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The Reverse EMA

Transforming a classic
indicator for better signals 8

PRICE CYCLES
Analyzing the ups and
downs for profit 14

SYSTEM
Optimization
Getting it right 18

Early Warning
System
Identifying optimal swing
trading buy/sell points 22

Focal Points
Know where to look and
what to look for 26

INTERVIEW
Ed Easterling of
Crestmont Research 38

September 2017
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 CONTENTS SEPTEMBER 2017, Volume 35 Number 10

7 Daytrading Within 22 An Early Warning System

Whole Numbers (Part 2)
by Ken Calhoun by Mike Slattery
Keeping your entry and exits Some trading signals are better
based on simple concepts makes than others. In this second part of 44 All-Inclusive ETF Websites
it easier to manage your trades. a three-part series, we describe a
Here’s a strategy you can apply. by Leslie N. Masonson
filter that’ll help identify optimal
swing trading buy/sell points. Interested in learning more about
FEATURE ARTICLE using exchange traded funds
(ETFs) in your trading? Here are
8 The Reverse EMA TIPS 26 Focal Points three free sites that will aid in the
Indicator by Dirk Vandycke ETF selection process.
by John F. Ehlers Financial survival and thriving in
The exponential moving average trading and investing could have 46 Q&A
is a popular indicator among something to do with knowing
where to look and what to look for. by Rob Friesen
technical analysts. But it has its This professional trader answers
shortcomings. Here’s a look at This article explains why and how.
a few of your questions.
how the indicator can be used
so it results in minimum lag and 30 Gann And Gann Analysis AT THE CLOSE
provides crisper trading signals. by Mark Putrino, CMT
There’s a lot of trading lore behind 60 Why Most Traders Fail
13 Futures For You the life and trading career of W.D. (And Why You Won’t)
by Carley Garner Gann. How much of it is true and by Stephen Burnich
Here’s how the futures market how much has been exaggerated? It’s often said that most traders fail
really works. Here’s a deeper look. or never get to the point of having
consistent profits. But the chances
35 Explore Your Options of beating these odds may be more
14 Profiting From Monthly attainable than you think.
by Tom Gentile
Trading Cycles Got a question about options?
by Domenico D’Errico
Price movement in stocks comes
INTERVIEW
DEPARTMENTS
in waves, and within waves are 6 Opening Position
more cyclical waves. What’s 38 An Insight Into Cycles
the best way to analyze them? 42 †Traders’ Glossary
With Ed Easterling
Here’s a look at using a scientific by Jayanthi Gopalakrishnan
48 Books For Traders
approach to measure cycles. Author and researcher Ed 49 Trade News & Products
Easterling is able to combine the 50 Traders’ Tips
18 Optimization—Getting science and art of market analysis 57 Advertisers’ Index
It Right and come up with some interesting
perspectives on the markets. He 57 Editorial Resource Index
by Perry J. Kaufman 58 Futures Liquidity
Creating a trading system is hard shares his insights and publishes
work and we want our system to provocative research on the 59 Classified Advertising
work well. Oftentimes, we get car- financial markets at his website, 59 Traders’ Resource
ried away by trying to tweak it so [Link].
it works the way we want it to. But We spoke with him to hear his
that can lead to unrealistic results. perspective on secular markets,
Here’s one way to set realistic where we are in the current cycle,
expectations when optimizing and what to expect going forward.
trading systems. This article is the basis for
TIPS Traders’ Tips this month. n Cover: Inga Poslitur
n Cover concept: Christine Morrison
Copyright © 2017 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
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 September 2017 • Volume 35, Number 10
Opening Position
The Traders’ MagazineTM

S
EDITORIAL
editor@[Link] ecular or cyclical? That is the question.
Editor in Chief Jack K. Hutson If you ever find yourself in a position
Editor Jayanthi Gopalakrishnan where you have to explain cyclical move-
Production Manager Karen E. Wasserman
ments in the stock markets, and you have to
Art Director Christine Morrison
talk about specific cycles that have occurred
in the past, you better know precisely when
Graphic Designer Wayne Shaw
Webmaster Han J. Kim
Contributing Editors John Ehlers,
they started and when they ended. Any error
Anthony W. Warren, Ph.D. there and it’ll throw off all your calculations.
Contributing Writers Thomas Bulkowski, Martin Pring, The precise start and end date of cycles is an
Barbara Star, Markos Katsanos
error that is very common. The reason could
be that there are different methods used to
OFFICE OF THE Publisher
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calculate cycles and there is a lot of misunderstanding about the differences
Industrial Engineer Jason K. Hutson between secular and cyclical price movements and how they are calculated.
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6 • September 2017 • Technical Analysis of Stocks & Commodities

 TRADING ON MOMENTUM
2017 WINNER

Daytrading Within
AI TRADING SOFTWARE

Whole Numbers
Winner
15 years
in a row!
Keeping your entry and exits based Daytrading whole-numbers
on simple concepts makes it easier to strategy Build powerful
manage your trades. Here’s a strategy When I first developed this technique in
you can apply. 1999 during the dotcom daytrading era,
trading systems in
my students found it extremely helpful. MINUTES
by Ken Calhoun The goal is simply to buy a stock that
without coding

D
is breaking out to new two-day highs,
eciding exactly where to enter if that price level occurs within $0.20
and exit stock daytrades can be above the whole number, then sell it
challenging. If you use whole once it reaches $0.80 or so above the
numbers to help manage your entries and next whole number. ®

exits, you will likely find that it becomes Of course, you can test different spe-
a favorite trading strategy, once you learn cific entry and exit prices; strategically,
the specific techniques explained in this you are simply seeking to buy just above
month’s column. a whole number and then sell once it has
Traders often get into trouble when moved in your favor, before it reaches
they use subjective, overly complicated the next whole number. Daytraders lose
[Link]
technical signals to trade that are in- money when they trade choppy, cheap 301.662.7950
consistent. These complicated signals stocks under $10 or overtrade weak entry
often lead to stop-losses caused by false signals; this strategy is designed to help
breakouts. Instead, traders may find that you avoid making those mistakes. Step 1: Visually scan for stocks in
using simple, strong price action signals the $15–$50 per share price range,
such as whole numbers is an easier, Step-by-step action plan that are in the process of taking out
potentially more successful approach to Here’s how you can start using this a two-day high just above a whole
managing their intraday trades. price action breakout strategy with your number, as seen in the chart of Twitter
daytrades: Inc. (TWTR) in Figure 1.

Step 2: Set a buy-stop order at

$0.20 above the whole number;
in this example, that would be
$17.20. Use an initial $0.20
stop at the whole number
($17.00 in this example).

Step 3: Your exit target is $0.80

above the whole number. In
this example, our exit target
is $17.80, which was hit suc-
cessfully for an exit.

Insights: Why this

technique works
Daytrading successfully de-
pends on entering using volatil-
ity, momentum, and price action
breakout signals combined with
esignal

extremely tight risk management.

Figure 1: whole number support & resistance. In this example of Twitter Inc. (TWTR), if the price continues its
current trend, you would enter just above a whole number and exit just below the next whole-number resistance level. Continued on page 62
September 2017 • Technical Analysis of Stocks & Commodities • 7
8 • September 2017 • Technical Analysis of Stocks & Commodities
 INDICATORS

Lean & Mean

The Reverse EMA Indicator

The exponential moving average is a popular indicator The EMA
among technical analysts. But it has its shortcomings. An EMA is computed by multiplying the input data by
Here’s a look at how the indicator can be used so it results a number (less than 1) and adding to it the complement

T
in minimum lag and provides crisper trading signals. of that number, multiplying the previously computed
value of the EMA. In EasyLanguage code, this is
he exponential moving average (EMA) is written as:
one of the cornerstones of technical analy-
sis. It is easy to implement and has excellent EMA = a*Price + (1 – a)*EMA[1];
smoothing qualities over a wide range of
applications. The disadvantage of the EMA The two coefficients of this filter sum to unity, so
is that it has different group delay, or lag, the gain of the filter is 1. That is, if a constant input
across the spectrum of frequencies present in market is applied to the filter, the quiescent filter output will
data. This different lag causes a nonlinear relationship have the same value. If a spike amplitude of 1/a (an
between frequency and phase, leading to waveform impulse) is applied to an EMA, its immediate output
distortions. The moving average is computed from left is a value of 1. In the next sample period there is no
to right across the chart, and some traders have tried input, so the output value is just (1 – a). In the next
to also perform the EMA from right to left, thereby sample period there is still no input, so the output
canceling the nonlinear phase response and getting value is (1 – a)2. The process continues, so the general
twice the smoothing in the process. expression for the EMA response to an impulse at
The problem with forward and backward EMA is the Nth sample period is (1 – a)N. This is one reason
that it is noncausal. In other words, you cannot actu- why it is called an exponential moving average—the
ally use such a filter in real time. Trading is always amplitude response falls off as the exponent of the
performed at the right-hand edge of the chart, and time sample from the impulse event.
waiting for data to happen so you can perform a With apologies to the mathematical purists, we can
reverse EMA is a way of cheating on real results. In frame the EMA equation in terms of Z-transforms,
short, it doesn’t work for real trading. where Z–1 signifies one unit of delay. Doing this, the
In this article I will describe a causal forward and EMA equation becomes:
backward EMA indicator that can be used in real
trading. This indicator provides a clean and crisp Output = a *Input + (1 – a)*Output*Z–1
output that can be adapted to cycle, momentum, and
trend activity. It has the primary attributes I think Rearranging the terms, we get:
are necessary for a technical indicator. That is, it has
double smoothing at the high end of the frequency Output*(1 – (1 – a)*Z-1) = a *Input
spectrum to reduce aliased components, and it has a
INGA POSLITUR

difference that mitigates the impact of spectral dilation The Z-transform of a filter is the ratio of the output
at the low-frequency end of the spectrum. to the input, so algebra further gives us:

by John F. Ehlers
September 2017 • Technical Analysis of Stocks & Commodities • 9
 TRADESTATION
Figure 1: EXAMPLE OF FILTER RESPONSE. On this daily chart of the SPY, the reverse EMA accurately reflects turning points with little lag.

can further factor the previous equation for an FIR filter as:
Output α
= H(Z ) = H(Z) = (1 + cZ –1) (1 + c2 Z –2) (1 + c4Z –4) (1 + c8Z –8) …
Input 1 − (1 − α) Z –1

Time reversal of the FIR filter is easy. All that need be done
is to reverse the order of the impulse response and add a total
The reverse EMA algorithm delay to make the time-reversed filter causal.
I came across this algorithm in Martin Vicanek’s article “A The equation for such a filter is:
New Reverse IIR Filtering Algorithm.” To understand the
reverse EMA algorithm, it is best to simplify the Z-transform H(Z) = (c + Z –1) (c2 + Z –2) (c4 + Z –4) (c8 + Z –8) …
equation by forgetting about the a gain term and letting c =
(1 – a). Doing this, the Z-transform becomes: This filter can be realized by successive filtering where each
module filters the preceding module. Errors are sufficiently
1 small for trading by using only eight modules.
H(Z) =
1 − cZ
The reverse EMA indicator
If we carry out the long division of this rational equation for A practical indicator can be created by subtracting a forward-
the Z-transform of the EMA, we get the infinitely long series: and-reverse EMA response from a standard EMA. The basic

H(Z) = 1 + cZ –1 + c2 Z –2 + c3Z –3 + c4Z –4 + …

This is an exponential decay of the filter response to an input.

In addition, since c has a value less than unity, the coefficients
become vanishingly small after a sufficient number of terms. This indicator provides a clean
Therefore, we can truncate the infinite series to a finite number
of terms with a quantifiable amount of error. If we truncate the
and crisp output that can be
series, the Z-transform now becomes the expression for a finite adapted to cycle, momentum,
impulse response (FIR) filter. A simple moving average (SMA) and trend activity.
is a special case of an FIR filter where all the coefficients are
the same.
Having the Z-transform of the filter represented as a FIR, we
10 • September 2017 • Technical Analysis of Stocks & Commodities
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idea is that the forward-and-reverse EMA does not contain the
EasyLanguage Code for Reverse EMA Indicator
frequency-phase distortions, so subtracting it from a standard
EMA highlights those distortions. One perspective is that it is
{
just those distortions that comprise the indicator output. Reverse EMA Indicator
A typical example of the filter response is shown in Figure 1. (C) 2017 John F. Ehlers
The single input parameter to the filter is the typical alpha for }
an EMA filter. By changing the alpha to be 0.05, the indicator
will show more of the trend response. By changing the alpha Inputs:
to 0.3, the indicator will show more of the cycle response. The AA(.1);
reverse EMA indicator output is similar to that of the roofing
filter (discussed in my book Cycle Analytics For Traders) except Vars:
that the roofing filter has independent control of the upper and CC(0),
EMA(0),
lower band edges.
RE1(0),
The EasyLanguage code to compute the reverse EMA indica-
RE2(0),
tor is given in the sidebar “EasyLanguage Code For Reverse RE3(0),
EMA Indicator.” RE4(0),
RE5(0),
The reality of it RE6(0),
The reverse EMA indicator is causal RE7(0),
and can be used for real trading. It RE8(0),
is virtually universal. It has a single Wave(0);
input parameter that lets it highlight
cycle, momentum, and trend com- //Classic EMA
CC = 1 - AA;
ponents. It has minimum lag. It has
EMA = AA*Close + CC*EMA[1];
high-frequency filtering that reduces
the impact of aliased components of //Compute Reverse EMA
the sampled data. It has low-frequency RE1 = CC*EMA + EMA[1];
filtering that rolls off at the rate of 6 dB per octave, thereby RE2 = Power(CC, 2)*RE1 + RE1[1];
mitigating the effects of spectral dilation. All around, it is a RE3 = Power(CC, 4)*RE2 + RE2[1];
crisp new indicator that should be in everyone’s toolbox. RE4 = Power(CC, 8)*RE3 + RE3[1];
RE5 = Power(CC, 16)*RE4 + RE4[1];
S&C Contributing Editor John Ehlers is a pioneer in the use RE6 = Power(CC, 32)*RE5 + RE5[1];
of cycles and DSP technical analysis. He is president of MESA RE7 = Power(CC, 64)*RE6 + RE6[1];
Software. [Link] offers the MESA Phasor and RE8 = Power(CC, 128)*RE7 + RE7[1];
MESA intraday futures strategies.
//Indicator as difference
He will hold a three-day workshop in October in San Sim-
Wave = EMA - AA*RE8;
eon, CA to offer an intimate and intense learning experience
in cycles and DSP including fully disclosed trading strategies; Plot1(Wave);
for more information, see [Link]/#workshop. Plot2(0);

The code given in this article is available in the Article Code section
of our website, [Link]. _____ [2014]. “The Quotient Transform,” Technical Analysis
of Stocks & Commodities, Volume 32: August.
See our Traders’ Tips section beginning on page 50 for commentary _____ [2013]. Cycle Analytics For Traders: Advanced Techni-
and implementation of John Ehlers’ technique in various technical
cal Trading Concepts, Wiley.
analysis programs. Accompanying program code can be found in the
Traders’ Tips area at [Link].
Vicanek, Martin [2015]. “A New Reverse IIR Filtering Algo-
rithm,” [Link]
‡TradeStation
Further reading ‡See Editorial Resource Index
Ehlers, John F. [2015]. “Decyclers,” Technical Analysis of †See Traders’ Glossary for definition
Stocks & Commodities, Volume 33: September.
_____ [2014]. “Predictive And Successful Indicators,” Tech-
nical Analysis of Stocks & Commodities, Volume 32:
January.
_____ [2016]. “Measuring Market Cycles ,” Technical Analysis
of Stocks & Commodities, Volume 34: September.
12 • September 2017 • Technical Analysis of Stocks & Commodities
 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the se-
nior strategist for DeCarley Trading, a division of Zaner, where she also works
as a commodity broker. She has written multiple books on futures and options
trading, the latest is titled Higher Probability Commodity Trading. Garner also
authors widely distributed e-newsletters; for your free subscription visit www.
[Link]. To submit a question, email her at info@carleygarner-
[Link] or via [Link]. Selected questions will appear
Carley Garner
in a future issue of S&C.

THE TRANSITION FROM OPEN OUTCRY In today’s world, this is unheard of Even brokerage firms with the strictest
(Part 2 of 2) because technology has enabled broker- risk controls during open outcry trading
The CME closed the majority of open age firms to keep much better tabs on wouldn’t have rejected an order because
outcry pits at the end of last year. What traders and individual brokers. All trades an account was short a buck or two. The
are the advantages and disadvantages of are placed through brokerage platforms, bottom line is, there’s a new sheriff in
the futures markets moving exclusively many of which communicate with each town and he is here to stay.
to the “screen”? other. As a result, risk managers have a
Last month, I outlined some of the precise accounting of what positions are No sleep for the weary
positive changes in the commodity in a client’s account and what his account Being a commodities broker has never
industry resulting from the decline of stats are at any given time throughout the been a typical 9-to-5 commitment. It
open outcry trading. This month, I want day and night. In short, traders today will takes long and hard hours to make it
to focus on some of the drawbacks (or at need more than $5,000 in their account in this business. Nevertheless, in the
least minor grievances). to buy options valued beyond $5,000. beginning of my career, I slept well at
This is obviously reasonable, but some of night knowing that although asset values
Stricter intraday margin the traders who were accustomed to the were adjusting to global markets, any
In the “good ole days” of pit trading, there benefit of smoke and mirrors provided positions my clients had open wouldn’t
wasn’t any way to enforce daytrading by open outcry trading found it to be have the opportunity to move until the
margins, nor to keep track of the cash in following day when the pits opened.
option trading accounts. This is because I know many of my clients shared in
orders to buy and sell futures were often Electronic trading has the same comfort. But it’s no longer
placed directly with a broker on the ex- made it possible for that way. Electronic trading has made
change floor. As a result, the only two commodity futures and it possible for commodity futures and
people who knew exactly which posi- options to trade around the clock. This
tions a particular client had on intraday
options to trade around means traders and brokers must sleep
was the client and his individual broker. the clock. This means with one eye open.
This was true until the end of the day traders and brokers
when all trades placed on the exchange must sleep with one Options spreads don’t translate to
floor and through brokerage platforms eye open. the “screens”
were reconciled. Thus, some brokers let There are a handful of options on futures
clients “get away with murder” when it trading platforms capable of accept-
came to daytrading margin or option annoying as technology burdened their ing options spread orders such as iron
purchases. quest for leveraging already leveraged condors, bull call spreads, and so on.
For example, a trader with $5,000 on options contracts. However, we’ve yet to see a platform
deposit in a trading account might place Long-term daytraders experienced the or exchange solution to execution that
several orders to buy options with the same disappointment when electronic matches the flexibility and ease of plac-
total amount spent equating to something trading began to dominate the landscape. ing such orders in an open outcry pit.
beyond $5,000. For as long as this trader Open outcry and direct-floor access often We thought nothing of constructing a
offset enough of those long options to enabled them to daytrade with far more complicated custom options spread and
bring his cash balance to positive, he leverage than futures trading platforms phoning it in to the trading pits. We could
wouldn’t have been hassled by risk allow with electronic trading. Also, it always find a market maker to give us a
managers. I’m not suggesting this was can be frustrating to have a platform fair quote for execution. Traders today
right, or even wise. I am just saying this reject an order because the account is
happened somewhat frequently. short $1 in regard to required margin. Continued on page 25
September 2017 • Technical Analysis of Stocks & Commodities • 13
 They Come In Spurts

Profiting From
Monthly Trading Cycles
Price movement in stocks comes in waves, and within waves economic, electromagnetic, music, social, just about anything.
are more cyclical waves. What’s the best way to analyze Any science discipline has its own cycles, and analyzing them
TRADER: TZIDO SUN/MOON: SOMCHAL SOM/WEREWOLF:
BOB ORSILLO/SHUTTERSTOCK/COLLAGE NIKKI MORR

them? Here’s a look at using a scientific approach to mea- can help to understand how things work.
sure cycles. In this article I will focus on stock price cycles using a

T
scientific approach. I will start with some observations, then
by Domenico D’Errico come up with some possible theoretical explanations, then
perform some experiments to validate them.
he concept of a repetitive sequence of events in a
process that plays out over time is common in nature Price observation
and can affect any aspect of human life. You find it in I’ll start by observing price behavior. I compared the close
agricultural cycles, astronomical, business, climate, on the first day of the month versus other days’ closes for the
14 • September 2017 • Technical Analysis of Stocks & Commodities
 cycles SPY — Price by Day of Month (Calendar Dates)
100.6

100.4

100.2

last 20 years of the SPY ETF. In Figure 1 you see that in the 100.0

calendar dates chart and also in the trading dates chart, there 99.8

are two main up movements—one in the middle of the month 99.6

and one at the end of the month. 99.4

Why does price move in two waves in a month? If you
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

understand the reasons behind such behavior, it could help SPY — Price by Day of Month (Trading Dates)
you gain confidence and trust in such an approach before 100.8

trading it. 100.6

100.4

Coming up with a hypothesis 100.2

Starting with this observation about monthly price cycles,

100.0

I then looked for possible reasons behind it. If you search

99.8

microsoft excel
99.6
on the Internet for “trading cycles,” you’re likely to see the 99.4
concept of moon trading come up. Lots of material has been 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

written on the possible correlation between lunar phases and 1st Day of Month = 100

stock prices. The first time I read some of this material I was FIGURE 1: PRICE MOVEMENT OBSERVATIONS. Notice how there are two
pretty amused. I started to imagine Wall Street managers main up movements—one in the middle of the month and another at the end of
the month.
waiting for the new moon before giving their trading desk
guidelines, and big pension fund managers taking their ties SPY — Average Daily Volumes Traded ($)
off and howling in the moonlight. But I didn’t find any ratio- 16000

nale in the moon hypothesis to explain the observed monthly 15500

price behavior, although those who swear by lunar cycles 15000
would beg to differ. 14500
So then, why do prices move up twice during the month?
Let’s go back to Wall Street pension fund managers and put
14000

ourselves in their shoes. Once or twice a month, depending

13500

on companies’ payroll procedures, a small percentage of any 13000

worker’s salary gets wired to the pension fund’s banking ac- 12500

count. On a national level, this is a huge amount of money. So 12000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31
if you were a pension fund manager, you would receive a large
FIGURE 2: WHAT DOES VOLUME SAY? Volume confirms the same two waves
cash influx to invest on a regular monthly schedule. in one month.
Once you received that cash, you would have to make an
investment decision. Should it go into stocks or bonds? Pension
funds are not allowed to open short positions and, generally, rebalance their portfolios once or twice a month, it is safe to
their clients don’t like to have their savings invested in other assume they have to invest a portion of this money, generally
assets like currencies or commodities, which remain a small 20% to 80%, in the stock market for the rebalancing.
part of the main portfolios. Let’s crunch some numbers to see whether we could profit
So twice a month, a large amount of money is ready to be from such a cycle. I first prepared a simple strategy based on
invested in the stock markets. You also have to think that it the following rules:
is difficult for pension fund managers to stay in cash, because
their clients pay them commissions to invest the assets. Once Long side
the cash influx is received, they would have a few days to If it’s the first (second, third, etc.) day of the month, buy at the
rebalance their portfolios. market close and hold the position from one to eight days.
Of course, this is just conjecture. I have not had the oppor-
tunity to mingle with or play golf with Wall Street pension
fund managers to know this as fact.
But if my theory is correct, there should be a volume in-
crease around the middle of the month and again at the end If you combine what you see
of the month since big pension funds cannot avoid leaving in charts with real-world
their footprints. To test this theory, I plotted the daily volume observations, you may be
for each day of the month for the last 20 years of the SPY
ETF. The chart in Figure 2 shows the same two waves in one
able to come up with a
month. That’s enough to pique my interest. trading method that gives
you an edge.
Here’re some experiments
Based on the theory that pension fund managers need to
September 2017 • Technical Analysis of Stocks & Commodities • 15
 FIGURE 3: TIME PERIOD AND HOLDING DAYS FOR LONG ENTRIES. There are FIGURE 4: TIME PERIOD AND HOLDING DAYS FOR SHORT ENTRIES. The first
two main clusters. The first is from the 7th to the 12th of the month with holding cluster is from the 2nd to 7th of the month with a holding period from two to six
periods from four to eight days; the second is from the 20th to the 28th of the month days. The second cluster is from 15th to the 23rd with holding periods from one to
with holding periods ranging from five to eight days. In both clusters, the hit rate% five days. Hit rate % average in both clusters is around 50%.
average is above 60%.

Short side realized. I’ll use the concept of the monthly cycle to filter the
If it’s the first (second, third, etc.) day of the month, sell short following three basic entry techniques applied to the last 20
at the market close and hold the position from one to eight years of SPY daily data (Figure 5):
days.
1. Buy when the relative strength index (RSI) (5)
In Figure 3 you find the hit rate percentage for all combinations goes below 30
of any day’s long entry and different number of days held. I 2. Buy when price crosses over the lower Bollinger
identified two main clusters. The first is from the 7th to the 12th Band (10,2)
of the month with holding periods from four to eight days; the
3. Buy when the close breaks the previous five-day
second is from the 20th to the 28th of the month with holding
top.
periods ranging from five to eight days. In both clusters, the
average hit rate is above 60%. In each case, hold the position for eight days.
In Figure 4 you find the hit rate percentage for all com- Note that the RSI tends to be the more aggressive approach
binations of any day’s short entry and different number of since it buys when price is going down, whereas the Bollinger
days held. I identified a first cluster from the 2nd to the 7th Band strategy waits for a strength signal before generating
of the month with a holding
period from two to six days. RSI (5) < 30 Bollinger Band (10,2) Cross Over 5 Days High Break
There’s a second cluster from
the 15th to the 23rd with hold- 0
Sell
0
Sell
ing periods from one to five
days. The average hit rate in
both of these two clusters is 0
around 50%. Sell

Buy #2

A trading plan
43 Buy #4
43

The cluster analysis confirms

the hypothesis, but how can
you use such information Buy #3

in your trading plan? One

43

approach is to filter trades FIGURE 5: CREATE A TRADING PLAN. Here trades are filtered using the relative strength index, Bollinger Bands, and a
according to what we’ve just breakout strategy.

16 • September 2017 • Technical Analysis of Stocks & Commodities

 Total Trades Average Trade Hit Rate %
400 1.4% 80%
350 1.2% 70%
300 1.0% 60%
250 0.8% 50%
200 40%
No Filter 0.6% No Filter No Filter
150 30%
100 0.4% 20%
Cycle Filter Cycle Filter Cycle Filter
50 0.2% 10%
0 0.0% 0%
-0.2%
RSI (5) < 30 Bollinger 5 Days RSI (5) < 30 Bollinger 5 Days RSI (5) < 30 Bollinger 5 Days
Band (20,2) Break Out -0.4% Band (20,2) Break Out Band (20,2) Break Out
Cross Over Cross Over Cross Over

FIGURE 6: AND THE RESULTS ARE OUT. Relative strength index and Bollinger Band strategies show a gain, whereas the breakout strategy loses money. This could
be because of the mean-reverting nature of the SPY.

a buy signal. Meanwhile, the five-day breakout is a classic and software house ([Link]). D’Errico is
breakout approach. a TradeStation Open Platform Developer and a two-time
In Figure 6 you see the backtesting results. The RSI and winner of the TradeStation developer contest. He is avail-
Bollinger Band strategies show a gain, while the breakout ap- able for advisory and coaching through his website, www.
proach loses money. In previous articles I’ve applied breakout [Link].
strategies to indexes and ETFs. These instruments are an
average of many stocks, and it’s difficult to trade them using Further reading
a breakout approach since they tend to mean revert. D’Errico, Domenico [2017]. “Detecting Swings,” Technical
When I apply the cycle filter and limit the trade entries to Analysis of Stocks & Commodities, Volume 35: May.
between the 20th and the 28th of the month, the number of ‡TradeStation
trades reduces. The average trade percentage goes from 0.6% ‡See Editorial Resource Index
to 1.3% for the RSI strategy, from 0.4% to 0.6% in the Bol-
linger Band strategy, and from -0.2 to 0.1% in the breakout
approach. The hit rate percentage increases from 62% to 67%
in the RSI strategy, from 60% to 63% in Bollinger Bands, and Noisy indicators
from 52% to 57% in the breakout. These results confirm there
is room for profit using this trading plan.
delay your analysis

Find those price movements

Stock prices generally move in two waves within a one-month
period, with a first peak around the middle of the month and a
second one at the end. In my attempt to find a logical explana-
tion for this, I found that the most likely reason for such price Jurik algorithms
movement is that pension fund managers need to rebalance
their stock portfolios twice a month when new cash flows into
deliver low lag,
their trading accounts. Based on that logic, I crunched some low noise analysis
numbers and backtested three common trading strategies
filtered by this monthly cycle movement. Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, eSignal,
Applying technical analysis to financial markets based NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, Sierra Charts,
merely on chart analysis comes with its weaknesses. But if Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software

you combine what you see in charts with real-world obser-

vations, you may be able to come up with a trading strategy Jurik Tools on live charts, on the web !
that gives you an edge. To return to my earlier point, can you [Link]/jurik-online
remain confident in your strategy when the chips are down if
you don’t understand the reasons behind the movement that
you’re trying to exploit? It’s a tough question. Anyway, it’s Jurik Research
getting late and the moon is climbing high … my tie is still
on … and … it’s time to go!
2010 -- 2011 -- 2012 -- 2013
Domenico D’Errico is an independent research & develop- Add-In software

ment partner for investment management companies and

professional traders. He also runs his own research firm [Link] • 800-810-3646 • 719-686-0074

September 2017 • Technical Analysis of Stocks & Commodities • 17

 Step Back, Look At The Big Picture

Optimization—Getting It Right
Creating a trading system is hard work and we want our itself is not the wrong thing to do. Rather, it’s the way that
system to work well. Oftentimes, we get carried away by it’s done and the way the results are interpreted that could
trying to tweak it so it works the way we want it to. But that be incorrect. Incorrect implementation is a case of snatching
can lead to unrealistic results. Here’s one way to set realistic defeat from the jaws of victory. In this article, I will try to
expectations when optimizing trading systems. demonstrate how I think it should be done.

by Perry J. Kaufman Before you optimize

I’m going to assume you have a basically sound trading strat-

We
all know the worst about optimization—it leads egy. It could be trend-following, a short-term pattern (breakout
to overfitting, and overfitting means there is or divergence), a seasonal trade, a pairs trade, or any other
little chance a system will work. It’s not that the idea that has a successful history. Therefore, you can omit the
Art: TASHSATU VANGO/SHUTTERSTOCK

system rules are wrong. It’s that the parameters proving the concept step. We’ll also assume you’ve written a
are too finely tuned. They are so closely tied program for the strategy that can now be optimized. We’ll use
to the exact patterns of the historical data that TradeStation for testing here.
they won’t work on any data that’s different, which is the most With a strategy to backtest, a trading platform or trading
recent data. My experience with an overfitted system is that software to help you do the number crunching, and a desire to
most trades end up as losses. test-drive your system as well as to establish the best parameters,
Does that mean that optimization is wrong? Optimization I’ll look at some preliminary considerations of optimization.
18 • September 2017 • Technical Analysis of Stocks & Commodities
 Legal Notice
trading systems

If You Owned a U.S. Dollar LIBOR-Based

Use as much data as possible
Instrument Between August 2007 and May 2010
I don’t believe any data becomes obsolete. You May Be Eligible for a Payment from
More data means more patterns, more bull a $120 Million Settlement
and bear markets, and more price shocks.
More important, it means the test will have There is a Settlement with Barclays that What does the Settlement provide?
more trades, which is the most useful part. impacts individuals and institutions that The Settlement will create a $120 million
If you don’t have enough data, you’ll need entered into over-the-counter financial Settlement Fund that will be used to pay
derivative and non-derivative instruments
to include other similar (or not-so-similar) directly with Barclays or a Non-Settling
eligible Class Members who submit valid
claims. Additionally, Barclays will cooperate
markets, in order to get more patterns. But Defendant that received payments tied to with the Plaintiffs in their ongoing litigation
for our purposes, we’ll use futures markets U.S. Dollar LIBOR. Barclays and the Non- against the Non-Settling Defendants.
that go back quite far. Settling Defendants are U.S. Dollar LIBOR
Panel Banks (see list of Defendants on How can I get a payment?
Settlement website). The instruments include You must submit a Proof of Claim to get a
Setting aside out-of-sample data certain interest rate swaps, forward rate payment. You can submit a Proof of Claim
Consider whether you want to hold some agreements, asset swaps, collateralized debt online or by mail. The deadline to submit a
obligations, credit default swaps, inflation Proof of Claim is December 21, 2017. You
data aside for final confirmation. I used to swaps, total return swaps, options, and are entitled to receive a payment if you have
do that and then decided that I would rather floating rate notes. a qualifying transaction with Barclays or a
handle it another way, which I’ll discuss later Non-Settling Defendant. At this time, it is
on in this article. If you want to separate The litigation claims that the banks unknown how much each Class Member who
submits a valid claim will receive.
manipulated the U.S. Dollar LIBOR rate
the data, don’t reserve the most recent data during the financial crisis, artificially lowering
because it’s important that the system works the rate for their own profit, which resulted in What are my rights?
when you use it. purchasers receiving less interest payments for Even if you do nothing, you will lose your
their U.S. Dollar LIBOR-based instruments right to sue Barclays for the alleged conduct
from the banks as they should have. Plaintiffs and will be bound by the Court’s decisions
Define the test range in advance assert antitrust, breach of contract, and unjust concerning the Settlement. This Settlement
If you are a macrotrend trader, then you’ll enrichment claims. Barclays denies all claims will not result in a release of your claims
against any Non-Settling Defendant, and the
want to use a test range of 40–120 days. of wrongdoing.
litigation against Non-Settling Defendants is
If you’re a short-term trader, you’ll want Am I included? ongoing. If you want to keep your right to sue
to go from 5–40 days. If you want a trend You are included in the Settlement if you Barclays, you must exclude yourself from the
crossover, then those two ranges could be (individual or entity): Settlement Class by October 9, 2017. If you
stay in the Settlement Class, you may object to
used. For profit-taking, you generally want • Directly purchased certain U.S. Dollar the Settlement by October 9, 2017.
the calculation to be variable, based on an LIBOR-based instruments;
average true range (ATR) of 20 days and a •
The Court will hold a hearing on October
From Barclays or any Non-Settling 23, 2017 to consider whether to approve
profit factor of between 1 and 4. Those are Defendant (or their subsidiaries or the Settlement and approve Class Counsel’s
my values, but you can choose your own. affiliates); request of attorneys’ fees of up to one-third of
Don’t make the macrotrend test range • In the United States; and the Settlement Fund, plus reimbursement of
costs and expenses. You or your own lawyer
from 5 to 250 in steps of 1. You want to • Owned the instruments at any time may appear and speak at the hearing at your
choose a range that you expect to work. between August 2007 and May 2010. own expense.
Running a test over all the values, then nar-
rowing the range by removing the tests that 1-888-568-7640 [Link]
don’t work is the first step toward overfitting.
If the system doesn’t work for the parameter
range that you think is right, something is wrong. You need the fast trend crosses above the slow one and short when the
to step back and figure out why. fast crosses below the slow.

First, a simple system Position sizing

I’ll start with a simple trend test using only one parameter—the I always try to get as close to volatility parity as possible when
moving average calculation period. I’ll try it for copper back- sizing positions. For futures, it’s an investment of $25,000
adjusted futures because that’s what I had on my screen. My divided by the 20-day ATR multiplied by the big point value.
expectation is that an 80-day average should be good because For stocks, it’s simply the investment of $10,000 divided by
that’s a typical macrotrend period. The data starts in 1985. the stock price. It’s not perfect but it is close enough for gov-
ernment work, as the old saying goes.
The rules
To decide the direction of the trend, I only look at the trendline. Multiple test periods
If it’s rising, I’m long and if it’s declining, I’m short. Using The results of using the suggested range from 40–120 in steps
the trendline avoids many false signals that occur if you’re of 5 can be seen for copper in Figure 1. I like testing over three
using a price penetration of the trendline. time periods, each half the length of the previous one. It shows
For a moving average crossover system, I’ll go long when whether the trends have held up over the years, within reason.
September 2017 • Technical Analysis of Stocks & Commodities • 19
 7000000
Copper Trend Optimizations

6000000

5000000
For copper, the overall picture is
4000000 excellent; however, a closer look
Total Profits

3000000 shows that while the two longest

periods are similar, the most
recent shows weakness above
2000000

1000000 70 days. The most consistent

0
range is 60 to 70 days. If I were
to pick the “optimal” parameter,
it would be 60 days.
Microsoft excel

-1000000
40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120
Trend Calculation Period However, that’s not what I
From 1985 From 2000 From 2008 would pick. I would pick 40 and
Figure 1: a simple trend test. Here you see a comparison of trend optimization over three time periods. For copper, 70 and 120, where the values
the overall results look good. If you take a closer look, you’ll see that the two longest periods are similar, but the most recent are greater than the previous
of the two shows weakness above 70 days. The most consistent range is 60 to 70 days. value by a factor of 1.75, or I
would pick 40, 60, and 90, each
a factor of 1.5 greater. To get a
3500000
Hogs Optimizations fair distribution, you need to
3000000
use a ratio. While the longest
2500000
periods are not the best, I don’t
know what will happen in the
next few years, so I’m looking
2000000

1500000
for an average return. If I knew
1000000
which would be best, it would be
500000 much easier. The one thing I am
0 sure about is that the best past
-500000 result had some degree of luck.
-1000000 Perhaps it was on the right side
-1500000 of a price shock. You don’t know
-2000000
if it had a lucky profit or missed
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 a big loss, but one of those two
LH 1997 LH 2007 LH 2012 are most likely. You can’t count
Figure 2: shorter trends. Because hog futures have a shorter life cycle (hogs can’t be stored), the short-term trends on it happening again.
are always profitable and the long-term trends are always losses. Hence, you are better off using 10, 20, and 40 days as By choosing multiple param-
your multi-timeframe parameters.
eters, spaced out by the same
percentage, you’ve selected an
average return, which is most
4000000
Cotton Optimizations similar to expectation in real
trading. The more parameters
you choose, each trading an
3000000
equal percentage of the invest-
ment, the closer you’ll come to
2000000 the average. Multiple trading
signals will each have a smaller
1000000 size and will scale in and out of
a trade—all a nice outcome.
0
Shorter trends
Not all markets look as robust
-1000000
as copper or eurodollars. Hogs
have a much shorter life cycle,
-2000000 5–6 months, and are not stor-
able, so it has a different pattern.
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150

An optimization using the same

CT 1997 CT 2007 CT 2012

FIGURE 3: DECAYING PERFORMANCE. From 2007 onward, cotton futures show deterioration especially in the short term. test period and trend calculation
And the past five years have been losses in all periods. periods as copper gave the re-
sults you see in Figure 2.
20 • September 2017 • Technical Analysis of Stocks & Commodities
 Filtering based on volatility
usually reduces returns by a
small amount but reduces risk
by much more, which is a
good tradeoff.

In their own way, the hog results are consistent. The short-term
trends are always profitable and the long-term trends are always
losses. To take advantage of a short life cycle (170–180 days),
we should expect a 20-day moving average to be better than a
120-day average. A multiple-parameter selection for hogs would
be 10, 20, and 40 days, each differing by a factor of 2.0.

Decaying performance
Then there is the issue of whether performance had decayed
to the point where you don’t want to trade that market. In
Figure 3, the cotton optimization points to longer calculation
periods, although the tests from 1997 were mostly profitable
in the shorter range and then in the midrange. The past 10
years (from 2007) show deterioration in all but the longest
periods, but especially in the short term. The past five years
have losses everywhere. I could explain this by fundamentals,
but then everything sounds smart after the fact. These results
would convince me not to trade cotton, although some may
say it’s only temporary. Well, so is life.

Robustness
A truly robust result has a large number of profitable tests.
For me, it doesn’t matter how profitable, as long as they are
profitable. For a trend system, you can expect as much as
70% success, as seen in the copper test. It’s the reason why
so many CTAs and fund managers use a macrotrend system
for a large part of their portfolio.
When you add rules to a basic system, the best outcome is
that the average of all tests improves, and most of the indi- FIGURE 4: HEATMAP OF TEST RESULTS FOR MOVING AVERAGE CROSSOVER
SYSTEM. The top chart shows results from 1985, the middle chart from 2000, and
vidual tests improve. If the improvement is limited to one area the bottom chart shows results from 2008. The green tones are the best results, the
of the test while the other results decline, then you’ve overfit red are the worst (though not necessarily negative). The far right column and bottom
the data. A new rule must be generalized. One example is to row show the averages, which makes it easier to see the shift in performance. The
exit a trade when the annualized price volatility exceeds 50%, best long-term trend shifts, but the short-term trend remains mostly the same.
and don’t enter a new trade until volatility drops below 50%
(you can use either historic or implied volatility, although I
prefer historic). Filtering based on volatility usually reduces 4 using the same three data periods. The green tones are the
returns by a small amount but reduces risk by much more, best results, the red are the worst (not necessarily negative).
which is a good tradeoff. The far-right column and bottom row show the averages, which
makes it easier to see the shift in performance.
A crossover system As we move from longer to shorter tests, the best long-term
The rules for the basic crossover system are to be long when the trend period gets shorter, while the short-term period is always
fast trend is above the slow trend and short when the fast trend best at 30 to 35 days. The long-term moved from 85 to 65 to
is below the slow trend. Using copper, which is understandably
a trending market, I show three heatmaps of results in Figure Continued on page 47
September 2017 • Technical Analysis of Stocks & Commodities • 21
 Swing Signals For the Day & Swing Trader

An Early Warning System

Part 2

Some trading signals are better than others. In this second Targeting the window of opportunity
part of a three-part series, we’ll describe a filter that’ll help The EWS produces two primary signals that flank this trading
identify optimal swing trading buy/sell points. window. The first signal serves as a warning or alert, indicat-
ing that your stock is approaching a potential turning point

L
by Mike Slattery (see Figure 1). The second signal serves as confirmation that
this turning point has occurred and that the stock or equity has
Traffic light: siridhata/shutterstock

ast month in part 1, I introduced my early warning crossed over or under the short-term moving filter that produces
system (EWS), which combines two indicators of the horizontal, center demarcation line for this indicator. These
different origins and defines a window of opportu- two flags define a window of opportunity. The distance between
nity for a trade. Here in part 2, I’ll introduce a swing these two indications define the size of this window, which can
trading system with the EWS as its foundation that be as small as one day and as large as several weeks.
produces relative reference points for a definitive Pattern recognition is utilized to identify when these two
and optimal entry/exit signal within that window. signals have been triggered within the array of columns pro-
22 • September 2017 • Technical Analysis of Stocks & Commodities
 trading strategies

duced by the EWS. Visually, these patterns can be all

but indistinguishable because of the small and subtle
changes that can trigger them. For this reason, I use
unique flags in the form of distinctive dots to visually
communicate to the trader when these patterns have
developed. A legend of these dots is provided at the
bottom of Figure 1.

The Goldilocks paradigm

The problem with the two EWS indication dots is by
design. The first dot often occurs significantly before
a trading opportunity and the second dot often occurs
considerably after the most profitable entry or exit
opportunity has passed. The Swing•Genie indicator
described in this article aims to fill this window of

[Link]
opportunity, generating a “Goldilocks” dot that is just
right. Swing•Genie displays all three indicator dots,
providing the trader with a minimum of three signals
or flags that indicate to the trader:
1. A trading opportunity is on the horizon FIGURE 1: EARLY WARNING SYSTEM. The dots were generated by the Swing•Genie early
warning system and have been duplicated on the candlestick chart at the top to show the
2. An optimal entry/exit opportunity has relationship between the indicator and the resulting entry & exit signal positions.
occurred, and
rocket on its intended trajectory. If you have ever watched a
3. A buy/sell decision is confirmed as the trend
rocket take off, the control generated by the combination of
continues, and your last chance for a profit-
the COG calculation and vector-directed thrust produced by
able entry/exit opportunity is upon you.
the rocket’s engines generates a path that often produces a
Each one of these three indicators is designed to incrementally perfect parabolic swing. (See the left side of Figure 3.) The
and progressively increase the trader’s confidence that the analogy here is that the buying and selling over time provides
decisions he has made are correct by way of the appearance the equity’s fuel, driving its vector-directed path, and the COG
of the next indication dot. The appearance of each additional provides you with an excellent indication of exactly where
incremental signal validates the prior dot. in this parabolic path your equity currently resides. Where
In the final article in this series I will provide you with a COG really excels, though, is determining and indicating
structurally similar indicator utilizing volume as a final ad- where within this parabolic path tipping or turning points
ditional validation/confirmation of your trading decisions. have occurred (Figure 2).
This volume price projection indicator is shown at the
bottom of Figure 1.

Combining center of gravity and

Arnaud Legoux moving averages
Just as with the EWS indicator dots, the Swing•Genie
dot is also produced by combining several indicators.
And again, just as one indicator used in the EWS was
from the work of John Ehlers, for the Swing•Genie dot,
the first three indicators in the combination are from
Ehlers’ work.
The first is the center of gravity (COG) (Figure 2, gold
line) and it produces a moving filter indicator that heavily
weights the most extreme and most current values in
the stream of data within the window of the indicator.
The COG is an actual rocket science calculation that
is utilized to determine how the center of gravity of a
rocket is changing as its fuel burns off. This is a critical Figure 2: Center of gravity (COG). The COG indicator is shown for an eight-day
point of information because the vectoring of the thrust period on a daily chart of American Express (AXP). The COG calculation heavily weights
the most extreme and most current values in the data within the window of the indicator.
must constantly change, incorporating and adjusting The COG is useful for indicating where within a parabolic path a tipping or turning point
to this vital point of information in order to keep the has occurred.

September 2017 • Technical Analysis of Stocks & Commodities • 23

 The output of the results from the COG passband filter were
then utilized as the input into the ALMA filter. ALMA set-
The goal of the filter is to isolate tings were as follows:
optimal swing/daytrading buy/sell • window size (4)
targets, which reside between • offset float (0.67)
the early warning signals and the • sigma float (1.1).
crossover (last opportunity) signal.
The result of driving two lengths of COG filters with two
different inputs through a passband filter and finally smooth-
ing that reactive output by using an ALMA filter provides the
trader with excellent responsiveness within a smooth output
Ehlers’ passband is again utilized here by taking a longer signal with few artifacts or whipsaws, which, in my experi-
COG period of 10 days, utilizing the candle’s body size as ence, produce highly reliable trading signals that accurately
its input and then subtracting a short period of six days us- indicate optimal entry and exit points.
ing only the close of the day. The result is a tight tracing of The ultimate advantage of the ALMA component of this
the stock’s price with an emphasis on the extreme values, filter is it gives the trader the ability to adjust the data window,
that is, the maximum apex and the minimum vertex of each allowing the primary entry/exit signals to dial down more
parabolic swing. exactly to the optimal spot between the early warning indica-
Finally, the Arnaud Legoux moving average (ALMA) is tor dot and the crossunder/crossover dot. Because this system
utilized as a smoothing filter to slightly shift the weighting was initially designed for swing traders, whose timeframe is
from the COG passband filter in a selective and adjustable normally a few days to a few weeks, the lookback periods are
manner to more current bars. This is desirable because COG short. ALMA improves the system’s ability to dial in these
dramatically emphasizes the most current candle or bar as short timeframe filters with as few whipsaw trade indications
well as large candles and strong deviations from within the as possible. These same attributes also enable daytraders to
moving average. alter trading timeframes to effectively utilize this indicator.
Arnaud Legoux and Dimitrios Kouzis Loukas developed
ALMA. It’s a Gaussian distribution–shifted filter with an offset And still more to come
that is not centered on the data’s window, but instead slightly The goal of the Swing•Genie filter is to isolate optimal swing/
shifted to the more (not the most) current data. The ALMA daytrading buy/sell targets, which reside between the early
performs better in this situation because it takes into account warning signals and the crossover (last opportunity) signal. As
that the closer you get to the most current data, the higher the you can see in the chart of American Express (AXP) in Figure
uncertainty becomes. In this case, it’s true because the most 1, intuitive and profitable trading signals are generated.
recent candle or bar is the one most heavily weighted by the The third and final article in this series on the volume price
COG calculation and produces the most uncertainty about future projection (VPP) will offer another confirmational indicator
direction. Of course, we are also at a demarcation point between that helps to validate the signals provided by the Swing•Genie
what is known and what is unknown. This offset is adjustable so
the trader can balance between smoothness and responsiveness.
The data window size is also adjustable, allowing the amount
of data included within the filter to be dialed in.
The third parameter is sigma, which determines the filter’s
shape and is also adjustable, enabling the trader to widen or
shorten the filter’s focus. Another unique attribute of the ALMA
filter is the removal of small price fluctuations, enhancing the
trend by applying a moving filter twice—once from left to right,
and once from right to left. This process (called zero-phase
digital filtering) reduces noise in the signal, further reducing
the phase shift (price lag) commonly associated with moving
averages.
For anyone attempting to recreate this hybrid moving
filter, the settings that were used to generate the chart in
Figure 1 are:
Figure 3: ROCKET TRAJECTORY. This is an image from the Falcon 9 and SES-8
• center of gravity (10) utilizing open + close / 2 as launch from SpaceX’s launch pad at Cape Canaveral. If you have ever watched a
the input rocket take off, the control generated by the combination of the COG calculation
and vector-directed thrust produced by the rocket’s engines generates a path that
• center of gravity (6) utilizing only the close. often produces a perfect parabolic swing.

24 • September 2017 • Technical Analysis of Stocks & Commodities

 Author — Connie Brown, CMT, MFTA
early warning system. The combination
of this suite of indicators enables the

ht
technical swing/daytrader to more con-

tp
fidently and profitably time and execute Mastering Elliott Wave

s:/
entry and exit opportunities.

/a
er
oi
Michael Slattery is CEO of StockDot­
Fibonacci Analysis

nv
[Link], a technical analysis (TA)

es
charting platform and educational

t.c
website that aims to shorten the learn­ Technical Analysis for the
ing curve for new and novice traders.

om
He invests in equities based on techni­ Trading Professional

/O
cal, fundamental, human, social, and Live,

nl
Internet sciences. He can be reached

in
at StockDotGenie@[Link].

eC
Interactive,
furTher reading

las
Ehlers, John F. [2001]. Rocket Science

se
For Traders: Digital Signal Process­ Real-Time Markets,

s .h
ing Applications, Wiley.

tm
[2013]. Cycle Analytics For
Traders: Advanced Technical Trad­ Starting @ $315 (2 hrs)
ing Concepts, Wiley.
[2016]. “Super Passband Filter,”
Technical Analysis of StockS &
LIVE ONLINE CLASSROOM
commoditieS, Volume 34: July.
[2014]. “Predictive And Suc- Technical Analysis of StockS & commoditieS, Volume
cessful Indicators,” Technical Analysis of StockS & 35: August.
commoditieS, Volume 32: January. ‡[Link]
Slattery, Michael [2017]. “An Early Warning System, Part 1” ‡See Editorial Resource Index

FUTURES FOR YOU

GARNER of the trade and margins it as a spread the stop-loss orders accumulating? This
Continued from page 13 … and the trader saved himself several type of inside information was extremely
minutes in order entry. helpful in judging market sentiment and
are free to create custom options spreads speculating on future price changes.
in some trading platforms, but getting a Order flow, chatter, and sentiment When the pits died, so did this source of
market maker to pay attention to it and The greatest aspect of the open outcry information. Big players now route their
be willing to take the other side of it is trading pits roaring on the floors of the orders through online trading platforms
challenging. Further, it can take several CME, CBOT, and NYMEX was the via what are known as iceberg orders.
minutes to create the spread in the plat- constant chatter and visible order flow. This means not only is their buying
form. It is an extremely time-consuming Although I was never stationed on the and selling activity anonymous, but the
and often confusing process. trading floor, I had access to those who ultimate quantity of the orders of the
We generally recommend that clients were via telephone and instant message. market-moving traders is disguised. In
simply leg into options spreads in liquid This type of admittance was helpful in short, now that trading activity has moved
markets. We’ve found this to be simpler that those with eyes on the floor had to the screens, speculators, floor traders,
and comes with more efficient fill quality. the ability to convey the feeling of the and brokers have been forced to find an
For example, if a trader wanted to buy market. Were local pit traders sweating edge somewhere other than the pit order
a vertical call spread he might simply or getting excited? What were the big flow and floor chatter.
enter an order to buy an emini S&P banks’ desks doing (for example, was the
2400 call and then another order to sell Goldman Sachs desk going long or short
a 2450 call. The exchange nets each leg and how aggressively)? And where were
September 2017 • Technical Analysis of StockS & commoditieS • 25
 Where’s The Crowd?

Focal Points
Financial survival and thriving in trading and investing could Making money in the markets
have something to do with knowing where to look and what You could extract money from the markets by using a myriad
to look for. This article explains why and how. of systems against an even wider range of philosophies, more

S
generally referred to as “beliefs” about the market. There
PEOPLE: HOBBIT/CLOCKS: SUPER TROOPER/SHUTTERSTOCK/

by Dirk Vandycke are many books on trading and investing that try to help
you find your edge based on your beliefs about the markets.
urvival—it’s one of life’s necessities. Think But for this approach to succeed, you need beliefs that are
of being stranded on an island. How do you true and an edge that is real. And even then, you could still
start a fire? You could do it by concentrating lose money. Remember this aphorism: The market can stay
COLLAGE: CHRISTINE MORRISON

sunlight into binocular lenses or a piece of ice irrational far longer than we can keep coughing up money to
or by applying friction. Likewise, financial fight it. But what if we focused our attention on what other
survival and thriving in trading and investing people were thinking?
may depend on being able to spot focal points In reality, we do not have that many certainties to go on,
or places of friction. so we cling to the ones we have. We might hold beliefs and
26 • September 2017 • Technical Analysis of Stocks & Commodities
 Trading Techniques

invent systems or methods based on them, but in the end the

result will depend on what others will do after our order gets Fundamental Financial Technical
filled. It’s simply the future actions of other people that will Information Market Information
determine our success (or lack of it).

System dynamics
Take a look at Figure 1. It depicts a system dynamics view of FIGURE 1: Systems view of a financial market. Financial (as well as
what might constitute a financial market. The input is funda- most other) markets can be viewed as dynamic systems generating output from
mental information such as corporate and macro economic a wide spectrum of inputs. Part of the output is fed back into the system, actually
data and the output is generated in the form of financial changing the system’s behavior.

transactions. At both ends are factual numbers as well as

people’s views on them. importance of such a signal immensely. The focal point could
The input consists of raw data such as quarterly company be initiating a change in behavior that is significant—it’s the
and government reports. Assume, for the sake of simplicity, financial market’s version of a fire.
the data are based on facts, that is, they are true. However, In reality, you wouldn’t find too many such focal points. But
these facts are summarized into and interpreted through when the example is broadened to encompass all securities
viewpoints—either personal views or opinions made up for and to a lot of commonly used rules on a lot of indicators,
us by analysts in terms of models or reports. things might get interesting.
The output is represented by financial transactions. These This is basically what multi-timeframe systems embody.
can be hard facts in liquid and regulated markets. These The big difference here is the viewpoint. We are no longer
transactions, in turn, get interpreted according to beliefs. interested in what we are looking for but rather, what all
Popular tools for interpreting these transactions include charts, people are looking for.
indicators, and statistical summaries.
Fundamental analysts measure the system at the input while Implementation
technical analysts measure it at its output. Thus, both are basi- A computer can filter out the same signals in different time-
cally two parts of the same spectrum, with neither knowing frames. Different signals and/or different timeframes may
exactly what the future holds. The red arrow points to the fact get different weights. All weighted signals then get summed
that the output (what prices do) influences people’s behavior, into one collective total and that total could be normalized if
resulting again in (more) transactions. The output, as such, is needed. Signals can be fundamental as well as technical. The
fed back into the system. This embodies the so-called self- weights can even be optimized using back- and/or forward-
fulfilling prophecy. If enough people act based on the same testing, giving successful collective signals higher weights.
or similar interpretations of the facts, the causality between Be mindful of curve fitting when it comes to optimization.
that interpretation and market action becomes true. Using neural networks, the back-propagation algorithm can
The feedback loop also explains why technical analysis, in even distribute the weight adjustment to the comprising
contrast to fundamental analysis, captures (measures) people’s subsignals and their weights.
views and emotions and consequently the future collective In my experience, it’s not necessary to make things too
behavior stemming from it. complicated. You don’t need hundreds of rules over tens of
If we want to know what people are doing or are likely to indicators here. A few good signals and a few timeframes
do, we should look at the numbers as well as all their inter- will do.
pretations. The most important fundamental interpretations It’s important to understand that we leave the notion that
are analyst reports, while price charts evidently take that role one signal or set of signals takes all and either fire or not.
on the technical side. This type of thinking leads to fuzzy theory where you can,
for instance, get 65% of a signal. This can only be done on
Focal points
What’s all this got to do with focal points? To explain the
concept of a focal point, I’ll focus on just one rule. Suppose
there’s some widespread rule stating that you should buy a
certain security whenever indicator XYZ gets above 0.7. In If enough people act based
reality, having only one rule won’t cut it. But it suffices for this on the same or similar
thought experiment. So with that out of the way, whenever we interpretations of the facts,
look for such a signal, the question comes to mind: In which
timeframe should the trader look? The signal could pop up on
the causality between that
a daily, monthly, or even an intraday level. Suppose you can interpretation and market
look at all these timeframes at once and hypothetically find a action becomes true.
moment where the same signal occurs in all timeframes. This
is what we would call a focal point and it would augment the
September 2017 • Technical Analysis of Stocks & Commodities • 27
 Widen your horizon
The idea is not to look at one timeframe,
just as you wouldn’t look at only one in-
dicator. Try to look at other timeframes
and look at what other people (the market)
are looking for. A 13-week exponential
moving average might be useless to you,
but it can pay handsomely to know when
it’s firing a signal that a lot of people are
looking at. The way a security reacts to
different signals in different timeframes
can form the basis of the weights we put
on them. In the end, all those “weighted”
signals over different indicators and time-
frames crystallize into super indicators
telling how a market “fire” is starting at
[Link]

a certain focal point.

Dirk Vandycke has been actively and

FIGURE 2: VWAP Analysis. On this chart of Tesla Inc. (TSLA), volume-weighted average price lines are
independently studying the markets since
anchored to important candles (lows and highs). They tend to help identify where important turning points
might culminate. 1994 with a focus on technical analysis,
market dynamics, and behavioral finance.
He writes articles on a regular basis and
an algorithmic level after gathering multiple signals into develops software partly available at his co-owned website,
one “super” or “meta” signal. The idea of grading equities [Link]. With master’s degrees in both electron-
has been used for as long as stock markets have existed. It ics engineering and computer science, he teaches software
can be done by using different timeframes as well as differ- development and statistics at www. [Link], a Belgian
ent indicators or chart properties. You can find this rating university. He’s also an avid reader of anything he can get
on various software products. The point is to stalk the ones his hands on. He may be reached at dirk@[Link].
with a good technical rating until their setup quality turns
a green light. Further reading
Reyna, George [2001]. “Volume-Weighted Average Price,”
Examples Technical Analysis of Stocks & Commodities, Volume
One interesting experiment I’ve done in- 19: May.
volves the use of volume-weighted average Tanksley, Michael [2000]. “Volume-Weighted Average Pric-
price (VWAP) lines and anchored VWAP ing,” Technical Analysis of Stocks & Commodities,
lines. Given all transactions with their price Volume 18: December.
and volume, you could calculate an average Vandycke, Dirk [2017]. “Trendline Algorithm,” Technical
price weighted by volume. This can be done Analysis of Stocks & Commodities, Volume 35: July.
over a sliding window of fixed length, but Vandycke, Dirk [2016]. “Trading Expectancy,” Technical Anal-
it gets interesting if the starting point of ysis of Stocks & Commodities, Volume 34: March.
the calculation window is pinned to important points, dates, Vandycke, Dirk [2015]. “The Laws Of Cyclicality,” Techni-
or events such as important highs or lows (Figure 2). cal Analysis of Stocks & Commodities, Volume 33:
Another option is to pin it to the point back in time where October.
the free float in total accumulated volume would be. Thus, Vandycke, Dirk [2014]. “Flatliners Breaking Out,” Techni-
if the free float of XYZ is 1M shares, you count back the cal Analysis of Stocks & Commodities, Volume 32:
volume to the left up to the point where you reach a total ac- February.
cumulated volume equal to the free float. Anchored VWAP ‡[Link]
lines are particularly interesting because they represent the ‡See Editorial Resource Index
average buy/sell line or the dividing line of profit and loss †See Traders’ Glossary for definition
for the average holder of the stock. Looking at VWAP lines
over different timeframes weighted by their importance (a
daily level would be more important than, say, a one-minute
level) tend to give better fine-grained overall VWAP as well
as support & resistance levels.

28 • September 2017 • Technical Analysis of Stocks & Commodities

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 Man Of Mystery

Gann And Gann Analysis

There’s a lot of trading lore behind the life and trading career ous. I was only able to find a few facts and they all came with
of W.D. Gann. How much of it is true and how much has been questionable references. In any case, it seems that Gann was
exaggerated? Here’s a deeper look. born in Texas on a cotton ranch in 1878. He eventually ended
up in New York City and opened a brokerage office in 1908.
by Mark Putrino, CMT According to one source I read, he was apparently quite the

W
playboy and a big partier and gambler.
hat exactly is behind the legend of W.D. Gann? At that point, it seems that he developed a reputation for
We often think of him being held up as a leg- himself as a phenomenal trader. It is important to note that
endary trader and as having developed useful many of the stories that I read about Gann’s alleged success
trading techniques. But yet, in the almost two aren’t footnoted, and the few that are all refer to the same
Silhouette Art: sergign/shutterstock/collage: joan Barrett

decades I have spent as an institutional trader, I dubious publication. Furthermore, experienced traders know
can tell you that I never heard a professional trader or money that success ultimately comes from risk management and
manager ever once mention Gann analysis. proper psychology, a fact that Gann seems to have understood
I did come across the methodology while studying for the although his legions of followers do not always seem to.
Chartered Market Technician (CMT) designation, but that was In my opinion, there is an element of weirdness to the
a long time ago and I had since forgotten many things about claims that some of Gann’s proponents made. For example,
it. So I decided to embark on an in-depth study of Gann, and one popular book on Gann reads like a bad ad in a tabloid.
I was surprised by some of my findings and conclusions. I The author claims that over a period of 25 market days, Gann
will share some of what I learned here. had a success rate of 92.31% and turned $450 into $31,000.
If you believe that, you’re a sucker. Not surprisingly, there is
Who was Gann? no footnote for that claim.
Like many things surrounding Gann, even his life is mysteri- More “proof” of Gann’s alleged greatness comes from a sup-
30 • September 2017 • Technical Analysis of Stocks & Commodities
 CLASSIC TECHNIQUES

posed colleague of Gann who saw him

turn $130 into $12,000 in one month.
Of course, that “colleague” is name-
less. After some research, I located the
article this story came from. It wasn’t
from a newspaper but rather a magazine
called The Ticker And Investment Di-
gest and I don’t put too much credence
into it. After all, about twice a week I
get a tabloid multipage advertisement
in the mail that claims that the writ-
ers’ last prediction yielded something
astronomical like a 4,000% return
in a month or something similar and
that if I don’t subscribe immediately I
will miss the next “once-in-a-lifetime
monthly idea.” My guess is that the
article concerning Gann’s returns was
an advertisement like this one and not
real journalism.
His followers also claim that he al-
legedly predicted the stealth bomber
60 years before it happened, predicted
World War II, and predicted the exact
date of the Kaisers’ abdication. It’s
hard for me to believe that we should
take all this seriously. But to be fair, in
the 1930s, many people predicted stealth technology because angle. There are nine angles, with the 1x1 being the most
radar had just been invented and the feeling was that if man important:
can invent it, then he can certainly figure out a way to beat
it; also, many wise people thought that World War II was 1x8, 1x4, 1x3, 1x2, 1x1, 2x1, 3x1, 4x1, 8x1
inevitable when Hitler came to power.
But in my professional opinion, these other claims of Each of the angles is supposed to provide support and/or
Nostradamus-like abilities are ludicrous and there seems to resistance if applied properly on a chart (Figure 1).
be no substantiation of them. So there you have it. Gann’s Gann’s techniques assumed that equal time and price
life and trading career is the subject of much mystery and intervals be used on the chart so that a rise/run of 1x1 will
I’m sure we’ll never know many of the details surrounding always equal a 45-degree angle. The ideal is one price unit
it. And for those who push or profit
from his work, that is no doubt an
3x1
advantage. 8x1
1x1
4x1 2x1 1x2
Modern Gann
analysis applied
Gann practitioners claim Gann
thought that specific geometric
patterns and angles had unique 1x3
1x4
characteristics that could be used
to predict price action. Gann angles
are specified by two numbers and 1x8
separated by an “x.” For instance,
a 1x4 line rises one point for each Gann Angles
Dow Jones March ’09–August ’10
four time periods. Gann believed
the ideal balance between time and
FIGURE 1: GANN ANGLES. Gann believed that the ideal balance between time and price exists when prices rise or
price exists when prices rise or fall fall at a 45-degree angle relative to the time axis. This would be the “1x1” angle. There are nine angles, with the 1x1
at a 45-degree angle relative to the being the most important. Each of the angles is supposed to provide support and/or resistance if applied properly on
time axis. This would be the 1x1 a chart. But there is much room for interpretation in the description.

September 2017 • Technical Analysis of Stocks & Commodities • 31

 courses. In fact, in his original
books, there are many advertise-
ments for his work. One states that
Gann is “too busy to take time to
answer inquiries in regard to the
rules except from people who send
$1.00 to pay for their inquiry.”
Presently, I am not aware of any
successful money managers who
charge for snippets of advice but I
do know of many trading courses
that do.
Gann Grid
Dow Jones March ’09–August ’10
Don’t get me wrong…I am not
here to bash Gann as a person and
FIGURE 2: CHART SCALE. It isn’t practical to use a price unit of 1 on a high-price issue like the DJIA. This is one of
I did not come across any evidence
the fundamental flaws with this type of analysis. that he ever did anything wrong. He
seems to have run a successful busi-
for one measure of time. Obviously, that opens the door to a ness and I admire him for that. I am merely trying to expose
vast degree of interpretation. For example, just what exactly and explain some of the mystery that surrounds modern-day
is a price unit? Is it a point or a percentage? Gann analysis.
Of course, it isn’t practical to use a unit of 1 on a high-price
issue like the Dow Jones Industrial Average. This is one of My findings
the fundamental flaws with this type of analysis. Gann purists When I read Gann’s works I was surprised to find that he didn’t
apparently insist on proper chart scale (Figure 2). talk about all the esoteric stuff that I heard from others. Instead,
This is where it gets weird. According to the believers he presents many trading rules and gives trading advice that
and followers of Gann theory, it is also supposedly based on is driven by principles that are still valid today.
what Gann called “the law of vibration,” financial astrology, Instead of relying on a lot of dubious analysis, I went di-
important numbers, geometric patterns, and a whole slew of rectly to the source. For example, I read the New Stock Trend
other esoteric things that would take a whole book unto itself Detector, which was written by Gann and published in 1936. I
to explain. Soon things dive into the realm of parapsychol- was happily surprised to find out that it isn’t nearly as esoteric
ogy and astrology. Maybe this is why this particular brand of or as mysterious as modern Gann enthusiasts make it out to
analysis appeals to people, much in the way that legends of be. On the charts that are in the book, which were apparently
ancient aliens building the pyramids or of Bigfoot romping made by Gann himself, there are no Gann angles or Gann
around the forests of Canada do, but I can attest that in the fans. Gann offers many trading rules and insights and there
real world, I have never seen a successful trader or portfolio are some predictions that are not correct. Gann followers seem
manager use Gann’s work. to forget to mention these.
In the first chapter, Gann talks about how much he opposes
Controversy surrounding Gann analysis the New Deal (remember this was written in 1936 so it was a
Gann’s followers and advocates treat him with a reverence. But current topic of discussion at that time). It’s amazing how much
there are many obvious holes in the Gann success theories. First it sounds like the political debate that is occurring today.
of all, Gann analysis as advocated by modern practitioners can In the second chapter, he talks about the “foundation for
be easily disproved by something as simple as switching from successful trading,” which includes:
a standard to a logarithmic chart or changing the scale.
Second, if you carefully read some of the “analysis” that • independent thought
has been put out by Gann enthusiasts, it will soon be apparent • a definite plan
that much of it is contradictory. • knowledge
Third, what about common sense? We all know that if it • patience
seems too good to be true then it probably is. If Gann had • nerve and good health
the success that his proponents allege, then he would have • adequate capital.
amassed a fortune.
Fourth, if his forecasting methods were so accurate, then There’s nothing mysterious here. A good question for a Gann
why did he spend so much time in his books discussing risk theorist would be, if his predictions are so accurate, why would
management and trading rules? you need these rules?
In the next three chapters, Gann gives a detailed verbal
Was Gann personally successful? explanation and review of the market’s recent history. If you
The main focus of Gann’s career was writing and teaching read it closely, he is merely trying to explain how things such
32 • September 2017 • Technical Analysis of Stocks & Commodities
as double tops and triple bottoms form. For example, when
he writes about “selling at recent top,” he is explaining how Gann talks about many trading
a traditional double top pattern may form.
Chapter seven is “A practical trading method,”
rules and gives trading advice
which covers: that is driven by principles that
are still valid today.
• Amount of capital required
• Utilization of stop-loss orders
• How to detect buying and selling
points. For example, “Sell against
double and triple tops” • Time to stay out of the markets
• How to pyramid • The best way to trade
• What to do when commodities are going
All in all, most of this book made perfect sense to me and I against you
didn’t find anything that was too mystical or mysterious. • What to do when you have a series of
Next I read 45 Years In Wall Street, which was originally losses
published in 1949. Again, I was surprised to find nothing mys- • How to answer margin calls
terious or esoteric in it. The book consists of commonsense • What causes booms and wars
trading rules, detailed descriptions of how chart patterns are • Human nature never changes.
formed, and some predictions for the future.
The first few chapters include “rules for trading stocks” Next, Gann goes into a lengthy description of what he calls
and “twenty-four never-failing rules,” many of which make form reading. I suppose this discussion may seem somewhat
perfect sense. Then there are some lengthy detailed discus- mysterious if you don’t have a trading background, but if you
sions concerning how chart patterns form. It is apparent that do, it makes sense. For example, he writes things like “sell at
like many technical analysts, Gann is a believer in cycles and old tops or old bottoms” and “go with the main trend. Never
retracements. Then he talks about some great market operators buck it.”
of the past, claims he lent money to Jesse Livermore, talks At this point he goes into a bunch of timing rules, but in
about overtrading, and the use of stop-loss orders. Then he my opinion these aren’t predictions but rather additional rules
spends some time discussing his predictions for the future, to trade by. Yes, maybe they can be viewed as magical, but
which seem to include war with Russia and an economic remember that many trading systems have time stops as well
meltdown in the early 1950s. as price stops.
Next I read How To Make Profits Trading In Commodities, For example, when he states something like, “Regardless of
which was published in 1951. It opens with a simple summary how high wheat is selling, a decline of five cents below the old
of the advantages of trading commodities instead of stocks, top would indicate the trend had reversed and at the medium
and then Gann talks about various trading rules and principles time would not go higher.” Of course, maybe he did mean them
that are similar to the ones in his other books. He then gives as exact predictions but there are so many things like this that
a list of qualifications that are required for success in trading. I am sure more than a few turned out as predicted.
These include: Next there are literally hundreds of examples that Gann walks
you through where he points out how his rules or predictions
• stop-loss orders regarding price movement in conjunction with time have been
• independence accurate. Obviously, hindsight is 20/20 and it is possible that
• definite plan Gann cherry-picked these examples. And of course it’s also
• knowledge possible that the data is not correct … it isn’t footnoted and it
• patience would take hundreds of hours to verify or disprove it. Maybe
• nerve it’s just because I spent decades working in New York City,
• good health. but I just can’t believe everything that I’m told.
Finally, I read Truth Of The Stock Tape, which was Gann’s
After this, Gann goes through a whole bunch of topics rel- first book, written in 1923. It is basically a how-to guide for
evant to commodity trading and spends a short time giving beginners that covers many general trading rules. Once again
his advice and commentary on each topic: there is nothing here that is too esoteric or far out. He describes
many principles and dynamics that are still relevant to this day.
• How to read the grains or cotton tape As with his later books I mentioned earlier, Gann spends time
• How the tape fools you discussing different applications of trading rules and how it is
• False hope … eliminate fear and hope important to do things like maintain good physical health and
• Markets discount future events to be aware of your psychology. Out of his four major books,
• Human element is the greatest weakness I thought this was his best one and I would recommend it to
September 2017 • Technical Analysis of Stocks & Commodities • 33
 going on in the 1930s and what is happening now. Many of his
points are astute and surprisingly relevant 75 years later.
The books that were written He calls the New Deal the “raw deal” and says the policy
by Gann are filled with great is “creating a nation of loafers.” He talks of how the policies
that were being followed in Washington will ruin the country.
trading wisdom and verbal He points out that many of the laws that FDR passed were
explanations of how some found to be unconstitutional by the US Supreme Court. Here
classical patterns like double are some of the things he said:
and triple tops or bottoms are “The New Deal thrives on promises, promising everybody
something for nothing.”
formed. “What caused France to lose the war? It was unions and
Communism.”
“The right to union labor leaders is given by politicians who
have betrayed the rights of the people who elected them.”
those who are interested in learning more about trading. I
would also recommend it to those who think that Gann was Why are people obsessed
a visionary guru because they will soon realize that their with Gann?
perceptions of him are wrong. Essentially, I think the reason comes down
When I conducted research into Gann analysis it became to the work being already done and the
immediately clear that the modern practice and application of mystery that surrounds it. Most people like
it is full of strange and mystical things. Much of it is focused the idea of studying a chart or two and us-
around financial astrology and the supposed powers behind ing some magic so they know which basket to put all of their
different numbers. But when I read his actual writings, I eggs in. They’d rather do that than study the markets every
didn’t come across any of this. Some things may seem a little day … which is the true secret of success. And for whatever
mysterious when he writes about how chart patterns form reason, people enjoy a good mystery, sometimes to the point
because he spends time focusing on cycles and retracement of irrationality.
levels, but to those of us with a background in trading, his When I was researching Gann, I saw Gann trading classes
descriptions make perfect sense. It seems that in many cases, and programs that were offered for thousands of dollars. I
modern promoters of his systems and analysis have little spent about $70 to buy Gann’s four main books, and over the
understanding of his actual work. course of a weekend I realized the real Gann is nothing as
advertised. But for anyone who has an interest in trading and
Gann’s predictions history, they are good books and there are many great lessons
When reading Gann’s works I found some pretty bad predic- about trading in them. In a way, it is a shame that his actual
tions, although I must say that I admire how he had the guts work has been ignored and misunderstood.
to put precise calls into print. Here are just two of the most It goes without saying but I’ll say it anyway. If these Gann
notable, which, by the way, I didn’t see on any of the websites promoters had the holy grail of trading, they would be trading
that promote his work. themselves. They wouldn’t sell the information to others who
In 1936 Gann said, “I am confident that the Dow Jones would all get into the same trades, thereby diminishing their
Industrial Average will never sell at 386 again.” At the time, potential profits. Always remember: Whether it’s trading or
the Dow Jones was trading between 150 and 180. For some any other aspect of life, if it sounds too good to be true then
reason, Gann proponents always seem to miss that one. The it probably is.
DJIA surpassed 386 in the fall of 1954. 386 was an important
number because it was the peak before the crash in 1929. My conclusions
In 1949 Gann predicted the country would face economic
calamity in the 1950s. “The Depression and the panic will • As practiced, I believe modern Gann theory has stretched
come before the New Deal goes out of office in 1953. Nothing into the ridiculous and I would recommend that you
can prevent it.” And, “1951 and 1952 indicate very depressing not waste your time learning or applying it. It is easily
years for business and a bear market for stocks.” Gann was disproved and full of contradictions.
wrong about this as well, and as it turned out, the 1950s could • It’s obvious that the legend of Gann has far surpassed the
be the most prosperous decade the county has ever had. From reality of the man. Most modern Gann analysis seems
the beginning of 1950 through the end of 1953 the DJIA was to be adaptations and expansions of his work that are
up about 40%. nothing like Gann originally proposed. I think there’s
a good chance that if Gann himself saw a modern chart
Gann’s outspoken political views with a “Gann angle” or “fan” on it, he would not even
Gann was an outspoken Republican who was disgusted with recognize it.
Franklin Roosevelt and the New Deal. Any student of history
would find it interesting to note the parallels between what was Continued on page 36
34 • September 2017 • Technical Analysis of Stocks & Commodities
Explore Your Options
Got a question about options? Tom Gentile started his trading career on the floor
of the American Stock Exchange in 1994. He has appeared on many financial
TV and radio shows, as well as hosting a weekly talk show himself, and has co-
authored many books on the markets. He can be found at [Link].
To submit a question for Tom Gentile, post it to our website at [Link]
[Link]. Answers will be posted there, and selected questions will
appear in a future issue of S&C.
Tom Gentile

The Scariest Two Months I am going to take a look at a long put contracts of each.
Of The Year idea and a put credit spread idea on the You buy to open a higher (likely, ITM
Are there any specific option strategies SPDR Dow Jones Industrial Average put) and then buy, on the same order
someone could use to protect himself or ETF (DIA). This ETF’s objective is to ticket, an option with a lower strike
herself during September and October, track the price and yield performance of price, which would likely be an out-of-
which are the two months of the year that the Dow Jones Industrial Average. the-money (OTM) put.
have been the scariest in the past? I’ll frame both option strategy ideas Your max risk is if the stock trades
There are times of the year when the with the hypothetical scenario that the or is above the higher strike option at
markets perform extremely well. This market experiences a 15% selloff. expiration, but it is limited to the cost
isn’t one of those times. This is the time of the trade only (as both options expire
of the year is when the more dramatic A long put trade worthless). Max profit is also limited
and severe crashes in the markets have This is when you buy to open a put option. and is realized when the stock trades
happened, and these months are stuck You profit on a put option when the stock below the sold option strike price. Let’s
with the reputation of being months to trades lower in price. A put buyer has the say you bought a $40 put for $3.50 and
be wary of. right to, but isn’t obligated to, sell a stock sold a $35 put for $1.00, your net debit
September historically is the month at a specific strike price on or before a would be $2.50.
when the markets have performed the specific date (expiration). If the stock drops under and is below
worst, and by “markets” I am talking $35 at expiration, the account can exer-
about the big three—the DJIA, Nasdaq, cise the right to put stock to the market at
and the S&P 500. The Stock Trader’s October has shown $40 (sell it for $40) and then the market
Almanac shows that since 1950, the to be one of the more could exercise and put you to stock at $35
month of September has seen an average volatile months in (make you buy it for $35). The amount
decline in the DJIA of 1.1%, the S&P to be made is $5.00 per contract or $500,
500 declines an average of 0.7%, and the that it has seen some which is the difference between the two
Nasdaq Composite, since it came about catastrophic drops. strike prices.
in 1971, fell an average of 1%. You then offset that money made by the
Over time, October’s returns are for cost of the trade to start, in this example,
the most part on par with other months, If you own a $40 put you bought for $2.50. Here’s a case where the option
but October has shown to be one of the $2.00 or $200 for one contract, and the trader made $2.50 and his cost was $2.50,
more volatile months in that it has seen stock drops to, say, $36 and is at that resulting in him making a double.
some catastrophic drops, such as the price at expiration, it is at least $4.00 in In Figure 1, you can see the max risk
stock market crashes of 1929 (known the money (ITM) so it has to have real right away as the cost of the Sep. 220 put
as “Black Thursday,” which occurred on value and be priced at $4.00, or worth is $6.00 per contract and you can offset
October 24) and 1987 (known as “Black $400. If you bought it at $2 and sold at that cost by selling the 210 put for $1.85
Monday,” which occurred on October $4, that would be a double. and the resulting cost (and cost is risk)
19); the “Asian Contagion” in 1997; the is $4.15 per contract.
2002 tech crash; and the crash in 2008 A bear put spread Max profit is realized with DIA trading
during the Great Recession. Therefore, This trade is one to consider when you under the strike price of 210 at expira-
October is also considered a month to expect a price drop in the underlying tion. Therefore, the buying of the stock
be careful or to contemplate using a security, in this case, we’re considering at 220 to sell it at 210 realizes 10-points
bearish approach. the DIA. The option trader is trading two or $10 per contract. $10 made versus the
The question isn’t so much as to why put options with different option strike cost of $4.15 results in profit of $5.85 or
but rather how can I prepare and even prices, yet they have the same expira- $585 per contract … a 140% return on
profit should the markets sell off? tion. It’s best to do the same number of investment.
September 2017 • Technical Analysis of Stocks & Commodities • 35
 Explore Your Options
The option strategy in Figure 2 in-
volves buying to open the September
$220 put. In this scenario, you are buy-
ing the option for $6.00 per contract

[Link]
and not selling another option strike to
offset the cost.
The thing about a long put is its profit
isn’t limited like the bear put spread.
The DIA can drop to $190 and the real
value or intrinsic value at expiration Figure 1: DIA Sep 220/210 Put Debit Spread. The max profit is realized with DIA trading under the strike
would be $30 and that is what the option price of $210 at expiration. Buying the stock at $220 to sell it at $210 realizes 10-points or $10 per contract. $10
made versus the cost of $4.15 results in a profit of $5.85 or $585 per contract—a 140% return on investment.
value should be at that time with DIA
at that price.
If you bought the option at $6 and can
now sell it at $30, that is an impressive
rate of return and good amount of cash
to haul in.
Keep in mind the difference in a long
option trade. In this case a long put trade
has more risk than a spread, in this case
a bear put spread.
Figure 2: DIA Sep 220 Long Put Trade. Here, you’re buying the September $220 put for $6.00 per
You must decide if you are ok with contract and not selling another option strike to offset the cost. The profit for a long put isn’t limited. If the DIA
going for more of a return with increased drops to $190, the intrinsic value would be $30. If you bought the option for $6 and sell it for $30, you’re making
risk or if you want to minimize your risk an impressive return. But keep in mind that the long put trade carries more risk than a bear put spread.
and subsequently your rate of return, but
with increased probability.

puTrino/gann anD gann anaLYSiS • There many analysts who aren’t successful traders and
Continued from page 34 Gann seems to have been one of them. The secret of
success in trading comes from emotional discipline, not
from astrology and magic numbers. While many people
can produce decent analysis regarding the markets, few
• When I look at Gann’s original charts in his original can trade successfully.
books I do not see any angles or fans drawn on them, • The legend of Gann is alive and well and probably will
and his actual books do not contain any of the mysticism
Gann Grid
be for some time.
that his modern-day proponents are so fond of. Dow Jones March ’09–August ’10
• The books that were written by Gann (and not someone Mark Putrino is a Chartered Market Technician since 2003
purporting to be a proponent of Gann technique) are filled and is currently a financial markets analyst/trading & com-
with great trading wisdom and verbal explanations of pliance consultant with Bulls Head Trading Analysis, LLC.
how some classical patterns like double and triple tops He has an MBA in finance from the NYU Stern School of
or bottoms are formed. Business and has more than 15 years of experience manag-
• Based on the available evidence, I think it is obvious ing institutional trading desks that specialize in small and
that Gann wasn’t successful as a trader. If he were, he micro-cap equities.
probably would not have had time to write all these
books. He made his living selling his trading methods. FURTHER READING
He also wrote novels. Gann, W.D. [1923]. Truth Of The Stock Tape.
• Gann was a relentless self-promoter and he advertised [1936]. New Stock Trend Detector.
in all of his books. He actually ran an ad in some of [1949]. 45 Years In Wall Street
his original books that states he will answer questions [1951]. How To Make Profits Trading In Commodities.
about his work for $1 per inquiry.
• Gann may have made some accurate predictions, but he
also made some that were wrong.

36 • September 2017 • Technical Analysis of Stocks & Commodities

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 INTERVIEW

They Go Up & They Come Down

An Insight Into Cycles With

Ed Easterling
Navigating the financial markets can be a science and an art. Ed Easterling,
founder and president of Crestmont Research, is able to combine the science
and art of market analysis and come up with some interesting perspectives
on the markets. He shares his insights and publishes provocative research on
the financial markets at his website, [Link]. He is the
author of Unexpected Returns: Understanding Secular Stock Market Cycles and
Probable Outcomes: Secular Stock Market Insights, contributing author to Just
One Thing: Twelve Of The World’s Best Investors Reveal The One Strategy
You Can’t Overlook, and coauthor of chapters about Crestmont’s research in
Bull’s Eye Investing by John Mauldin.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Ed
Easterling on July 13, 2017 to hear his perspective on secular markets, where
we are in the current cycle, and what to expect going forward.

Ed, can you tell us a little else. I tried to break the market into
bit about yourself and how its component parts, then looked at
you got interested in the what drove the market over time, and
financial markets? whether the market was overvalued
Certainly, and it goes as or undervalued. A lot of that analysis I can credibly tell you
far back as high school. started with what I had learned in col- with a high degree of
I was just fascinated, for lege. Yet the further I dug into it, the confidence whether the
whatever reason, with the stock market more I realized there could be some- next 10 or 20 years will be
and maintained an interest in it through thing beyond the conventional wisdom
college. Then after graduation, I had a associated with market randomness a secular bull market or a
brief stint in the commodities trading and efficient markets. That led to the secular bear market.
industry early in the 1980s. continued digging and digging.
After that, my career veered off into Through that research I began to
private equity, which took me away from realize a few things. First, I initially incidents. Doesn’t that cause conflicts
the market. This lasted for a couple of thought it was a phenomenon of some in opinions?
decades, and then I got back into the sort, and then ultimately determined it It certainly creates a diversity of views,
financial markets in 2000. With the was “principles-driven.” I also realized and we know diversification is good in
move from private equity into the hedge the market has distinct fundamental the financial market, right? So I suppose
fund industry, I wanted to understand drivers over the longer term, not over that’s a helpful thing. I don’t think that
and analyze what drove the market, and periods of a month or a year or two or they always conflict, and from my time in
whether at the time, in 2001, the market even five years. But when you get up to the commodity trading industry I gained
was overvalued or whether a brief cor- 10 years, and a decade or two is relevant a strong appreciation for the power or
rection had set us up for another bull for most investors’ horizons, that’s when ability of charts to reflect some underly-
leg. That led to a body of research that the principles begin to take hold, and ing dynamic that’s taking place. That is
is now Crestmont Research and the two the old adage about the market being an art and science unto itself.
books that I wrote and two other books a weighing machine versus a voting At the same time there is a conven-
that I contributed to. machine becomes true. tional wisdom about the stock market that
it is random over the long term, driven
Is that what made you become aware That’s interesting. There are so many by efficient markets, and that according
of cycles and if so, what insights did different ways of measuring cycles. to modern portfolio theory, you just need
you gain? You can use chart patterns, funda- to buy and hold for the long term.
It was more accidental than anything mental factors, or certain recurring The reality is that market returns are
38 • September 2017 • Technical Analysis of Stocks & Commodities
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 inflation rate. The inflation These days, the market is much choppier.
rate drives P/E as it moves It’s nondirectional. We have big runs
We’re very much still in the toward or away from price and then sharp declines. You just don’t
early phase of a secular stability. have the same protection underneath
bear market. The next When it’s low and stable, you that you had in the 80s and 90s,
valuations go up. When where breaks were buying opportuni-
decade or longer will be a we have higher inflation or ties. These days, just as we saw twice
repeat of the last 17 years. deflation, stock valuations so far in the past 17 years, breaks have
go down. That cycle of P/E been brutal. What I’m saying is that I
moving higher or lower, can credibly tell you with a high degree
which happens over periods of confidence whether the next 10 or 20
driven by three key dynamics, three key of five to 25 years, is what generates years will be a secular bull market or a
components. We need to make sure that above-average and below-average re- secular bear market.
ultimately, we bring back together the turns. So a secular bull market is a period And, spoiler alert: We’re very much
fundamental view with the technical of rising valuation, like we had in the still in the early phase of a secular bear
view. I do think it’s helpful sometimes to 1980s and 1990s and four cycles this market. The next decade or longer will
see when those get out of line. That often last century. Secular bear markets are be a repeat of the last 17 years. It has no
can show a future change in trend. periods where P/Es start out high and go chance of being a period like the 1980s
low, as we’ve seen five times in the past and 1990s were.
You’ve worked on cycles for a long century. So that’s really the fundamental
period of time. Can you tell us, briefly, driver. Now, within that context, there So, in the secular cycles, what clues
about what you look for when you mea- are shorter-term cycles called cyclical do you look for to determine when a
sure cycles and the three components stock market cycles. Those are the ones cycle is ending?
markets are driven by? that happen over months, quarters, or On the Crestmont Research website
Absolutely. Keep in mind I study even over a few years or longer. Those you’ll find a lot of colorful charts and
secular stock market cycles. “Secular” are driven much more by current trends, graphical presentations, which you’d
is a term that comes from the Latin psychology, momentum, and probably a also find in my books. There’s one good
term “secula,” which means long term series of other technical factors, supply chart that basically explains secular stock
or an era, an extended period. And so & demand, and otherwise. market cycles, and one thing it shows is
I focus on the drivers of stock market that secular cycles are driven by the trend
cycles that are principles-based over the Would emotions come into play in these in the price/earnings ratio. When P/E
longer term. cyclical stock market cycles? is rising—say, doubling or tripling over
There are three key components to Emotions, money flow, supply, de- an extended period—it gives us above-
stock market returns. They are earnings mand. But short-term cycles are not my average returns. We saw this in the 80s
growth, change in valuation, or price/ expertise. I look at myself as a market and 90s when P/E more than tripled. Dur-
earnings (P/E) ratio, and dividend yield. climatologist, and not a market weather ing periods when P/E is falling, we have
Essentially, the price/earnings ratio and forecaster. However, traders often ask, a secular bear market. The challenge in
earnings growth together give us capital “I trade from day to day, hour to hour, secular stock market analysis is picking
gains or losses, and then on top of that, month to month. Why does this secular that point of inflection when it changes
there’s dividend yield. Those are the only stock market cycle stuff matter?” When from one cycle to the next.
three components to stock market return. people ask that question, I respond, “If Admittedly, that’s not a moment in
As a matter of fact, I just finished a piece you knew we were in a period like we time, and you can’t necessarily predict
that was published with the most recent had in the 1980s and 90s, would your it in the moment. We could be going
website update called “Reconciliation trading style be different if you knew we through it right now. Keep in mind we’re
Principle.” The [Link] would be continuing a period like we’ve coming off of a peak in the year 2000
website is open access—there are no had the last 17 years? Would you trade when P/E was over 40. So even with P/E
subscriptions, no banner ads. It’s a pub- differently? Would you see the market near 30 today, we’re still in a downtrend
lic access research website. That article operate differently? Do you anticipate from where we were just 17 years ago. It’s
describes those three components and that the market might move in different just that we went so high 17 years ago. The
how they drive returns, why they drive ways if we’re in secular bull market reason I say we’re in the relatively early
returns, and how each one of those three conditions like we had in the 80s and stages of a secular bear, even though this
components has its own fundamental 90s or bear markets like we had in the has been going for 17 years, is that the
driver built from principles of finance 60s and 70s, or the last 17 years?” valuation level is so high, and what you
and economics. Inevitably people say, “Oh absolutely. can’t expect from here is a sustainable
The most significant thing that drives The way I traded in the 80s and 90s is doubling or tripling of the price/earnings
the secular stock market cycles is the very different than the way I trade today.” ratio over the next decade. Without that,
40 • September 2017 • Technical Analysis of Stocks & Commodities
you can’t get above-average or even Come visit one of the most popular trading
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tionary environment. So when people
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have if it doesn’t relate to inflation
and any other factors that may have
an impact on it?
I need to comment on that because Swing Trading Key Reversals
you hit the perfect insight. That is a
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valuation is high today, as though
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be high in a low-inflation environment. parlaying $10,775 into $18 million in 18 months!
Similarly, we expect interest rates and
bond yields to be low in a low-inflation Home of The Zanger reporT.
environment. That is a natural financial
reaction to low inflation.
As it turns out, if you look back his-
torically, price/earnings ratio tends to
peak in the low-to-mid 20s. Now that
we’ve moved up close to 30 on a normal- it’s financial principles that drive valu- level of complacency. In the Crestmont
ized basis—normalized for the business ation in the market, not the phenomenon Research work, the analysis reflects that
cycle—it means we’re probably 20% or of reversion to the mean over time for the recent trailing standard deviation is in
so above what should be considered a some unexplained reason. I tend to refer the lowest 4% of all periods since 1950,
fair value range. So admittedly, we’re a to folks who assume mean reversion but that’s a retrospective view. The pro-
bit overvalued. But not because P/E is for the stock market over the long term spective view I use is the VIX index. It’s
above average; it’s because P/E is above as “reversion-to-the-meanists.” This based upon option pricing and therefore
the fair value range for low inflation. contrasts the two views of phenomenon it is prospective because option pricing
If we were at 25, I’d be saying that versus principles. We’ll get back to and is forward-looking. What’s interesting
we’re within the value range. That we’re through the market’s historical mean is that this year, we’ve had seven days
just above that means we’re a bit overval- when and if inflation comes back, or we with the VIX below 10. Since the VIX
ued at this point, but we’re not grossly get into deflation. When does that hap- was created in 1990 there have only
overvalued. Where investors get misled pen? I think right now, most people are been 14 days with the VIX below 10. So
is when they’re told that today’s P/E, in expecting inflation to pick up a bit over half of all the days below 10 since 1990
relation to the average P/E of 15 or 16, the next one to three to five years. have been this year. We now have low
is very overvalued. But the average P/E volatility, high complacency to risk, and
of 15 or 16 is associated with a period Yes, at least a little bit. a high-valuation period. Although I can’t
of average inflation over the last century. One thing we have right now is an make a prediction from that information
Average inflation over the last century ultra-low period of volatility in the alone, what I can tell you is that in the
was over 3%, or over twice where it is market. That builds and reflects a high shorter term, those are the kinds of signs
today. So yes, if we had higher inflation, of vulnerability that set up for changes
which means we should expect average in short-term cycles.
or below-average P/E, then we would be Also, in a secular market context, the
grossly overvalued. But instead, we’re other data point would be to look at 10-
just a bit overvalued. year periods, a period that’s relevant for
a lot of investors’ horizons. Since 1900
That makes sense. there have been about 110 10-year peri-
What’s embedded in your question ods—1900-1909, 1901-1910, and on to
and in your insight is recognition that current. The average return from all those
September 2017 • Technical Analysis of Stocks & Commodities • 41
 decades is 10% including dividends. But it means that this is a trader’s market. I from the market of 10% is the wrong
it’s not exactly 10%. Let’s use a wide talk about this in my book Unexpected threshold to use for investment options.
range for the average of 8% to 12%. Only Returns in chapter 10 titled “Row, Not The threshold should be the much lower
20% of those decades delivered returns Sail.” It uses a boatman’s analogy that likely return from this environment, and
between 8% and 12%. Eighty percent of says sometimes, investors should jump that makes a lot of investment approaches
the decades since 1900 have either been into their boat, throw the sail up, and much more desirable.
above 12% compounded annual return or enjoy the ride, like in the 80s and 90s. I think this is going to be an inter-
below 8% compounded annual return. So But in this environment, you’ve got to esting time in the market. I think it’s
the odds-on bet over the next 10 years is pull out the oar and row. And there are particularly interesting and different
an 80% chance we’re above 12% or below lots of ways to row. One is to trade, and from what we were in before this secu-
8%. A key insight is that the periods above others include active investing, diversi- lar bear started in 2000. The last seven
12% start with below-average valuations. fication, international markets, and so or eight years have seen a very strong
The periods below 8% started with on. There are lots of ways to row, but rally. I think it’s led people to have a
above-average valuations. We’re well it’s not buy & hold. It’s the antithesis of sense of confidence in momentum, and
above average on valuations today. So buy & hold. maybe it’s causing them to not recognize
although simple statistics would include that value ultimately drives the market.
the periods above 12% as possible, any That’s good news for traders. Also, the market’s going to be a lot more
reasonable application says that 12% is As it turns out, traders can take ad- volatile than people realize. Right now,
not in the cards. vantage of this environment, because volatility seems to have taken a break.
That’s why I can say with a high degree it’s challenging for buy & hold to keep Low volatility is an indication that we’ve
of confidence that for the next decade, up. Sailing worked in the 80s and 90s been in a good period. It’s not a forecast
we’re likely to have well below-average at 17% a year. But in this environment, of a good period to come.
returns. And then, if we walk through whether investors are trading on their
the three components—P/E change, own or they’re doing it for others, this is Thank you so much for speaking with
dividend yield, and earnings growth—I an environment where stocks are going us, Ed.
think we’ll come to the conclusion that to only deliver 1% to 6% on average, but
the likely return is an annualized 1% to with some years having big moves up
6%. So if we do have that level of return, or down. The long-term average return

Aliasing—A phenomenon that occurs in (Yesterday’s moving average * (1-k)), to fit the data.
sample data systems when a signal fre- where k = 2/(n+1); n = no. of periods. Overfitting—The parameters of a trading
quency approaches the sample frequency. Finite impulse response (FIR) filter— system are selected to return the highest
A familiar example would be the “wagon Referred to as “finite” because it only profit over the historical data and thus are
wheel effect” in movies about the his- responds to prices within the period (the tailored precisely to the data set.
torical American West, where the wagon “window”) of the filter (usually, an aver- Response—The change in value of the aver-
wheels appear to turn backward. age of some kind; an example of an FIR age in response to the impulse.
Attenuation—The fractional part of reduced is a simple moving average). An infinite Smoothing—Simply, a mathematical tech-
energy or lost power due to smoothing impulse response (IIR) filter, such as nique that removes excess data variability
or filtering. an exponential moving average, retains while maintaining a correct appraisal of
Average true range (ATR)—A moving aver- data through its averaging process from the underlying trend.
age of the true range. all periods of its calculation. Theoreti- Transfer function—The mathematical rela-
Backtesting—A strategy is tested or opti- cally at least, that could be an infinite tionship between the output of a control
mized on historical data and then the amount of data. system and its input for a linear system.
strategy is applied to new data to see if Frequency—The number of complete cycles It is the Laplace transform of the output
the results are consistent. observed per time period (i.e., cycles divided by the Laplace transform of the
Breakout—When price moves strongly per year). input under conditions of zero initial
above the top of the chart pattern or trend Lag—The number of datapoints that a filter, energy.
channel, or below the pattern bottom or such as a moving average, follows or Transfer response—Refers to the shape of the
trend channel. trails the input price data. Also, in trad- wave coming out of a filter in comparison
Coefficient—A constant used to multiply ing and time series analysis, lag refers to to the shape going into it.
another quantity or series; in 3x and ax, the time difference between one value True range—The largest of the following:
3 and a are coefficients of x. and another. Today’s high minus today’s low, today’s
Exponential moving average—A variation Mean-reverting—A state when price is oscil- high minus yesterday’s close, today’s low
of the moving average, the EMA places lating randomly about some (unknown) minus yesterday’s close.
more weight on the most recent closing mean value. That is, it is not trending.
price. The formula for calculating EMA Optimization—A methodology by which a For more terms, visit the glossary at
is: EMA = (Today’s closing price * k) + system is developed with rules tailored [Link].
42 • September 2017 • Technical Analysis of Stocks & Commodities
 Go digital and stay connected.
Every article at
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Did you know that every subscriber to Technical Analysis of Stocks & Commodities magazine
has full access to the magazine in digital format? No waiting for the mail to be delivered, no need to carry
around back issues — just log on to [Link] on any internet-capable device and read any issue or
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 WhY tRADE ETFS?

All-Inclusive ETF Websites

Are you interested in learning more about using exchange
traded funds (ETFs) in your trading? Leslie N. Masonson, With a few mouse clicks, these sites
an active ETF trader, is president of Cash Management offer a fast way to analyze specific
Resources, a financial consulting firm that focuses on ETF
strategies. He is the author of Buy—Don’t Hold: Investing With
user-determined ETF characteristics.
ETFs Using Relative Strength To Increase Returns With Less
Risk; and All About Market Timing, as well as Day Trading
On The Edge. His website is [Link], where of June 14, 2017 are BlackRock ($1.2T), Vanguard ($741.4B),
he writes a weekly blog. To submit topics for future columns, State Street Global Advisors ($547.2B), Invesco PowerShares
reach him at lesmasonson@[Link]. ($126.6B), and Charles Schwab ($77.4B).
Since 2001, [Link] has been one of the most comprehen-
by Leslie N. Masonson sive ETF analysis and educational websites. It’s a subsidiary

W
of CBOE. Coverage includes daily news, listings of ETFs in
ith the explosion of US ETFs numbering 1,716 registration and closures, daily articles written by staff and
at year-end 2016 valued at nearly $2.524 trillion contributors, ETF fund flows, listing of service providers, and
according to the 2017 Investment Company Fact 24 ETF channels (for example, sectors, commodities, smart-
Book, it is no surprise that there has also been a beta, alpha-seeking, and more). In addition, the firm publishes
proliferation of websites offering comprehensive ETF coverage. a monthly magazine titled ETF Report, all at no charge.
Here, I will briefly review three free sites that offer investors After registering for this free site, users can obtain exten-
and traders an impressive array of analytical metrics and sive information including online access to the magazine’s
other useful arrayed data that will aid in the ETF selection articles, educational material including its ETF University
process. courses, research, podcasts, white papers, strategy, watchlists,
Previously in S&C, I reviewed two easy-to-use online screeners and databases, industry perspectives, newsletters,
resources that offer different approaches to ETF momentum and much more. This site provides the information you need
investing and strategy backtesting for active market players. to make well-informed ETF selection decisions.
Those were [Link] (June 2017 S&C) and ETFReplay. Figure 1 shows the site’s ETF screener variables with a list-
com (December 2011 S&C). The latter is strictly a subscription- ing of all ETFs that meet any criteria selection. The URL for
based offering. this is [Link] The screen
opens with all 2,031 ETFs shown in the table.
[Link] Every year, the firm coordinates its well-attended (more
The websites of the 102 ETF issuers and the major brokerage than 2,200 participants) annual “Inside ETFs” conference
firms have extensive data on the ETFs they cover or sponsor, in January in Hollywood, FL, and its annual “Inside Smart
respectively. Go to [Link] for a listing of all issuers for their Beta” conference in New York City in June. I have attended
contact information including website addresses. The five the January conference for the past three years and the NYC
largest issuers based on assets under management (AUM) as one recently (June 18–19, 2017) and found them to have high-
quality industry-leader speakers, panels, and workshops on
contemporary topics; numerous vendor exhibits, literature,
and contacts; and networking opportunities with all the key
players as well as other attendees from different firms.

[Link]
[Link] is another website that offers all-encompassing
ETF analysis. The extensive free portion of the site offers a
database of ETFs from all issuers, a detailed screener, tools,
news, research, and an advisor center. A yearly fee of $199
provides additional services and more in-depth data. In par-
ticular, the screener’s extensive capability sets it apart from
Source: [Link]

other sites. Specifically, it incorporates not only the standard

data on returns, expenses, dividends, and portfolio holdings, but
FIGURE 1: TOP PORTION OF [Link] SCREENER. Here you can see the 14
also includes tax-related data, technical analysis, and charting.
criteria for selecting ETFs of your choice. The results of the search are shown in Also provided is an ETF’s asset allocation in terms of sec-
the lower portion, which itself has eight tabs for more information. tors, countries, and market-cap size, along with performance
44 • September 2017 • Technical Analysis of Stocks & Commodities
 3 shows a portion of a heatmap for a few broad industries in
North America that depicts the performance over one month.
(The URL for this page is [Link]
Heatmaps?section=industry&region=North%20America&​
country=&tab=0&level=1&lite=0.) Other timeframes shown
such as one week, one year, and more are premium-priced.
Another highly useful tab is the ETF comparison. Here, up to
six ETFs can be compared in five categories including ratings
and price data, static data, asset class, and performance. There
are subset data for each of these categories. And XTF’s rank-
ing is provided without charge. Registered users (registration
is free) obtain more data than casual users, but there are two
premium versions costing $39 or $99 per month, both with a
15-day free trial. Both PDF printing and exporting data to a
spreadsheet are premium-priced services.
Source: [Link]

Each of these three sites offers many more features than

can be covered here. I encourage you to spend time clicking
on the tabs and making a note of the features that interest you,
FIGURE 2: ETFdb MOST POPULAR ETFS BY TRADING VOLUME. Surprisingly, or make those pages favorites. After reviewing the sites, you
XLF (Financial Select Sector) beat out SPY in average volume. And VXX (VIX short-
term futures) and GDX (gold miners) came in at third and fourth place.
will no doubt find a handful of features that provide exactly
what you are looking for. Be sure to check pages for updated
information.
compared to peer-group ETFs over various time periods.
This functionality allows the user to pick and choose the Info at your fingertips
most relevant ETF based on their predetermined selection With a few mouse clicks, these three sites offer a fast way to
criteria. Figure 2 (from [Link] analyze specific, user-determined ETF characteristics. Imagine
shows the site’s listing of the most popular ETFs by trading how laborious it would be for you to gather all the raw ETF
volume, certainly of great interest to active traders looking
for liquidity and low bid-to-ask spreads. Two volatility ETFs Continued on page 56
were listed in the top 10.
In addition, a full listing is displayed
of all alternative ETFs in the same
category including such information
as expense ratios, AUM, average daily
volumes, and year-to-date returns. This
is accompanied by analyst reports, an
overall real-time rating, and a list of firms
(Fidelity, Vanguard, TD Ameritrade,
and Charles Schwab) that offer specific
ETFs commission-free.

[Link]
This site contains ratings of all ETFs with
a listing of new ETFs, fund sponsors,
and index providers, listing of ETFs by
investment objective with XTF ratings
from 1 to 10 (highest), industry statis-
tics, research, education, and heatmaps.
This latter dynamic category encom-
passes multiple heatmaps. These are
performance tables colored from dark
Source: [Link]

red (worst performers) to dark green,

showing the percentage change in the
category selected (such as sectors, asset FIGURE 3: [Link] INDUSTRIES HEATMAP. Basic Materials and Consumer Cyclical are arrayed on top.
classes, industries, commodities, curren- The other eight sectors are available by moving the vertical bar. The number of ETFs, assets, and performance
cies, and regions and countries. Figure over a month are shown.

September 2017 • Technical Analysis of Stocks & Commodities • 45

 Q&A

SINCE YOU ASKED

Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading ([Link]), an equity trading corporation,
answers a few of your questions. To submit a question or suggest a topic, email him
at robfriesen@[Link], or post your question to our website at http://
[Link]. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Rob Friesen

Structural Changes Can Impact ing traders within the firm I manage quantitative, technical, macro, or fun-
Technical Patterns to be forward-thinking and ultimately damental, where short stock is required
Market structure, procedures, and settle- prepared for any adjustments they might for hedging or opportunity should be
ment processes have come a long way need to make. examined in light of this structural
since the 1700s when couriers made the The shortened cycle will require change after 22 years.
journey to consummate a transaction by greater efficiency throughout the system I also recommend checking other
horseback or by ship. The settlement to have things go smoothly and will lead worldwide markets that may still be on
adopted at that time for Amsterdam to even more efficiency down the road. T+3 as there could be some anomalies or
and London exchanges was 14 days. Ultimately, drawing from the observa- misalignments, especially in the stocks
Obviously, the perils that came with the tions of history as well as the technologies of globally based companies. The record
modes of transportation as well as the that exist today such as blockchain, the date for dividends, corporate AGMs,
quantity of time involved put significant industry will be moving to instantaneous and other events will also get moved
counter-party risk on the table. settlement to eliminate counter-party up with T+2.
Things have changed. The settle- risk altogether. This brings us to the big question for
ment time dropped to five days (T+5) many technical traders:
in the 1980s and then down to T+3 in
the 1990s. In 1995 the SEC reduced This could cause Have there been specific patterns that
that settlement to three days and we changes to the have been identified, validated, tracked,
have been running on that ever since. behavior of the stocks and utilized since 1995 that might no
After 22 years of T+3 in US eq- longer be relevant or may change to some
uity markets, we are moving to T+2 on
and ETFs we trade and degree after September 5, 2017?
September 5, 2017. By the time you the technical patterns It is my opinion that patterns we
read this, we will already be full steam we rely on. observe that we can take action on, in a
ahead. compoundable way, are based on some
underlying reason as to why they occur.
What is behind this move? What could be some problems following The example I often show to traders is
It is really all about strengthening the the September 5th implementation? the turn of the month (TOME) effect or
financial system by reducing counter- Any increase in the failure to deliver mid-month and end-of-month seasonal-
party risk. There could be further mo- securities by the seller or buyer in the ity. There are observable technical pat-
tivation in cost savings industry-wide. appropriate form could increase costs for terns in the major indexes, liquid stocks,
The Industry Steering Committee (ISC) brokers and investors. Security lenders, and ETFs. This is due to the behavior of
has been focused since 2014 on prepar- borrowers, and service providers have funds, investors, and the timing of payroll
ing our industry for the compression of to examine all aspects of the impact of deposits and 401K monies. Because of
timeframes for clearing and settling, the tighter settlement cycle. When stocks the metronome-like money flows, pat-
specific regulatory rule changes, as well are shorted, they are borrowed by the terns emerge and can be utilized by
as changes to the trade processing, asset party who is shorting and loaned out by savvy traders and investors.
servicing, and other key systems and the owners/lenders who will have less Again in my opinion, with a short-
process changes. time to recall those securities. This may ened settlement cycle, there will be that
The topic of this column is about the increase the cost of overnight lending catalyst influencing various market
potential for structural changes to impact to the borrowers. I would encourage all participants all along the food chain
the technical patterns and setups that we traders who short equities to watch their to make slight adjustments. This could
are familiar with and to examine trading costs carefully, as well as the liquidity cause changes to the behavior of the
strategies and our workflow in light of and inventories of the “hard to borrow” stocks and ETFs we trade and the tech-
this. For months, I have been encourag- stocks. Any models you use, whether nical patterns we rely on. My thoughts
46 • September 2017 • Technical Analysis of Stocks & Commodities
 Q&A
are to look at any common patterns that and workflow and keep doing what you research items, and backtest for yourself
involve the 1-2-3 where 3 is a lower high love, which is significantly easier and to identify patterns and anomalies. As
or a higher low, and three-day breakouts more rewarding when you move when always, start simple, start small, and build
or reversals, as well as three days after the cheese moves. a scalable trading business.
earnings or major catalyst events. Watch My writing is an effort to stimulate
to see if those tighten to a two-day pat- thought, provide you with ideas you
tern. If they do, you can adapt your style can build on, have you question things,

KauFman/OptImIZatIOn—gettIng It rIght
Continued from page 21

If the system doesn’t work for

1985 2000 2008 the parameter range that you
One trend 5,010,061 2,923,862 174,179 think is right, something is
Crossover 5,169,201 2,813,867 209,066 wrong. You need to step back
FIgure 5: WhIch SYStem prOFIle DO YOu preFer? The single trend holds and figure out why.
trades much longer, while the crossover has more trades with smaller profits and
(usually) smaller losses. Since the results are similar, the choice is yours.

60 (a wider range because there is less data). There are also at the averages of all tests, you can set realistic expectations
losses in the bottom-left heat map for 2008. of future performance. Or you can simply pick the best com-
A big-picture comparison shows the average of all the bination from a large number of tests and hope for the best.
crossover tests is similar to the average of the single-trend It’s your money.
tests for the three periods (Figure 5). Now you have to decide
which trading profile you prefer. The single trend holds trades Perry Kaufman is a trader and financial engineer. He is
much longer, while the crossover has more trades with smaller the author of many books on trading and market analysis,
profits and (usually) smaller losses. It’s more likely you can including Trading Systems And Methods, 5th ed. (with the
use profit-taking with the crossover system, but not with the first edition published in 1978 as a seminal book in the field
single trend system. That would change the profile. of technical analysis), and A Guide To Creating A Successful
The most important point to consider is that you can select Algorithmic Trading System (2016). For questions or com-
three parameters from the single trend system that worked over ments, please go to [Link].
all timeframes while the crossover system has been slowly
changing. Can you pick three parameters from the crossover FURTHER READING
system that solves the problem? It was easier to pick three of Kaufman, Perry J. [2017]. “VIX Or Historical Volatility?”
17 than three of 119 tests. The first reaction would be to choose Technical Analysis of StockS & commoditieS, Volume
the short term as either 30 or 35 days, but is that overfitting? 35: March.
The more parameters you have, the more complicated you [2013]. Trading Systems and Methods, 5th ed., Wi-
make the solution. Given that the results are similar, I stay ley.
with the single trend system. [2015]. A Guide To Creating A Successful Algorithmic
Trading System, Wiley.
WRAP-UP [2003]. A Short Course In Technical Trading, Wiley.
Optimization can tell a lot about system performance. You [1995]. Smarter Trading, Wiley.
can find out visually whether it’s robust or erratic. You can
compare the averages of various systems and time periods and
see if the system is performing well or degrading. By looking

September 2017 • Technical Analysis of Stocks & Commodities • 47

 cal is false and detrimental to the finance industry itself. In this
The following selection of book descriptions represents a
well-researched book, which grew out of a popular 2015 lecture
sampling of recent book releases in the investing field. Books
described here may be from some of the major book publish- he delivered to Harvard’s graduating MBA class of 2015, Desai
ers as well as some independent book publishers. These examines the connection between finance and morality and shows
are not critical reviews or editorial evaluations, but rather a how finance can be principled, life-affirming, and worthy.
brief look at the book marketplace to help keep readers up [Link]
to date on new or recent book offerings.
The DIY Investor, second edition (288
pages, £17.99 softcover, £11.00 ebook,
Money Machine: The Surprisingly June 2017, ISBN 9780857196019 /
Simple Power Of Value Investing (320 9780857196026) by Andy Bell, published
pages, $27.95 hardcover, June 2017, by Harriman House. This book offers les-
9780814438565 / ebook 9780814438572) sons in constructing a portfolio, investing
by Gary Smith, published by Amacom. If in a tax-efficient manner, and focusing on
you want to succeed in the market, start low-cost investments. The new edition
thinking of stocks as money machines, concentrates on how to build a long-term
says this author, who is a professor of investment portfolio using a range of low-
economics at Pomona College. In this cost, tax-efficient strategies. It covers
new book he advises against reckless setting investment objectives and taking emotion out of investing;
speculation and guesses about zigs and constructing and managing a diversified investment portfolio; and
zags in stock prices. Instead, he explains how to invest based on investing in a tax-efficient way using ISAs, SIPPs, and dealing ac-
value that will continue to appreciate for years to come. With value counts. The author offers [Link] and [Link]
investing being the key to success for Warren Buffet, Benjamin to offer investment solutions to do-it-yourself investors as well as
Graham, and other Wall Street legends, the author preaches that clients of financial advisers and financial services companies.
individual investors can benefit from this approach too. The criteria [Link]
he outlines for value stock selection include: evaluating a stock
by the cash it generates; determining its intrinsic value; using key Creating Strategic Value Through
investment benchmarks such as the price/earnings ratio, dividend/ Financial Technology (288 pages,
price ratio, and q ratio; the Bogle and Shiller models; recognizing $65 hardcover, $42.99 ebook, April
stock market bubbles and profiting from panics; and avoiding the 2017, ISBN 978-1-119-24375-5) by Jay
psychological traps that can trip you up. Don’t treat the stock market D. Wilson, Jr., published by Wiley. This
as a get-rich-quick scheme, he preaches. Instead, achieve financial book explores the growing financial
success through these value strategies. technology (FinTech) industry to pro-
[Link] vide insight on how traditional financial
institutions and FinTech companies can
The Wisdom Of Finance: Discover- boost innovation and enhance valuation
ing Humanity In The World Of Risk in a complex regulatory environment. As
And Return (240 pages, $27 hard- financial regulations grow more com-
cover, May, 2017, 9780544911130 / plex, and customers are presented with more options, it is becoming
ebook 9780544911208) by Mihir Desai, imperative for traditional institutions to modernize processes and
published by Houghton Mifflin Harcourt. carve out a place in the future of financial services. This book seeks
This book, written by a renowned econo- to be a guide for navigating that space, with practical guidance on
mist and Harvard professor, seeks to how FinTech companies and traditional financial institutions can
take a look at the often misunderstood enhance profitability and valuation from the trends. Wilson presents
world of finance through the prism of key themes that have contributed to the industry’s success and
the humanities. How does finance have maps them together to provide guideposts for investors, entrepre-
parallels to the principles of our lives? neurs, and traditional institutions looking to facilitate growth through
Interestingly, this book considers the many parallels between life the intersection of the technology and financial services. With a
and finance, including how insurance can help us make sense of perspective on history and outlook, certain trends and examples
and confront the disorder of the world, how bankruptcy teaches of value-enhancing strategies stand out. FinTech niches covered
us how to react to failure, and how value creation can help us include payments, crowdfunding, alternative/marketplace lending,
live a meaningful life. It also considers how theories of leverage the blockchain, and technology solutions in the context of banking,
can teach us about the value of commitments, how the lessons insurance, and investment companies.
of mergers apply to marriages, and how the capital asset pricing [Link]
model demonstrates the value of relationships. The author makes
the case that the preconception of finance as inherently unethi-
48 • September 2017 • Technical Analysis of Stocks & Commodities
WORKSHOP ON CYCLES AND DSP
John Ehlers, an expert in analyzing
cycles in market data using a scientific
approach, has announced a new three-day
workshop to be held in San Simeon, CA
on October 20–22, 2017. The workshop
is designed be an intimate and no-holds-
barred learning experience. Major topics
will include the spectral structure of the
market; advanced DSP (digital signal
processing) techniques for traders;
indicators that actually indicate; robust
trading strategies; and intraday trading
strategies. Takeaways will include fully
disclosed trading strategy code.
Ehlers is president of MESA Software,
which offers the MESA Phasor and for each individual component within changing industry, as well as extending
MESA intraday futures strategies. MESA their system, such as optimal placement the reach of the organization. The new
Software develops filters, indicators, and of trailing stops, trailing stops, and limit look and logo on its properties will reflect
trading systems, and then uses statistics orders, as well as optimal settings for the name change. The organization states
to verify performance. He is also chief indicators. Clicking the Q-Calc button its mission and goals, however, will
scientist at [Link]. Earlier, he will backtest each system component remain unchanged—it will continue to
worked at Raytheon as a Senior Engi- against the user’s overall trading system offer a place for collegial discourse and
neering Fellow. A pioneer in the use of and suggests optimal settings based on exchange of ideas among like-minded
cycles and DSP technical analysis, he is past performance. professionals, and to advance the disci-
a contributing editor to this magazine, Track ’n Trade’s Thrust Bar Preven- pline of technical analysis. Membership
with dozens of articles published in S&C tion Filter seeks to automatically detect status for members will not change
over the years since 1985. and filter out exhaustion moves when regardless of whether a member is a
big news events hit so the user doesn’t charterholder or not, the organization
enter the market after the fact. The Track states. In addition, no changes in its
’n Trade Autopilot plug-in was designed structure, staff, or volunteer leadership
to help take the emotion out of trading are planned.
and to help both new and experienced CMT Association, [Link]
traders adhere to their personal guide-
lines, giving them the ability to stick to
a predetermined, optimized trading plan. CMT EXAMS
The company’s goal with this product is Registration is open for the October
to help traders succeed by allowing them 2017 CMT exams offered by the CMT
[Link]/#workshop
to more easily stick to a solid trading Association. The Chartered Market
plan and to avoid overtrading and taking Technician (CMT) credential is a widely
AUTO-TRADING PLATFORM uninformed risks. recognized designation for practitioners
Gecko Software has released a new [Link] of technical analysis.
version of its Autopilot plug-in for Track The following exam dates are sched-
’n Trade LIVE Futures and Forex. The uled:
platform is designed to be a complete NAME CHANGE FOR THE MTA CMT Level I & II: October 19–21,
graphical user interface to allow the The Market Technicians Association, 2017
trader to quickly and easily design, au- home to the Chartered Market Techni- CMT Level III: October 19, 2017
tomate, and even Monte Carlo backtest cians (CMT) certification program, has
their own trading system without the need announced it is changing its name to the Registration deadline is September 19,
to write any code. Using the platform, CMT Association in order to consolidate 2017.
users can create, modify, and backtest the MTA and CMT acronyms for better Dates for upcoming CMT webinars
trading strategies using the Track ’n name recognition, as well as to update and CMT education web series presenta-
Trade set of tools and user interface. its brand after 50 years of serving the tions will be announced.
The platform offers Q-Calc buttons financial industry. The organization CMT Association, [Link]
with Monte Carlo simulation technology states it seeks to uphold the vision of its
to help the user calculate optimal settings founders while adapting to the rapidly
September 2017 • Technical Analysis of Stocks & Commodities • 49
 For this month’s Traders’ Tips,
the focus is John Ehlers’ article
in this issue, “The Reverse EMA
Indicator.” Here, we present the
August 2017 Traders’ Tips code
with possible implementations in
various software.
The code for the following Traders’ Tips selections is
posted here:
• [Link]  Home–S&C Magazine 
Traders’ Tips
The Traders’ Tips section is provided to help readers im-
plement a selected technique from an article in this issue
or another recent issue. The entries here are contributed Figure 1: TRADESTATION. This shows a TradeStation daily chart of GLD with the
by software developers or programmers for software that reverse EMA strategy and indicator applied.
is capable of customization.
Wave = EMA - AA * RE8 ;
_ReverseEMA = Wave ;

F TRADESTATION: SEPTEMBER 2017 TRADERS’ TIPS CODE Strategy: ReverseEMA

{
In “The Reverse EMA Indicator” in this issue, author John Reverse EMA Strategy
Ehlers presents a causal forward and backward EMA indicator (C) 2017 John F. Ehlers
that can be used in real trading. It has double smoothing at the TASC Sep 2017
}
high end of the spectrum to reduce aliased components and is
able to mitigate the impact of spectral dilation at the low end. inputs:
Trend( .05 ),
The author describes the indicator as having unique flexibility Cycle( .3 ) ;
in that it can display trend or cycle information by varying the variables:
alpha parameter and do this with very low lag. CycleRevEMA( 0 ),
TrendRevEMA( 0 ) ;
Here, we are providing a function for calculating the re-
verse EMA that you can use in your own code. In addition, TrendRevEMA = _ReverseEMA( Trend ) ;
we have provided an example strategy and a demonstration CycleRevEMA = _ReverseEMA( Cycle ) ;
indicator. if TrendRevEMA > 0 and
CycleRevEMA crosses over 0 then
Function: _ReverseEMA Buy next bar at Market ;
{
Adapted from if TrendRevEMA crosses under 0 or
Reverse EMA Indicator CycleRevEMA crosses under 0 then
(C) 2017 John F. Ehlers Sell next bar at market ;
TASC Sep 2017
} if TrendRevEMA < 0 and
CycleRevEMA crosses under 0 then
Inputs: Sell Short next bar at Market ;
AA( numericsimple ) ;
Vars: if TrendRevEMA crosses over 0
CC( 0 ),EMA( 0 ),RE1( 0 ),RE2( 0 ), or CycleRevEMA crosses over 0 then
RE3( 0 ),RE4( 0 ),RE5( 0 ),RE6( 0 ), Buy to cover next bar at market ;
RE7( 0 ),RE8( 0 ),Wave( 0 ) ;

//Classic EMA Indicator: ReverseEMA

CC = 1 - AA ; {
EMA = AA * Close + CC * EMA[1] ; Reverse EMA Indicator
(C) 2017 John F. Ehlers
//Compute Reverse EMA TASC Sep 2017
RE1 = CC * EMA + EMA[1] ; }
RE2 = Power( CC, 2 ) * RE1 + RE1[1] ;
RE3 = Power( CC, 4 ) * RE2 + RE2[1] ; inputs:
RE4 = Power( CC, 8 ) * RE3 + RE3[1] ; Trend( .05 ),
RE5 = Power( CC, 16 ) * RE4 + RE4[1] ; Cycle( .3 ) ;
RE6 = Power( CC, 32 ) * RE5 + RE5[1] ; variables:
RE7 = Power( CC, 64 ) * RE6 + RE6[1] ; CycleRevEMA( 0 ),
RE8 = Power( CC, 128 ) * RE7 + RE7[1] ; TrendRevEMA( 0 ),
//Indicator as difference AvgTrend( 0 ) ;

50 • September 2017 • Technical Analysis of Stocks & Commodities

 TrendRevEMA = _ReverseEMA( Trend ) ;
CycleRevEMA = _ReverseEMA( Cycle ) ;

AvgTrend = Average( TrendRevEMA, 10 ) ;

Plot1( TrendRevEMA, “Trend”, Green ) ;

Plot2( CycleRevEMA, “Cycle”, Red ) ;
Plot3( 0, “ZL”, Blue ) ;

To download the EasyLanguage code, please visit our

TradeStation and EasyLanguage support forum. The files
for this article can be found at [Link]
[Link]/Discussions/[Link]?Topic_ID=142776. The
filename is “TASC_SEP2017.ZIP.”
For more information about EasyLanguage in general,
please see [Link]
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of trading
or investment recommendation, advice, or strategy is being made, FIGURE 2: eSIGNAL. Here is an example of the study plotted on a daily chart of
given, or in any manner provided by TradeStation Securities or SPY.
its affiliates.
—Doug McCrary
article, Ehlers presents an indicator based on the exponential
TradeStation Securities, Inc.
[Link] moving average (EMA) that minimizes lag inherent in the
conventional version of the indicator.
The study contains formula parameters that may be con-
figured through the edit chart window (right-click on the
chart and select edit chart). A sample chart is shown in Fig-
ure 2 .
F METASTOCK: SEPTEMBER 2017 TRADERS’ TIPS CODE
To discuss this study or download a complete copy of the
In “The Reverse EMA Indicator” in this issue, John Ehlers
formula code, please visit the EFS library discussion board
presents an oscillator to identify cycles, momentum, or trend
forum under the forums link from the support menu at www.
activity. The MetaStock formula for implementing this indica-
[Link] or visit our EFS KnowledgeBase at [Link]
tor is shown here:
[Link]/support/kb/efs/. The eSignal formula script
Reverse EMA (EFS) is shown below, and is also available for copying &
pasting from the Stocks & Commodities website in the
alpha:= 0.1; Traders’ Tips section.
ca:= 1-alpha;
ma:= (alpha * C) + (ca*PREV);
re1:= ca*ma + Ref(ma, -1); /*********************************
re2:= Power(ca,2)*re1 + Ref(re1,-1); Provided By:
re3:= Power(ca,4)*re2 + Ref(re2,-1); eSignal (Copyright c eSignal), a division of Interactive Data
re4:= Power(ca,8)*re3 + Ref(re3,-1); Corporation. 2016. All rights reserved. This sample eSignal
re5:= Power(ca,16)*re4 + Ref(re4,-1); Formula Script (EFS) is for educational purposes only and may
re6:= Power(ca,32)*re5 + Ref(re5,-1); be
re7:= Power(ca,64)*re6 + Ref(re6,-1); modified and saved under a new file name. eSignal is not
re8:= Power(ca,128)*re7 + Ref(re7,-1); responsible
ma - (alpha*re8); for the functionality once modified. eSignal reserves the right
0 to modify and overwrite this EFS file with each new release.

Description:
—William Golson The Reverse EMA Indicator by John F. Ehlers
MetaStock Technical Support
[Link] Version: 1.00 07/12/2017

Formula Parameters: Default:

Alpha 0.1

Notes:
The related article is copyrighted material. If you are not a sub-
F eSIGNAL: SEPTEMBER 2017 TRADERS’ TIPS CODE scriber
For this month’s Traders’ Tip, we’ve provided the study Re- of Stocks & Commodities, please visit [Link].
verse_EMA.efs based on the formula described in John Ehlers’
**********************************/
article in this issue, “The Reverse EMA Indicator.” In the

September 2017 • Technical Analysis of Stocks & Commodities • 51

 var fpArray = new Array();

function preMain(){
setPriceStudy(false);

var x=0;
fpArray[x] = new FunctionParameter(“Alpha”, FunctionParam-
[Link]);
with(fpArray[x++]){
setName(“Alpha Value”);
setDefault(0.1);
setLowerLimit(0);
}
}

var bInit = false;

var bVersion = null;
Figure 3: WEALTH-LAB. Here, we show application of the indicator to SPY in
var xClose = null; comparison to Ehlers’ RoofingFilter.

var xEMA = null;

var xRevEMA = null;
if (nRevEMA != null) return nRevEMA;
function main (Alpha){ }
if (bVersion == null) bVersion = verify();
if (bVersion == false) return; function verify(){
var b = false;
var nLength = ((2 / Alpha) - 1) * 3; if (getBuildNumber() < 779){
drawTextAbsolute(5, 35, “This study requires version 10.6 or
if (getCurrentBarCount() < nLength) return; later.”,
[Link], [Link], [Link]|Text.
if (getBarState() == BARSTATE_ALLBARS){ RELATIVETOLEFT|[Link]|[Link],
bInit = false; null, 13, “error”);
} drawTextAbsolute(5, 20, “Click HERE to upgrade.@
URL=[Link]
if (!bInit){ [Link], [Link], [Link]|Text.
xClose = close(); RELATIVETOLEFT|[Link]|[Link],
null, 13, “upgrade”);
xEMA = efsInternal(“calc_EMA”, Alpha, xClose); return b;
xRevEMA = efsInternal(“calc_RevEMA”, (1 - Alpha), 1, }
xEMA); else
b = true;
var power = 2;
return b;
for (var i = 0; i < 7; i++){ }
xRevEMA = efsInternal(“calc_RevEMA”, (1 - Alpha),
power, xRevEMA);
—Eric Lippert
power *= 2;
eSignal, an Interactive Data company
} 800 779-6555, [Link]

addBand(0, PS_DASH, 1, [Link], 1);

bInit = true;
}

if ([Link](0) != null){
return ([Link](0) - 0.1 * [Link](0)); F WEALTH-LAB: SEPTEMBER 2017 TRADERS’ TIPS CODE
} Once again, John Ehlers, in his article in this issue, shares an
}
universal oscillator with features such as minimum lag and a
function calc_EMA(nAA, xSeries){ single-input parameter that lets it highlight cycle, momentum,
var nEMA_1 = ref(-1);
if (nEMA_1 == null) nEMA_1 = 0;
and trend components.
var nEMA = (([Link](0) - nEMA_1) * nAA) + To use the ReverseEMA indicator, first update your TA-
nEMA_1; SCIndicators library to v2017.08 or later and then look un-
if (nEMA != null) return nEMA;
der the TASC Magazine Indicators group. You can plot the
} indicator on a chart or use it as an entry or exit condition in
a rule-based strategy without having to program any code
function calc_RevEMA(nCC, power, xSeries){
if ([Link](-1) == null) return; yourself.
var nRevEMA = [Link](nCC, power) * [Link](0) Get the companion strategy’s C# code by downloading it
+ [Link](-1); right from Wealth-Lab’s open strategy dialog:
52 • September 2017 • Technical Analysis of Stocks & Commodities
Wealth-Lab strategy code (C#):

using System;
using [Link];
using [Link];
using [Link];
using WealthLab;
using [Link];
using TASCIndicators;

namespace [Link]
{
public class TASC201709 : WealthScript
{
private StrategyParameter paramAlpha;

public TASC201709()
{
paramAlpha = CreateParameter(«Alpha», 0.1, 0.05,
0.5, 0.05);
}

protected override void Execute()
{
var re = [Link](Close, paramAlpha.
Value);
ChartPane rePane = CreatePane( 30,false,false ); Figure 4: AMIBROKER. This daily SPY chart (upper pane) with the reverse EMA
HideVolume(); in the lower pane replicates a chart from John Ehlers’ article in this issue. The re-
PlotSeries( rePane, re, [Link], [Link], verse EMA reflects price turning points with little lag.
2);

//RoofingFilter for comparison for( i = 1, p = 1; i <= 8; i++, p *= 2 )
var rf = [Link](Close); re = re * ( beta ^ p ) + Ref( re, -1 );
ChartPane rfPane = CreatePane( 25,false,false);
PlotSeries( rfPane,rf,[Link],LineStyle. return eema - alpha * re;
Solid,1); }
}
} alpha = Param(“alpha”, 0.1, 0.01, 0.99, 0.01 );
} Plot( ReverseEMA( alpha ) , _DEFAULT_NAME(), colorRed );
Plot( 0, “”, colorBlue, styleNoLabel );
A sample chart is shown in Figure 3.
—Eugene (Gene Geren), Wealth-Lab team _SECTION_END();
MS123, LLC
[Link] —Tomasz Janeczko, [Link]
[Link]

F NEUROSHELL TRADER: SEPTEMBER 2017

TRADERS’ TIPS CODE
F AMIBROKER: SEPTEMBER 2017 TRADERS’ TIPS CODE The reverse EMA indicator discussed in John
In “The Reverse EMA Indicator” in this issue, author John Ehlers’ article in this issue, “The Reverse EMA
Ehlers presents very interesting filtering technique based on Indicator,” can be easily implemented in NeuroShell Trader
a Z-transform of the exponential moving average. using NeuroShell Trader’s ability to call external dynamic
A ready-to-use AmiBroker formula that implements the linked libraries. Dynamic linked libraries can be written in
reverse EMA algorithm is given here. To use it, enter the C, C++, and Power Basic.
formula in the formula editor and press apply indicator to After moving the EasyLanguage code given in Ehlers’ ar-
create a chart such as the one shown in Figure 4, which repli- ticle to your preferred compiler and creating a DLL, you can
cates a chart from Ehlers’ article. You can adjust the smooth- insert the resulting indicators as follows:
ing factor using the parameter window.
1. Select new indicator from the insert menu
AmiBroker code
2. Choose the External Program & Library Calls category
_SECTION_BEGIN(“ReverseEMA”); 3. Select the appropriate External DLL Call indicator
4. Set up the parameters to match your DLL
function ReverseEMA( alpha )
{ 5. Select the finished button.
beta = 1 - alpha;
re = eema = AMA( C, alpha ); Similar filter-based and cycle-based strategies can also be
September 2017 • Technical Analysis of Stocks & Commodities • 53
 Figure 6: TRADERSSTUDIO. Shown here is the reverse EMA indicator plotted on
a chart of Apple Inc. for part of 2013 and 2014.
Figure 5: NEUROSHELL TRADER. This sample NeuroShell Trader chart shows
the reverse EMA indicator. RE5 = (CC^16)*RE4 + RE4[1]
RE6 = (CC^32)*RE5 + RE5[1]
created using indicators found in John Ehlers’ Cybernetic RE7 = (CC^64)*RE6 + RE6[1]
and MESA91 NeuroShell Trader Add-ons. RE8 = (CC^128)*RE7 + RE7[1]
Wave = EMA - AA*RE8
Users of NeuroShell Trader can go to the Stocks & Com- EHLERS_REVERSE_EMA = Wave
modities section of the NeuroShell Trader free technical
support website to download a copy of this or any previous End Function
Traders’ Tips.
A sample chart is shown in Figure 5. The following code files are included in the download:
—Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@[Link] • Function EHLERS_REVERSE_EMA: A function that
[Link] returns the values of the reverse EMA indicator
• Indicator plot EHLERS_REVERSE_EMA_IND: An
indicator plot that creates the custom indicator.
F TRADERSSTUDIO: SEPTEMBER 2017 Figure 6 shows the indicator on a chart of Apple Inc. for
TRADERS’ TIPS CODE part of 2013 and 2014.
The TradersStudio code I am presenting here —Richard Denning
is based on John Ehlers’ article in this issue, “The Reverse info@[Link]
EMA Indicator.” for TradersStudio
The code will be available at [Link].
com/[Link] and is also shown here:
‘THE REVERSE EMA INDICATOR, TASC Sept 2017 F UPDATA: SEPTEMBER 2017
‘Author: John Ehlers
‘Coded by: Richard Denning, 7/12/17
TRADERS’ TIPS CODE
‘[Link] The Traders’ Tip for this month is based on the article in
this issue by John Ehlers, “The Reverse EMA Indicator.” In
Function EHLERS_REVERSE_EMA(AA)
the article, Ehlers proposes some refinements to the classic
‘AA = .1 exponential moving average (EMA), reverse-engineering the
Dim CC formula to remove any lag, to create a causal forward and
Dim EMA As BarArray
Dim RE1 As BarArray backward indicator that can be used on real-time data.
Dim RE2 As BarArray The Updata code for this article is in the Updata library
Dim RE3 As BarArray and may be downloaded by clicking the custom menu and
Dim RE4 As BarArray
Dim RE5 As BarArray indicator library. Those who cannot access the library due
Dim RE6 As BarArray to a firewall may paste the code shown here into the Updata
Dim RE7 As BarArray custom editor and save it.
Dim RE8
Dim Wave
PARAMETER “AA” @AA=0.1
CC = 1 - AA NAME “” “”
EMA = AA*Close + CC*EMA[1] @CC=0
RE1 = CC*EMA + EMA[1] @EMA=0
RE2 = (CC^2)*RE1 + RE1[1] @RE1=0
RE3 = (CC^4)*RE2 + RE2[1] @RE2=0
RE4 = (CC^8)*RE3 + RE3[1] @RE3=0

54 • September 2017 • Technical Analysis of Stocks & Commodities

FIGURE 7: UPDATA. Here is the reverse-engineered exponential moving average FIGURE 8: TRADE NAVIGATOR. TradeSense code for the indicator is shown.
as applied to the SPY ETF in daily resolution data.

@RE4=0
@RE5=0
@RE6=0
@RE7=0
@RE8=0
@WAVE=0

FOR #CURDATE=0 TO #LASTDATE

   @CC=1-@AA
   @EMA=(@AA*CLOSE)+(@CC*HIST(@EMA,1))   
   ‘COMPUTE REVERSE
   @RE1=(@CC*@EMA)+HIST(@EMA,1)
   @RE2=EXPBASE(@CC,2)*@RE1+HIST(@RE1,1)  
   @RE3=EXPBASE(@CC,4)*@RE2+HIST(@RE2,1)
   @RE4=EXPBASE(@CC,8)*@RE3+HIST(@RE3,1)
   @RE5=EXPBASE(@CC,16)*@RE4+HIST(@RE4,1)  
   @RE6=EXPBASE(@CC,32)*@RE5+HIST(@RE5,1) FIGURE 9: TRADE NAVIGATOR. Here, the reverse EMA indicator is plotted on a
   @RE7=EXPBASE(@CC,64)*@RE6+HIST(@RE6,1) daily chart.
   @RE8=EXPBASE(@CC,128)*@RE7+HIST(@RE7,1)  
   ‘INDICATOR AS DIFFERENCE
   @WAVE=@EMA-@AA*@RE8 tinue button. Your library will now download. This library
   @PLOT=@WAVE contains an indicator named “Reverse EMA.”
NEXT
If you would like to recreate these indicators manually,
—Updata support team click on the edit dropdown menu, open the trader’s toolbox
support@[Link] (or use CTRL + T) and click on the functions tab. Next, click
[Link] on the new button, and a new function dialog window will
open. In its text box, input the code for the highlight bar.
Ensure that there are no extra spaces at the end of each line.
When completed, click on the verify button. You may be
presented with an add inputs pop-up message if there are
F TRADE NAVIGATOR: SEPTEMBER
variables in the code. If so, click the yes button, then enter
2017 TRADERS’ TIPS CODE
a value in the default value column. If all is well, when you
We’re making available a special
click on the function tab, the code you entered will convert
file for download in the Trade Navigator library to make it
to italic font. Click on the save button, and type a name for
easy for users to implement the strategy discussed in “The
the indicator.
Reverse EMA Indicator” by John Ehlers in this issue. The
Once complete, you can insert these indicators onto your
filename is “SC201709.”
chart by opening the charting dropdown menu, selecting the
To download it, click on Trade Navigator’s blue telephone
add to chart command, then on the indicators tab, finding
button, select download special file, and replace the word
your named indicator, selecting it, then clicking on the add
“upgrade” with “SC201709” (without the quotes). Then click
button. Repeat this procedure for additional indicators as
the start button. When prompted to upgrade, click the yes
well if you wish.
button. If prompted to close all software, click on the con-
September 2017 • Technical Analysis of Stocks & Commodities • 55
 The TradeSense code for the indicator is shown in Figure
8. A sample chart is shown in Figure 9.
Users may contact our technical support staff by phone or
by live chat if any assistance is needed in using the indica-
tors or strategy.
—Genesis Financial Technologies
Tech support 719 884-0245
[Link]

F NINJATRADER: SEPTEMBER 2017 TRADERS’ TIPS CODE Figure 10: NINJATRADER. Here is an example of the reverse EMA indicator on a
The reverse EMA indicator, as discussed in “The Reverse daily SPY chart between June 2016 and July 2017 as displayed in Figure 1 of John
EMA Indicator” in this issue by John Ehlers, is available for Ehlers’ article in this issue, “The Reverse EMA Indicator.”
download from the following links for NinjaTrader 8 and for
NinjaTrader 7: the REMA file. You can review the indicator’s source code
in NinjaTrader 7 by selecting the menu Tools → Edit Nin-
NinjaTrader 8: [Link]/SC/[Link] jaScript → Indicator from within the control center window
NinjaTrader 7: [Link]/SC/[Link] and selecting the REMA file.
NinjaScript uses compiled DLLs that run native, not in-
Once the file is downloaded, you can import the indicator terpreted, which provides you with the highest performance
into NinjaTader 8 from within the control center by selecting possible.
Tools → Import → NinjaScript Add-On and then selecting A sample chart implementing the strategy is shown in
the downloaded file for NinjaTrader 8. To import into Ninja- Figure 10.
Trader 7, from within the control center window, select the —Raymond Deux & Jim Dooms
menu File → Utilities → Import NinjaScript and select the NinjaTrader, LLC
downloaded file. [Link]
You can review the indicator’s source code in NinjaTrader
8 by selecting the menu New → NinjaScript Editor → Indi-
cators from within the control center window and selecting

MASONSON/ALL-INCLuSIVE ETF WEBSITES deals offered to new customers for standard as well as retire-
Continued from page 45 ment accounts from the well-known firms. For example, both
Fidelity and Schwab offer 500 free stock and ETF trades a
year for a $100,000 deposit. Fidelity gives investors two years
data, keep it updated, and lay it out in a massive spreadsheet, to make the trades compared to one year for Schwab. In some
and then try to analyze it quickly to make sense of it. For- campaigns, cash bonuses are offered for different account ar-
tunately, that task has been accomplished for you. So enjoy rangements. Other brokerage firms including TD Ameritrade
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Some additional websites also offering ETF information are ing a new account with a specified minimum balance.
listed in the sidebar “Other Useful ETF Websites.”
If you trade often, check out brokerage firms with great of- FURTHER READING
fers for new accounts. Investors considering a new brokerage Masonson, Leslie N. [2017]. “[Link],” Quick-Scan,
account for buying ETFs should also check out the worthwhile Technical Analysis of StockS & commoditieS, Volume
35: June.
OTHER uSEFuL ETF WEBSITES
[2011]. “[Link],” product review, Techni-
[Link] [Link] cal Analysis of StockS & commoditieS, Volume 29:
[Link] [Link] December.
[Link] [Link] ‡[Link]; [Link]; [Link]
[Link]/etfs [Link] ‡See Editorial Resource Index

[Link] (e.g., Instant X-Ray in portfolio tab)

56 • September 2017 • Technical Analysis of Stocks & Commodities

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September 2017 • Technical Analysis of Stocks & Commodities • 57

 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
S&P 500 E-Mini (Sep ’17) GBLX 3.7 13.8 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>
Crude Oil WTI (Sep ’17) NYMEX 5.6 5.5 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
10-Year T-Note (Sep ’17) CBOT 1 15 7 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Russell 2000 Mini (Sep ’17) ICEUS 2.6 7.5 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra T-Bond (Sep ’17) CBOT 2.5 13.5 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Sep ’17) CBOT 2.2 13.3 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••
5-Year T-Note (Sep ’17) CBOT 0.7 16.4 13 •••••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Sep ’17) GBLX 3.6 9.6 1 ••••••••••••••••••••••••••••••••••••••••••••
Euro FX (Sep ’17) CME 1.6 10.7 3 ••••••••••••••••••••••••••••
2-Year T-Note (Sep ’17) CBOT 0.2 11.4 15 ••••••••••••••••
Eurodollar (Dec ’17) CME 0.1 8.1 19 ••••••••••••••••
ULSD NY Harbor (Sep ’17) NYMEX 4.6 5.6 1 •••••••••••••••
Gasoline RBOB (Sep ’17) NYMEX 4.9 6.7 1 ••••••••••••••
Natural Gas (Sep ’17) NYMEX 6.5 12.2 4 ••••••••••••••
Soybeans (Nov ’17) CBOT 4.6 14.1 4 •••••••••••••
Ultra 10-Year T-Note (Sep ’17) CBOT 1.2 12.7 5 •••••••••••••
British Pound (Sep ’17) CME 2.8 9.8 3 ••••••••••••
Dow Indu 30 E-Mini (Sep ’17) CBOTM 3.6 12.1 2 •••••••••••
Japanese Yen (Sep ’17) CME 2.9 22.3 4 •••••••••
Sugar #11 (Oct ’17) ICEUS 7.6 11.6 6 •••••••••
High Grade Copper (Sep ’17) COMEX 3.7 11.2 3 ••••••••
Live Cattle (Oct ’17) CME 5 9.7 3 •••••••
S&P Midcap E-Mini (Sep ’17) GBLX 3.7 11.8 1 •••••••
Silver (Sep ’17) COMEX 6.6 24.3 3 •••••••
Corn (Dec ’17) CBOT 4.8 21.6 14 ••••••
Australian Dollar (Sep ’17) CME 1.8 10 4 •••••
Canadian Dollar (Sep ’17) CME 1.3 8.2 5 •••••
Coffee (Sep ’17) ICEUS 5.8 8.8 2 •••••
Gold (Aug ’17) COMEX 3.4 20.3 3 ••••
Mexican Peso (Sep ’17) CME 5.3 14.3 6 ••••
Soybean Meal (Dec ’17) CBOT 6 14.7 4 •••• CBOT Chicago Board of Trade, Division of CME
Cocoa (Sep ’17) ICEUS 7.9 11.3 4 ••• CFE CBOE Futures Exchange
Lean Hogs (Oct ’17) CME 4.9 6.5 3 ••• CME Chicago Mercantile Exchange
Platinum (Oct ’17) NYMEX 4.5 7.4 2 •••
COMEX Commodity Exchange, Inc. CME Group
Wheat (Sep ’17) CBOT 5.5 13.4 6 •••
GBLX Chicago Mercantile Exchange - Globex
30-Day Fed Funds (Jan ’18) CBOT 0.1 5.3 12 ••
ICE-EU Intercontinental Exchange-Futures - Europe
Cotton #2 (Dec ’17) ICEUS 6.4 24.1 6 ••
Crude Oil Brent (F) (Sep ’17) NYMEX 5.6 5.2 1 •• ICE-US Intercontinental Exchange-Futures - US
Hard Red Wheat (Sep ’17) KCBT 6.4 13.7 5 •• KCBT Kansas City Board of Trade
Palladium (Sep ’17) NYMEX 12.1 24.9 1 •• MGEX Minneapolis Grain Exchange
Soybean Oil (Dec ’17) CBOT 4.5 17.5 11 •• NYMEX New York Mercantile Exchange
Swiss Franc (Sep ’17) CME 2.6 14.6 3 ••
Feeder Cattle (Aug ’17) CME 5.8 8.8 1 •
New Zealand Dollar (Sep ’17) CME 1.9 11.1 5 •
S&P GSCI (Aug ’17) CME 4 6.5 1 • 1709
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • September 2017 • Technical Analysis of Stocks & Commodities

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When in- After you’ve minimized costs,
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The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis, Inc. declines any and all liability
for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical Analysis, Inc. makes no warranties, express or implied, as to the
accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers, directors and shareholders, from any and all liability and obligations whatsoever in connection with or
arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to cease using it. This list is updated frequently.
If you are aware of a business that should be listed, please email us at Editor@[Link].

September 2017 • Technical Analysis of Stocks & Commodities • 59

 Putting The Probabilities In Your Favor

Why Most Traders Fail

(And Why You Won’t)
It’s often said that most traders fail or never get to the point effort—to profit consistently. To be successful in anything in
of having consistent profits. But the chances of beating these life, you must spend time putting in consistent effort. In his
odds may be more attainable than you think. book Outliers, Malcom Gladwell writes that it takes roughly
10,000 hours of practice to achieve mastery in a field. He
by Stephen Burnich came to this conclusion based on his research and studies of

W
extremely successful people that he conducted to find out how
e’ve all heard that the majority of traders never they achieved success. He found this practice rule applied to
become consistently successful. But I believe many unrelated professions and talents, including:
that most traders never really give themselves a
chance to be winners. Most likely, they’ve started Learning to play the violin. In the 1990s, a team of psycholo-
with a lottery mindset that goes something like gists studied violin students and their habits as children.
this: “Trading seems like easy money … I’ll just The conclusion was that the elite performers had averaged
throw a couple thousand dollars into my brokerage over 10,000 hours of practice while the underperformers
account and see what happens, ” or “If I can just had only 4,000 hours of practice.
find that one big winner, then I’ll be able to retire
ALVOV/SHUTTERSTOCK

on the beach.” Too many people have been lured into trading Computer programming. Bill Gates and Paul Allen acquired
by so-called gurus who make claims of massive profits and more than 10,000 hours of coding before they even launched
promise that you can too, and with very little effort. Microsoft. Not your average college dropouts!
But the fact is that trading does take effort—a lot of
60 • September 2017 • Technical Analysis of Stocks & Commodities
 AT THE CLOSE

Probability of Profit at Expiration

+1000
SPX 5.17% 77.42% 17.41%
+500 Max profit at expiration
Break-even Break-even
P/L 0 at expiration at expiration

-500

-1000

thinkorswim by TD Ameritrade
-1500

-2000
Max loss Max loss
2056.33

2348.60
-2500 at expiration at expiration
1/2/17
2/17/17
-3000
2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100 2110 2120 2130 2140 2150 2160 2170 2180 2190 2200 2210 2220 2230 2240 2250 2260 2270 2280 2290 2300 2310 2320 2330 2340 2350 2360 2370 2380 2390 2400
Price
FIGURE 1: PROBABILITY OF PROFIT AT EXPIRATION. This trade setup would give us a probability of profit of 77.42%, meaning if we repeated this trade enough times,
it would succeed about 77.42% of the time—our average win rate. The maximum possible loss would be $2,645 and the maximum possible gain is $355 at expiration.
Would this trade be worth the risk to you? Now that you know the risk–reward tradeoff, you can decide.

Musicians. The Beatles played more than 1,200 concerts you’re looking for.
together before their breakout year in 1964. In this example, there are 47 days to expiration, and suppose
we chose the following strikes:
You might be thinking, yes, but some people are just born
with all the necessary natural talent, right? You would think Sold 2345 call
that some elite performers, with fewer hours of practice, Bought 2375 call
would have emerged from Gladwell’s studies. But there were Sold 2060 put
no such “naturally gifted” performers that emerged. Elite Bought 2030 put
performers not only practiced more, but they fell in love with
their practice. I show a graph of this trade setup in Figure 1. This trade setup
would give us a probability of profit of 77.42%. So theoreti-
No shortcuts cally, if we did this trade over and over, the probabilities would
Have you ever met someone who seems to have a lucky play out to winning 77.42% of the time. That wouldn’t be a
horseshoe in their back pocket? Start paying closer attention bad result, would it?
to these people. What you may find is that the harder they However, the winning percentage is not the only thing that
work, the “luckier” they get. matters. We also have to determine if the risk we are taking
How does this relate to trading? How do you become con- is worth the reward. In this case, the maximum loss we could
sistent at producing winning trades? How do you become part suffer would be $2,645 (assuming one contract is traded). The
of the top 10%? How do you become an “elite” trader? potential gain, if SPX stays in our range, would be a maximum
As you may have guessed, the answer is practice. There is of $355 at expiration.
no magic indicator, or naturally gifted traders. In fact, nobody There’s a relationship between risk and reward with every
knows what the market is going to do. Not Warren Buffett, not trade. It’s up to you to determine what is best for you. Do
Jimmy Buffett … no one! Once you realize that, you will be you want a lower payout with a higher probability of profit,
well on your way to becoming a great trader. That’s because or would you prefer a higher payout for a lower probability
trading is not about this or that expert knowing more than you of winning?
do about a particular stock. Rather, it’s about using the correct The key is to enter the trade that best fits your personality
strategy, and at a time when the odds are more in your favor. and fits the overall risk/return of your portfolio. Then it’s a
Trading is about probabilities. matter of placing the trade over and over until you have traded
Here’s one important aspect about trading, and option-selling enough occurrences to allow the probabilities to play out. The
strategies in particular: You can define your probability of
profit (POP) before you even enter a trade.
Let’s look at an iron condor in SPX (S&P 500) as an example.
Say you enter this type of trade with 30 to 60 days to expiration Trading is about using the
(DTE) and that you wanted to enter your iron condor trade
with a probability of profit over 75%. This suggests you want
correct strategy at a time when
a 75% chance of making money on the trade as long as the the odds are more in your favor.
price of SPX stays within a certain range between the time Trading is about probabilities.
you enter the trade and the time the options expire. You could
simply choose the strikes that give you the probabilities that
September 2017 • Technical Analysis of Stocks & Commodities • 61
 more trades you place, the closer your winning percentage Stephen Burnich is the cofounder and head instructor at
will match the theoretical probabilities of each trade. NavigationTrading, an options education firm. He can be
For example, If you place 10 trades with a 77% chance reached via the website at [Link] or by email
of winning, but you lose eight of them, does that mean the at info@[Link].
trading strategy doesn’t work? No, it just means you haven’t
made enough trades to complete a large-enough sample size. Further reading
Consider placing 100 or more trades to give yourself a chance Chen, Jesse [2001]. “The Iron Condor,” Technical Analysis of
for the probabilities to play out. Stocks & Commodities, Volume 19: August.
Sarkett, John A. [2007]. “Double Calendars And Condors,”
In the end Technical Analysis of Stocks & Commodities, Volume
You must put in consistent effort not only 25: June.
to get in your hours of practice, but also to ‡thinkorswim (TD Ameritrade)
place enough trades to achieve the average ‡See Editorial Resource Index
winning percentage for your strategy. †See Traders’ Glossary for definition
I think I’m currently on my 9,999th hour
of trading … only one more to go!

TRADING ON MOMENTUM

DAYTRADING WITHIN WHOLE NUMBERS

Continued from page 7 Strategically, you are simply seeking
to buy just above a whole number
and then sell once it has moved in
This technique works because traders with thousands of
use whole numbers for both swing and shares; this is dan- your favor, before it reaches the next
intraday decision making. To capital- gerous and false whole number.
ize on intraday momentum daytrading (as any credible
volatility, entering slightly above whole expert will attest).
numbers and exiting slightly below Professional daytrading depends on with stocks priced $15–$50 per share
the next highest whole number makes wide-range, liquid, high-volatility instru- that trade at least 15K shares per min-
perfect sense, And the best part is, you ments that have solid profit potential and ute (volume), because these are the best
will find that it becomes much easier for tradable ranges. For example, it is much stocks to daytrade (they are much more
you to spot entries and exits when you smarter to trade 300 shares of a $30 stock likely to run at least $0.50 compared to
use whole numbers as default support & with a two-point trading range than to dangerous under-$10 stocks, which are
resistance areas. trade 3,000 shares of a $3 stock with a choppy and have poor risk-to-reward po-
hard-to-trade $0.40 trading range, for tential). In my experience with day- and
doN’t Be teMPted the same amount of capital. swing trading several million dollars’
The worst instruments to daytrade are worth of real-money trades over the
low-float, under-$10 stocks (or penny trade MaNageMeNt tIPs years, I have found that simple, strong,
stocks), because the upfront risk needed Hyperactive, coffee-drinking daytraders easily recognized technical breakout
to profit from these requires scalping for (you know who you are!) may be tempted signals like these can produce the biggest
tiny $0.20-type moves with thousands of to enter too soon, for example, just $0.05 winning trades. I hope this helps you in
shares, which leads to account-destroy- cents or $0.10 cents above a whole num- your trades as well.
ing, expensive stop-losses and should ber. This is too early and often leads to
be avoided. Why? Because cheap stocks false breakouts that stop out. Similarly, Ken Calhoun is a producer of trading
seldom run for $0.50 cents or more in traders may want to erroneously “let courses, a live trading room, and video-
a single direction, which is a necessary their winners run” and wait too long based training systems for active traders.
component for successful daytrading. to exit, which is also a mistake, since He is the founder of [Link],
There are educators who tend to mis- sellers come in at whole numbers more an educational resource site for active
lead the retail trading community into often than not. traders, and is a UCLA alumnus.
believing that people can easily make a One final important note: This tech-
fortune scalping cheap, under-$10 stocks nique is designed to be used specifically
62 • September 2017 • Technical Analysis of Stocks & Commodities
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