic may
increase shortly.
Step 2: Trade-Planning
If the trader has found an underlying with a low volatility
ratio he can plan the trade precisely. The direction of
the breakout cannot be predicted for sure in advance,
therefore the trader should place stop orders long and
The direction of the breakout cannot be predicted for sure in
advance, therefore the trader should place stop orders long and
short to profit from the coming impulse.
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A useful additional requirement
prior to the entry of a trade is
an inside day respectively the
NR4-signal of Toby Crabel (more
information in classic strategies in
TRADERS’ June 2013). The latter
describes a candle that represents
the narrowest trading range of the
past four periods – another hint
that volatility may increase shortly.
If such a pattern occurs, the
probability of success will increase.
At the same time you can place the
stop wisely and that leads to an
improvement of the risk-reward
ratio. The glance at the higher
time frame chart should be done
as well to add possible support-
or resistance levels to the trade.
If you trade stocks you should
also consider important dates like
publication of quarterly figures.
You should protect your capital against false
signals and limit the risk. Therefore, it is important
that you place a stop-loss below the low of the
signal candle when buying. If your short signal wastriggered, the stop should be placed above the high
of the signal candle. If the trade runs into profit, you
should trail the stop to break-even first and then trail
it – as a suggestion – according to the general rules
of market mechanics on a lower time frame to protect
book profits.
Example DAX
Figure 1 shows the hourly chart of the DAX from 24th
April to 7th May 2013. Below the candlestick chart you see
the historical volatility with the settings 10/100 and the
threshold of 0.5 (red line) which is the signal line. During
the shown period there were three situations where the
short term volatility was only half of the long term one
– a good sign for a future breakout. Let us take a closer
look at the first signal on 24th April. After the 2 pm-candle
the HVR reached the signal level and therefore a breakout
was “in the air”. Therefore we placed a stop-buy order
above the high of the signal candle at 7710 as well as a
stop-sell order at 7675.
The glance at the lower time frame (Figure 2)shows, that the breakout took place shortly after wards
and therefore the long order was executed (Point
E). The big candle confirmed the buying signal and
The glance at the shorter time frame – trade 1 in Figure 1 – enables the precise stop placement during the
trade. After the entr y (E) the stop was trailed twice. We closed the position at the end of the trading day (A).
Source: www.tradesignalonline.com
F2) DAX 10-Minute Chart
You can use tools like stockfetcher.com to enter individual screening filters torecognise attractive trading candidates. The picture shows the filter-code for
the HVR with the settings 6/100 and 10/100.
Source: www.stockfetcher.com
F3) Screening Results US Stocks (10th May 2013)
short to profit from the coming impulse. In detail this
means:
• Stop-buy above the high of the signal candle • Stop-sell below the low of the signal candle
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therefore the stop (red line) could be trailed higher
at this time and the risk was considerably decreased.
After a short correction and the following new high
the stop was trailed again to secure a first part of
profit. We avoided the overnight-risk and therefore
the long position was closed at the end of the trading
day (point A) in profit.
Implementation with Screening Software
The strategy described here can be implemented with
the use of a screening tool. The trader has the possibility
with software like stockfetcher.com, to identify all stocks
or ETFs with a HVR of 0.5 or less with one click. Figure
3 shows the filter-code for the HVR, settings 6/100 and
10/100. Stocks that fulfil these requirements are displayed
automatically.
Conclusion
The trading strategy introduced here is neither new nor
complicated. The basic idea of the trading of breakouts in
price areas with low volatility is one of the most effective
methods. Because whether you trade in a short term
Strategy name: Volatility breakout
Strategy type: Momentum breakoutTime frame: Weekly, daily or hourly chart
Setup:HVR < 0.5 – that means an increased probability
of an imminent breakout
Entry:
Long: stop-buy above signal candle with HVR
< 0.5; short: stop-sell below signal candle with
HVR < 0.5
Stop-loss:Above (below) high (low) of the signal candle
respectively at support/resistance
Take profit:Close part of the position if 2 R is reached,
rest of the position with trailing stop
Trailing stop: Manually
Risk management: 0.5% risk per trade
Average number ofsignals:
depends on number of underlyings
Strategy Snapshot
Relative Rotation GraphsJulius de Kempenaer and Trevor Neil developed a unique tool that shows
the movement of many stocks both relative to a benchmark as well as
relative to each other. In other words, it gives traders a quick but still
sophisticated overview of relative movements happening on the markets.
There are four specific chart sectors allowing for convenient trade ideas.
Today, even Bloomberg offers Relative Rotation Graphs in their workstation.
The Wandering TraderMarcello Arrambide is a Daytrader who
travels the world. He has lived in ten
countries across four continents and visited
roughly 70 countries. He speaks about his
way of trading as well as the problems
that arise when trading on the road.
Preview of the next Issue
PEOPLE
The September issue of TRADERS´ appears on 29th August 2013.
Coverstory
period or you trade the daily chart – the change from silent
to turbulent phases is a basic principal at the markets and
offers good chances for active traders. Especially if you
watch a large pool of underlyings to find a signal. «
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Part 2: Success Starts Inside
The Psychology of Trading
In the 03/2013 TRADERS’ cover story, Norman Welz, a leading expert in applied trading
psychology, described the basics for success in the stock markets. Here he continues and
observes other important effects that a trader need to be clear about. First he deals with
the importance of knowledge and how the selfish mind works. After a sidebar about the
disadvantages of trading-gurus, Welz eyes one’s weaker self and finally concludes that
learning to trade affords a change in personality.
Norman Welz
Mr Norman Welz is a trading psychologist atGodmodeTrader and is a fully-trained trader whoalso runs a private psychotherapy practice inHamburg. He is the producer of the “Better mind
Coaching Program for Traders” and the TRADERSTALK CD box of intervie ws. His book “TradingPsychology” has made him a best-selling author.
www.bettermind.de, www.godmode-training.de
» We Are Not Able to Do
Something That’s Not Part of Our Brain
The human being can only implement what is firmly
grounded in its neural network. One example: You are abusinessman and travel in China on business. Your mind
might say: “Oh yes, if I talk to Chinese business partners,
I should speak Chinese.”. But if you have not learned how
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to speak Chinese, you cannot do it.
You probably say now: “Sure.” But is
it really clear why? Because it is not
in your neural network. There are no
neural connections in your brain. You
have not learned to speak Chinese –
no vocabulary, no pronunciation, no
grammar.
The same goes for trading. You
are not able to do things in trading
that are not already available in your
brain (in the form of a brain cell): to
understand the relations between
time frames; to find wise reversal
points in the charts; to recognise
when it is pointless to follow a trend
(Figure 1); to notice if the risk of a
trade is higher than the reward and
to be able to estimate if you risk
more or less on one trade – and
much more.
A Thought Is like a Photo Flash
Many traders are convinced that it is enough to understandthings to be able to complete an action. But if that were
true, you would only have to read a good trading book
or attend an educational seminar and you would be a
trading professional. The objective relations of trading
can be understood within several weeks. Despite this you
continue to fail. Why is that? Because in general a thought
is only a momentary understanding. There is a little
current pulse in our brain, nothing more. It is like a photo
flash: It lightens the situation for a short moment, but it is
not enough to illuminate the environment permanently.
The Mind Is Selfish
The human ego is often deceived by this effect. We fail
in the practical implementation, thanks to our mind. Our
mind often pretends something that does not really exist
– it does so because it just can’t help it. The mind needs
a plausible and reasonable world, where it can exist in
a controlled manner. If that is not the case, it creates
this safe and meaningful world. Even if it is absurd – for
example continuing to buy stocks that lose in value. No
human being would buy more and more apples that rotaway just because they are getting cheaper. But people
follow this impulse in the case of stock investments again
and again.
What should you do in this 4-month chart of the stock of BMW ? Should you speculate on increasing prices
and follow the trend or protect your profit s and wait for a strong correc tion? Uncertainty influences the trader
again and again.
Source: www.tradesignalonline.com
F1) Clear Trend, but…
The reason is that money equals existence in our life.And existence has the first priority in our brain. The less
value our money has, the greater the threat to our lives.
The mind automatically tries to compensate for this fear
impulse. Because the mind wants to have everything
under control and does not like uncertainty; it therefore
forces us to buy more and more stocks although it may
be completely wrong. The mind is convinced that it will
save us from death. It is absurd, but the selfish mind does
not care. It has the unconscious task to save us – and then
we can fulfil our most important task – to preserve the
human race.
If You Follow a Guru You Will Always Be a Copy
Most trading beginners imitate the actions of professional
traders by trading their stock market newsletters. This
way they try to get rid of the responsibility that comes
with trading the markets, but they fail to realise that they
are responsible the minute the trade is active.
Inexperienced traders often make the mistake that
they want to be smarter than the professional traders.
They trade their recommended trading signals butthen they are influenced by their own emotions and
thoughts. They take profits too early or miss trades
because they have another opinion of the market
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personality. That can be nearly as good, but most of the
time it is an inadequate copy.
One Thought Is Nothing
but Smoke and Mirrors – Not an Ability
If you want to change your trading behaviour, you
immediately encounter an inner opponent. This power of
avoidance is often called one’s weaker self. If you want to
change your behaviour or your personality, two massive
systems fight against each other: volition and ability. And
our mind is in the middle and creates one’s weaker self
to convince us that we are always the ones that make
the decisions. “Mistake” says the hedgehog and climbs
down the brush.
If you want to change familiar behaviour – even if it is
negative behaviour like smoking, drinking, gambling orbinge eating – but also cutting profits short – the brain
perceives it like someone knocking on your door and
saying: “Well, I really like your flat, please move out. I
want to live here now.” Of course we will not move out
(habit) only because the new one (mind) likes our flat.
There are other strategies necessary to reach the goal.
The same goes for unnecessary trading behaviour. If
you do not have enough discipline for a certain behaviour,
you do what you can do instead. Therefore you never
trade falsely but always the way you can. If you want to
improve your trading you have to control yourself: “How
do I behave and how do I want to behave?” For example
if you always let losses run, you need more than pure
brains. Because then everybody would say: “From today
on I trade like I have to to be profitable”. And then you do
it! But as already mentioned, a thought is not the ability
but only the thought. The ability is a verifiable part of our
brain in the form of brain cells. It is part of our body,
like an arm, a nose or feet. A thought is nothing –
smoke and mirrors. I am telling you explicitly: If you
do not have a certain ability in your brain, if it is notpart of your neural network, you do not have it. You
may have another ability, but doubtlessly, it will not
lead to success.
environment. They are not even aware that they then
trade a completely different system. Although it
may not seem that way, their active intervention has
a greater meaning. All actions that people take, are
based on their very personal experiences: things they
experienced, inhered, learned or thought. If you trade
the trading system of someone else you should know
that no two people are the same. You only have to listen
to amateur singers who interpret a song recorded by
someone else. It is the imitation of the original, because
the interpretation is always influenced by one’s own
If you do not have the ability to
let profits run, then it is not partof your brain and you cannot do it.
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If you do not have the ability to let profits run, then
it is not part of your brain and you cannot do it. The
pure intention that it would be wise
to do so to earn more money than
you lose, is not enough. It is that
simple and at the same time so
crucial!
Learning to Trade Means
a Change in Personality
If you ask yourself why trading
is so difficult, there is only one
answer: Because nothing in life is
more difficult than to change your
personality. If you want to change
your personality you need a very
good reason. Otherwise the old
habit has no interest in moving
out of the comfortable penthouse
in your brain. If you want to adapt
a new ability you need a lot of
time, patience, strategies and a
very convincing reason. Because
You should never cheapen a stock. The stock is not getting bet ter because price is getting cheaper.
Source: www.tradesignalonline.com
F2) Solarworld in Free Fall
our brain changes as slowly as a supertanker changes
course. «
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» In this trade I used the medium
term sentiment signals of the whole
market to build a pure call-write
position. I used the daily chart and
I calculated the market-breadth
indicators based on the stocks that
build the particular index as a whole.
In addition I used technical analysis
formations.
The Setup in the English Index
2013 is the year of new highs in
some of the most important indices.
Whereas the DAX and some other
indices built one new high after the
other, the English FTSE 100, called
“Footsie”, stays in a sideways range.
At the end of April the time has
come: The daily chart showed a so-called “W-formation” and the signal
line has already been exceeded.
The whole market showed a trend
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Trading Journal:Thomas Bopp
In our new feature “Trading Journal” traders – beginners
or professionals – present actual trades which taught them
something special. It is Thomas Bopp’s turn this time.
26th April 2013 – Call-Write Trade FTSE 100
F1) Sell of a Put on the FTSE 100
A W-formation in the index has to be confirmed by the sentiment. Only then do we get a signal based onthis technical setup. We sold a put with a strike price of 5950 points (green line) below the upper 80 0-days
envelope (blue line). The target was at 66 96 points.
Source: www.captimizer.de
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reversal to the upside based on the Advance-Decline-
Line, but the moving signal line (25 days) in the indicator
was not exceeded in order to trigger a signal. Only if the
sentiment indicator exceeds this line it is recommended
to build a position. On 26th April this signal occurred and
we got the green light in the FTSE 100.
The Trade
Call-writers earn money by selling options that most
likely will be worthless at duration. If such a signal occurs
you sell a put with a basis clearly below the current price.
Therefore it is an option “out-of-the-money” where the
price is only the time value. A put with duration until
the third Friday of July 2013 seemed like a good idea.
You received 51 points per ten pounds for this option.
You needed about 6000 British pounds as margin. The
ideal basis of this option was at 5950. Figure 1 shows an
800-days envelope (blue line) above this green line. If it
would have been a false signal, that would have been themaximum possible loss.
I used the general mirroring
technique of a W-formation to
calculate the minimum target in the
index. The FTSE 100 should rise to
at least 6696 points. As it has not
yet generated a new high of several
years, a sideways tendency was also
possible. But in any case the position
would have been a success because
of the daily time value loss – which
is good for call-writers. But the stock
markets looked bullish worldwide
and I speculated that there would
be a breakout in the FTSE 100. The
position was built shortly before
the weekend. Therefore the option
already lost a little in value until the
following Monday and I generated a
little book profit.
Target Outreached
On the following Monday the option
had already lost ten points or 100
pounds. The position developed better than expected
and was bought back for safety reasons on 23rd May at
the open for eleven points or 110 pounds. The reason
was the crash in the Japanese Nikkei index. At this time
the option had already lost 80 per cent of its value and
therefore the call-writer had achieved considerable
profits.
What about keeping the option? Not a good idea,
because the residual term of 50 days would have been
a considerably higher risk than the additional expected
gain. Figure 2 shows the strong down candle that caused
the doubling of the price of the option on this day.
Because of the the call-writer’s nearly unlimited risk you
have to take this candle into account – because you can
never know how far prices will fall.
We achieved very good results by closing the
position at the market open. We gained more than five
per cent – based on the necessary margin – within four
weeks. «
On 23rd May 2013 the Japanese Nikkei lost more than seven per cent, therefore the pu t-option was closed at
the open. We earned nearly 80 per cent of the premium.
Source: www.captimizer.de
F2) Open: We Bought Back the Option with Considerable Profit
Call-writers earn money by
selling options that most likely
will be worthless at duration.
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Common Indicators in Meta Trader – Part 2
The Trader’s Technical Arsenal
Following part 1 of the series titled ‘Common Indicators in the Meta Trader’ (TRADERS´ 06/2013),
Part 2 discusses the Average Directional Movement Index (ADX), the Average True Range (ATR), and
the Awesome Oscillator (AO); as they work in Meta Trader, which continues to increase in popularity
(especially version 4.0). In most cases, the indicators’ default parameters are used.
» The Average Directional Movement Index (ADX)
Created by Welles Wilder and introduced in his book
called “New Concepts in Technical Trading Systems”
(1978), the ADX then looked futuristic and has now
been tested and trusted. In the book a number of other
important indicators were featured. The ADX was created
to play the commodity markets, but it can also be used
successfully in stock and currency markets. By clicking on
the settings of the indicator, you are able to change some
colours and parameters to your taste. The ADX line itself
shows the strength of a bias, without giving emphasisto the direction of the bias. For example, if the ADX line
is moving above level 30, it shows that the current bias
is getting strong. So any readings above levels 40, 45,
50 et cetera show a very strong bias. Since trendless
markets are often unfavourable to those who follow the
line of the least resistance, it would be wise to stay off a
market when the ADX line is below level 30. This is how
we are spared from the ordeal of the consolidating prices.
Although when the ADX line goes towards level 55 or 60,
there may be a temporary pullback in the extant bias.
There are two other lines in the indicator called
Positive Directional Indicator (+DI) and Negative
Directional Indicator (-DI). It just happens that, when the
+DI is above the -DI, it indicates the supremacy of thebulls, whereas the -DI situated above the +DI indicates
the supremacy of the bears. This means that while the
ADX line can be used to determine the stamina of a bias,
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the situation of the +DI and -DI can
be used to determine whether to go
long or to go short.
For you to harness gains from
the events that move the markets,
it is not mandatory that you are
aware of the reasons behind all the
events. It is like the more you are
aware of them, the worse off you
are. Ultimately, the price direction is
what matters, not what we feel may
happen. In any case, let us examine
two important uses for the ADX.
Example 1: In Figure 1, you see
how the ADX is used as a complete
trading system on the GBP/JPY
4-hour chart. The ADX period 14 was
coloured blue, while the +DI green
and the -DI red. Please pay attention
to that chart; you would see that the bias is strong
whenever the ADX line is above the level 30 or more.
In addition, you would notice that the market is coming
down when the -DI is above the +DI, and vice versa. You
would have noticed that the most favourable positions
would have been taken when the ADX line is above level
30 while there is a ‘sell’ signal or ‘buy’ signal as given bythe positions of the -DI and +DI. It is noteworthy that there
is not much movement whenever the ADX line is below
the level 30.
Example 2: Another way of using the ADX is to
confirm what the other indicators are saying. In this
example, we examine the use of
the ADX with a Moving Average.
In Figure 2 (on the same GBP/JPY
4-hour chart), the 20-period Simple
Moving Average is used. Basically,
a bullish bias is assumed when the
price crosses the SMA 20 (colour
red) to the upside, and a bearish bias
is assumed when the price crosses
the SMA 20 the downside. Looking
at the chart, you would see when a
trade signal could be taken and when
it should be ignored, considering all
the above rules.
The Average True Range (ATR)The ATR was introduced by Welles
Wilder, and it has become a valuable
indicator since then. One needs
You can see how the ADX is used as a complete trading system on the GBP/JPY 4-hour chart. T he ADX period
14 was coloured blue, while the +DI green and the -DI red. You see that the bias is strong whenever the ADX
line is above the level 30 or more. In addition, notice that the market is coming down when the -DI is above
the +DI, and vice versa.
Source: www.metaquotes.net
F1) The ADX as a Complete Trading System
Another way of using the ADX is to use it to confirm what the other indicators are saying. In this example,
we examine the use of the ADX with a Moving Average. Basically, a bullish bias is assumed when the pricecrosses the SMA 20 (colour red in chart above) to the upside, and a bearish bias is assumed when the price
crosses the SMA 20 the downside.
Source: www.metaquotes.net
F2) The ADX Used to Conrm the Signals on the SMA
to note that the ATR gives an indication of the market
volatility rather than the direction. This means that, unlike
Moving Averages and the ADX, the ATR only showcases
the intensity of the current volatility, rather than showing
whether the main trend is bearish or bullish. Significant
biases in the markets tend to come with significant
ranges (or significant True Ranges, hence the indicatorname). The ranges tend to become narrow in noiseless
markets. Therefore the ATR gauges the significance of a
bias – giving a range increase during an extremely volatile
bullish outbreak or a range increase during an extremely
volatile bearish outbreak.
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above the prior period’s high and
the low is below the prior period’s
low, then the current period’s high-
low range will be used as the True
Range. This is an outside day that
would use Method 1 to calculate the
TR. This is pretty straight forward.
Methods 2 and 3 are used when
there is a gap or an inside day.
The default parameters of the
ATR on the MT4 is usually period 14
(14 days on daily chart or 14 candles
on a lower time frame), plus we can
see how a default ATR looks on the
GBP/AUD 4-hour chart. Please see
Figure 3.
The Awesome Oscillator (AO)
For the sake of simplicity, this controversial indicator
will be explained in the simplest possible manner, for if
the details of the AO indicator are conveyed as they are
documented in highly technical trading jargon (which
would appear ostentatious to beginners and certain
advanced traders), they may fail to achieve our desired
ambition – which is to make every trader understand the
signals generated by the indicator. Like most indicators,the Awesome Oscillator simply generates long and
short signals. The AO has a bar graph of green and red
bars, with a zero line. Looking at the Figure 4, you would
see the AO on the AUD/USD daily chart, with default
parameters, just as they are in the MT4. When you move
your chart forwards, you would see
how the indicator shows long and
short biases.
Here is the computation for the AO:
It is a Simple Moving Average (SMA)
period 24, plotted through the central
points of the bars (High + Low) / 2,
and subtracted from the SMA period
5, graphed across the central points
of the bars (High + Low ) / 2.
MEDIAN PRICE (MP) = (HIGH+LOW)/2
AO = SMA(MP, 5) - SMA (MP, 34)
The Awesome Oscillator under FireThe AO indicator has come under
fire by its critics. Detractors say that
it is just another indicator, and so
The default parameters of the ATR on the MT4 is usually period 14 (14 days on daily chart or 14 candles on a
lower time frame), plus we can see how a default ATR looks on the GBP/AUD 4-hour chart.
Source: www.metaquotes.net
F3) The Default ATR on the GBP/AUD Chart
Like most indicators, the Awesome Oscillator simply generates long and short signals. The AO has a bar graph
of green and red bars, with a zero line. Here, you would see the AO on the AUD/USD daily chart, with defaultparameters, just as they are in the MT4. When you move your chart forwards, you would see how the indicator
indicates long and short biases.
Source: www.metaquotes.net
F4) The Awesome Oscillator on the MT4
The True Range
The True Range is described as being the most significant
of the methods below:
• Method 1: Current high less the current low
• Method 2: Current high less the previous close (total
value)
• Method 3: Current low less the previous close (total
value)
Total values are useful for positive numbers, for the
creator of the ATR initially had it in mind to measure the
distance between two extremities not a directional bias.
According to one study, if the current period’s high is
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Azeez Mustapha
Azeez Mustapha is a trading professional, anofficial analyst and representative at InstaforexCompanies Group, a blogger at ADVFN.com, and
a freelance author for trading magazines as wellas a provider of trading signals at a number ofwebsites.
azeez.mustafa@analytics.instaforex.com
there is nothing awesome about it. But we should not
forget that it is just an indicator, and it may be more
sensible to combine it with other technical factors/
indicators when using it. When your trade has sensible
positive expectancy incorporated into it, it makes you
smaller losses during losing periods and larger gains
during winning streaks. The chance that a trade would
move in your favour is never 100 per cent, so when you
include positive expectancy with the AO, you have a
huge edge. When you are given an equal chance to face
negativity and positivity, you will come out victorious
if you capitalise on your positivity and truncate your
negativity. By effectively controlling risk and using
safe position sizing method, so that losses do not have
catastrophic effects on you, you are far ahead of most
traders, if you are disciplined enough when using the
AO.
Conclusion
Doing something different than what you see on the chart
is suicidal. There is no certainty. This is why technical
indicators are probabilistic in nature, for events only
push prices in the direction of the indicators or contrary
to the direction of the indicators. Do you have to be able
to predict the future with an utmost certainty before
you can open a position? The more you think like this,
the worse off you are. The logic is to capitalise on your
positivity.
With the indicators described above, you can have
some profits (which, however, do not always come). But
when profits do come, you make the most of it, and when
profits do not come, you take control of the situation.
Negativity is part of any business whatsoever, not trading
alone, and it should be seen as an experience that can
bring out the best in you. Positivity will inevitably follow
negativity. «
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The Pro’s Process
In this series we are asking Pro Traders about their psychological processes. Delving a little into how
it feels to them when trading. The good and the bad. How this has changed over time and what
preparation they do mentally for performing as a trader. One of the key features for us was that we
wanted traders with experience who have been through the mill over the years and of course, we
appreciate those who were kind enough to broach this subject publicly. We hope this gives developing
traders more to learn from. Each interview in this series was conducted by Richard Chignell who is
himself a trader. Please visit his blog at http://embracethetrend.com.
Part 11: Gregory W. Harmon
» Hometown: Born Basking Ridge NJ,but living in Shaker Heights, Ohio (outside of Cleveland)
» Interests: Outside of trading, family, wine, golf
» Trading Style: Top Down Technical Trader with a focus on Options
» Website: www.Dragonflycap.com, www.presidiumcapital.com
arbitrage type trades, repurchase agreements versus
commercial paper all over night and took over seven
years before moving to equities.
Richard Chignell: What style of trading do you practice?
Harmon: I am a top down technical trader. So I start with
identifying the trend and then look for how inter-market
activity can influence that trend. With a grasp of the big
picture I then search for technical set ups within myuniverse of about 1000 names. When I see something
very interesting I then determine whether to play the
trade in the stock or in options.
I am CMT, CFA, and founder of Dragonfly Capital Management, LLC providing dailytrade ideas, technical analysis of securities markets and consulting services to themarketplace, and I’m Chief Investment Officer at Presidium Capital. Prior to that I traded
in the securities markets since 1986. I have held senior positions including Head of GlobalTrading, Head of Product Development, Head of Str ategy, and Director of Equity andPortfolio Swaps Trading at Chase Manhattan, State Street Corporation and BNP Paribas.I earned an MBA in Finance from NYU Stern School of Business and BS in MechanicalEngineering from Cornell University.
Gregory W. Harmon
» Richard Chignell: How long have you been trading?
Harmon: I have been trading one way or another since
1986. I started with very short term money market
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Richard Chignell: How do you feel when a trade goes
against you?
Harmon: It sucks when a trade goes against me. Like
every trader I know, I never want to be wrong. But of
course I am wrong a lot.
Richard Chignell: How do you feel when a trade goes
for you?
Harmon: When a trade goes as good as could be hoped
for it is a great euphoric feeling. I would expect that most
traders feel this way, too.
Richard Chignell: How have these feelings changed
over your trading career?
Harmon: Now this is the crux of the matter. Early on
losing trades would be brushed aside and winners
would have me puffing up my chest like I could do no
wrong. This had a lot to do with the market I was tradingin the late 80’s. As the market got more complex,
trading equities and derivatives, losses, especially a
streak, could really get me down. I would sometimes
feel that maybe it was time to stop and move away
from it for a while. Wins would still help to inflate an
ego. Now 26 years in I know that losses can be learning
experiences and should be studied, even if only for a
few minutes, but then let go. You cannot let them be
an anchor around your neck and give you any doubt at
all about whether the next trade will be successful or
not. Yes they still suck, but next, move on. Wins still
feel great but with age I realise that they come from
preparation and sometimes luck. I am not some great
invincible being but take the time to be ready for what
the market presents.
Richard Chignell: Do you have any practices that you do
away from the trading screen to help you mentally and
emotionally handle trading?
Harmon: Really just recharging the batteries. I like to
spend time with family. What my five and seven yearold children see in the world and how they learn and
experience life can show you the proper context for
trading within your life and reset the emotional faculties.
Richard Chignell: Have you always done this?
Harmon: No, prior to the kids it was going out with co-
workers and friends and talking about other things,
playing sports or working out. You adapt your coping
mechanisms as your life circumstances change.
Richard Chignell: If not, how have you learnt to deal
with the feelings that come up when trading?
Harmon: Added time doing the same thing also allows
you to recognise the same wins and failures and takes a
bit of an edge off of them. Repetition and experiencing
the same things over and over is a good thing.
Richard Chignell: Can you describe a time in your
trading life which really rammed home the point that so
much of trading comes down to psychological factors?
Harmon: For me it is a matter of a slow realisation through
experience. Not a break through moment. Recognisingpatterns and then dealing with them works in trading
charts but also helps in the way that you move through life.
Richard Chignell: If you could give aspiring traders one
piece of advice about emotionally handling the market
what would it be?
Harmon: Wake up every day prepared for the market with
your analysis as well as with a good clean mental state.
If you cannot come into the day ready to accept both
winners and losers and then move on, then do not go to
work that day or do not trade.
We’d like to thank Greg Harmon for sharing the way he
tackles the market from an emotional/mental side of things
and for his willingness to allow us to post this as a free
resource in the hope that traders who have been in the market
for less time or are thinking of entering can perhaps pick up
some A-HA’s.
If you are interested in finding more out about Greg
Harmon you can find him:
» On twitter: @harmongreg
» At his firms website: www.Dragonflycap.com,
www.presidiumcapital.com «
Recognising patterns and then dealing with
them works in trading charts but also helps
in the way that you move through life.
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Ralph Acampora
Godfather of Technical Analysis
Ralph Acampora launched the Market Technicians Association (MTA) about 40 years ago and was also the founder of the
International Federation of Technical Analysts (IFTA) whose members today include the Association of Technical Analysts
in Germany (VTAD). Ralph Acampora boasts nearly 50 years of market experience and has witnessed many a bull and bear
market during this time. And it is this very experience that is invaluable when it comes to correctly interpreting the recurring
cycles of the stock market. To this day, Ralph Acampora teaches at the prestigious New York Institute of Finance. He is alsoManaging Director of Technical Analysis at Altaira, a Swiss wealth-management firm. Marko Graenitz has interviewed Ralph
Acampora over the telephone, talking to him about his career and the nature of his analyses as well as his assessment of the
market. This is a very special interview with one of the living legends of technical analysis. Enjoy!
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TRADERS´: Mr Acampora, many technical analysts
have pursued different careers before as you yourself
have done. Can you describe to us what caused your
attention to be drawn to the markets?
Acampora: Yes, my original career path was quite
different, and I actually ended up in the markets just by
chance. I had been a student of history and theology and
would certainly have chosen a different profession if it
hadn’t been for a serious car crash I
was involved in at that time, which
was pretty much exactly 50 years
ago today. Sometimes your worst
experiences in life turn out to be the
best in the end. And so it came to
pass that I learned a great deal about
Wall Street during my 3-month stay
in hospital. A certain Mr Downey had
introduced me to a good surgeon to
operate on me. Mr Downey regularly
visited me in hospital, each time
bringing along his financial-market
research, which I found intriguing
and went on to study meticulously.
It was so exciting that I decided to
apply for a job in finance.
TRADERS´: Did you actually
manage to land a job in that field?
Acampora: Well, I had no experience
whatsoever – except for what I had
read in Mr Downey’s research. I
vividly remember talking to the head
of the research unit of a fund company
PEOPLE
The Dow Theory was developed by the American economist
Charles Henry Dow and provides the theoretical background
for trend lines and trend channels. Dow defined a trend
as a market movement that clearly pointed to a certain
direction. Basically, there are three possible trends: uptrend,
downtrend, and sideways trend. Depending on the time
frame, several – possibly opposite – trends can be shown to
exist in any index or security. The long term trend is referred
to here as the primary trend, which may last for a year or
longer. Within the primary trend, secondary trends may
occur which are usually estimated to last for a period of up to
three months. Tertiary trends are short term and only last for
a week up to a maximum of one month.
Dow Theory
According to the Dow Theory, the transport index must confirm the signals of the Dow Jones for a clear trend
to exist. For a while, it may also work without confirmation as it did, for example, in 2012: Here, the Dow Jones
(upper chart) formed an upward trend, which was, however, not confirmed by the transport index (lower chart)
for a long time. Instead, the entry price in the Dow Jones in this case was lower for long positions than it
would be if one were to wait for the actual confirmation. So traders and investors are sometimes faced with
a trade-off between the reliability of the signal and the price potential.
Source: www.tradesignalonline.com
F1) Dow Jones and Dow Transportation Index
during a job interview. He told me to do an MBA at a
university first and then try again. I was very disappointed
to hear that and it looked as though my lack of formal
qualifications kept me from achieving my aspirations.
TRADERS´: What happened then?
Acampora: I refused to give up and went on to read all
sorts of job adverts. Finally, I saw an ad where an analyst
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was wanted – with no prior knowledge required. And I
got the job, which was at a small fund company. My tasks
included 50 per cent fundamental research and 50 per
cent technical analysis. Since I had no experience, they
first gave me a book to read which was Edwards and
Magee’s classic “Technical Analysis of Stock Trends.” Iread the book, which was how I picked up the basics.
TRADERS´: What was your job as a technical analyst?
Acampora: Primarily, technical analysis meant collecting,
recording, and evaluating price-related data, which was
still rather laborious at that time. However, studying prices
intensively enabled me to develop a better feel for the market.
TRADERS´: How important, do you think, is technical
analysis now compared to fundamental analysis?
Acampora: I do both and call it “fusion analysis”. Strictly
speaking, it is actually a combination of macroeconomic,
fundamental, quantitative, and technical analysis.
TRADERS´: Can you describe that in more detail?
Acampora: I believe that any professional and meaningful
analysis needs to include all four components. I always
start out at the macro-level, which means that I look at the
national economy as a whole. You do not have to carry
out each of these analyses yourself but can instead draw
on existing analyses conducted by experts. In any event,
the important thing is the interpretation of the relevant
research. The second step to take is fundamental analysis.
This is all about checking to see what the valuations are,what the management of a company is doing and how
the individual products are positioned. The whole thing is
then put into context by quantitative
analysis: What impact do which
fundamental data have, historically
speaking, and what are the most
likely scenarios? There are a lot of
statistics here that you can analyse.
Finally, there is technical analysis
which I always carry out last because
it is there that I want to see the results
of the first three steps confirmed – if
the technical side does not fit into
the picture, I will stay away from the
investment.
TRADERS :́ Do you know of any
example where analysts clearly
contradicted each other?
Acampora: A particularly glaring
example of such a contradictionoccurred when Enron saw its price
plummet when the New Economy
bubble burst. Virtually every
Most recently, Ralph Acampora has been neutral on gold. Since the slump in April, gold and silver have ceased
to be long candidates for him since the technical-analysis picture has clearly deteriorated.
Source: www.tradesignalonline.com
F2) Gold: Avoid Positions
Phase 1: Disbelief and Fear: The early phase of a bull market
is characterised by most market participants – if they invest
in shares at all – much preferring to put their money on
“safe” quality stocks (blue chips).
Phase 2: Belief and Trust: Rising share prices attract
investors. Trust builds up causing minor stocks and previous
laggards to take off.
Phase 3: Complacency and Greed: “Easy profits” onspeculative and risky stocks dominate, the fundamental
valuations rise significantly, and there’s euphoria.
The Three Psychological Phases in Every Major Bull Market
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In retrospect, early January was a very good time to be
bullish on stocks. Ralph Acampora was one of the few
people to anticipate this at that time. On 9th January, he
posted 11 reasons on Twitter that made him feel very bullish:
1. The March 2009 low was and is a generational low –
just like the Oct/Dec 1974 bottom. We will work our
way irregularly higher.
2. NYSE breadth is at all-time new highs. The majority of
of stocks are doing very well.3. With close to 50 years’ experience I have never seen so
many people, so negative on the stock market, for so
long.
4. The market has doubled since its 3/09 low and there is
still trillions of dollars on the side lines. This is more fuel
for the bull.
5. The 10-year yield broke above 1.9 per cent recently –
the bottom in yields is in and the air is slowly coming
out of the bond bubble.
6. Rotation is the life-line of every bull market. The long
overlooked financials are leading – this is very bullish.
7. Most markets around the world are doing well despite
local problems. Negative news has been largely
discounted.
8. China has bottomed – it will help power the global
recovery; and Japan is boosting its stimulus.
9. The European bellwether – the DAX – is about two per
cent away from an all-time new high. That has to be a
fantastic omen for Europe.
10. Like the late 1970s, the “Street” is contracting because
the equity market is out of favour with the public. Don’tfollow the herd.
11. And lastly: “Don’t Fight the Fed”. We all have a vested
interest in a strong stock market.
Many of these things continue to be valid. By now, Ralph
Acampora assumes that the bull market has moved into its
second phase – after the “safe” blue chips had first risen
significantly, mid-and small-cap stocks have followed suit
most recently. So investors are becoming more tolerant of
risk. “Corrections or even minor bear markets that might be
in the offing represent buying opportunities,” he wrote on
9th January 2013. And he was right.
9th January 2013 – 11 Reasons Why Ralph Acampora Is Bullishfundamental analyst had a “buy” recommendation
for the stock, but it rapidly slid more and more to rock
bottom. From a technical perspective, the stock was a
clear “sell” recommendation. Only shortly before Enron
went bankrupt did some fundamental analysts change
sides – much too late. And when Citigroup crashed during
the financial crisis, something similar happened.
TRADERS´: What steps do you subdivide your
technical analysis into?
Acampora: You need to keep things simple. Price
is always the most important thing. Nothing has a
higher priority for me. My further analyses are based
on the Dow theory and the trend analysis of the major
markets. In the case of stocks, I analyse the ten major
sectors of the S&P next and then the subgroups right
down to important individual stocks. I will also look at
inter-market relationships and analyse how the markets
interlock and whether everything there is above board
or whether there are any distortions emerging. For
my trend analyses, I use trend indicators like Moving
Averages, the MACD (Moving Average ConvergenceDivergence) and the RSI (Relative Strength Index) –
usually on a weekly basis in order to get a clear picture.
I think that analyses that are more short term are more
confusing to most people and of no value. Depending
on market conditions, however, I will also look at daily
charts.
TRADERS :́ Do you also analyse volatility?
Acampora: Sure. The VIX volatility index is an excellent
market barometer. Many think that low volatility levels
are a sign of a possible slump, but I see that differently:
To me, low VIX levels are bullish since they can stay low
for a long time, signalling a good investment climate.
It is different with high volatility levels: If the VIX goes
up by leaps and bounds in a crash, the bottom often
is not far off. A good example of this was provided in
August 2011: When the VIX had risen above 40, people
desperately turned to me asking whether price losses
would ever come to an end. My answer was that the VIX
historically had only very rarely reached such levels
and that the bottom was highly likely to be approachingfast. And that is exactly how things turned out to be.
Only in 2008 did volatility levels climb significantly
higher.
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difficult years on the stock market,
people found it impossible to believe
that we had a new bull market. And
hardly anyone was fully invested –
just like today. I think that the initial
phase – that of fear and disbelief – is
already a thing of the past since the
new all-time highs and that we have
moved on to Phase 2. In early May, I
was interviewed on the US television
station CNBC. I was asked by the
presenter what I would expect now
that my target of 15,000 points for the
Dow had been achieved. I said that the
Dow would now be headed towards
20,000 points, which caused the
presenter to look a little surprised. But
that’s exactly what usually happens in
a bull market. However, Phase 2 is only
just starting because trading volume is
still low, only at about half the level of
previous peaks. This indicates that the
vast majority of market participants
continue to not be in on the action. And there is a similar
situation in other countries of the world. For example,
Germany or the DAX, is the engine in Europe, and it’s doingvery well – just as a Mercedes would (laughs).
TRADERS´: Are there any other
signs to indicate that the first phase
of the bull market is already over?
Acampora: Recently, “safe” stocks
with high dividend yields have
been shown to underperform, such
as utility stocks, for example. This
shows that investors are already
becoming somewhat less risk-
averse, which is a sign of Phase 2
TRADERS´: Is it also possible
for the bull market to get out of
control?
Acampora: In theory, this would
be possible. Since so many big
investors are not in on the action,
fund managers, for fear of losing
their jobs, may well be swiftlyentering the market in a big way. That
in turn could trigger a buying panic,
but this is anything but healthy for
The 1-year chart shows the development of the ET F on the financial sector (symbol: XLF), which is in a clear
uptrend. Most recently, the situation was highly overbought in the wake of the ever steeper rise, which
increased the risk of pullbacks.
Source: www.tradesignalonline.com
F3) Daily Chart of US Financial Sector
The monthly chart of the E TF on the financial sector (XLF) confirms the long term bullish assessment by Ralph
Acampora and puts the overbought situation of the daily chart in Figure 3 in perspective. The latter hererepresents the last twelve candles which produced the successful breakout from a multi-year consolidation.
According to Acampora, larger pullbacks along the way are to be interpreted as buying opportunities.
Source: www.tradesignalonline.com
F4) Monthly Chart of US F inancial Sector
TRADERS´: You have been very bullish since early
2013. What is your current long term assessment?
Acampora: We are in a major bull market. Psychologically,the situation is the same as after 1982: After so many
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the market. I hope that we will not be
experiencing anything like that.
TRADERS´: Do you only analyse
long opportunities or would you
also enter into short positions?
Acampora: Sure, if that is what my
analyses require me to do. Primarily,
I would then short individual stocks.
TRADERS´: How do you see other
markets, such as gold, silver, or oil,
for example?
Acampora: Gold and silver have
been struggling since the slump in
April. I’m currently inclined to be
neutral, but would not recommend
any long positions. The same goes
for oil, which is in a sideways trend.
Here you just have to wait and see at
this point in time (as of 28 May 2013).
TRADERS´: How do you invest in
the markets of the world that you think are attractive?
Acampora:ETFs today are a great way of doing this. These
products have really made it easy to invest globally.
TRADERS´: Do you also use ETFs
for sector analysis?
Acampora: Yes, and I have two fine
examples of that. The first is the
financial sector or the corresponding
ETF with the symbol XLF (Figure 3).
The daily chart is clearly overbought.
But that does not change my long
term bullish assessment. If we look
at the monthly chart (Figure 4),
we can see that there was a clean
breakout from a huge base. There is
no evidence of any large tops on the
monthly chart, quite the opposite.
Every major pullback should be
viewed as a buying opportunity.
TRADERS´: That’s an unequivocal
statement. What’s the second
example?Acampora: The monthly chart of the
technology ETF (symbol: XLK) shown
in Figure 5 reveals a solid performance.
The chart shows the development of the ET F on the technology sector (symbol: XLK). While the sector has not
outperformed the market recently, it has consistently been on the rise for quite some time – most recently
with new 10-year highs, which have moved a long-lasting base upwards.
Source: www.tradesignalonline.com
F5) Monthly Chart of US Technology Sector
In late May, the closing price of the Veeco stock marked a new high on the daily chart (see top mark). This
was confirmed by the breakout from the large base, which had developed since early 2012. The share is anexample of a stock that until very recently was at t he very top of Ralph Acampora’s watch list. The upward
trend was confirmed with pullbacks representing buying opportunities.
Source: www.tradesignalonline.com
F6) Breakout at Veeco
While the sector has not outperformed the market recently,
it has consistently been on the rise for some time – most
recently, the sector has made new 10-year highs, alsoleaving a long-standing base by moving upwards.
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Acampora: One part is science and one part is art. And
the art part is to find the right interpretation. But you
can always rely on price, which is a fact that will not
be changed in hindsight (unlike earnings estimates or
sometimes even corporate-earnings figures that have
already been reported). The price just keeps pricing in
information and expectations of the future, which makes
it the ideal construct to analyse the strength of the buyers
vis-à-vis the sellers.
TRADERS´: Do you have an example of such an
interpretation?
Acampora: Let’s look at the last few months or even
years. Time and again, we get a wave of bad news on
several fronts, but the markets still go up. If bad news
does not bring the market down, then that is good news.
This is a very classical interpretation. There will be good
times at some point in the future, and that is already being
anticipated now. Five or maybe eight years from now,
the US could be independent of oil and perhaps even be
promoted to being an exporter of natural gas. President
Obama has already laid the foundation for this. Such
things are so-called game changers that today nobody
talks about yet but that create
completely new opportunities.
TRADERS´: How important is the
concept of relative strength?
Acampora: The markets are driven
primarily by the institutions.
Especially for funds, it is important
to outperform. But if those funds are
behind on the benchmark index, they
are going to have a problem since
customers will be withdrawing their
funds. The upshot then is that, more
often than not, especially markets
that have gone up significantly will
again be bought widely – by investors
who had missed the movement. This
may again fuel the relative strength
of this market for some time to come.
TRADERS´: Do you also use stop
prices for your investments?
Acampora: Yes, from a certain level
on I need to exit, which is what Ihave mental stops for. However, it
all depends on which investment is
involved and what time level time
This shows the development of the yields on 10-year US Treasuries over the last five years. Ralph Acampora
believes that the most recent increase above the two per cent mark could have confirmed the turnaround ininterest rates. That would mean that the huge rally in the bond markets that has been going on since 1982 is
coming to an end and that yields will go up again in the long run.
Source: www.bigcharts.com
F7) Has the Big Turnaround in Interest Rates Already Materialised?
TRADERS´: So the big decisions are ultimately always
made on the basis of the long term charts, aren’t they?
Acampora: Yes, they are. In the short term, there is
a lot of market noise and confusion. In view of that,
it is tremendously helpful to take a step back and
look at the long term charts. And that’s what I would
recommend to anyone who doesn’t know where to go
on the markets and who is looking for guidance. And
if you do that – looking at a monthly chart of the stock
market –, you will know where things are most likely
to be headed.
TRADERS´: But such simplistic approaches are rarely
discussed in the media.
Acampora: The problem is that it’s always easier to
talk about problems and scare people since this causes
the media to be more present amongst the people. It is
perfectly natural for threats to be perceived more widely.
This is one of the reasons for ignoring the media as much
as possible and relying on your own analyses.
TRADERS :́ So technical analysis is something you can
count on, isn’t it?
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I trade at. More often than not, for example, pullbacks
in an uptrend – that we can currently witness in stocks
– represent additional buying opportunities where I can
further increase my position.
TRADERS´: What’s the maximum amount you would
use from your investment capital to invest in a position?
Acampora: Again, it depends on the situation but ten
per cent would certainly be a very large position which I
might describe as an upper limit.
TRADERS´: Can you remember any analysis that you
are upset about in retrospect?
Acampora: Yes, absolutely. Prior to the crash of 1987,
there was an article in Barron’s where several analysts
were being surveyed. Some said that they expected a
crash. I wasn’t quite as bearish as that and spoke of an
early correction. I now wish I had been more bearish at
the time since that could well have been deduced from
the analyses. “Correction” was clearly the wrong word to
describe what followed.
TRADERS´: Which of your analyses do you remember
that was particularly successful?
Acampora: In June 1995, the Dow was at 4500 points
(Figure 8) and I published a 58-pageresearch report where I suggested
that a rise to 7000 points would be
possible. Over the short term, this
was received with a great deal of
ridicule, but in February 1997 that
target was reached and prompted
my then employer to give me a red
Corvette, which I had always wanted
to have.
TRADERS´: Not a bad reward!
Where did you get the idea that the
Dow might go up that much?
Acampora: The entire analysis was
based on a conversation I had with an
investor by the name of Ken Wood,
who was 85 years old at the time
and had practically seen every bull
and bear market of the 20th century.
I asked him what his most difficult
time had been and I thought he wouldanswer by mentioning the Great
Depression after 1929. But instead
he said that the years from 1963 to
1965 had been the most difficult. The reason he cited was:
During that time, the markets were overbought all the time
without forming a real correction. And that’s exactly what
it seemed to look like in early 1995, which then made it
possible for me to come up with this bullish interpretation.
Who knows, maybe it’s the same again this time.
TRADERS´: When you look back on your successful
career, what are you particularly proud of?
Acampora: In those days when my friend John Brooks and
I laid the foundation for MTA, technical analysis enjoyed
as little recognition as voodoo. I knew that this would
change at some point, but did not think that I would live
to see it. I am particularly proud that we have managed
to establish the Chartered Market Technician (CMT) as an
alternative to the classical CFA certificate – and also of the
fact that the SEC officially recognised that qualification in
2005. That was really a major breakthrough for technical
analysis. Unfortunately, the IFTA refused to follow suit
because they had fallen out with the MTA internally. But
I am confident that this old dispute will be settled in the
future. After all, technical analysts need to hold together
(laughs).
The interview was conducted by Marko Graenitz “
In June 1995, the Dow was at 4500 points (see arrow), having almost doubled since the low in 1991. At
that time Ralph Acampora published a 58-page research report where he suggested that a rise to 7000
points might be in the offing. Hardly anyone thought at the time that this could possibly materialise sinceprices already seemed to be “high”. But as early as February 1997 – just 20 months later –, the target was
reached.
Source: www.tradesignalonline.com
F8) Dow Jones in June 1995
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SEMINARS
80
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Date Seminar Firm Location Website
04.08.2002 Forex Seminar Knowledge to Action Knightsbridge www.knowledgetoaction.co.uk
02.08.2013 Introduction to Physical Trading & Warehousing London Metal Exchange Shanghai www.lme.com
02.08.2013 Stock Market Seminar Knowledge to Action Oxford www.knowledgetoaction.co.uk
04.08.2013 Stock Market Seminar Knowledge to Action Knightsbridge www.knowledgetoaction.co.uk
05.08.2013 Trading Market Trends and Chart Patterns Phillip CFD Singapore www.phillipcfd.com
05.08.2013 Futures, Options & Derivatives Energy Management Institute Houston www.energyinstitution.org
05.08.2013 Forex Seminar Knowledge to Action Canary Wharf www.knowledgetoaction.co.uk
06.08.2013 Technical Analysis: The Trend is Your Friend Fidelity Investments Del Mar www.fidelity.com
06.08.2013 Demystifying Bond Selection for Your Portfolio Fidelity Investments San Francisco www.fidelity.com07.08.2013 Searching for Stock Ideas on Fidelity.com Fidelity Investments Charlotte www.fidelity.com
07.08.2013 Forex Seminar Knowledge to Action London www.knowledgetoaction.co.uk
09.08.2013 Quarterly Market Update Fidelity Investments Scottsdale www.fidelity.com
12.08.2013Technical Analysis: Gaining Confirmation
and Managing RiskFidelity Investments Towsen www.fidelity.com
13.08.2013 Is a Professionally Managed Account Right for You? Fidelity Investments Kansas City www.fidelity.com
14.08.2013 Basic Options Strategy Fidelity Investments Santa Monica www.fidelity.com
14.08.2013 Understanding Exchange-Traded Funds (ETFs) Fidelity Investments New Haven www.fidelity.com
14.08.2013 Establishing and Maintaining Your Estate Plan Fidelity Investments Jacksonville www.fidelity.com
15.08.2013 Tax-Smart Investing Fidelity Investments Knoxville www.fidelity.com19.08.2013 High Volatility Trading Using CFD Phillip CFD Singapore www.phillipcfd.com
20.08.2013 Is a Professionally Managed Account Right for You? Fidelity Investments Chandler www.fidelity.com
20.08.2013 Maximizing Options Tools in Active Trader Pro Fidelity Investments Paramus www.fidelity.com
21.08.2013 Technical Analysis: The Trend is Your Friend Fidelity Investments Denver www.fidelity.com
21.08.2013 Energy Trading Fundamentals Energy Management Institute New York www.energyinstitution.org
22.08.2013 Technical Analysis: Identifying Chart Patterns Fidelity Investments Birmingham www.fidelity.com
22.08.2013 Intro to Energy Trading for the Non-Trader Energy Management Institute Houston www.energyinstitution.org
23.08.2013 Introduction to the LME London Metal Exchange Shanghai www.lme.com
24.08.2013 Introduction to Hedging with Futures and LMEswaps London Metal Exchange Shanghai www.lme.com
25.08.2013 Introduction to Hedging with Options London Metal Exchange Shanghai www.lme.com
26.08.2013 Automate and Capture trading Opportunities with CFD Phillip CFD Singapore www.phillipcfd.com
Important Dates for Your Calendar
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COLUMN
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The 7 Habits of Highly Successful Traders
1. Traders must have the perseverance to stick to trading
until they break through to success. Many of the best
traders are just the ones that had the strength to gothrough the pain, learn, and keep at it until they learned
to be a success.
2. Great traders cut losing trades short. The ability to
accept that you are wrong when a price goes to a place
that you were not expecting is the skill to push the ego
aside and admit you are wrong.
3. Letting a winning trade run as far as it can go in your
time frame is crucial to having big enough winners to
pay for all your small losing trades.
4. Avoiding the risk of ruin by risking only a small portion of
your capital on each trade. It is a skill to not get arrogant
and trade too big; if you risk it all enough times, you will
lose it all eventually.
5. Being reactive to actual price action instead of predictive
of what price action will be is a winning principle I have
seen in many wealthy traders. Letting price action give
you signals is trading reality. Trading your beliefs about
what price should be is wishful thinking.
6. Great traders are bullish in bull markets and bearish in
bear markets, until the end when the trend turns.
7. Great traders care about making money more thanany other thing. Proving they are right, showing off, or
predicting the future is not as important as hearing
the register ring. «
Steve Burns has been an active and successful trader forover 13 years. He is t he author of “New Trader, Rich Trader“,
“Show Me Your Options“ and “How I Made Money Usingthe Nicolas Darvas Syste m“. He has also been a contributorto ZenTrader.ca and Business Insider. Steve blogs at w ww.
NewTraderU.com and twitters as @SJosephBurns. He lives inNashville, TN with his wife, five children, and granddaughter.
7 Habits of HighlySuccessful Traders
» There are seven things that I believe are pretty common
in the successful traders I have known, read about, and
seen in action. Whether it is stock trader Nicolas Darvas in
the sixties, commodity trader Ed Seykota in the twentiethcentury, or Jesse Livermore at the turn of the last century,
many of these principles hold true. The closer I get to
these principles the better I trade, the farther I stray, the
worse I do. In trading, discipline pays.
Effective habits consist of internalised principles and patterns of behaviour.
Source: TRADERS´ graphic
F1) Development of Habits
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