THE TRADERS’ MAGAZINE SINCE 1982 [Link].

com AUGUST 2015

FEBRUARY 2016

Top Three
Indicators
Need a good set to start
the new year right? 10

Delta Neutral
Positions
Profit with reduced risk 14

Binary Options
Why traders like them 28

Market Moves
How we react to them
makes all the difference 32

INTERVIEW
Fausto Pugliese of
Cyber Trading University 40

QUICK-SCAN
n The Money Calendar

FEBRUARY 2016
Daily technical commentary
by expert analysts to help you
make smarter investment decisions
From daily blogs to live webinars, [Link] hosts free
current market analysis and educational commentary from some
of the industry’s most distinguished technical analysts.

Free daily blogs featuring over a

dozen renowned technical commentators
John Murphy Martin Pring [Link] hosts free daily blog content from over a
dozen professional technical analysts, including prominent
names such as John Murphy, Martin Pring and Arthur Hill.
Thousands of online investors trust [Link]
to provide the unbiased expert analysis and enriching
Arthur Hill Tom Bowley educational commentary they need to cut through the
noise and make smarter investment decisions.

Live, interactive webinars hosted

Greg Schnell Chip Anderson by seasoned market technicians
Our free daily webinars are hosted by some of the financial
industry’s most distinguished chartists. Join these technical
titans LIVE as they put their years of experience on display
and share invaluable insights into the tools and strategies
Carl Swenlin Erin Heim they use in their own trading. Tune in to any of our seven
different webinar shows for free, airing six days a week,
Monday through Saturday, and learn from the best to
boost your technical skills and financial prowess.

Gatis Roze Julius de Kempenaer

and more!

[Link]
© 2015 [Link],Inc. All Rights Reserved. Information provided by [Link] is not investment advice. You are responsible for your own investment decisions.
 ALWAYS BE
DATA DRIVEN
Fidelity Active Trader Pro®
helps traders:

KNOW WHEN TO GET IN

with pattern and event recognition
CVL INDIVIDUAL (X12345678)
CVLCVL
1 Year Support/Resistance (100 Day) Trade Alert CARSON GENETICS
Today
Today 3 MO
3 MO 6 MO
6 MO 1 Year
1 Year 2 Year
2 Year SaveExport
B 17.45
Save Export
x 515 fully integrated into the interactive charts.*
Draw Indicators
Draw Indicators Events
Events Compare
18.79
Compare Technical
Technical
S
18.65
Analysis Settings
Analysis Settings 17.45 A 17.45 x 1,971
Zoom:
Zoom:
-0.03 (-0.17%) V 45.819.056

KNOW WHEN TO GET OUT

03/21/2015 [Link] PM O 236.02 H 236.20 L227.50 C 229.45
03/21/2015 [Link] PM O 236.02 H 236.20 L227.50 C 229.45
18.29
OPEN POSITION
T TS 260.00

with tools that let you set conditional

260.00
Value S $8,725 500 SHRS
17.79 250.00
250.00

orders based on profit and loss scenarios.

Cost $8,735 $17.47 240.00
17.45 240.00
17.29 Margin Req. $2,616 30.00% 229.45

CVL
229.45

CVL
Today’s G/L -$10 -0.12% 220.00
S 16.85

EASILY PLACE TRADES & ALERTS

220.00
16.80 Total G/L -$10 0.12% 210.00
210.00
CLOSING EQUITY ORDERS 200.00

directly from charts.

200.00
16.30 Est. Gain (Limit) $690 7.90% 190.00
CARSON GENETICS 190.00

T CARSON GENETICS Est. Loss (Stop) -$260 -2.98% 180.00

TB B 15.80
180.00
170.00
CLOSED POSITION 170.00
160.00
$
160.00
15.80 YTD G/L $2,735 3.60% 150.00
150.00
140.00
140.00
Volume 6,228,654 14.80
Volume 6,228,654

14.30
Positions News Research Options

OPEN AN ACCOUNT GET 500 FREE TRADES†

Visit [Link]/AlwaysBe, or call [Link]

Where smarter investors will always be.

STOCKS | BONDS | MUTUAL FUNDS | ETFS | OPTIONS

†
Get 500 commission-free trades good for two years, access to Active Trader Pro®, and a $200 Apple® Gift Card when you deposit $100,000 into a nonretirement brokerage account.
Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). Trades are limited to online domestic equities and options and must be used within two
years. Options trades are limited to 20 contracts per trade. Offer valid for new and existing Fidelity customers opening or adding to an eligible Fidelity IRA or Fidelity brokerage retail account.
Accounts receiving $100,000 or more will receive 500 free trades. Account balance of $100,000 must be maintained for at least nine months; otherwise, normal commission schedule rates
may be retroactively applied to any free trade executions. See [Link]/bundleoffer1 for further details. Apple Gift Cards can be redeemed at any Apple Store®. Other terms and conditions
may apply. Apple is a registered trademark of Apple Inc. All rights reserved. Apple is not a participant in or sponsor of this promotion.
*Active Trader Pro PlatformsSM is available to customers trading 36 times or more in a rolling 12-month period; customers who trade 120 times or more have access to Recognia anticipated events
and Elliott Wave analysis.
Screens are for illustrative purposes only.
Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2015 FMR LLC. All rights reserved. 736003.1.0
 CONTENTS FEBRUARY 2016, Volume 34 Number 2

10 Top Three Indicators For 27 Futures For You

Your 2016 Trades by Carley Garner
(And Beyond) Here’s how the futures market
by Joshua Martinez really works.
You’ll have more confidence in 48 Q&A
the trades you place if you use the 28 Why Do Traders Love by Rob Friesen
right combination of confirming This professional trader answers
Binary Options? a few of your questions.
indicators. Need a good set to get
by Gail Mercer
started with? Here are three you
The answer is simple—you can
can use to help get your trading AT THE CLOSE
avoid most pitfalls that cause
geared up for the new year.
failure in trading. 61 Stop Shooting Yourself
In The Foot
13 Moving Average Breakouts 32 Reacting To Market Moves, by Alan Kindrick
by Ken Calhoun The idea of following the trend
Here, we introduce a new monthly Part 1
is nothing new, yet we often
column written by this professional by Melvin E. Dickover
tend to ignore it. Here’s why you
daytrader and founder of Trade- The reason we make counter-
shouldn’t.
[Link]. The column will productive trading decisions is
cover momentum trading, breakout because of our biases and flawed
trading, and other techniques for intuition. In this first part of a two- REVIEW
active traders. This month, you’ll part series, we analyze and under-
learn an updated trading technique stand these trading behaviors so 47 • The Money Calendar
we can avoid costly mistakes and Quick-Scan: Seasonal calendar
with specific, actionable technical software feature from Tom’s
analysis, and you’ll learn how to become more effective traders.
Option Tools
identify and manage the trade from
start to finish. INTERVIEW
40 Understanding Price DEPARTMENTS
FEATURE ARTICLE Movement With 6 Opening Position
14 Profiting With Delta Fausto Pugliese 8 Letters To S&C
Neutral Positions Fausto Pugliese is founder and
president of Cyber Trading Uni- 49 Trade News & Products
by Stan Freifeld
Trading delta neutral positions is versity. He began his career on 50 Traders’ Tips
a strategy that is used by profes- Wall Street as a stockbroker and 57 Advertisers’ Index
sional and nonprofessional traders was one of the first independent 57 Editorial Resource Index
to produce profits with reduced traders to take advantage of the
risk. The idea is to remove the di- Direct Access Trading technology 59 Classified Advertising
rectional component from the po- boom that started in 1987. He is 59 Traders’ Resource
sition so that profits can be made the author of How To Beat Market 60 Futures Liquidity
whether the underlying moves up Makers At Their Own Game: Un-
or down. Here’s how to construct covering The Mysteries Of Level
delta neutral positions. II. We spoke with him about why
education is important if you want
to become a successful trader.
20 Higher Highs & Lower Lows TIPS

by Vitali Apirine 45 Explore Your Options

Spotting emerging trends, defining
by Tom Gentile
correction periods, and anticipating
Got a question about options?
reversals can benefit your trading
in many ways. Here’s a look at a
trading system that uses momentum This article is the basis for
TIPS Traders’ Tips this month.
n Cover: Lisa Haney
indicators to define trend direction. n Cover concept: Christine Morrison/Lisa Haney

Copyright © 2016 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
postage paid at Seattle, WA and at additional mailing offices. Postmaster: Send address changes to Technical Analysis of Stocks & Commodities™ 4757 California Ave. S.W., Seattle, WA 98116-4499 U.S.A.
Printed in the U.S.A.

4 • February 2016 • Technical Analysis of Stocks & Commodities

 Economics 101

Why does IBKR do more

trades than any other broker?
Because it is the least expensive.*

Why is IBKR the least expensive broker?

Because it does more trades.†

How did we get here?

In a free economy the best technology wins!*

Interactive Brokers
[Link]/sc101

Member - NYSE, FINRA, SIPC – Supporting documentation for any claims and statistical information will be provided upon request.
*According to Barron’s best online broker review on March 9, 2015, How Secure Is Your Securities Portfolio. Lowest cost of any broker and
Best Trading Experience & Technology in Barron’s survey. For more info see [Link]/awards. Barron’s is a registered trademark of Dow
Jones & Company, Inc. † Based on DARTs of US ebrokers in Q3 2015. 02-IB15-959CH940
 February 2016 • Volume 34, Number 2
Opening Position
The Traders’ MagazineTM

O
EDITORIAL
editor@[Link]
ur lives move forward based on the
Editor in Chief Jack K. Hutson decisions we make, and we make a lot
Editor Jayanthi Gopalakrishnan
of them each day. The same goes for trading—
Production Manager Karen E. Wasserman
our success is directly correlated to whether
Art Director Christine Morrison
Graphic Designer Wayne Shaw
we make the right decisions or not.
Webmaster Han J. Kim
The Federal Reserve finally raised interest
Contributing Editors John Ehlers, rates and that decision impacted the markets.
Anthony W. Warren, Ph.D. After the announcement was made, it sent
Contributing Writers Thomas Bulkowski, Martin Pring,
Barbara Star, Markos Katsanos
waves of optimism among investors and
traders. It was a sign that perhaps the worst
OFFICE OF THE Publisher
was over and the economy would be strong
Publisher Jack K. Hutson moving forward. Obviously, the Fed’s decision had an impact on traders. But the
Industrial Engineer Jason K. Hutson next day when the markets opened, that optimism didn’t follow through, and as a
Project Engineer Sean M. Moore
Controller Mary K. Hutson
result, you may have regretted opening that position you did the previous day.
This type of reaction is seen in the markets all the time. Any spurt of optimism
Advertising Sales sends traders rushing to buy positions. Emotions are powerful and we don’t re-
4757 California Ave. S.W.
Seattle, WA 98116-4499 alize how much they control what we do. When the markets move quickly, we
1 206 938-0570 Fax 1 206 938-1307
advert@[Link]
tend to make quick decisions, which can often be careless ones. We don’t want
National Sales Manager Edward W. Schramm
to take the time to analyze anything and instead go with our gut feeling, taking
on more risk than we should. After all, our gut instincts have to be correct, or so
Circulation we think.
Subscription & Order Service 1 800 832-4642
1 206 938-0570 Fax 1 206 938-1307
This type of behavior is seen repeatedly in the markets and is the main reason
circ@[Link] so many traders fail to succeed. When you trade based on gut instinct, you’re
Subscription Manager Sean M. Moore making a decision that is not based on any type of analysis. You have a 50%
chance of being wrong. That’s too much of a risk to take. Your reward from a
Website
[Link]
trade is probably going to be less than 50%, so why take on a risk as high as
Staff members may be emailed through the Internet 50% to make a much smaller percentage gain?

O
using first initial plus last name plus @[Link]

Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal

ne of the biggest reasons so many traders fail is that they don’t think about
use, or the inter­nal or per­sonal use of spe­cific cli­ents, is grant- the risk/reward tradeoff before placing a trade. It is not unusual to have
ed by Tech­ni­cal Anal­y­sis, Inc. for users reg­is­tered with the
Cop­y­right Clear­ance Cen­ter (CCC) Transactional Reporting
a string of losing trades and you have to be able to withstand those losses. That
Serv­ice, pro­vided that the base fee of $1.00 per copy, plus means you have to have enough capital to allocate to your trading and you have
to know how much you are willing to risk to make a small gain. The reality is
50¢ per page is paid directly to CCC, 222 Rosewood Drive,
Danvers, MA 01923. Online: [Link] For
those organ­iz­ a­tions that have been granted a photocopy
license by CCC, a sep­a­rate sys­tem of pay­ment has been
that you’re going to have far fewer gains than losses. Your responsibility as a
arranged. The fee code for users of the Transactional trader is to figure out how much of your capital you can risk without losing too
Reporting Serv­ice is: 0738-3355/2015 $1.00 + 0.50.
Sub­scrip­tions: USA: one year (13 issues) $89.99;
much. Yes, it involves some math, but nothing too complicated.
Magazines shipped outside the US require additional Next time, before making the decision to place a trade, think about how much
of your entire trading capital you’re risking on the trade and how much of that
postage as follows: Canada, US$15 per year; Europe,
US$25.50 per year; all other countries US$39 per year.
Sin­gle copies of most past issues from the cur­rent year are
avail­a­ble pre­paid at $8 per copy. Prior years are avail­a­ble
amount you’re willing to lose. Are you prepared to lose that much? If not, or
in book format (without ads) or digitally from [Link]. you’re not sure, don’t place that trade.
com. USA funds only. Washington state res­i­dents add
sales tax for their locale. VISA, MasterCard, AmEx, and
Here’s to good, logical trading.
Discover [Link] orders: 1 800 832-4642
or 1 206 938-0570.
Technical Analysis of Stocks & Commodities™,
The Traders’ Magazine™, is prepared from information
Miami Downtown Richard Cavalleri/Shutterstock

believed to be reliable but not guaranteed by us with­out

further verification, and does not purport to be complete.
Opinions expressed are subject to revision without noti-

Jayanthi Gopalakrishnan,
fication. We are not offer­ing to buy or sell securities or
commodities discussed. Technical Anal­ysis Inc., one or
more of its officers, and authors may have a position in Editor
the securities discussed herein.
The names of products and services presented in this
magazine are used only in an editorial fashion, and to the
benefit of the trademark owner, with no intention of infring-
ing on trademark rights.

6 • February 2016 • Technical Analysis of Stocks & Commodities

 THE SMART OPTION
FOR OPTIONS TRADERS

REAL-TIME CHART ALERTS

Analyze the market from all angles with real-time chart
patterns, alerts and indicators.

POWERFUL STRATEGY SCANNING TOOLS

Use advanced tools to search the market for
trading opportunities.

UNLIMITED 2-D AND 3-D RISK ANALYSIS

Visualize profit and loss potential for option positions
based on time to expiration, volatility and underlying price.

ADVANCED ORDER-ENTRY TECHNOLOGY

Trade even the most complex options spread
strategies with just a few clicks.

[Link]/TASC | 800.264.7538

An option is a contract to buy or sell a specific financial product at a certain price on a certain date. Each leg of a multi-leg spread incurs
a commission and bid/ask cost that can be significant. It is possible to lose all of your investment if the underlying market moves against
your position. Options trading is not suitable for all investors. Please visit [Link] for relevant risk disclosures and a link to the
document titled Characteristics and Risks of Standardized Options or call 1-888-OPTIONS to obtain a copy.
A minimum activity fee of $99.95 may apply. A $14.95 fee applies for options exercises or assignments. There is an Options Regulatory Fee of $0.0417 per contract ($0.05
minimum) applicable to all options transactions. A $1 cancellation fee may apply. These costs will affect the profitability of all stock and options trades and should be considered
prior to making any trade. No offer or solicitation to buy or sell securities, securities derivative, futures products or off-exchange foreign currency (forex) transactions of any
kind, or any type of trading or investment advice, recommendation or strategy, is made, given or in any manner endorsed by any TradeStation affiliate.
Past performance, whether actual or indicated by historical tests of strategies, is no guarantee of future performance or success. There is a possibility that you may sustain
a loss equal to or greater than your entire investment regardless of which asset class you trade (equities, options futures or forex); therefore, you should not invest or risk
money that you cannot afford to lose. Your account application to trade options will be considered and approved or disapproved based on all relevant factors, including your
trading experience. System access and trade placement and execution may be delayed or fail due to market volatility and volume, quote delays, system and software errors,
Internet traffic, outages and other factors.
Equities, equities options, and commodity futures products and services are offered by TradeStation Securities, Inc. (Member NYSE, FINRA, NFA and SIPC). TradeStation
Securities, Inc.’s SIPC coverage is available only for equities and equities options accounts. Forex products and services are offered by the TradeStation Forex divisions of
IBFX, Inc. (Member NFA) and IBFX Australia Pty Ltd, ABN 84 142 210 179, holder of AFSL #363972. Copyright © 2001-2015 TradeStation Group, Inc.
 The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communi-
cation with our readers. Is there something you would like to know more (or less) about?
Tell us about it. Without a source of new ideas and subjects coming from our readers, this
magazine would not exist.
Email your correspondence to Editor@[Link] or address your correspondence
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
name and address for verification. Letters may be edited for length or clarity. The opinions
expressed in this column do not necessarily represent those of the magazine.—Editor
Author Markos Katsanos replies:
As I mentioned in my December 2015
article, the correlation between the Ca-
TRADING THE LOONIE in detail to try to grasp the logic. nadian dollar and oil can break down
Editor, I also did research on Canadian oil for very high oil prices.
I just finished Markos Katsanos’ ar- sands and the relationship between the In 2008 when the oil price went as
ticle in the December 2015 issue of Canadian dollar and oil futures. I wanted high as $140, the Canadian dollar made
Stocks & Commodities (“Trading to have a deeper understanding of the a top almost eight months earlier as
The Loonie”)—it’s excellent (and the market, cost of production, and so on investors believed that oil couldn’t go
article’s art is shared to the front cover, (by the way, I worked my way through any higher. In 2011 when oil was lower
too). The results discussed in the article college working for an oil & gas analysis (around $110 per barrel), the opposite
are impressive. I reread the article several company analyzing core samples). occurred. Investors, anticipating higher
times and also reviewed Katsanos’ book In addition, I was investigating poten- oil prices, pushed the Canadian dollar
Intermarket Trading Strategies, with its tial proxies to minimize the drawdowns higher, which made a double top before
discussion of Bollinger Band divergence, and enhance exits. I had a thought based eventually following oil lower.
on the logic that a com- As you correctly pointed out, Cana-
pany’s price often leads dian oil stocks correlate better with oil
materials, so I explored a than with the Canadian dollar.
few of the largest oil firms As you can see in the correlation ma-
in Canada. Figure 1 is a trix shown in Figure 2, the correlation
quick look at Suncor En- between oil and SU is stronger (r=0.62)
ergy (SU); note the down- than its correlation with the Canadian
turn before WTI crude dollar (r=0.54). It is interesting that SU
oil in 2008. Also note the correlates even better with OIH (r=0.93).
divergence with both WTI I am not sure, however, whether you can
and SU as compared to the take advantage of this strong correlation
Canadian dollar in 2011. to trade SU using a divergence system,
My guess is that WTI because as you can see in the chart
provides a more consistent in Figure 3, they both move together,
indicator (firms often have presenting fewer opportunities to use a
other nonrelated factors divergence-based system. In addition,
influencing price). considering the very high correlation,
One of the things I one can’t be sure that a decoupling
appreciate about Katsa- between SU and OIH is because of a
nos’ approach is how he company-specific problem rather than
combines different types a temporary market inefficiency.
of indicators/tools (Bol-
linger Bands, MACD, CONTINUING…
stochastics, stop-losses, Thank you, Markos Katsanos, for tak-
and so on) to leverage ing the time to perform the correlation
each tool’s strengths to analysis and sharing it with me.
maximize the combined Yes, you did mention in your article
approach. Thank you the decoupling at higher/lower prices—
Figure 1: Suncor Energy (SU). Note the downturn before WTI crude
again to him for sharing that’s why I investigated the breakeven
oil turned down in 2008. Also note the divergence with both WTI and SU this approach. cost for Canadian oil sand companies.
as compared to the Canadian dollar in 2011. Ed McDonald My first assumption was that at very
8 • February 2016 • Technical Analysis of Stocks & Commodities
 Build powerful trading
systems in MINUTES,
not hours or days.
10-Year Correlation 2005–2015 would you explore to determine
which approach was optimum?
CAD SU OIH CL
(My guess is you would use
CAD 1.00 0.54 0.53 0.81 backtesting, as you did in your
SU 0.54 1.00 0.93 0.62 book, and testing multiple ap- ®

OIH 0.53 0.93 1.00 0.67 proaches to see how they ranked.)
Do the fundamentals that drive
CL 0.81 0.62 0.67 1.00
each correlated market have an
Figure 2: CORRELATION MATRIX. The correlation between oil influence on which approach
and Suncor Energy (SU) is stronger (r=0.62) than its correlation
with the Canadian dollar (r=0.54). may be better? Some examples
of this would be when identifying Maybe it’s time to try
low oil prices (short-term), the oil sands a market leader or laggard driven by the
producers would drop out based on their same fundamentals (such as a change in something NEW!
operating/production costs being higher short-term interest rates with bonds vs.
than other conventional supplies. What I stocks, or if one market drives the other,
discovered was that the cost of oil sands such as—as you mentioned—an increase
is not as great as I had recalled (it’s now in Canadian oil leads to an increase in Winner
probably a more efficient process) and the Canadian dollar). 13 years
one article indicated they can be will- Thanks again for your time and for
ing to operate at a loss (short-term) in providing the chart. in a row!
order to maintain for the longer-term
projections. Author Markos Katsanos replies:
I agree that a divergence system would Actually, my first choice for the Canadian
not provide sufficient opportunities with dollar system was the single regression [Link]
“tightly” correlated markets. I purchased method, but it didn’t perform well enough, 301.662.7950
a subscription to S&C to read your article so I used the BB instead. Based on my
on the aussie (“Trading The Aussie,” experience with divergence systems, I
S&C, February 2009). I noticed in that think that the BB divergence performs independent variable, crude light (CL),
article that you also used Bollinger Band better on tightly correlated markets, as and only improved very slightly when I
(BB) divergence with the aussie. My it will detect even minor divergences and substituted the CAD for the CL.
guess is (as pointed out in your articles will produce more signals. By the way, do you have an estimate
and book) that’s because both correlate The multiple regression system will of the cost of extracting oil from the
strongly with a commodity. only add value in cases where there is oil sands?
In reading your book (the forex chap- low correlation between the independent
ter), I noticed the BB divergence did variables. For example, in trying to FINALLY
not do well (as compared to the other predict SU in terms of OIH, the r2 of the In response to your question about costs
approach tested), but the multiple regres- regression when using only OIH did not of extracting oil from oil sands, I located
sion really excelled. What indicators improve at all when I added a second a few articles and some graphs at the fol-
lowing sites that seem to discuss this:
Suncor Energy (SU), Light Crude Composite continuous (CL), HOLDRS Oil Service ETF • [Link]
volume-10/issue-10/features/shale-oil-
[Link]
• [Link]
Oil au/2014/11/saudis-declare-war-on-frack-
[Link]
OIH
as well as some data from Scotiabank.
Here are my comments based on what
SU
I can surmise:

Comment 1: Oil sands (today) are primar-

ily derived from surface mining, a much
lower-cost method. But the vast amount
of supply seems to require drilling and
Figure 3: Weekly chart of SU, OIH, and CL. Suncor Energy (SU) is depicted by a thick blue line, the oil
fracking.
service ETF (OIH) is the black plot line, and WTI crude oil futures continuous contract is the red plot line. SU and
OIH tend to move together, presenting fewer trading opportunities in a divergence-based system. Continued on page 62

February 2016 • Technical Analysis of Stocks & Commodities • 9

 N
ow that we’ve had our fill
of holiday fun and times
are slowing back down (as
slow as normal is, I sup-
pose), it’s back to looking at charts
to find those big trading wins for
the new year. I’ve personally been
setting up my charts to continue
the momentum of last year’s trades
and, most important, checking my
indicators yet again to make sure
I have the perfect combination. As
you set up your charts, there are
three main indicators I think traders
should pay close attention to in 2016
and beyond. I’ll describe the three
indicators here and how I use them,
but for more details as well as how
they’re calculated, see sidebar “The
Three Indicators.” The indicators are
useful in forex trading but also for
stock trading.

Indicator 1: T3 moving average

The first indicator is the T3, devel-
oped by Tim Tillson, which he wrote
about in this magazine in 1998. I use
the T3 like clockwork to help find
major trends in the market. Some
people use the Perry Kaufman in-
dicator. Whatever you use is fine,
but the first indicator I would lock
down is one focused on identifying
the overall trend on the time frame
in question. Check out the red line
on the chart in Figure 1; anything
above that red line is considered to
be in the buy zone. As I’m sure you
can guess, anything below that line is
a potential sell zone. I primarily use
this indicator to find the buy versus
Coin flipping: mj007/waves: tukkki/Tilt dice: bilciu/Shutterstock/Collage: Joan Barrett

Attention, FX Traders
sell zones in the market. This is

Top Three Indicators extremely important for one reason:

Unless you choose to sit out, you can

For Your 2016 Trades

only buy or sell in the market. If you
were to enter the market on a guess,

(And Beyond)
you’d have a 50/50 chance of being
right in your decision to either buy or
sell. For most traders, that’s not worth
the chance of failure and I completely
agree. My goal with this indicator is
You’ll have more confidence in the trades you place if you use the right combination
to tilt the odds in my favor of trading
of confirming indicators. Need a good set to get started with? Here are three you can
in the right direction. But, as you
use to help get your trading geared up for the new year.
know, this is just the beginning of
planning and executing your trade.
by Joshua Martinez
This is why I combine this indicator
10 • February 2016 • Technical Analysis of Stocks & Commodities
 FOREX FOCUS

with the stochastic relative

strength index (stochRSI).

Indicator 2: Stochastic RSI

(StochRSI) indicator
This is one of the more
common indicators and for Buy zone
good reason. This indicator
counts the endless waves in
the market to identify over-
bought and oversold zones.
In Figure 2, you can see
that this indicator breaks up
the market into three zones
made from the two red lines Sell zone
on the chart. When the Sto-
chRSI breaks above the top
red line into the overbought
zone, you might expect the

Market Traders Institute

market to U-turn. The op-
posite is also true; when
the StochRSI is below the
lower red line, the market’s
considered oversold, and
a market correction is ex- FIGURE 1: T3 MOVING AVERAGE. This indicator helps to identify the overall trend. Anything that is above the red line is
pected. U-turns are critical considered to be in the buy zone and anything below the red line is in the sell zone.
to your trading plans since
these reversal points could
either help you turn a great
profit or make your trading
account take a hit.
What I like most about this
indicator is that it’s nothing
new. It’s been around a while,
people have worked hard to
perfect it, and it works. As
always, in trusting any indi-
cator, you have to see its past
performance. Looking back
at Figure 2, in the time span
of this chart, if you were to
have traded using just this
indicator alone, you could
have made three successful
trades just by trading market
U-turns that the indicator
identified.

Indicator 3: Flipit
Last, the one that doesn’t
get enough attention in my
opinion is the flipit indicator.
Finding the trend and where
FIGURE 2: STOCHASTIC RSI. When the StochRSI breaks above the top red line into the overbought zone, you might expect
the market’s going next sim- the market to U-turn. The opposite is also true; when the StochRSI is below the lower red line, the market’s considered over-
ply isn’t enough. Pinpointing sold, and a market correction is expected. These reversal points could either help you turn a great profit or make your trading
your trade means planning account take a hit.

February 2016 • Technical Analysis of Stocks & Commodities • 11

 your position down to the en-
try, which this indicator helps
you do. The gist is that this
indicator acts as an aggressive
inner trendline that makes
the charts pop more visually,
leading you to find potential
entries more easily. Visually
(Figure 3), when the market
is above the green line, the
market is expected to extend
its bullish move when in an
upward trend. If the market
is showing candles below the
red line, consider the market
to be in the buy zone during a
short-term pullback. Overall,
this indicator helps you not
only spot directional shifts but
you can also see the overall FIGURE 3: FLIPIT INDICATOR. When the market is above the green line, the market is expected to extend its bullish move
direction of the trend versus when in an upward trend. If the market is showing candles below the red line, consider the market to be in the buy zone during
a short-term pullback.
a short-term pullback.

Trade with confidence

I want to leave you with this: convergence is key in 2016. If Utilize multiple indicators and
you were burned at all by the market in 2015, you know that trading tools so that you are more
placing confident trades is an important factor in whether or
not your trading account is profitable by the end of the year. If confident about your expectation
you can’t trust what you’re seeing in the market or you’re not for what the market will do next.
sure about your trading plan, chances are, that’s not the trade
for you. Convergence is when you utilize multiple indicators
and trading tools so that you have multiple points of proof [Link] or via Facebook at [Link]
about your expectation for what the market will do next. When com/fxpathfinder/.
multiple signs point to the same trading conclusion, you’ll be
more confident in your trading decisions, right? With that Further reading
said, combining multiple indicators like the three discussed Tillson, Tim [1998]. “Smoothing Techniques For More Ac-
in this article could boost your confidence and returns, start- curate Signals,” Technical Analysis of Stocks & Com-
ing this year. modities, Volume 16: January.
‡The Ultimate Charting Software (Market Traders Institute, Inc.)
Joshua Martinez is a forex analyst at Market Traders In- ‡See Editorial Resource Index
stitute, Inc. He may be reached via email at JoshM@mar-

THE THREE INDICATORS

1. The T3 moving average is an adaptive moving average. StochRSI = (RSI – Lowest low RSI) /
It is a smoothed moving average with a value that falls (Highest high RSI – Lowest low RSI)
between a double exponential moving average (DEMA) and
an exponential moving average (EMA). Trading signals are 3. The flipit indicator is a stop-and-reverse indicator and
generated similar to how moving averages are applied. is helpful for generating entry & exit signals. The indica-
tor plots in step-like fashion. Here’s the formula for the
2. The stochastic RSI (StochRSI) is an oscillator developed flipit indicator:
by Tushar Chande and Stanley Kroll. It applies the stochas-
tic formula to RSI values. The oscillator moves between Top = Sum(high, period)/period
the values of zero and 1. Here’s how it is calculated: Bottom = Sum(low, period)/period
—J. Martinez

12 • February 2016 • Technical Analysis of Stocks & Commodities

 TRADING ON MOMENTUM

Moving Average Breakouts

Welcome to a new column on techniques for active traders. Step 1: Locate a 90-day daily stock chart priced between $20
Each month, this daytrader and founder of TradeMastery. and $70 per share with a minimum range of at least 10 points,
com will cover topics such as momentum trading, breakout similar to the daily chart of E.I. DuPont de Nemours & Co.
trading, and other technical analysis–based techniques. This (DD) illustrated in Figure 1.
month, you’ll learn an updated trading technique with specific,
actionable technical analysis, and you’ll also learn how to Step 2: Set a buy-stop order to enter your trade when price
identify and manage the trade from start to finish. has moved at least $0.50 above the high of the days in which
price breaks over each of the 100 SMA and 200 SMA lines.
by Ken Calhoun In Figure 1, the 100 SMA breakout occurred on October 6,
2015 (entry trigger would be $58 + $0.50 = $58.50). The 200
Trading strategy: SMA breakout happened on October 28, 2015 (entry would
100- and 200-period moving average entry be $63 + $0.50 = $63.50).
When price action on a 90-day daily candlestick chart breaks
out above major moving averages, institutional trading volume
usually lifts prices to new highs. You can capitalize on these This strategy works because hedge
breakouts by entering your trade once price moves above fund managers and other market
100-period and 200-period simple moving average (SMA) professionals use these same entry
lines.
signals to enter their positions.
Step-by-step action plan
Here’s how you can put this strategy to work in your trades:
Continued on page 26

AbleTrend Identifies Trend Changes Award

Winning

As Soon As They Happen! Trading

Software

AbleTrend
Guidance 1997 - 2015

Chart —
For Stocks,
Futures,
FOREX, and
multiple time frame Options
AbleTrend 7.0

trend alignment
in one chart
helps to identify
the choppy market

CTA
Risk FREE AbleTrend 30-Day Trial · $20 Discount code: SCMF16 REGISTERED
WITH THE

21
CFTC
®

CELEBRATING SINCE 1995

Start Today! [Link]/SCM Reader’s Choice Awards

©2015 Ablesys Corp. • 20954 Corsair Blvd. • Hayward, CA 94545 • Tel: 510-265-1883 • sales@[Link] 1997-2015 in Stock Trading
System; Futures Trading System
& Option Trading System

THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS
DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET
FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION OF EXCELLENCE
IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND 1994 – 2015
THE TESTIMONIAL IS NO GUARANTEE OF FUTURE PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

February 2016 • Technical Analysis of Stocks & Commodities • 13

14 • February 2016 • Technical Analysis of Stocks & Commodities
 TRading OPTIONS

No direction? No problem.

Profiting With Delta

Neutral Positions
Trading delta neutral positions is a strategy that is Why do you want a DN position?
used by professional and nonprofessional traders When you make a position DN, you are reducing the
to produce profits with reduced risk. The idea is to directional risk the position carries and as you’ll soon
remove the directional component from the position see in an example, the value of the position will not
so that profits can be made whether the underlying change over a small range of stock prices. You are, in
moves up or down. Here’s how to construct delta effect, insuring the value of the position over a range
neutral positions. of stock prices. This insurance can be thought of as
an expense of the position and so the profitability of
the position may be reduced. The range of stock prices

I
t’s not easy to make money trading, but when where the position is protected can be extended further
trading equities, at least the concept is clear: by also making the position gamma neutral, although
buy low and sell high, or sell high and buy I won’t be discussing that in this article. By reducing
low. When trading options, you have more alterna- the directional risk, you can base your strategy on
tives using spreads. It is not unreasonable to buy an one of the other variables that determine the value of
option that you expect will lose value and will result the position—usually volatility, sometimes the time
in a loss while simultaneously selling an option that to expiration, and rarely (especially in the current
you think will lose even more value and will result economic environment) on interest rates.
in a gain. The combination of the gain and loss will In the past, traders used DN trading to take advan-
yield a net profit on the spread. Oftentimes, an option tage of mispriced options, although finding mispriced
trader will determine that he can’t accurately predict options in today’s marketplace is not as easy as it
which way a stock will move and so will want to sounds. Others will make a position DN to protect
take the directional risk out of the equation. Employ- it from price swings over a short period of time.
ing this strategy is often referred to as delta neutral Finally, DN trading is also used in conjunction with
(DN) trading. gamma scalping, which is also beyond the scope of
this article.
Defining delta neutral To understand DN trading, you’ll need to know
A DN position is an option position that may also the definitions of the five greeks and several of the
include stock, where the sum of the deltas of the puts, characteristics of delta and gamma (see sidebar
calls, and stock is equal to zero or close to it. Since “Definitions.”)
deltas represent the risk associated with the directional
component of the position, more deltas (positive or Characteristics of delta and gamma
negative) represent greater risk. When I was a market Delta and gamma are generally expressed as per-
maker, I considered a position that was long or short centages. For example, the delta for one option can
LISA HANEY

less than 500 deltas to be DN. For retail traders, I be shown as 80% or 0.80, meaning that if the stock
consider a delta between -50 and +50 to be DN. price changed by $1, the option price would change

by Stan Freifeld
February 2016 • Technical Analysis of Stocks & Commodities • 15
by $1 x 0.80, or 80 cents. However, the
delta for one option contract (represent- XYZ = 55.00 Position
ing 100 shares of stock) would be 0.80 Size Option premium Delta Delta $$$
x 100 or 80. When viewing delta this +6 Nov 50C @ 6.25 80 480 3,750
way, you can think of it as an equivalent -4 Jan 45P @ 2.10 -30 120 -840
stock position. -6(00) shares @ 55.00 100 -600 -33,000
Deltas for long call options range from 0 -30,090
zero for far out-of-the money (OTM)
options to 100 for deep in-the-money XYZ = 55.50 (+.50) XYZ = 54.00 (-1.00)
(ITM) options. Long put deltas range $$$ P/L $$$ P/L
from zero for far OTM options to -100 +6 Nov 50C@ 6.65 3,990 240 +6 Nov 50C@ 5.45 3,270 -480
for deep ITM options. Short options have -4 Jan 45P@ 1.95 -780 60 -4 Jan 45P@ 2.40 -960 -120
the opposite sign as long options. Long -6(00) shares@ 55.50 -33,300 -300 -6(00) shares @ 54.00 -32,400 600
calls and short puts will have positive -30,090 0 -30,090 0
deltas, whereas short calls and long puts Figure 1: delta neutral example. As the stock price increases to $55.50 or decreases to $54.00, the dollar
will have negative deltas. The delta of value of the position doesn’t change, so there is no gain or loss.
long and short stock is always 100 and
-100, respectively, and doesn’t vary as the price of the stock (remember the D and G are for one option contract)
changes. Here’s an interesting thought question: what is the
delta of cash? Answer: zero. ■■ Jan 40 put @ $1.10, D = -25, G = 4
The gamma of a long put and its corresponding long call is
positive. In fact, the gammas are equal in value. So a position To form a DN position without stock, you just need to calcu-
gains positive gamma when options are bought and negative late a ratio of the deltas. So 60/25 = 2.4, which means you will
gamma when options are sold. Since the delta of stock is 100 need to trade 12 puts for every five calls. Let’s look at three
and doesn’t change, and we know that gamma is the change in ways to make DN positions.
delta, the gamma of stock is zero.
1. You can buy five calls for every 12 puts and the position will
Formulas for delta look like this:
and gamma
We can always look at an option pricing calcu- +5 calls, D = 300, G = 40
lator to determine the greeks of our positions. +12 puts, D = -300, G = 48
However, to get a quick approximation, you 0 88
can use the following formulas:
2. Or you can also sell five calls for every 12 puts and the posi-
Let P = option premium, D = delta, G = gamma, and M = tion will look like this:
stock movement (+ for increase and – for decrease).
-5 calls, D = -300, G = -40
If the stock moves M, and assuming nothing else changes, -12 puts, D = 300, G = -48
the new P and D can be calculated using these formulas: 0 -88

P(new) = P(old) + M * D 3. Alternatively, if you are willing to add stock to the position,
D(new) = D(old) + M * G you can easily make any position DN:

Be careful to observe the signs of D, M, and G since they can be +5 calls, D = 300, G = 40
positive or negative depending on the position. Also, remember +8 puts, D = -200, G = 32
that a negative number multiplied by a negative number yields -100 shares D = -100, G= 0
a positive number. 0 72

How to make a delta neutral position Note that even though each of these positions is DN, the
There are a myriad of ways to make a DN position and it’s rela- gamma (and also the theta, vega, and rho) will be different in
tively easy. Let’s look at an example using two options and see each case.
how to combine them with and without stock to make some DN In the DN example in Figure 1, you’ll notice that the dollar
positions. On XYZ stock we see the following two options: value of the position doesn’t change as the $55 stock moves
up to $55.50 or down to $54. This is a nice and neat example
■■ Jan 50 call @ $3.00, D = 60, G = 8 meant to illustrate a point. Of course, in real trading the deltas
are changing as the stock price changes due to gamma and so
16 • February 2016 • Technical Analysis of Stocks & Commodities
The people have spoken.
And by spoken we mean
downloaded.
#1 trading app in the App Store.
Number 1 for good reason. Trade equities, options, ETFs, futures, and
even FOREX. Place advanced orders and access tons of chart stats.

Open and fund an account, download the app, and trade commission-free
for 60 days. Visit [Link]/mobile

Market volatility, volume and system availability may delay account access and trade executions. See [Link]/600offer for offer
details and restrictions/conditions. Applies only to equity, ETF or options trades. Contract, exercise and assignment fees still apply.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business. TD Ameritrade, Inc., member FINRA/SIPC.
© 2016 TD Ameritrade IP Company, Inc.
the gain or loss may not be exactly zero. XYZ Change Stock Calls Position P/L
Now let’s look at an example of how you can use DN to make
some profit in real trading. Here’s the setup: 45 -15% 4,500 0.24 4,428 -191
47.68 -10% 4,768 0.50 4,618 B/E
• XYZ = $53 49 -8% 4,900 0.68 4,696 77
• Implied volatility normally trades between 35–55% 50 -6% 5,000 0.85 4,745 126
• Earnings are coming out tomorrow
51 -4% 5,100 1.05 4,785 166
• IV is high at 60% and you project it will fall to 50%
after earnings are released 52 -2% 5,200 1.28 4,816 197
• Jan 60 call = $2.27, D=33.3 53 0 5,300 1.55 4,835 216
54 +2% 5,400 1.85 4,845 226
You can put on a position like this: 55 +4% 5,500 2.18 4,846 227
56 +6% 5,600 2.55 4,835 216
Position delta Cost
57 +8% 5,700 2.96 4,812 193
+100 shares @ $53, D = 100 100 $5,300
-3 Jan 60 calls @ $2.27, D = 33.3 -100 -681 60.84 +15% 6,084 4.88 4,620 B/E
0 $4,619 61 +15% 6,100 4.97 4,609 -10
Figure 2: results. Here you see the results one day after earnings are released.
The next day, IV does drop to 50% as predicted. You can see One day later after earnings are released, the IV dropped to 50% as predicted.
from the chart in Figure 2 that the position will be profitable
over a wide range of price changes, from down 10% to up
15%. This results in a nice annualized rate of return for this
one-day trade.
An option trader may not be able
Be aware of these pitfalls to accurately predict which way
Does this mean you’ve found the holy a stock will move and so will
grail of trading? I don’t think so. The first want to take the directional risk
obvious problem is that the stock can move
too far to the upside or downside. Then
out of the equation.
you also have the volatility projection. If
volatility doesn’t come in enough, or worse
yet, increases, which may happen due to
a swift price move to the downside, the Definitions
position can suffer losses. Since two of the
three short calls in the example are naked, there is a margin Delta—The change in an option’s premium relative to a
requirement and you will need the highest option trading ap- change in the price of the stock.
proval level from your broker. Because of those naked calls, Gamma—The change in an option’s delta relative to a change
this particular strategy cannot be used in retirement or cash in the price of the stock.
accounts and you also have the usual commissions, spreads, Theta—The change in an option’s premium relative to a
and other expenses eating into the profits. change in the time to expiration.
As a final note, those of you who are familiar with syntheti- Vega—The change in an option’s premium relative to a
cally equivalent positions may realize that the results obtained change in the volatility.
in the example can be duplicated without having to purchase Rho—The change in an option’s premium relative to a change
stock. The equivalent position would be to sell the January 60 in the risk-free interest rate.
straddle and to sell one additional Jan 60 call.
Note that with the exception of gamma, each of the greeks
Stan Freifeld is a former market maker and white badge floor relates to a change in the option’s premium. Gamma relates
official on the American Stock Exchange. He is a frequent to a change in delta.
speaker at trading shows and now runs a one-on-one option
mentoring program at McMillan Analysis Corp. He can be
reached via email at stan@[Link].

Further reading
Gopalakrishnan, Jayanthi [2014]. “Learning The Ropes With
Stan Freifeld,” interview, Technical Analysis of Stocks &
Commodities, Volume 32: February.
18 • February 2016 • Technical Analysis of Stocks & Commodities
 Free Admission. Priceless Information.

“Award Winning Strategies for Traders”

Rob Hoffman
“Our Favorite Trade Setups”
“The Power of Simplicity” Vince Vora
Rahul Mohindar

“Secrets to Trade Earnings with Options”

“The Art of Trading” “Big Fish Trading”
Mark Sebastian
Mark Dannenberg Dave Aquino

“Proprietary Indicators Pinpoint Trades” “Finding Opportunities in Today’s Market”

Wendy Kirkland Jeff Gibby

FREE!
Online Trader’s Summit
January 30, 2016 • 8 Speakers • 8 Hours of Instruction
Register for FREE at [Link]/traders-summit
Sponsored by
 It’s A Stochastic

Higher Highs & Lower Lows

Spotting emerging trends, defining correction periods, and the level of the lower low relative to the highest low. The HS
anticipating reversals can benefit your trading in many ways. formula is similar to the stochastic oscillator, which was de-
Here’s a look at a trading system that uses momentum indica- veloped by George C. Lane. The LS formula is analogous to
tors to define trend direction. Williams %R, which was developed by Larry Williams.

by Vitali Apirine ◆◆ The HHS and LLS are 20-day exponential moving
averages (EMA) of HS and LS. Thus, the HHLLS

T
he higher high lower low stochastic (HHLLS) is a mo- indicator is more sensitive to recent higher highs or
mentum indicator–based system that helps determine lower lows.
the direction of a trend. It is made up of two separate
indicators: the higher high stochastic (HHS) and lower ◆◆ The HHS and LLS are bound between zero and 100.
low stochastic (LLS). These two indicators can be used to
spot emerging trends, define correction periods, and anticipate Rarely, if ever, will the HHLLS indicator reach these ex-
reversals. Signals can also be generated by looking for diver- tremes. It would take 20 consecutive highest highs (lowest
gences and crossovers. Because the HHLLS is range-bound, it lows) for the 20-day HHS/LLS to reach 100. It would take
can also be used to identify overbought and oversold levels. 20 consecutive lower or equal highs (higher or equal lows)
for the 20-day HHS/LLS to reach zero. Typically, the HHS/
Calculation LLS is considered overbought when above 60 and oversold
HHS is based on price highs, while LLS is based on price when below 10.
lows. These two indicators are plotted side by side so they can These levels can be adjusted to suit analytical needs and
be easily compared. The default parameter setting is 20 and security characteristics. At its most basic, the bulls have the
you’ll notice that the example shown in the sidebar “Calculat- edge when the HHS is above 50 and the LLS is below 50.
ing HHLLS” is based on 20 days. The MetaStock code for Conversely, the bears have the edge when the HHS is below
HHS and LLS can be found in the sidebar “MetaStock Code 50 and the LLS is above 50. Consistently high readings mean
For HHS & LLS.” prices are regularly hitting new higher highs or new lower
Dirk Erken/Shutterstock

lows for the specified period. Conversely, consistently low

Interpretation readings indicate that prices are seldom hitting new higher
HS reflects how high the higher high is relative to the lowest highs or lower lows.
high in a specific lookback period. In contrast, LS reflects To get a better understanding of how the HHS and LLS
20 • February 2016 • Technical Analysis of Stocks & Commodities
 TRADING SYSTEMS

work, take a look at the chart in

Figure 1. The chart displays the
DJIA with its 20-day HHS/LLS
from May 1998 to January 1999.
The HHS is represented by the
green line and the LLS, the red
line. There are different ways to
use the HHLLS indicators.

Anticipate reversals
Divergences form when a new
high or low in price is not con-
firmed by the HHLLS indicators.
A bullish divergence forms when
price records a lower low but the
LLS forms a higher high. This
shows less downside momentum,
which could foreshadow a bullish
reversal. A bearish divergence oc-

MetaStock
curs when price records a higher
high but the HHS forms a lower
high. This shows less upside mo- Figure 1: DOW JONES INDUSTRIAL AVERAGE (DJIA) WITH 20-DAY HHS/LLS (MAY 1998–JANUARY 1999).
mentum and could foreshadow a Notice how when the HHS moves above the 50 level, the DJIA is in a bullish trend. When the LLS moves above 50, the
bearish reversal. index is in a bearish trend.
Chartists should look for a con-
firmation to signal an actual reversal. A bearish divergence When the market exceeded its late January high and HHS
can be confirmed with a break of a support level on the price broke above LLS (see blue lines), SPX started to rise again.
chart or an LLS break above 50. A bullish divergence can be Before the market correction (second half of August 2015
confirmed with a break of a resistance level on the price chart to first half of October 2015) LLS started to rise from the
or an HHS break above 50. second half of May 2015 (see blue line). HHS made a lower
high (blue line) when the index formed a double top (May–
Uptrend
The chart in Figure 2 shows the
S&P 500 index from August 2014
to November 2015, which happens
to be a major uptrend in the index.
The display above the chart is of
the 20-day HHS/LLS. During
September 2014, the HHS formed
a lower high (bearish divergence)
and LLS formed a higher low.
They didn’t confirm the SPX
52-week high and foreshadowed
the SPX pullback in September–
October 2014. LLS broke above
50 in the middle of October 2014
(red ellipse). This signal was ne-
gated when the HHS exceeded
50 (green ellipse) at the end of
the same month. Another HHS
lower high (bearish divergence)
and LLS higher low formed in
December 2014. It foreshadowed
the choppy market move from the FIGURE 2: UPTREND. Here you see the S&P 500 index from August 2014 to November 2015 with its 20-day HHS/LLS.
beginning of January to the first Note how divergences between the index and the HHS/LLS and the breaks of support levels can contribute to anticipating
half of February 2015. reversals, spotting emerging trends, and defining correction periods.

February 2016 • Technical Analysis of Stocks & Commodities • 21

 Correction periods
The chart in Figure 3 shows the
DJIA from June 2011 to Decem-
ber 2011 with its 20-day HHS/
LLS. The LLS drop and HHS rise
(second half of June 2011) fore-
shadowed the bounce in the DJIA.
HHS made a lower high (bearish
divergence) and didn’t confirm the
DJIA top of July 2011. This top that
formed was a double top, which
would have been another indication
that a correction was forthcoming.
The DJIA broke its support level
and LLS broke above 50 (dashed
vertical red line). This signaled the
start of a correction (beginning
of August 2011). The LLS lower
high (bullish divergence) and HHS
higher low didn’t confirm the DJIA
lower low (August–October 2011).
FIGURE 3: CORRECTION PERIODS. On this chart of the DJIA from June 2011 through December 2011, you see how After the trendline break in the
the decline in LLS and bearish divergence between the index and HHS didn’t confirm the top reached by the DJIA. DJIA (blue line), the index started
to bounce (October–November
2011). The index trendline breakout
July 2015). SPX broke support on August 20, 2015 and four and HHS break above 50 in December 2011 signaled the end
days later, LLS moved above 50 (see red ellipse). When the of the correction (dashed green vertical line).
stock market exceeded its mid-September peak on October
13, 2015 and the HHS exceeded 50 three days later (green Downtrend
ellipse), it negated the LLS bearish signal. The chart in Figure 4 shows the S&P 500 index from May
2008 to April 2009 with its 20-day HHS/LLS. When LLS
broke above 50 in the second half of
June 2008 it generated a sell signal
(red vertical dashed line). Lower
highs in the LLS and higher lows in
HHS didn’t confirm the index lower
lows (October–November 2008)
and foreshadowed the S&P 500
bounce (November 2008–January
2009). HHS broke above 50 (green
vertical dashed line) and signaled
the end of the correction at the end
of March 2009.
Typically, an HHS cross above
50 works well during an uptrend.
Conversely, an LLS cross above 50
works better in a downtrend.

HHS/LLS crossovers
The chart in Figure 5 is of the
Russell 2000 index from January
to December 2001 with its 20-day
HHS/LLS. This was during the
FIGURE 4: APPLYING HHS/LLS IN A DOWNTREND. On the chart of the S&P 500 index (May 2008–April 2009),
2001–2003 bear market. The green
lower highs in LLS and higher lows in HHS didn’t confirm the lower lows in the index. Sure enough, the index continued and red arrows indicate buy/sell sig-
lower. nals based on HHS/LLS crossovers.
22 • February 2016 • Technical Analysis of Stocks & Commodities
 Each of those signals could have
generated profitable trades.

Emerging trends
There are two stages to an emerg-
ing trend signal. One is the cross-
ing of the HHLLS lines. The other
is the HHLLS lines crossing above
50. For example, the first stage of
an uptrend signal is when HHS
moves above LLS. This shows that
new higher highs are more recent
than new lower lows. The second
stage is when HHS moves above
50 and LLS moves below 50. The
first and second stages do not
always occur in that order. Some-
times HHS will break above 50
and then above LLS. Conversely,
LLS will rise above 50 and then
break above HHS to generate the
emerging downtrend signal.
FIGURE 5: HHS/LLS CROSSOVERS. Crossovers of the HHS and LLS can generate profitable buy/sell signals.
The chart in Figure 6 shows the
S&P 500 index from May 2002
to January 2010 with its 20-week HHS/LLS. You can see the S&P 500 index broke its resistance level at the start of
on the chart that before the start of a bull market, the LLS August 2009.
starts to drop and HHS starts to rise. This took place from
October 2002–April 2003 and was confirmed by the S&P Conclusions
500 breaking above its resistance level at the end of May The HHS and LLS are momentum indicators. They are
2003 together with the HHS break above 50 (green dashed shown together so it is easy to identify the stronger of the
line) at the beginning of June 2003. The falling channel in two and determine the trend bias. A surge in HHS combined
the S&P 500 from January to
October 2004 was broken by SPX
at the beginning of November
2004 and confirmed by an HHS
break above 50 (green ellipse) in
the middle of November 2004.
The end of the pullback (May–
September 2006) was indicated
when HHS exceeded LLS (blue
line) in the beginning of Sep-
tember 2006 and when the S&P
500 index moved above the May
52-week high three weeks later.
The HHS lower high (bearish
divergence) and LLS higher low
foreshadowed the 2007 market
top, which was confirmed by
the index breaking its support
level in the middle of January
2008 and the LLS break above
50 (red dashed line) at the end of
the same month. The end of the
bear market was signaled when FIGURE 6: EMERGING TRENDS. Divergences between LLS and HHS; crossovers between HHS and LLS; the HHS and
HHS exceeded 50 (green dashed LLS crossing above 50; breakouts in the index above resistance; and breaks below support all play a role in identifying
line) at the end of July 2009 and emerging trends.
24 • February 2016 • Technical Analysis of Stocks & Commodities
Calculating HHLLS

The spreadsheet in Side-

bar Figure 1 shows an
example of how the 20-
day HHLLS is calculated
for the Dow Jones Indus-
trial Average (DJIA) using
Excel.

◆◆ The lowest and

highest highs are
the lowest and high-
est high for 20 days

◆◆ The lowest and

highest lows are the
lowest and the high-
est low for 20 days.

The first entered expo-

nential moving averages
(EMA) of HS and LS are
averages of the first 20
HS and LS values, respec-
tively. The real HHLLS
formula does not kick
in until day 21 (see blue
rows). EMA(HS,20) and
EMA(LS,20) are multi-
plied by 100 to move the
decimal point two places.
Note that the spreadsheet
values for a small subset
of data may not match ex-
actly with what is seen on
the price chart. Decimal
rounding can also affect
HHLLS values slightly.
—V. Apirine
SIDEBAR Figure 1: calculating 20-day hhlls using excel

If the current high is above the prior high then: If the current low equals or is above the prior
HS = (Current High - Lowest High)/(Highest High - Lowest High) low then:
LS = 0
If the current high equals or is below the prior high then:
HS = 0 Lowest Low = Lowest low for 20 days
Highest Low = Highest low for 20 days
Lowest High = Lowest high for 20 days
Highest High = Highest high for 20 days HHS: 20-day EMA of HS
LLS: 20-day EMA of LS
If the current low is below the prior low then:
LS = (Highest Low - Current Low)/(Highest Low - Lowest Low) HHS/LLS is multiplied by 100 to move the decimal
point two places.

February 2016 • Technical Analysis of Stocks & Commodities • 25

 MetaStock Code For HHS & LLS
MetaStock code for HHS:
The HHS and LLS are
HH:= Security(".SPX",H); momentum indicators, which,
HHH:=If(HH>Ref(HH,-1),(HH-LLV(HH,20))/(HHV(HH,20)- when combined, make it easy
LLV(HH,20)),0);
Mov(HHH,20,E)*100;
to determine trend bias.
MetaStock code for LLS:
LL:= Security(".SPX",L);
The code given in this article is available at the Subscriber Area at
LLL:=If(LL<Ref(LL,-1),(HHV(LL,20)-LL)/(HHV(LL,20)-
our website, [Link], in the Article Code area.
LLV(LL,20)),0);
Mov(LLL,20,E)*100;
See our Traders’ Tips section beginning on page 50 for commentary
on implementation of Apirine’s technique in various technical
with a decline in LLS signals the emergence of an uptrend. analysis programs. Accompanying program code can be found in
Conversely, a surge in LLS combined with a decline in HHS the Traders’ Tips area at [Link].
signals the start of a downtrend.
The HHS/LLS divergences can be used to foreshadow re- Further reading
versals. Combining the HHLLS with other technical analysis Apirine, Vitali [2015]. “The Money Flow Oscillator,” Tech-
tools such as support & resistance levels can make it a useful nical Analysis of Stocks & Commodities, Volume 33:
indicator for confirming your entry and exit decisions. October.
[2015]. “The Slow Volume Strength Index,” Technical
Vitali Apirine is a programmer engineer with an interest Analysis of Stocks & Commodities, Volume 33: June.
in technical analysis, especially the application of relative ‡MetaStock
strength index to trading. He may be reached at vitapirine@ ‡See Editorial Resource Index
[Link].

TRADING ON MOMENTUM

CALHOUN / MOVING AVERAGE BREAKOUTS

Continued from page 13

Step 3: You can use a maximum $2 initial and trailing stop

value on all stock swing trades.

Step 4: To set your exit target, simply use 50% of the 90-day
trading range and add to your entry. In Figure 1, that would
be ($68 - $47 = 21 points)/2 = $10.50, or about 10 points.

insights: WhY this tEChniQuE WorKs FIGURE 1: DUPONT (DD), 100- AND 200-SMA BREAKOUTS. Here you see how you
The main reason why this moving average crossover strategy
can enter new positions once prices break above major moving average lines.

works is because hedge fund managers and other market

professionals use 100 SMA and 200 SMA entry signals to two-step trading process minimizes initial risk and leverages
enter their positions. Think of each major moving average into a second trade only after your first entry has proven itself
as a key support or resistance level. By waiting to enter your profitable. You can then use a breakeven stop following your
trades until after price has moved above these useful lines, second trade, once the 200-SMA position is entered.
you improve your odds of getting into a position that has the Many traders struggle with deciding on their entry prices;
benefit of institutional buying power in it—the wind beneath this dual 100 SMA and 200 SMA crossover technique can help
the wings of a successful swing trading breakout. It’s important simplify your decision-making process for your short-term
to note that as with most strong technical chart patterns, you swing trades. Look for an opportunity to enter your trades
should focus on wide-range, cleanly defined charts like what following each breakout signal.
you see in Figure 1, in which there’re virtually no pullbacks
or broken trendlines to contend with. Ken Calhoun is a producer of trading courses, live rooms,
and video-based training systems for active traders. He is a
tradE managEmEnt tiPs UCLA alumnus and is the founder of [Link], an
It’s helpful to use the 100 SMA to initiate a small “pilot trade” educational resource site for active traders.
of less than several hundred shares. Then you can use the 200
SMA breakout to scale in and add additional shares. This
26 • February 2016 • Technical Analysis of Stocks & Commodities
 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner Group, where she also
works as a broker. She authors widely distributed e-newsletters; for your free
subscription, visit [Link]. Her books—Currency Trading
In The Forex And Futures Markets; A Trader’s First Book On Commodities;
and Commodity Options—were published by FT Press. To submit a question,
email her at info@[Link] or via [Link].
Carley Garner
Selected questions will appear in a future issue of S&C.

FINANCIAL DISCLOSURE FOR ACCOUNT the broker can determine whether or not find another broker.
HOLDERS: DOES IT GO TOO FAR? the client is “good for it.” In the unfortunate, and relatively rare,
Why do commodity brokerages require At this juncture, applicants tend to scenario in which a commodity trading
clients to disclose financial and employ- respond with something along the lines account loses more than was on deposit,
ment information? of, “It’s my money, why do they care if I the client is legally required to refund the
If you’ve ever filled out a commodity lose it?” The answer to this is two-fold. account in the amount necessary to make
account application, you’ve likely noticed To ensure a brokerage firm isn’t taking on it whole. In the meantime, the individual
the questions dive quite a bit deeper into clients who are risking financial ruin, and account executive (broker) handling the
your personal life than a similar applica- to comply with the standards set forth by account is forced to forfeit his commis-
tion would for a typical stock and bond regulators, it is necessary for brokerage sions to the brokerage firm until the client
account. As a commodity broker, I often firms to certify that clients have a reason- is able to pay his debt. There are times
feel the brunt of the frustration that com- able amount of net worth, and ideally, a in which the client simply cannot pay
modity traders express over the practice. steady income. the money owed to the brokerage firm.
Nevertheless, there is a good reason for With all of these things said, brokerage Perhaps the amount exceeds his available
futures brokers prying into your employ- firms also have a self-serving purpose for cash or net worth, or he simply refuses to
ment and financial information. delving into the financial stability of each pay for his mistakes. Should this occur,
For starters, the commodity markets are client. The truth is, commodity traders can the commissions held from the account
often targeted by individuals and groups potentially lose more money than is on executive are permanently surrendered
attempting to illegally launder money. deposit. Trust me, this is the last thing a to the clearing firm of the exchange to
Thus, brokerage firms will go a long way brokerage firm wants to happen. Brokers cover his client’s market losses in excess
to confirm identity through proof of resi- will do all they can to prevent a client’s ac- of funds on deposit.
dence and employment details to ensure count from going negative, but that doesn’t With this insight, by putting yourself
clients are legitimately using the commod- mean it can’t happen. And if it does happen, in the shoes of the broker, I’m sure you
ity markets for hedging and speculating it is not the broker’s fault; it is the trader’s will agree they have every right to know
purposes, and nothing more. fault for entering into an overleveraged or the financial standing of each and every
An additional concern brokerage firms ill-timed trade. If a brokerage firm is able client. After all, in extreme cases they
have is their risk of taking on a client. I to force-liquidate a client’s position prior are held financially responsible for their
often hear applicants complain, “Broker- to the account balance going negative, it’s clients’ trades.
age firms shouldn’t care how much money a luxury—not a guarantee. Of course, if a client fails to pay his debt
I have in the bank, or whether or not I am On the flip side, if you allow positions to to the brokerage house, there are conse-
employed. That is none of their business!” get to such dire straits that a risk manager quences. Similar to an unpaid loan or credit
Yet, what most applicants are overlooking has to step in to offset the trades and the card, debit collectors and legal action will
is that a commodity brokerage account market reverses leaving you with no means follow. Nevertheless, brokerage firms, and
enables traders to speculate with massive of recovering, don’t blame your broker. more specifically, individual brokers, are
amounts of leverage. In its simplest form, He should have never been placed in that accepting a substantial amount of risk with
a commodity trading account is a line of situation to begin with. every futures trading account opened, and
credit that is being extended by the futures On a side note, when it comes to housing they must know whom they are doing
exchanges and guaranteed by the broker on option trading accounts, not all brokerage business with, as well as their capacity to
behalf of the client. Accordingly, opening a firms are created equal. Some firms are, in pay for potential market losses.
commodity account is not unlike applying my opinion, too aggressive in liquidating
for a line of credit, a credit card, or even a their clients’ option trades. These brokers
mortgage. Therefore, before being granted often liquidate as a first resort, not a last
the ability to trade on margin, it is crucial resort. If you find yourself in this situation,
February 2016 • Technical Analysis of Stocks & Commodities • 27
 form of losing trades. If a trader
starts with $5,000, and has five
consecutive losing days, he could
be down 30% in his account (or
$1,500) if risking only $100 per
trade, three trades per day.

2. This leads to the fear of losing

more money. Most traders under-
stand that they need to increase
their risk-to-reward per trade to
overcome losses, but they have a
limited supply of capital. A trader
will then begin to question every
entry. Typically, because of the
fear they are experiencing, a trader
will not take the first, second, or
even third setup. After seeing the
market move in his direction and
calculating how much he would
have made, the trader may finally
choose to enter a trade only to be
stopped out yet again.

3. At this point, the trader decides

to find new indicators and a new
methodology. After all, “it can’t
be me,” the trader tells himself.
The trader will then follow a
new methodology and lose more
money. A trader may even pull
money out of his savings account
and justify the action by saying it
was the first set of indicators that

Blue digital cube: Mmaxer/Austrialian coin: Robyn mackenzie/US Eeagle coin: Hein Nouwens/Collage: Christine Morrison
Nothing To Fear

Why Do Traders Love

lost the money.

4. Usually, one of two things will

Binary Options?
happen next. The trader may
decide that it is the stops that are
causing his losses. He may decide
that they are too tight, so he will
widen them, resulting in even
bigger losses. Or the trader will
The answer is simple—you can avoid most pitfalls that cause failure in trading. simply sit and stare at the screen,
never able to pull the trigger. He
by Gail Mercer feels like a loser. He wants to make
this work so badly, but he simply

T
he reason traders love binary options is simple. Most pitfalls that cause a cannot pull the trigger. Words can-
trader to fail can be avoided with binary options. This gives the trader a not describe the depth of despair
greater chance of success. Most traders fail for one or more of the follow- he feels. He questions his ability to
ing reasons: trade and wonders how he could be
that stupid. The trader’s emotional
1. They are undercapitalized. Most traders only have $5,000–15,000 to initially anguish may be extreme.
fund their accounts. They need to make enough money to support themselves
and their families. Each week is going to present at least two to three days of 5. Usually, by this point, the trader
sideways movement. Sideways movement will cause them to lose money in the decides to take a break from trad-
28 • February 2016 • Technical Analysis of Stocks & Commodities
 OPTIONS

ing. He will need to find a job, but he will still watch the
markets. The trader has been “bitten” by the trading bug
and nothing compares to trading. The trader remembers
the highs of making money quickly in the market and it is
hard to get excited about any other type of work.

6. The trader saves up money again and comes back to the

markets, determined to make it work this time. He has in-
creased his knowledge of the markets and of price action,
and is convinced that this time it will be different. The
first couple of trades are awesome. He doubles his account.
“Oh yeah, he knows what he is doing this time!” Then the
market hits and hits hard. He loses a couple of trades and
he is angry. He is not going to let the market take his hard- Figure 2: capped risk. On this equity graph, you can see that the first few trades
were rocky but evened out. The account steadily increased and there was sufficient
earned money again. What happens next? The markets take money in the account to withstand the drawdown of approximately $800.
all the gains and then some. Again, desperation returns.

Typically, this cycle repeats itself over and over. Breaking the the potential reward is a maximum of $76.50 or a 1:3 risk
cycle is one of the hardest obstacles in a trader’s path. to reward ratio.” Instead of dreaming about the hundreds
Now, if you’re trading binary options with Nadex, there are of dollars he can make on the trade, the maximum profit on
some differences. each side is known upfront. Because this is shown upfront,
it encourages the trader to “think through” the process of
1. There are no margin calls. The risk is paid up front (the the trade before entering the market. This is a realistic ap-
strike price). This means that a trader cannot move his stop proach. This is intraday trading and day traders typically
farther away from price or have the markets jump over his do not take thousands of dollars in profit at a time. Instead,
stop (which happens frequently during market volatility). day traders take small profits throughout the day. Look at a
successful trader’s equity graph and chances are the equity
2. Losses are capped going graph slowly increases. Traders make money, give money
into the trade. This means back, make more money, give some more back, make more
that when the trader enters money, and give some more back. The key to an equity
the trade, his total potential graph is limiting the losses. Nadex does exactly that — it
loss is paid up front. Because limits the losses upfront.
the loss is paid up front,
Nadex

the trader has more control 5. Since Nadex offers the capped risk and each option contract
and realizes what he can Figure 1: capped losses. In this
AUD/USD position, the maximum loss
has a maximum payout of $100, being undercapitalized is
lose before ever placing the on the offer side is $85.75 and the less of an issue. The same $5,000 account in Nadex, with
trade. For example, in the maximum risk on the bid side is $15. proper money management techniques and sensible trading
AUD/USD image in Figure If you buy the binary option for $85.75, guidelines, allows for drawdowns. For example, the equity
1, the maximum loss on the itaccount.
is immediately deducted from your
graph in Figure 2 shows hypothetical results after 700
offer side is $85.75 and the trades, using a $50 maximum loss, a $50 maximum profit,
maximum risk on the bid side is $15.00 ($100 - $85). If a a 52 percent winning percentage rate, and a $1.80 round trip
trader buys the binary option for the AUD/USD, $85.75 is commission for each trade. The red line shows the drawdown
immediately deducted from his account. and the blue line shows the profits and losses. The first few
trades were rocky and then it evened out. Profits went up
3. In the example I have shown, the Nadex binary options and down several times, but steadily the account increased
are worth $100 at expiration of the contract and the profit and there was sufficient money in the account to withstand
potential is only $14.25. If the trader opted to sell the binary the drawdown of approximately $800.
option, $15 would be deducted from his account. In this
example the options would be worth $0 at expiration and 6. Since the trader would not be undercapitalized, his fears
the profit potential would be $85. However, the probabilities would tend to lessen. The trader would be more apt to
are greater on the buy side and are less on the sell side. concentrate on the charts and on the indicators rather than
keep an eye on the profit/loss window (DOM). He would
4. Profits are also capped. The order entry on every Nadex tend to feel more in control of his trade because he cannot
binary option shows the maximum loss and profit on be stopped out and the stops cannot be jumped. A loss of
every trade. This encourages the trader to think his trade $50 is much easier to take than a loss of $300—mentally
through. For example, “the risk on the trade is $23.50 and and financially.
February 2016 • Technical Analysis of Stocks & Commodities • 29
 you can lose more money. For example, if a sudden surge of
volatility occurs, price can jump over the stop and keep going,
You can trade during times thereby exposing the trader to an even higher loss. Periods
of market volatility with the of market volatility do happen. The nice thing about Nadex
confidence that your risk is binary options is that you can trade during times of market
capped. volatility with the confidence that your risk is capped.

Fringe benefits
Binary options offer traders the ability to trade with smaller
accounts, the ability to limit their risk, and the opportunity
7. Sideways markets are not an issue when trading binary to avoid the emotional pitfalls that cause many traders to fail.
options on Nadex. In fact, markets that are not trending That is why traders love the binary options.
are much easier to trade. Here’s an example. On June 4,
2014, a trader could have taken a binary option trade on Gail Mercer is a trader, an indicator expert, an instructor,
the USDJPY. The trade could have been taken because and founding director of [Link]. She hosts a
volatility in the USDJPY had decreased substantially in the free live trading room where she teaches forex traders and
last few months. On June 4, 2014, price was at the average index traders how to approach the markets. She currently
true range (ATR) stop with no buying volume (a desirable trades futures, forex, indexes, and stocks.
entry point). A trader would have entered a short position
believing that price would not go above $102.60. Price Further reading
moved down five ticks from the trader’s entry point and Gopalakrishnan, Jayanthi, and Bruce Faber [2011]. “Gail
stayed below $102.60. If a trader entered the trade at 5:03 Mercer of [Link],” interview, Technical
am and the option expired at 6:00 am (EDT)—57 minutes Analysis of Stocks & Commodities, Volume 29: July.
from the time of entry—price would have moved five ticks. Mercer, Gail [2014]. “Binary Options: Scam Or Trading Meth-
The trade would have netted $89 on two contracts after odology?” Technical Analysis of Stocks & mmodities,
commissions. Volume 32: September.
[2011]. “Empowering Traders To Trade Commodities,”
Now let’s compare what would have happened if the trader Technical Analysis of Stocks & Commodities, Volume
had been trading futures or forex contracts. 29: April.
On the spot forex side, the minimum pips spread for the trade [2010]. “Looking At Other Markets,” Technical Analysis
would have been at least one pip each side or $40 roundtrip of Stocks & Commodities, Volume 28: May.
(trading two contracts). The margin requirement would have [2012]. “Volume And Divergence,” Technical Analysis
been $2,000. The best-case scenario would be if the trader of Stocks & Commodities, Volume 30: September.
exited at the low, 102.56 (after the pip spread eight ticks of ‡Nadex (North American Derivatives Exchange, Inc.)
profit or $80). The worst-case scenario would have been a loss ‡See Editorial Resource Index
of at least 12 pips or $120 (pip spread of one tick going in and
one tick on exit plus a four tick stop with two contracts).
On the futures side, the typical margin requirement for the
Japanese yen is $500 per contract ($1,000 for two contracts). A
trader would pay $10 minimum round trip for two contracts,
and the best-case scenario would be a profit of eight ticks
(four ticks for each contract) minus commission ($70). The
worst-case scenario would be a loss of five ticks per contract
plus commission ($110).
Which trade gave the trader the highest percentage gain?
The highest percentage gain was with the Nadex binary op-
tion trade. Entering the option with two contracts was $108
($54 per option). The profit would be $89 after commissions
or a net gain of 82%. On the spot forex trade, it took $2,000
to make a 4% gain. On the futures side, it took $1,000 to
make a 7% gain.
You could argue that the Nadex binary option trade was
worse than the futures trade if the binary option had lost money.
Theoretically, it may seem that way. However, that would be
the maximum loss that the trade could incur. On the futures
and spot forex side, although you have a stop set, theoretically,
30 • February 2016 • Technical Analysis of Stocks & Commodities
ATTEND THE ONLY EXPO EXCLUSIVELY FOR ACTIVE TRADERS—FREE!

F E B R UA RY 2 1 – 2 3 , 2 0 1 6
N E W YO R K M A R R I OT T M A R Q U I S T I M E S S Q UA R E

Your FREE Registration Includes:

� ���+ High�Quality Educational Classes
� ��+ Trading Experts
� LIVE Trading & Software Demos
� Two Interactive Exhibit Halls
� The Fintech Symposium
� Must�See Tom Sosnoff Event
� �As Seen on CNBC� Exclusive Event
And much more�
MEET THESE TRADING MASTERS AND LEARN THEIR
S T R AT E G I E S T O M A K E C O N S I S T E N T P R O F I T S I N 2 0 1 6 !
LAN

EIN
N
F

McMIL

ERNST
RAMZA

GORDO
OSNOF

JAKE B
LARRY
TOM S

DAN G

TODD
REWS
JENN IERKING &
N

LLMAN
BOXER

OFFMA
LIEN

Y AND

ALAN E
HARRY
KATHY

ROB H

LIZ D

R E G I S T E R F R E E AT [Link]
O R C A L L 8 0 0 - 9 7 0 - 4 3 5 5 T O D AY ! MENTION PRIORITY CODE 040279

PLATINUM SPONSOR GOLD SPONSORS FUTURES THOUGHT LEADER EXCHANGE PARTNERS

 Dickover: 6” W, bleed L, x 6” H

Slow & Steady

Reacting To Market Moves

Part 1

The reason we make counterproductive trading decisions is The trouble with intuition in trading
because of our biases and flawed intuition. In this first part The root of most of the explanations in this article lies in the
of a two-part series, we analyze and try to understand these nature of human intuition. In his book Thinking, Fast and
trading behaviors so we can avoid costly mistakes and become Slow, Daniel Kahneman shows us that there are two kinds
more effective traders. of thinking. Intuition is fast thinking—effortless, automatic,
based on heuristics, and the result feels right in our gut. Slow
by Melvin E. Dickover thinking is conscious thought that requires effort, discipline,
possibly scientific or mathematical training, and the result

Y
our reaction to market moves is driven by several feels uncertain.
cognitive biases that affect every part of technical In Nate Silver’s book The Signal And The Noise, two
trading. You need to understand these biases. In this kinds of environments are described: normal and complex.
article, I first describe the origin of the problem in Normal environments can be learned through experience and
human intuition, and then use the example of expert repetition because they have dependable, regular patterns.
Ivsanmas/Shutterstock

prediction and then probability and gambling to illustrate a Examples include hunting, fishing, firefighting, bargaining, and
series of cognitive biases needed to understand the rest of the building trades. In these environments, intuition works.
the material. Following that I analyze a series of familiar These are the environments most similar to those our brains
trading behaviors, introducing more cognitive psychology evolved to survive in.
as needed. Complex environments are probabilistic, or have feedback
32 • February 2016 • Technical Analysis of Stocks & Commodities
 TRADING PSYCHOLOGY

loops, or chaotic aspects (the butterfly

effect.) Examples are weather, financial
markets, the economy, earthquakes,
and human relationships. In complex
environments, prediction is difficult. Confidence
Regardless of our education, training,
and experience, our intuition is consis- comes from
tently invalid when making judgments
about complex environments.
using the
All your life you have been told to trust
your gut feelings. You naturally want to
best tools.
use your intuition to make judgments
because it is effortless and you feel
confident you are right. To use slow think-
ing, you must have acquired expertise Risk-
(perhaps some statistics or mathematics)
and you must focus your attention on
FREE
developing and evaluating alternatives. 30-Day
You must decide consciously what is Trial
relevant and what is not, and work your
way to a conclusion. Regardless of
considerable effort, you might still get
a conclusion that feels uncertain. The
people most likely to get a rude shock
when they begin trading are those who
come to trading with success in other
professions where their intuition has
been trustworthy.

Probability biases
People’s intuitive understanding of
randomness is invalid. You intuitively
believe that for something to be random,
it should look random. When a pattern
is discernible, it intuitively seems non-
random. For example, if you see a string
of heads in a series of coin flips, you
intuitively suspect that series is not ran- eSignal’s award-winning trading platform lets you:
dom. Similarly, you intuitively believe a
4Beat the market with exclusive technical indicators and analytical tools
string of losing trades isn’t happening at
random and that something must have 4Generate trading ideas with customizable global market scanners
caused your system to stop working.
Statistically, however, you can expect 4Analyze the market anywhere with FREE mobile and web tools
an occasional series of losing trades 4Get lightning-fast data: Stocks, Forex, Futures, Options
when your trading strategy is working
correctly.
Other biases include the crime of small
numbers, which is our intuitive tendency Try eSignal Risk-Free for 30 days!*
to see significance in samples that are
too small to have any significance. Our 800.943.6039 | [Link]/trial
minds estimate how probable something
is by how easy it is to recall. People can
easily recall news stories of muggings or Join the Conversation eSignal, an Interactive Data company
company.

people struck by lightning or winning

*If you’re not completely satisfied during the trial, cancel the service, and we will refund your
subscription fees. Taxes, add-on service/exchange and activation fees are non-refundable.
lotteries. Their probability estimates for
the likelihood of these events occurring
February 2016 • Technical Analysis of Stocks & Commodities • 33
 you were in fact wrong.
Following your trading plan Contrary to evidence, experience, and repeated failures,
means you take all the trades experts continue to believe they make valid predictions. Over-
confidence bias is a measured (large) discrepancy between how
your strategy generates, and experts view their ability and how good their ability actually
none that it does not. is in practice. CEOs, doctors, stock pickers and many others
suffer from this “Lake Wobegone” effect in which everyone
thinks they are above average. Market experts are grossly over-
confident in their ability to predict the market, and believe the
uncertainty range of their predictions is small. Overconfidence
is off by orders of magnitude because these events are easy bias can arise from the WYSAITI illusion (What You See Is
to recall. All There Is). In analysis and decision-making, if information
There are other peculiar trading beliefs caused by probability isn’t easily recalled, it is ignored as if it did not exist. Predic-
biases. One I sometimes see in forex forums is the intuition tions are made based on what comes to mind.
that if you have a strategy with lots of losing trades, you can Once a prediction is made, confirmation bias causes the
make money by reversing the signals. The reason you get a expert to search for confirming information and ignore the
lot of losing trades is that your system is generating random rest. Unfortunately, people think all their beliefs are true.
trades, and reversing a random trade generator still gives The illusion of validity is the bane of stock pickers. Stock
random losing trades. pickers exercise high-level professional skills requiring ex-
tensive training. They gather and analyze extensive data that
The trouble with predictions generates new information they use to make stock predictions.
Intuition evolved to keep us alive in a normal environment They are supported by a strong professional culture that re-
that required a lot of quick decisions to avoid dangers and inforces their belief that the additional information enhances
exploit opportunities. Even though traders face complex and the validity of their predictions. Expertise in analyzing the
unpredictable environments, traders tend to trust their intuition. prospects for future earnings is not the same as knowledge
That intuition is subconscious and impossible to turn off. of how much of that information is already priced into a
People are not good at making predictions about complex stock. The analyst does not know this, and does not know
environments. Expertise and experience do not help. Evidence that it is unknown. The idea that the future is unpredictable
shows that sergeants can’t predict who will be good soldiers, is undermined by the ease that the same kind of analysis used
but they believe they can. Evidence shows that psychologists to make predictions can so easily and accurately be used to
can’t predict which marriages will succeed or who will be explain the past (hindsight bias.)
best for a job based on their interactions with the subjects,
but they believe they can. Evidence shows that market ex- Wired to believe expert
perts do no better than random in their predictions, but they predictions
stubbornly believe they can. In December 2007, economists You intuitively believe a prediction
in the WSJ forecasting panel predicted a 38% chance of re- from an expert who exudes confidence
cession. Data later showed that the economy was already in and has a coherent story that explains
recession at the time. For an entertaining selection of horrible the prediction. This is automatic—
predictions, read The Experts Speak by Christopher Cerf and you aren’t aware of it, you can’t help
Victor Navasky. it, and you can’t turn it off. You get
a gut feeling that the expert is right.
Why do experts keep making predictions? Only conscious effort can overcome
A series of cognitive biases are the reason you and experts this built-in bias, and that requires knowledge, discipline, and
completely misjudge your ability to predict. The human belief forcing your attention on the problem.
that an event could have been predicted all along if “all the You want to believe the future is predictable to feel that you
dots had been properly connected” is called hindsight bias have control. Probabilistic systems like markets have long runs
by cognitive psychologists. When you (or an expert) con- of coincidental-seeming events that you instinctively believe
front a surprising outcome different from your prediction, must have a reason, when it is simply the odds playing out
your brain readjusts your view of the world to accommodate normally. You may believe that “everything happens for a
the new reality. In the readjustment process, hindsight bias reason” but in a probabilistic system, no single event happens
causes you to experience an “I knew it all along” effect that for a reason. Your choice is to stay with your effortless false
alters your memory in such a way that your ability to recall intuition from fast thinking, or put in the much greater effort
past knowledge or beliefs that conflict with the revised view to do the slow thinking that can lead to valid results.
is suppressed. You find it hard to remember that you were And worst of all, your trading is affected. Once you hear
wrong; indeed, you often firmly believe you were right all an expert prediction, you unconsciously anchor to it. If the
along, and are shocked at videos or other evidence that show prediction conflicts with your trade plan, it undermines your
34 • February 2016 • Technical Analysis of Stocks & Commodities
ability to follow your trade plan. It
automatically, unconsciously biases
the way you interpret the information
you normally use to make trading
decisions.
If a prediction is about a complex
(unpredictable) system like the market,
you are better off treating the prediction
as nonsense, neither right nor wrong,
regardless of the outcome. So market
predictions are nonsense, and once you
hear them, you act as if you believe
them, even if you don’t want to, and they
affect how you trade, and you can’t help
it. That is the vulnerability you must
overcome. Don’t believe anything you
are foretold. Easier said than done!

Gambling, the edge, luck,

and being right
Many more cognitive biases can best be
illustrated through gambling examples.
The common belief is that longer-term
traders (fundamental investors) are
not gamblers, but shorter-term traders
(technicians, sometimes called specula-
tors) are gamblers. My opinion is more
nuanced, and it is based on an analogy to casinos. The casino likely to pay off sooner than another machine that has paid off
has an edge over the gambler, and always makes money over recently. The fallacy arises from intuitively misunderstanding
time. Casinos have a concept called “the grind” that refers to the significance of a random series of independent events.
the inexorable accumulation of losses from a long string of The trader’s delusion is the false intuition that random trade
gambles that eventually erodes the gambler’s stake to zero, events have an explanation that can be found in the market
or worse. Because the casino has the edge, the gambler has a data. A trade goes bad, and the trader looks at the chart and
negative expectancy. Here is an example of the grind, using indicators to see if there is an explanation for what went
a roulette table. wrong. There are hundreds of indicators and patterns for the
Roulette tables commonly have about a 5% edge favoring trader to use in constructing an explanation, one that will be
the casino. Assume there is a spin every two minutes. Assume a one-off curve fit. Hindsight bias creates the belief that an
you start playing with a $1,000 stake, and you bet $50 every event could have been predicted all along if “all the dots had
spin. If there is a spin every two minutes, then at 30 spins an been properly connected.” In the market there are so many
hour, you are wagering 30*$50 = $1,500 dollars each hour. dots to connect that you can always find an explanation. The
You win some bets, you lose some bets, but at a 5% loss rate explanation is always false, since the outcome of a single trade
(the grind), you would lose an average of $75 per hour. At is a probabilistic event, and can no more have an explanation
this rate, your $1,000 would last between 13 and 14 hours than can the result of a dice roll. Such false explanations are
before it is completely gone. In Skinners’ theory of operant particularly pernicious since confirmation bias causes you
conditioning, he found that occasional reinforcement was to focus on the evidence you can always find to support this
the most effective in maintaining a behavior. That is what false belief while ignoring conflicting evidence.
is happening in gambling games—the occasional wins keep Recording the process you used to devise false causes for
the gambler playing. Traders without an edge also face the uncaused events in a journal is your tool for creating and
grind, and will eventually blow up their account. Your goal maintaining delusions about the market. A journal can be
as a trader is to be the casino, not the gambler. valuable, but the value of a journal lies in tracking whether
you are following your trading plan, and if not, why not.
The trader’s delusion
The gambler’s fallacy is the delusion that if something happens What is luck?
more frequently in the present, the future is ever more likely Luck is a word we apply after the fact to describe how favorable
to balance it. That is why gamblers in front of a particular slot or unfavorable the outcome of a probabilistic event was. Luck
machine believe that a string of losses makes that machine more is not a property you can have ahead of a probabilistic event.
February 2016 • Technical Analysis of Stocks & Commodities • 35
 Having luck beforehand implies either fated outcomes arranged
Event Gaussian probability Cauchy probability
to benefit you or an invisible magical creature has noticed that
you have the luck attribute, possibly because you are wearing 5 sigma 1 in 3.5 x 106 1 in 16
your lucky sweater. The magical creature alters the laws of
physics in such a way as to make the outcomes favorable for 10 sigma 1 in 1.3 x 1023 1 in 32
you. This is of course done is such a way that the tampering 20 sigma 1 in 3.6 x 1088 1 in 63
with physics is undetectable. Many people behave as though
this sort of thing is real. The belief that you are lucky (rather 30 sigma 1 in 2.0 x 10197 1 in 94
than you had luck) based on past events is another example of FIGURE 1: GAUSSIAN VS. CAUCHY. Here you see the probability of black swan
how misleading our intuition is regarding probability. events occurring. They happen, and you can’t ignore them.

When are you right and when are tions among symbols, but in a crisis, everything becomes cor-
you wrong? related and goes down together. Goldman Sachs’ CEO referred
The concept of being right or wrong beforehand only makes to the 1997–98 fall of Long Term Capital Management as a
sense if interpreted in the context of the edge. Regardless of series of 10-sigma events, several days in a row. The 2010 Flash
the outcome of the trade, if you were with the edge, you were Crash has been called a 12-sigma event. These supposedly
right. Casinos are always right. If you went against the odds, impossible black swans keep appearing regularly.
you were wrong. Gamblers are always wrong.
Fear
In the conventional view, fear in traders is a bad thing, an emo-
tion that you must overcome. Many mentors offer courses and
Research shows that the mind is coaching to help you overcome your fear so you can trade. The
capable of dealing with two or supposed fear-driven behaviors include a variety of indecision
three varying indicators or data or poor decisions, including a crippling inability to “pull the
sources at once. More than three trigger.” Fear is a learned response. A set of environmental
cues associated with a threat or loss situation are wired into
are on the average trader’s chart. the brain, according to Pavlovian learning. A situation per-
ceived to be similar to a previously learned threat will trigger
the emotional state of fear, whether or not the fear is rational
Black swans in the current situation. Carried to the extreme, the fear is a
A misleading probability intuition is associated with risk. phobia. The fear response evolved to protect you from lions
This is exacerbated by the widespread use of the Gaussian and snakes; it works well for lions, but not for trading.
(bell curve) distribution to compute all sorts of things in Cognitive psychology shows that high fear shuts down
trading, including risks. The bell curve reinforces our false exploratory thinking and risk-taking. Neuroimaging studies
intuition. We know that market data do not follow a Gaussian show that a strong effect of fear on decision-making is to am-
distribution, and we do not know what distribution the data plify the endowment effect that causes you to value something
do follow. Using the hypothesis that the market is Gaussian, more once you own it. Brain scans show that the same group
we can compute that the 1987 stock market crash was a more of cells associated with the endowment effect is activated by
than 20-sigma event, an event that should not happen during fear. When your brain fears loss, you hold onto what you have
the lifetime of the universe. Figure 1 is a table created from more tightly. This is why people in a high state of fear cannot
data in David Hand’s book The Improbability Principle. The pull the trigger on a trade.
Cauchy distribution is similar in shape to the bell curve, and Some argue that this amplified endowment effect in hard
most people could not tell the difference by looking at plots economic times can affect the broader economy because people
of them. However, the Cauchy distribution varies dramatically fear the consequences of their expectations, hold their money,
in the long-tail odds where the black swans live. and slow the economy from recovering. People in a state of
The point of the table is that our way of estimating long-tail fear generate pessimistic assessments of their risk. Moderate
risk is wrong and the truth is likely closer to a Cauchy distri- fear improves financial decision-making by causing caution
bution than a Gaussian one. As Figure 1 shows, a five-sigma and causing more mental resources to be allocated to the
event is more than 200,000 times more likely in a Cauchy slow thinking decision process. Anger works the opposite of
distribution. fear. People in an angry state discount risks in their decision-
The trader cannot trust his intuition that certain market making, and make irrational, risky decisions.
events are highly improbable and won’t happen and need not Emotional states like strong fear, anger, and stress all cause
be planned for. It is possible to trade hedged, especially with the brain to fall back to intuitive fast thinking decision-making,
options, in such a way that most long-tail risk is eliminated. foreclosing the possibility of the much better (in financial
You might apply modern portfolio theory and diversify. The decisions) conscious, slow thinking decision-making.
problem with that is portfolio theory assumes stable correla- Fear is more a symptom than a cause. Fear is generated by
36 • February 2016 • Technical Analysis of Stocks & Commodities
 Noisy indicators
delay your analysis
our intuition to mobilize our resources to avoid threats, and
in trading, to protect traders from the threat of losses. Fear
can be justified, or unjustified. Probably, most of your trading
fear is justified, because you suspect you are gambling against
unknown odds. In the worst case, you overcome justified fear
and confidently gamble, incurring large losses. I will describe
what makes fear justified in more detail. Jurik algorithms
deliver low lag,
The bane of discretionary trading: low noise analysis
cutting profits, letting losses run
You are told to cut your losses and let your profits run. Yet,
most people do the opposite. When a trade goes bad, you
Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, eSignal,
NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, Sierra Charts,
begin to hope for a turnaround. Losses accumulate, and at Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software
some point, you freeze, unable to do anything about the
trade. When a trade gets a small gain, you begin to fear that
Jurik Tools on live charts, on the web !
you could lose it, so you exit the position early, missing out [Link]/jurik-online
on a big gain. The explanation of this behavior also lies in
cognitive psychology.
Jurik Research
Why don’t you cut losses?
One root of this behavior is the intuitive belief that you can
be right or wrong about a probabilistic event; you interpret a 2010 -- 2011 -- 2012 -- 2013
loss as “I am wrong about this trade, and thus I am a failure.” Add-In software

If you believe the outcome of a trade has a discoverable cause

(the trader’s delusion) then when an important trade is going [Link] • 800-810-3646 • 719-686-0074
bad, it is because you are doing something wrong—something
you should have controlled. To avoid being a failure, you are
likely to seize on the illusion that failure has not occurred Why don’t we let profits run?
until the position is closed. You believe “I still haven’t taken a There is a concept in psychology called prospect theory, dis-
loss.” Unfortunately, losses tend to accumulate, and cognitive covered by Kahneman and Tversky, that launched behavioral
psychology tells us that the response to bad news is ampli- economics. Prospect theory experiments found that you give
fied loss aversion and an amplified endowment effect. At the avoiding a threat twice the importance as maximizing an oppor-
extreme, the loss can trigger the freeze part of the fight, flight, tunity. In trading, you fear a loss twice as much as you hope for
or freeze reaction, creating a paralysis that prevents any action a gain. This means that when you watch the daily variations of
on the position. Brain damage to the amygdala can make you your account, you get twice as much pain from the small losses
a better investor by disabling the normal way risk is perceived. as you get pleasure from the small gains. So you tend to make
In healthy brains, prior losses adversely affect judgment for certain that small profits are not lost. You take the bad advice
the next trade, and you become excessively risk-averse. In- of trading gurus based on this cognitive bias such as “never let
vestors with a damaged amygdala perceive each opportunity a profit turn into a loss” or “you cannot go broke taking prof-
independently without being affected by prior losses. its.” That last piece of advice is flat wrong. If you are trading a
The attempt to avoid admitting a loss can lead to counterpro- typical profitable trend-following system, you will have a low
ductive schemes like cost averaging, which keeps increasing hit rate and make very big profits on just a few trades. Getting
risk. It causes some people to attempt complicated option out of those trades early will turn your profitable strategy into
schemes to repair trades when logic would dictate otherwise. a losing one that will cause you to go broke.
It causes people to embark on unwise Martingale schemes. The idea that exiting a trading session when you get ahead
Not cutting losses is also related to the peculiar advice that will improve your bottom line is the same behavior as cutting
you get from investment advisors as your account goes way your profits short and is rooted in the same cognitive bias.
down, “It will come back, so you really haven’t lost anything.” You are missing opportunities in order to protect small profits,
For me this is equivalent to telling a man working at a job that harming your bottom line.
pays $1,000 a week that he will not be paid for this week’s
work but he really hasn’t lost anything. That’s because next Why you don’t follow your trading plan
week he will (probably) be paid for next week’s work. Losses Following your trading plan means you take all the trades
occur at the instant the value of asset decreases, not at the your strategy generates, and none that it does not. You do
time the trade is closed. This is at the heart of the difference not take a trade as your plan decrees when you believe you
in market view between technicians and long-term investors. have important information that the strategy does not have.
Technicians time the market to try to avoid the drawdown. Therefore, you believe you can improve on the performance
February 2016 • Technical Analysis of Stocks & Commodities • 37
 or eliminate risks or bad trades. Also, most people are uneasy in particular, losses. Professional traders tend to be rational
about robots (your strategy coded into a trading platform is agents in the sense that the acquisition price of the asset is
a robot) making important decisions, and instinctively you irrelevant history to them. They ask, “How much do I want
think human intuition can improve robotic results. Various to be in this position compared to other opportunities?” They
cognitive biases contribute to this belief. seem not to be affected by the endowment effect or the sunk
The knowledge illusion gives false confidence in what we cost effect.
know, both in quantity and quality. It arises from the false
belief that additional information automatically translates into The challenge of discretionary trading
more knowledge. Evidence shows it does the opposite. Nicholas As you look at your screen covered with indicators, you just
Darvas wrote a book, How I Made 2 Million In The Stock hear a confident prediction with compelling rationale from an
Market. Darvas was a dancer who traveled and performed authoritative expert on CNBC regarding the market you are
around the world. His broker sent him daily telegrams with trading. The prediction colonizes your mind and you anchor
quotes on four symbols, and he successfully traded his system to it. You look back through the chart, and confirmation bias
from that meager information. When he quit traveling, he guides you in selecting just the evidence you need to support
came back to the states, set up an office in New York with all the prediction, and to ignore the rest. Now you are looking
kinds of information coming in that was previously unavail- for an excuse to take a trade in the direction of the predic-
able. He started losing money. More information destroyed tion. With a little creative fudging, you decide a particular
his performance because it was irrelevant to his method and chart formation is “close enough” to a pattern that points in
disrupted his decision-making process. the predicted direction and you enter the trade, against your
Overconfidence bias is one result of expertise and the knowl- normal indicators that you are now temporarily discounting.
edge illusion. Evidence shows that algorithms do better than At this point, the worst thing that could happen is for the trade
people at prediction regarding probabilistic systems. to succeed, because then you get the occasional reinforcement
You need to ask yourself if your intuition really can improve (more powerful than regular reinforcement) necessary to install
the results of a validated strategy, in spite of all the evidence a false belief about the predictor and market.
that it will not. If you are daytrading, you need to react instinctively to
If you do not take all the trades your strategy generates, you multiple simultaneously changing indicators and quickly
destroy your statistics and you can no longer be certain that decide if a good opportunity is presenting itself. Research
you have an edge. You may be transforming yourself into a shows that the mind is capable of dealing with two or three
gambler. If your strategy generates too many trades, develop varying indicators or data sources at once. More than three
one that trades at your desired frequency. are on the average trader’s chart. If you try to make trading
decisions consciously (slow thinking), your brain is likely to
The herd instinct be stressed by the complexity of the evaluation, decide it does
Humans, like many other species, have a strong herd instinct. not have the resources to do a slow thinking decision in time,
The herd instinct is probably responsible for the unprofitable and resort to its backup plan to get a quick decision. Its stress
phenomenon of “chasing trades.” It also causes you to exit mode backup plan is to abandon the conscious evaluation
the market when you see others exiting. It is difficult to be of alternatives and narrow its focus to one or two decision
a fast thinking contrarian due to the herd instinct. A longer cues. These cues may not be relevant to the decision; they
term contrarian is a slow thinking investor who consciously are chosen because they come to mind easily. The judgment
knows what he is doing. The herd instinct makes it too dif- that results will be affected by the array of cognitive biases
ficult for most people to be contrarians. Going against the I discussed earlier.
herd generates fear. Compare your trading situation to that of an airplane pilot.
The pilot sits in front of a large array of gauges (indicators)
A difference between you and and is looking out the window (the chart.) The pilot must have
a professional trader the ability to glance at the array of gauges (that are moving
Kahneman says that professional traders think differently in and sometimes in apparent conflict) and intuitively be aware
important ways. They have a broad frame of reference, that of the situation and quickly take the appropriate action. To
is, they do not focus on individual trades, and are thus not develop this intuitive ability could have taken the pilot a thou-
emotionally invested in the outcomes of individual trades, sand hours or more, in flight and in simulators. I have known
price-action traders who have taken as long or longer to be
able to react intuitively to Brooks’ patterns before they made
The value of a journal lies themselves into consistently profitable traders.
in tracking whether you are Unlike most traders’ screens, the pilot’s gauges and dials
look the same every time the pilot enters the plane—they don’t
following your trading plan, change size, move about, change color, or vanish and reappear
and if not, why not. later, or become completely different every now and then. The
changing part is the view out the window. The trader who
38 • February 2016 • Technical Analysis of Stocks & Commodities
 TRADING PSYCHOLOGY

keeps trying new indicators, layouts, colors, and strategies has

no stable dashboard. To develop the “gut feel” about what it If you are trading a typical
means will take much longer, if it can be done at all. profitable trend-following
Perceptual learning
system, you will have a low hit
There is a technique called perceptual learning that is ca- rate and make very big profits
pable of speeding up the acquisition of the intuitive gut feel on just a few trades.
for piloting and other skills. It is amazingly fast because it
works directly with visual perception rather than using the
slow thinking conscious mind to do enough repetitions to and few have, you should always trade in the slow thinking
wire in the intuition. In perceptual learning by direct visual mode. That means the combination of the time frame you trade
perception, the conscious slow thinking mind is completely and the complexity of your system must not add up to so much
bypassed. A pilot dashboard is present, a question about status analytical work per unit time that your brain goes into stress
is asked, and the student answers or takes an action, and gets mode for decision-making. The shorter the time frame and the
immediate feedback about whether the answer or action is more complex your chart display, the more likely you are to
right or wrong. No explanation is given as to why the answer overwhelm your mental resources and trigger the unprofitable
is right or wrong. This feedback loop causes the subject to intuitive backup mode. Being human, you do not have Spock’s
acquire the ability to read the combination of dials and window cool, emotionless logic, regardless of stress.
view as a gestalt and to automatically and correctly categorize In part 2, I will explore ideal technical trading as Spock
the situation. After an hour of perceptual learning training, a would do it, and discuss how you can succeed using quantita-
novice pilot develops the intuition and gut feeling accuracy tive techniques.
comparable to a pilot with 1,000 flight hours of conventional
training. I have based this example of perceptual learning Mel E. Dickover has been an active trader for about 15 years,
from Benedict Carey’s book How We Learn. focusing on technical analysis. He is an active member of his
The great advantage of those who have correct gut feeling is local Society of Market Technicians. He is a retired system
they have sufficient cognitive resources in times of stress that designer and builder, and holds a bachelorís of science in
the brain does not get overloaded and cause the undesirable physics from Purdue University and a masterís of science in
stress mode decision process to trigger. If you are a novice physics from Trinity College. He has programmed several
trader trying to learn to daytrade and you choose to trade with indicators in OmniLanguage script, including his Defended
the five minute emini S&P (ES), you are like a novice athlete Price Line (DPL) and Freedom of Movement (FoM), both of
who, after a couple weeks of training, enters Ironman triathlons which he has trademarked. He may be reached at MDick-
and bets on himself to win. ES is possibly the most difficult over@[Link].
symbol to make money on—the possible market inefficiencies
to exploit are the least because of the number of professional Further reading
and automated traders, and because the quarter-point tick is Carey, Benedict [2015]. How We Learn: The Surprising Truth About
larger relative to the moves compared to other futures, so it When, Where, And Why It Happens, Random House.
is jerkier and noisier. And since the automated competition is Cerf, Christopher, and Victor Navasky [1998]. The Experts Speak:
so fast, by the time you get in, some or most of the available The Definitive Compendium Of Authoritative Misinformation,
market inefficiency has already been extracted. First ones in Random House.
get the most profit, last ones in lose money. For best results, you Darvas, Nicholas [2011]. How I Made $2,000,000 In The Stock
Market, Marlino Fine Books.
must get in predicatively; that is one reason why my previous
Dickover, Melvin E. [2014]. “Evidence-Based Support & Re-
article, “Seeing Clearly,” sought predictive indicators and was sistance,” Technical Analysis of Stocks & Commodities,
skeptical of confirmation delays. The short time frame and Volume 33: April.
need for speedy decisions puts the most stress on the trader, [2015]. “Understanding Causes Of Market Movements,”
and forces the novice into intuitive backup stress mode. The Technical Analysis of Stocks & Commodities, Volume 33:
stress matters only at the time you make decisions. It doesn’t June.
matter if you’re relaxed at other times. [2015]. “Seeing Clearly,” Technical Analysis of Stocks &
To apply perceptual learning to trading offers a way for dis- Commodities, Volume 33: July.
cretionary traders to operate effectively at short time frames, Hand, David J. [2014]. The Improbability Principle: Why Co-
and perhaps even have something of real value to contribute incidences, Miracles, and Rare Events Happen Every Day,
to a trading algorithm. Algorithms are rule-based. Much of Scientific American.
what we learn to do we cannot explain. Perceptual learning Kahneman, Daniel [2013]. Thinking, Fast And Slow, Farrar, Straus
modules would need to be developed, and an unambiguous set and Giroux.
of categorization rules would be necessary. Then, in an hour Silver, Nate [2012]. The Signal And The Noise: Why So Many
Predictions Fail–But Some Don’t, Penguin Books.
or two, you would become an intuitive chart reader.
If you have not developed the intuitive chart-reading skill,
February 2016 • Technical Analysis of Stocks & Commodities • 39
 INTERVIEW

Trade Within Your League

Understanding Price
Movement With
Fausto Pugliese
Fausto Pugliese is the CEO of Cyber Trading University, which he founded in
1995. Pugliese began his career on Wall Street as a stockbroker and was one
of the first independent traders to take advantage of the Direct Access Trading
technology boom that started in 1987. Cyber Trading University offers both
onsite and online trading courses with stocks, forex, and options programs.
Pugliese is the author of How To Beat Market Makers At Their Own Game:
Uncovering The Mysteries Of Level II.
Stocks & Commodities Editor Jayanthi Gopalakrishnan interviewed Fausto
Pugliese on December 7, 2015 about why education is important if you want to
become a successful trader.

Fausto, tell us a little bit to go through what I went through. I

about yourself and how you lost money and sacrificed so much.
got started in trading. This is how Cyber Trading University
I’m one of the originals of was created. I am passionate about
what they call “SOES bandits.” I started trading and passionate about teach-
in 1995. I was like 22 years old and lived ing people.
in New York. I was trained by the best
traders in the world. Before I was a trader, What are some lessons you’ve
Losing money is a good
my sister and I were brokers. We didn’t learned from experiencing losses? thing because if you know
like it, and we quit. But we found out that I always tell people, “Losing money why you lost it, you’re not
the people who made the most money is a good thing because if you know going to lose it again.
were in the trading business. why you lost, you’re not going to lose
Actually, she is the smarter one and it again.” I was self-taught and the
she got a job and learned how to trade. biggest lesson I learned from that is
I was the guy who decided to go out that you can expect to have a large failure Yes, to me, a job is similar to getting
there and learn on my own. She became rate if you go that route. an education. Too many people want to
more successful than me and I thought to I came to realize that everything I tried try trading first and then learn later. I
myself, “What could she be doing that’s to learn on my own was the opposite of did the same thing and failed.
better than what I am doing?” what I was supposed to do. I wasn’t fol- I did take a job and learned from the
I finally went to find out where she lowing high-frequency traders, I wasn’t best people in the industry. My father
was working. She showed me where she using the right trading execution systems, used to tell me, “If you want to be great
worked, introduced me to her mentor, I was trading the wrong stocks. I tried at something, you’ve got to learn from
and told me which courses she’d taken. to be a poor man playing a rich man’s the best in the industry.” That’s what I
What I learned on that day made me game and traded things that were out of did, and I became well-known for it.
realize that I should have never made my my league. These are the same mistakes
first trade. It took me about six months that 90% of retail traders make and are I remember during the dot-com era,
to learn how to trade and took me two the reason many of them lose money. the term “SOES bandit” was one that
Digital art: Fon_Nongkran

years to master it. was heard often, but it has a negative

A lot of people asked me to teach them So, if I understand you correctly, you tone. What is an SOES bandit?
how to trade because they thought I was got a job and that helped you learn The word SOES stands for Small Order
doing it very well. I don’t want anybody to trade? Execution System, and that’s the execu-
40 • February 2016 • Technical Analysis of Stocks & Commodities
 Chart
Scan
Learn
Award-Winning Charting
Trusted by thousands of online analysts,
[Link] makes it easy to create Professional Commentary
high-quality technical charts with just a few
clicks. No software to install, just an internet From daily blogs to weekly webinar shows,
connection and the browser of your choice. [Link] hosts free current market
Watch your charts automatically update in analysis and educational commentary from
real-time and access them on-the-go from some of the industry’s leading technical
any web-enabled device. analysts. Learn from the best to boost your
technical skills and financial prowess.

Customizable Scanning
Fully customized to your technical parameters,
our world-class scan engine allows you to
instantly find the stocks that meet your Pring Murphy Elder
specific criteria. Plus, our technical alerts
notify you of key moves to help you stay
ahead of the curve.

Hill Bowley Schnell

Proud to be Voted
“Best Technical Analysis Website” and more!
For 14 Years Straight!

Start Your Free 10-Day Trial Today

[Link]
©1999-2015 [Link], Inc. All Rights Reserved.
 tion system we used for our trades. You on margin. That’s one of the reasons a level of education as they do? The mutual
could place a trade through SOES, and lot of people moved to trading options, fund manager did all the research on
then what happened is the market mak- futures, and forex. his own. Would they still feel comfort-
ers called us thieves, which are bandits, One thing I found is that if you can’t able having their money managed by
because they thought we were stealing trade a stock, there’s no way you’re go- someone else?
money from them. They didn’t like that, ing to be able to trade. Although there I encourage people to do it right the
so they came up with the term “SOES are several other markets to trade, it all first time. Trading is one of the greatest
bandit.” But really it’s just another word starts with the stock market. Because it’s jobs in the world and I believe everybody
for a daytrader. That’s how the use of so easy to open an account and trade, should participate in it in some way.
that ugly word came about. people feel they don’t have to really learn Whether you’re trading your retirement
how to trade. As an example, if we didn’t accounts or anything else, it’s important
So you were one of them. Did that give force people to get driver’s licenses, they to do it right the first time. If you learn
you an edge in the markets, and how probably wouldn’t go to the Department the hard way, it can get very expensive.
can a self-directed trader participate of Motor Vehicles and take the test. But You’ll lose so much money.
in these markets? we all know what ends up happening in
It’s a huge edge. I think the problem that case. Well, it’s the same with trading. When you say, “Do it right the first
with today’s traders is that they want It’s just unfortunate that people have to time” what exactly do you mean?
to learn to trade on their own. Nothing learn the hard way. We get brainwashed when we’re young
really has changed in trading other than about going to school and then to college
technology. Because of the change in Why do you think people don’t want to get good jobs. But it costs a lot to go
technology, people can easily start trad- to learn? to college, which is one of the many
ing on their own. Learning to trade is a lot of work. hurdles to cross. But if you do it right the
When I started trading, you had to be There’s cost and time involved. I tell first time, you’ll reap the benefits. It’s the
licensed as a trader. Today, you don’t people that they’re going to be doing this same with trading; if you do it right the
have to be. And now with so many for the next 20 to 30 years, so there’s no first time, you wouldn’t face the issue of
brokerage firms, people are beginning need to rush. What people need to do is losing money as you move forward.
to realize that no one’s going to care interview several good schools and men-
about their money more than them. We tors. They should take several courses Getting into the mechanics of trading,
work with a lot of retirees and we see and find out what works best for them what are some ways that traders can
that once people realize they have a lot and then go from there. You should never protect themselves from the volatility
of time on their hands, they want to do have to jump into anything. of the markets?
it on their own. As I mentioned earlier, you should
It’s not difficult to trade. The most That’s interesting you say that, because interview several mentors to find out
difficult thing to teach is the discipline a lot of people say they’ve done their what you want to trade. Do you want to
that is necessary. And then of course, research, but how much research trade futures, forex, options, or stocks?
there’s the emotion of greed that needs have they really done? Is it as detailed Then take some inexpensive courses that
to be overcome. There’s a big difference as it should be, have they tested their let you see how they trade in real time.
between a trader and an investor. Trading system, have they determined when to From there, you can make a judgment
is just a game. Once you learn how to exit their system? about them.
play it, you just have to learn to be very I tell people to think along the lines of I find that a lot of people trade stocks
consistent. if they give their money to a mutual fund, or options that are out of their league.
they’re basically giving their money to They are stocks that move too fast and
You just said that it’s not difficult to someone else to manage. But what hap- the volatility is too high. You have to
trade, but it takes a lot of discipline. So pens when they find out that the person remember that you’re competing with
do you think a lot of people jump into they gave their money to has the same the best traders on Wall Street. There
trading because it is so easy in that it’s are over 25,000 stocks you can trade,
easy to open a brokerage credit account so there are plenty of choices.
and press that buy button? You want to risk the least amount of
Absolutely, and that is one of the big- money possible with a high amount of
gest problems today. Making it so easy reward. At the end of the day, you just
to open a brokerage account hurt the want to make money. That’s what trad-
investor. Imposing the daytrading rule of ing is about. You need to make sure that
having at least $25,000 in your account stocks have good spreads, good volatility,
was, to me, discriminatory. They would good high-frequency trades, big block
have been better off telling people to orders, good support & resistances.
just trade their cash instead of trading You also have to know how to sim-
42 • February 2016 • Technical Analysis of Stocks & Commodities
 [Link]
plify the execution system. Being more
focused will help you weed out all
the things most brokerages offer. You
don’t need 80 percent of what you are
offered. Simple Rates.
You said that most traders trade stocks
or options that are out of their league. Clear Savings.
How do they go about selecting the right
stocks or options?
Every morning at Cyber Trading
University, we look at the premarket Deep Discount Commissions
activity, which a lot of people don’t know
they have access to. We’ll see where
as low as $.53 per contract.
the premarket trading is going on and
where the market makers are placing
their orders. View Commissions at [Link]/Futures
We go through the top 20 percent
gainers and losers. We stay away from
the expensive stocks because the more
You Know our Award-Winning Platform.
expensive a stock, the more likely the Get to Know our Next Generation Brokerage.
broker is going to put their better traders
on it. You’re not going to be able to beat
the best traders.
We look for stocks under $30, those
that have good spreads, strong trends,
good volume, and things like that. Usu-
ally, we work from the top percentage
gainers and losers list, because those are
the ones that will have the most action.
But not all of them are what we call trad- NinjaTrader equips traders with unmatched benefits including
able, so we dissect them and find those
we can trade. Those are the stocks we’ll 1000s of Apps & Add-Ons to personalize your platform with
focus on during the trading day. indicators, signals and custom strategies.
You mentioned something about sup- Go Direct to the Source.
port & resistance levels. Are these the
types of things you look for when you NinjaTrader Brokerage.
decide on your entry & exit points?
Stocks break support & resistance all
the time. I think of a chart as a GPS. It
only tells you what happened in the past. will you know there is a possibility of defaulted to place orders. Everybody
It’s not indicative of the future. I was prices breaking that resistance level. owns shares in some capacity, and these
trained by my mentors to read the tape. Most people don’t look for these sig- computers know where those defaulted
Yes, it’s old-fashioned, but I know which nals. Instead, they buy a stock at support orders were placed. So they’re already
stocks are going up and down. and wonder why prices went lower. You out there and they’ll be advertised.
Charts can help you, but what I have have to see if the supply & demand is There are what are called electronic
found is that most people read them there. You have to know this before you communication networks (ECNs). A lot
backwards. When you look at a support use any other tools. of people don’t realize you can see all
or resistance level, you’re supposed to those orders. Seeing these orders will
see if there are big block orders there How can you find whether block trades change your perspective on why you
in the past that created those support & took place in the past? Wouldn’t that should get in and get out of a position.
resistance levels. That way, you have a only be for intraday trading? Surprisingly, not many people use it.
game plan: are prices coming toward a That’s not true. You can do it for long- You can get that data and you’ll also
resistance level? If they are, are there big term trading. There is something called see those orders for the long term. It’s
orders coming in at that level? Only then program trading where computers are our most important tool when it comes
February 2016 • Technical Analysis of Stocks & Commodities • 43
 to trading, and now it’s bigger to trade for 20 years. When I
and better than ever. For ex- Trading is one of the greatest started teaching, there weren’t
ample, Nasdaq has TotalView, too many people who taught
which displays order depth.
jobs in the world and I believe trading. Cyber Trading Uni-
Often, Nasdaq presentations everybody should participate versity has taught many people
will be about TotalView, be- in it in some way. to trade. We teach our students
cause they’re trying to educate how to journal their trades and
people to trade using this learn from their mistakes.
information. money trading stocks and want to move It is important that people un-
Since the 1990s, when daytrading on to that next level. Options give you derstand that they should not become a
was popular, nothing has really changed more leverage but with more leverage self-taught trader. You need to learn from
except that pricing went from fractions to comes more risk. Just trading the stock other successful traders. Learn from the
decimals. Technology has become more itself is less risky than trading options. best people in the industry, learn from
streamlined, it’s a lot more user-friendly, Daytraders don’t necessarily make a their mistakes, and learn a little bit from
and it’s easier to access. lot of money; they too are trying to pay everybody. Then you can make that jump
their bills. But once you know you’re into trading. The one thing I know is
Earlier you said that people should consistent, then you can explore other that the stock market’s not going out of
know how to trade stocks before they ways to maximize your income by imple- business. It’ll always be there.
go on to something else. If somebody menting other strategies. For example, There’s no better job in the world than
wants to trade options, are you saying you may want to trade LEAPS. Just being a trader. You are your own boss,
they have to master trading equities always remember to not be a poor man you can come and go as you please, and
first? trying to play a rich man’s game. you can make a good living from it. Just
I love options and I think they’re a great Another reason people would turn to do it right and know why you’re doing it.
tool. However, the problem with them is options is because of the implementa- The money will always come later.
that people trade options because they tion of the $25,000 minimum account
can’t afford to trade stocks. It’s a poor requirement to daytrade. Daytraders Are the courses you offer for a specific
man playing a rich man’s game. This is turned to options and forex. You can time period or are they continuous?
the reason why more people fail trading open up a mini account in forex for $500. Our average course is usually a year
options. If you can’t make money trading Eventually, people are going to do what long. You’re not going to learn trading
a stock, there’s no way you’re going to be they can to trade, but you have to know in five days. You may learn enough to
successful trading options, because with why you are trading certain markets. be dangerous, but it takes at least two
options, you’ve got three things you have For the most part, all markets trade in to three months before the light bulb
to beat. In stocks, you have only two—the similar ways. They all have supply & kicks on. We trade everyday with our
spread, which could be very tight, and demand, support & resistance, they’re students, we have classes everyday, we
an inexpensive commission. all electronic, and you still have to go hand-hold our students, and we do most
In options, you have bigger spreads, through brokers. of it online. We run a professional trading
commissions, and time you have to You just have to know how to play room and teach at the same time. This
beat. And then the option could exercise the game. I compare trading to being a allows our students to learn and observe
worthless. I just find that people trade professional athlete. Some of the good at the same time.
options because they want to trade some athletes only like playing football and
of the higher-priced stocks but because baseball. I might not be great at base- Thank you for speaking with us,
they’re expensive, they move to trade ball, but if I’m a pretty good athlete, Fausto.
options on those stocks. But there are I could probably do it. Trading is the
a lot of other stocks out there that are same way. Further reading
not as expensive and make big moves. I’ve been trading and teaching people Pugliese, Fausto [2014]. How To Beat
For some reason, most people think that The Market Makers At Their Own
the only stocks to trade are Apple, Inc. Game: Uncovering The Mysteries
(AAPL) or QQQ. That’s a poor man Of Day Trading, Wiley.
playing a rich man’s game. If you can’t [2012]. “Daytrading Rule 1: No
make money from understanding how Overnights,” Technical Analysis of
to trade a stock, then you’ll never make Stocks & Commodities, Volume
money trading options. After all, it’s the 30: June.
movement in the stock price that makes ‡Cyber Trading University
an option move. ‡See Editorial Resource Index
The only people we recommend trade
options are those who make so much
44 • February 2016 • 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

TAKING THE LEAP a longer time frame until expiration, as take advantage of how options are a
What are LEAPS and how will they much as up to two years out before the way to leverage your cost in the trade,
benefit you? option expires. and since cost is risk, subsequently, your
I have shown readers of this column They were created in or around 1990 risk is minimized over the straight stock
from the get-go a handful of my option and started out as only being available purchase.
trading strategies, the tools I use to find on stocks but eventually became avail- When buying LEAPS, I typically like
them, and the education that goes behind able on indexes, and nowadays, you to consider doing so on an underlying that
each of my processes to find, analyze, and can even find these on exchange traded shows a habit of sustaining substantial
manage them. The constant in each of the funds, or ETFs. They are most often price moves over sustained periods of
strategies is that they are all short-term written (but not exclusively) for a Janu- time. The stock of Nike, Inc. (NKE) fits
in nature, meaning they are set up and ary of whichever year, up to two years that bill (Figure 1). An investment since
due to work within 20–30 days, and if I out. Say it was October 2015 and there the start of the year even has proven to
stretched that at all, it would be with op- are LEAPS on underlying securities for be a nice decision.
tions due to expire about 45 days out. October, November, whichever month
The mindset has been to get in, get is next in that issue’s option expiration Leaps vs. stock
out, and turn your profits pretty quickly. cycle, and January of 2016, 2017 and Purchasing 1,000 shares of NKE in Janu-
I also recognize that a lot of my read- maybe even 2018. The January 2017 ary of 2015 (using the chart in Figure 1,
ers or subscribers learning my process and 2018 would be considered LEAPS. consider the stock purchase price of $95)
come from a longer-term, more of a buy LEAPS options are really no different would have cost you $95,000, not includ-
& hold background. At times I sense than their shorter-term siblings in that ing fees and commission. Meanwhile,
this shorter-term, option-based way of they have an expiration date, they can be purchasing the January 2016 95 calls at
generating income can be a bit much found for both calls and puts, and they the time (10 contracts to be the equivalent
to take in as quickly as you would like. can be exercised. of 1,000 shares) would cost the options
Let me keep with the process of The primary benefit as I see it from an LEAP trader $8,350 (ask price on the 95
trading options as a strategy, but fuse investment standpoint is it allows people calls), which is a significantly lower cost.
in a longer-term mentality—a bit of a who are becoming option traders, and $8,350 is about a 91% reduction in cost/
buy & hold mindset with options. I will even those who have been doing this for risk. How’s that for leverage!
demonstrate LEAPS options and how a while, the
an investor can merge into the world of opportunity
option trading with an option that expires to take part
up to a maximum of two years and eight in a stock
months out till expiration. This will allow or underly-
you to benefit from the leverage of op- ing’s abil-
tions in minimizing risk, still potentially ity to make
have a better return on investment should prolonged
the trade work, and also start getting price moves
acclimated to options. without hav-
[Link]

ing to trade
What are LEAPS and what are in and out
their benefits? of shorter-
It’s an acronym for Long-term Equity term option
AnticiPation Securities. The “P” is often positions. It
capitalized when it is written out (prob- allows trad-
ably to get the word LEAPS to make ers the op- Figure 1: PRICE CHART OF NIKE, INC. (NKE). When you consider buying LEAPS, you
sense). These are options that allow for portunity to want to buy them on an underlying that shows a habit of sustaining price moves.
February 2016 • Technical Analysis of Stocks & Commodities • 45
 Explore Your Options
Another benefit is the theta, or time
decay, is much less dramatic for a large
part of its existence. A LEAP option,
by its very nature, isn’t going to have an
expiration date right around the corner
such that the stock has to make a quick Figure 2: RETURN ON INVESTMENT (ROI). The money available to be made on the option trade may be less than
move in order to counter that time decay. on the stock trade, but on a dollar-for-dollar return-on-your-money basis, the options clearly outperformed.
Time decay isn’t as much a detriment to
the position as it is to the shorter-term your favor, is a higher percentage. Another thing that some may consider
expiration. You get more bang for your buck, a drawback is the delta isn’t going to be
which is usually the case with any as large as a shorter term in-the-money
The ROI option trade when it works. option. The further out options expiration
Options offer less cost/less risk, but will have less of a delta move because
when they work, the return on investment When to use a LEAP option would be there is so much more time left on them.
(ROI) is better. You may make more based on your longer-term outlook for the Shorter term options have a bigger dol-
money on the trade of the underlying, stock. I would start with saying to any of lar for dollar move capability than the
but from a pure return percentage on you who own stock or have bought stock LEAP.
your money, the option trade is usually as an investment prior to learning and
better. In the chart in Figure 1, the value trading options is to stay with whatever LEAPS as a hedge
of NKE stock is at $132. If you were to reasons you have used up to this point When you buy a stock, you do so based
sell the stock now you would have a 37 for making those investment decisions. on whatever number of reasons, but you
point gain. The ROI on that would be But now you know that instead of buy- likely did it with the intention of simply
close to 39%. That is a nice gain and ing the stock, there is a lower cost/lower holding them for as long as you can or
percentage and I bet many a money risk way to participate in your projected as long as they are working. But what
manager would love to have that type of move on the stock or underlying. if they stop working? What constitutes
return. Well, I am not a money manager, them not working? Is it based on a
except for my own. My job is to educate point-drop measure? Is it based on a
you on my process and empower you to When trading LEAPS, you percentage drop? Do you base that on
become a more self-directed trader and won’t have to worry about the individual stocks in your account or
successful steward of your money, but every little up or down do you have some sort of overall account
I digress. move and how it can cause value metric you use?
Take a look at the image in Figure 2 harm to your trade. I am not going to get into a lengthy
showing the options scenario and you discussion to answer those questions.
will see a much better ROI number is/ Instead, I will offer an idea on how you
was available. The ROI is a whopping Using your fundamental analysis is can go about insuring your account, if
284%! The money available to be made a way to not get caught up in all the you will.
on the option trade is less than that on technical gyrations on a chart and may Consider talking to your profession-
the stock scenario. But on a dollar for help keep your emotions from getting the als about buying LEAPS put options on
dollar return on your money basis, the better of you. LEAPS provide you with a the SPY to act as a hedge or insurance
options clearly outperformed by leaps way to stay with the option trade longer, against a falling market. If you want to
and bounds, if you pardon my pun! because you have more time to let it work. do a bit more work and look at the batch
Summary of LEAPS benefits: Also, you won’t have to worry about of stocks in your portfolio and see what
every little up or down move and how it other ETFs are more specific or more
1. Allow you to participate in prolonged can cause harm to your trade, because closely match your stocks you can try
price moves on the underlying with the option value isn’t as susceptible to that, but for the most part, the SPY is the
options. those moves. broader means to accomplish this.
For a way to participate in option
2. Allow you to participate in prolonged But they come with drawbacks trading, giving yourself a means to
price moves with reduced cost/risk. Just like any option, they have an expira- participate in prolonged price moves in
tion date. You just won’t be up against a variety of securities at a reduced cost
3. Theta or time decay is less dramatic, the clock like you would be in a shorter and thereby limiting risk, using LEAPS
meaning the option will not lose term option trade. You do not want to just might be another way for you to profit
value as fast as a shorter term op- trade options on trade candidates found in the markets.
tion will. using tools that focus on securities that
are poised to make a calculated move
4. Rate of return, when the trade is in within 20-30 days.
46 • February 2016 • Technical Analysis of Stocks & Commodities
 The Money Calendar
TomsTradingRoom, LLC
[Link]
Price: Part of the Complete Trader
package which is $199 per month

The thought of finding double-digit

winners on small price movements will,
without a doubt, attract the attention of
any trader. Too good to be true? Let’s
find out.
The Money Calendar, one of the prod-
ucts offered by Tom Gentile (an option
trader and regular contributor this maga-
zine especially by way of our monthly
Explore Your Options column), finds the
top 250 stocks and exchange traded funds
(ETFs) that make consistent moves on a
specific date or time period. The Money
FIGURE 1: THE MONEY CALENDAR. The Money Calendar is a seasonal calendar that looks for seasonal
Calendar is a seasonal calendar—yes, it patterns in stocks with a 90% or greater historical win accuracy. The stocks with the high-probability patterns
looks for seasonal patterns in stocks— are filled in on the calendar. The deeper the green or red, the more bullish or bearish the day is.
which looks for patterns with a 90% or
greater historical win accuracy. To find
the promising seasonal patterns, it looks
at 400 million bits of data to project 30
days out.
The stocks with the high-probability
patterns are placed on a monthly calen-
dar similar to what you see in Figure 1.
The calendar resembles a heat map—the
deeper the green or red, the more bullish
or bearish the day is. If you click on a
specific date, it’ll list top candidates for
that date (Figure 2). Bullish candidates
are displayed as green horizontal bars
and bearish ones as red horizontal bars.
This list can be sorted based on any of
FIGURE 2: VIEW BY DATE. If you click on a specific date in the monthly calendar shown in Figure 1, it will
the columns displayed on the right-hand
list top candidates for that date. Bullish candidates are displayed as green horizontal bars and bearish ones
side of the bars (net profit, accuracy, aver- as red horizontal bars.
age profit, and the date the trade ends) by
double-clicking on the column header. A clearly see which stocks, from a historical Money Calendar is part of the Complete
left-mouse click on any symbol on this perspective, have a seasonal tendency to Trader package, which costs $199 per
list will display the buy/sell date and a move in a particular direction on a spe- month. This includes trader support, we-
10-year bar chart showing yearly trade cific day or time period. More reds and binars, a library of more than 100 how-to
results for each of those years. And if yellows on the monthly calendar tell you videos, and Tom’s Weekly Market Out-
you want to dig deeper into any year in that you can expect bearish moves ahead look. A seven-day free trial is available,
which the profits were unusually high or and more greens mean you can expect giving you a chance to see for yourself if
low, just left-click on that bar and you’ll bullish moves. If, for example, you’re this seems too good to be true.
see a price chart of the selected stock for waiting for the central bank’s decision on
just that year. interest rates, and the monthly calendar Jayanthi Gopalakrishnan is Editor of
What does all this tell you? One of the shows more greens, then you can expect Stocks & Commodities magazine.
greatest challenges faced by traders is de- the equity indexes to move up.
ciding which stocks to trade. The Money To access this tool, you need to be a ‡The Money Calendar (TomsTradingRoom, LLC)
Calendar makes that decision easier for subscriber to Tom’s Option Tools. The cost ‡See Editorial Resource Index
you by providing you with the ability to of a subscription starts at $79/month. The
February 2016 • Technical Analysis of Stocks & Commodities • 47
 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

Edges Come, Edges Go. Make the critical. For example, it is one thing to days (T+3). Note: Back in the days of
Most of Them While They Are in have three, four, or five up days in a row horseback couriers, the settlement for the
Your Hands before you enter the window as compared LSE was 14 days, so as clearing technol-
Those with years of trading experience to three, four, or five down days in a row. ogy improves, the settlement window
will nod their heads about all the edges There is more information out about the continues to be shortened.
they discovered, applied, and then saw TOME than the mid-month swell, but it Settlement risk is the risk that occurs
dwindle and disappear. The look back is there; watch index behavior around the when one counterparty does not deliver
always says, “I should have maximized eighth, ninth, and 10th business days of a security (selling or shorting) or its cash
it while it was here. I did not make the the month. value according to the agreement at the
most of it.” This may fall into the category of a time the security was purchased after
One of the more painful things in life soft edge that is here to stay as long as the other counterparty or counterparties
is regret, and this is true in the world of timing remains as to when employees have already delivered the security or
trading also. How do you reduce regrets get paid, employers continue to contrib- its cash value.
in trading? You do it by capitalizing on ute, and pension funds still invest. This Even though the settlement window
all the soft edges that are within your brings me to the subject of another soft was reduced to T+3, credit risks still
control. Traders should seek to identify edge that may or may not be there, but persist since crisis events such as a flash
the reason behind a trend, a shift, con- if it is, a major change could be on the crashes could still happen. What if there
solidation, spike, capitulation, or patterns horizon. was instant settlement?
that repeat in general. With equities, That is where we are heading. I am
there is a definite reason behind a mid- The settlement window watching the speed of the digital ledger
month swell, or an end-of-month to the When you buy securities, your brokerage system being adopted by financial institu-
beginning-of-the-new-month pattern. firm must receive your payment by the tions around the world. It is happening
The answer lies in the fundamentals. I close of business three business days quickly, though the weak link is the old
am not referring to valuation metrics but after the trade was executed. When you establishment processes that this new
rather to the structure of the system. sell a security, you must deliver your technology continues to run up against.
Most employees get paid every two securities certificate to your brokerage This ledger system is the one that bitcoin
weeks or bimonthly (mid-month and firm no later than three business days is built on. I will not be talking about the
end of the month). So payroll deposits after the sale. This settlement cycle for crypto currency itself here, but rather the
and 401K money could contribute to an purchases or sales is known as “T+3” technology that drives it.
identifiable pattern. If you would like to or trade date plus three days. How you This block-chain ledger is a disruptive
research it, look up “turn-of-the-month hold your securities (either in physical technology. In the current dollar-based
effect” (TOME). Plenty of research pa- certificates or in electronic accounts) monetary system, we entrust banks and
pers have been written on the subject. can affect how quickly you are able to other fee-charging intermediaries to act
This usually refers to the last four deliver them to your broker. as gatekeepers to nearly every transac-
days of one month and the first three The three-day settlement date applies tion. Those centralized institutions main-
of the new month. At Bright Trading, to most security transactions, including tain closely guarded in-house ledgers
we tighten it a bit and educate about stocks, bonds, municipal securities, and, with that information, determine
the last three days and first two. Note: mutual funds traded through a brokerage whether their customers have enough
Before you blindly buy the SPY or other firm, and limited partnerships that trade credit to write checks, buy goods with
stocks after researching this persistent on an exchange. Government securities credit cards, or wire money.
and statistically significant event, think and stock options settle on the next busi- So how does this relate to our earlier
about context. Certain months of the ness day following the trade. discussion of “soft edges”? Just as there
year may be better than others. How The financial markets were strength- is a TOME pattern arising from the “way
the market has been performing as you ened when the SEC reduced the settle- things are done” and how the system al-
arrive at your seasonality window is ment cycle from five days (T+5) to three locates money to the markets, there may
48 • February 2016 • Technical Analysis of Stocks & Commodities
 Q&A
be patterns that stem from the settlement Instant settlement? one knows, but it is coming.
process, from how credit is used, how it’s So again, what if settlement was virtu- My suggestion to readers of this col-
distributed, and the associated risks. ally instant? We are heading in that umn is to think about the patterns in the
Margin calls are a regular occurrence direction. Goldman Sachs has filed a market today (as we do have signals, not
in volatile or directional markets and patent application for a cryptographic just a random walk) that are associated
broker–dealers have systems in place currency called SETL Coin to be used with the way things have been done
(automated or human) to intervene and for securities settlement. It appears as if through exchanges and the settlement
liquidate assets. These occur at certain a bridge has been created between the process and consider: what if this all
times of the day. The first half hour of the virtual and the nonvirtual, allowing for changes?
day session is more prone to margin calls an open transaction with the immedi- How will we reinvent our trading and
than, say, four hours into the day. The 45 ate transfer of funds, the verification of find new edges? With change comes op-
minutes before the New York lunch is owners, and the settlement process all portunity as well as the loss of something
more prone to margin calls than at 2 pm completed almost instantly. This begs that you benefited from or relied on. I
ET. Again, patterns related to movement, the question: in the future, why would encourage you to also think about its
volume, and time of day usually have a we need an exchange when we can just widespread adoption through the entire
structural basis for them. transact through the digital ledger system financial system. What jobs will be lost?
You may have seen a pattern in com- at a virtual “Wal-Mart” of stocks? What jobs created? What companies will
modities when margin requirements for This immediate verification, authen- benefit or be negatively affected?
an instrument have increased. You may tication, payment, and settlement will By the way, on a statistical note: If a
have identified two- or three-day pat- reduce credit risks with counterparties trader wanted to mine for a three-day
terns in stocks, especially after news or significantly. It could also strengthen candlestick pattern, he or she could do so
breakouts. Most likely, you can find more our financial system, although I am with daily bars but would need the close-
long buy patterns, since the general bias sure there will also be new risks and to-close percentage change from day 1 to
of equity markets is toward the upside. “unintended consequences,” but that is a day 2, and from day 2 to day 3, as well
Could some of these patterns be linked subject for another day. The technology as the prices of the open, high, and low
to the settlement window effect (the lag based on the network ledgers within a relative to the close for each day.
between when the stock or ETF is pur- peer-to-peer network (essentially the
chased and when the investor or trader digital block-chain ledger system used
is obligated to deliver the funds to cover by bitcoin) has made this possible for
the trade) and margin accounts? the future. How far into the future no

Fidelity Launches Fidelity App Market Technicians Association

for Apple TV announces dates for 2016
Fidelity App for Apple TV has been Annual Symposium
released. The app is designed to give The Market Technicians Association
investors a way to keep tabs on the (MTA), the governing body for the
markets and generate investing ideas. Chartered Market Technician (CMT)
Fidelity is one of the first brokerage program, has announced the dates
firms to offer an app for Apple TV, for its 2016 annual symposium. The
which owners of the new Apple TV can 43rd annual symposium will be held
download from the Apple App Store. April 7–8 in New York City’s historic
Users can navigate the app with its Siri Fidelity app Financial District.
Remote to display a variety of market The Market Technicians Association
data. Users can run the Today’s Overview grated live Bloomberg TV news; real- is a not-for-profit member association of
slideshow for an accessible way to stay time market quotes for the DJIA, S&P more than 4,500 investment profession-
up-to-date with that day’s market. 500 index, and NASDAQ; quotes and als in 85 countries. Examinations for the
The app allows viewers to see a run- symbol lookup for stocks; ETFs, mutual CMT program are administered twice a
ning status of six key financial categories: funds, and international markets; and year in April and October at Prometric
top gainers, bull & bear of the day, US recent quotes. Fidelity provides apps for testing centers around the world.
markets, world markets, most actives, iPhone, iPad, iPod touch, Apple Watch, [Link]
and top losers. Users can also navigate and Apple TV.
to specific app features, including Inte- [Link]
February 2016 • Technical Analysis of Stocks & Commodities • 49
 Click on the plot name, then click edit. Set the color to green,
For this month’s Traders’ Tips, the focus is
the period to 20, and the formula to:
Vitali Apirine’s article in this issue, “Higher
Highs & Lower Lows.” Here, we present the 100 * ABS(H > H1) * (H - MINH20) / (MAXH20 - MINH20)
February 2016 Traders’ Tips code with pos-
sible implementations in various software. Repeat for LLS using the following formula:
Code for implementing the HHS/LLS for
MetaStock as well as for Microsoft Excel is 100 * ABS(L < L1) * (MAXL20 - L) / (MAXL20 - MINL20)
already provided in Apirine’s article. Sub-
scribers will find that code at the Subscriber Area of our This will give you two plots in different panes. Move the
website, [Link]. Presented here is an over- LLS plot into the same pane and scale with HHS. To add the
view of possible implementations for other software. horizontal levels at 10, 50, and 60, click on HHS and select
horizontal lines.
The code for the following Traders’ Tips selections is If you want to use a period other than 20, change the pe-
posted here:
riods on each indicator and also the max and min periods in
• [Link]  Home–S&C Magazine  each formula.
Traders’ Tips If you would like a copy of this chart to use in your TC2000
software, simply send an email to support@[Link] and
(Or from [Link], scroll down to the current articles we’ll send it to you.
section and click on the Traders’ Tips tab.) —Patrick Argo
The Traders’ Tips section is provided to help the reader Worden Brothers, Inc.
implement a selected technique from an article in this is- [Link]
sue or another recent issue. The entries here are contrib-
uted by software developers or programmers for software
that is capable of customization.

F TRADESTATION: FEBRUARY 2016 TRADERS’ TIPS CODE

In “Higher Highs & Lower Lows” in this issue, author Vitali
F TC2000 VERSION 16: FEBRUARY 2016
Apirine presents a momentum indicator–based system that he
TRADERS’ TIPS CODE
describes as a tool to help traders determine the direction of a
The higher highs and lower lows stochastic described by Vitali
trend. The indicator is made up of two separate calculations:
Apirine in his article in this issue, “Higher Highs & Lower
the HHS or higher high stochastic, and the LLS or lower low
Lows,” can be easily applied in TC2000 version 16.
stochastic, which together comprise the HHLLS. Here, we
In Figure 1, we show a daily chart of INTC with the HHS
are providing the TradeStation EasyLanguage code for the
and LLS plots along with horizontal lines at 10 (red), 50 (yel-
HHLLS indicator.
low), and 60 (green).
To recreate the HHS, right-click on the chart and select Indicator: _HHLLS
add plot, then select custom PCF indicator from the list. // Indicator: HHLLS
// Author: Vitali Apirine
// Technical Analysis of Stocks
// and Commodities Feb 2016

inputs:
Length( 20 ),
Threshold( 50 ),
OverBought( 60 ),
OverSold( 10 ) ;

variables:
HHH( 0 ),
LLL( 0 ),
HHS( 0 ),
LLS( 0 ) ;

HHH = iff( High > High[1],

( High - Lowest( High, Length ) ) /
( Highest( High, 20 )
- Lowest( High, Length ) ), 0 ) ;

LLL = iff( Low < Low[1],

( Highest( Low, Length ) - Low ) /
( Highest( Low, Length )
- Lowest( Low, Length ) ), 0 ) ;
Figure 1: TC2000. Here are sample HHS and LLS plots along with the 10, 50, HHS = XAverage( HHH, Length ) * 100 ;
and 60 levels on a TC2000 version 16 chart.

50 • February 2016 • Technical Analysis of Stocks & Commodities

 Figure 3: eSIGNAL. Here is an example of the study plotted on a daily chart of
$SPX.

In the article, the author presents a method of determining the

Figure 2: TRADESTATION. Here is an example TradeStation chart with the HHLLS direction of the trend.
indicator applied to a daily chart of the Dow Jones Industrial Index (DJIA). The study contains formula parameters that may be
configured through the edit chart window (right-click on
LLS = XAverage( LLL, Length ) * 100 ; the chart and select “edit chart”). A sample chart is shown
Plot1( HHS, "HHS" ) ; in Figure 3.
Plot2( LLS, "LLS" ) ; To discuss this study or download a complete copy of the
// Ref Lines formula code, please visit the EFS Library discussion board
Plot3( OverSold, "OverSold" ) ; forum under the forums link from the support menu at www.
Plot4( Threshold, "Threshold" ) ;
Plot5( OverBought, "OverBought" ) ; [Link] or visit our EFS KnowledgeBase at [Link]
[Link]/support/kb/efs/. The eSignal formula script (EFS)
// Alerts
if AlertEnabled then is also available for copying & pasting from the Stocks &
begin Commodities website in the Traders’ Tips area.
if HHS crosses over Threshold then —Eric Lippert
Alert( "HHS crossing over Threshold" )
else if LLS crosses over Threshold then eSignal, an Interactive Data company
Alert( "LLS crossing over Threshold" ) ; 800 779-6555, [Link]
end ;

To download this EasyLanguage code, please visit our

TradeStation and EasyLanguage support forum. The code
shown here can be found at [Link]
com/Discussions/[Link]?Topic_ID=142776. The ELD F THINKORSWIM: FEBRUARY 2016 TRADERS’ TIPS CODE
filename is “TASC_FEB2016.ELD.” In “Higher Highs & Lower Lows” in this issue, author Vitali
For more information about EasyLanguage in general, Apirine uses ideas he discovered while studying the stochastic
please see [Link] oscillator and Williams’ %R to form a new indicator based on
A sample chart is shown in Figure 2. consecutive highs and lows.
This article is for informational purposes. No type of trading or We have built his higher high & lower low stochastics to-
investment recommendation, advice, or strategy is being made, given, gether in one study using our proprietary scripting language,
or in any manner provided by TradeStation Securities or its affiliates.
thinkscript. We have made the loading process extremely
—Doug McCrary
TradeStation Securities, Inc. easy: simply click on the link [Link] and
[Link] choose save script to thinkorswim. Choose to rename your
study “HHLLS.” You can adjust the parameters of this study
within the edit studies window to fine-tune your variables.
In the example shown in Figure 4, you see a chart of SPX,
which is the S&P 500 index, with the HHLLS study added.
F eSIGNAL: FEBRUARY 2016 TRADERS’ TIPS CODE The green line indicates higher highs and the red line indi-
For this month’s Traders’ Tip, we’ve provided the study cates lower lows.
HighH_LowL.efs based on the formula described in Vitali For more details about the strategy, refer to Apirine’s ar-
Apirine’s article in this issue, “Higher Highs & Lower Lows.” ticle in this issue.
February 2016 • Technical Analysis of Stocks & Commodities • 51
 Figure 5: WEALTH-LAB. This sample Wealth-Lab chart illustrates application of
the system’s rules on a daily chart of RUT (Russell 2000 Index).

using WealthLab;
using [Link];
using TASCIndicators;
Figure 4: THINKORSWIM. The SPX is shown with the HHLLS study added. The namespace [Link]
green line indicates higher highs and the red line indicates lower lows. {
public class TASC201602 : WealthScript
{
—thinkorswim private StrategyParameter slider1;
A division of TD Ameritrade, Inc. private StrategyParameter slider2;
[Link] private StrategyParameter slider3;

public TASC201602()
{
slider1 = CreateParameter("HHS Peri-
od",20,10,100,10);
slider2 = CreateParameter("LLS Peri-
F wEALTH-LAB: FEBRUARY 2016 TRADERS’ TIPS CODE od2",20,10,100,10);
According to Vitali Apirine’s article in this issue, “Higher slider3 = CreateParameter("Smooth
HHLLS",3,1,10,1);
Highs & Lower Lows,” the momentum indicator-based system }
HHLLS (higher high, lower low stochastic) can help to spot
protected override void Execute()
emerging trends, define correction periods, and anticipate {
reversals. As with many indicators, HHLLS signals can also var hhs = [Link]( [Link](Bars,slider1.
be generated by looking for divergences and crossovers. ValueInt), [Link]);
var lls = [Link]( [Link](Bars,[Link]-
Because the HHLLS is an oscillator, it can also be used to ueInt), [Link]);
identify overbought & oversold levels. [Link] = "Smoothed HHS"; [Link] =
"Smoothed LLS";
This month, we explore HHS/LLS crossovers. The HHLLS is
made up of two separate indicators: the higher high stochastic for(int bar = GetTradingLoopStartBar(20); bar < Bars.
Count; bar++)
(HHS) and lower low stochastic (LLS). In Figure 5, they’re {
visible as green and red lines, respectively. As it seems that if (IsLastPositionActive)
the indicators can produce whipsaws, we thought it could be {
if( CrossUnder(bar,hhs,lls))
a nice idea to smooth them with a simple moving average. As SellAtMarket(bar+1, LastPosition);
it turned out, this resulted in fewer losing trades. }
else
After updating the TASCIndicators library to v2016.01 or {
later, HHS and LLS indicators can be found under the TASC if( CrossOver(bar,hhs,lls))
Magazine Indicators group. They can be plotted on a chart BuyAtMarket(bar+1);
}
and also be used as an entry or exit condition in a rule-based }
strategy without having to program any code yourself. ChartPane paneHHLLS1 = CreatePane(40,true,true);
PlotSeries(paneHHLLS1,hhs,[Link],LineStyle.
The included Wealth-Lab strategy is set to configure the Solid,1);
HHS, LLS lookback period and HHLLS smoothing period PlotSeries(paneHHLLS1,lls,[Link],LineStyle.
Solid,1);
interactively through the parameter sliders on the bottom left HideVolume();
of the screen.
}
}
Wealth-Lab 6 strategy code (C#): }
using System;
using [Link]; —Eugene, Wealth-Lab team
using [Link]; MS123, LLC
using [Link]; [Link]

52 • February 2016 • Technical Analysis of Stocks & Commodities

 Figure 7: NEUROSHELL TRADER. This NeuroShell Trader chart displays the HHS
and LLS on the S&P 500 index.
Figure 6: AMIBROKER. Here is a weekly chart of GSPC with the HHS and LLS
indicators shown.

F NEUROSHELL TRADER: FEBRUARY 2016

TRADERS’ TIPS CODE
The higher high lower low stochastic indicators
F AMIBROKER: FEBRUARY 2016 TRADERS’ TIPS CODE described by Vitali Apirine in his article in this issue, “Higher
In “Higher Highs & Lower Lows” in this issue, author Vitali Highs & Lower Lows,” can be easily implemented with a few
Apirine presents his higher high lower low stochastic indica- of NeuroShell Trader’s 800+ indicators. Simply select “new
tor. A ready-to-use formula for AmiBroker based on Apirine’s indicator” from the insert menu and use the indicator wizard
article is shown here. To use it, enter the code into the formula to set up the following indicators:
editor and press the apply indicator button. You can adjust the
HHS: ExpAvg(IfThenElse(A>B(High,Lag(High,1)),Stoch%K(Hig
indicator period by right-clicking on the chart and selecting
h,High,High,20),0),20)
the parameters window.
LLS: ExpAvg(IfThenElse(A<B(Low,Lag(Low,1)),%R(Low,Low,L
// uncomment line below if you want to ow,20),0),20)
// calculate the indicator always using
// SP500 or whatever fixed symbol you wish
// SetForeign("^GSPC" ); Users of NeuroShell Trader can go to the Stocks &
hh = High; Commodities section of the NeuroShell Trader free technical
ll = Low; support website to download a copy of this or any previous
period = Param("period", 20, 10, 100 ); Traders’ Tips.
A sample chart is shown in Figure 7.
hhh = IIf( hh > Ref( hh, -1 ), —Marge Sherald, Ward Systems Group, Inc.
(hh - LLV( hh, period ))/( HHV( hh, 20 ) - LLV( hh, 20 ) ),
301 662-7950, sales@[Link]
0 );
[Link]
hhs = 100 * EMA( hhh, period );

lll = IIf( ll < Ref( ll, -1 ),

(HHV( ll, period ) - ll)/( HHV( ll, 20 ) - LLV( ll, 20 ) ), F AIQ: FEBRUARY 2016 TRADERS’ TIPS CODE
0 );
The AIQ code based on Vitali Apirine’s article in
lls = 100 * EMA( lll, period ); this issue, “Higher Highs & Lower Lows,” is shown
Plot( hhs, "HHS" + period, colorBrightGreen );
here and is also provided at [Link]/
Plot( lls, "LLS" + period, colorRed ); [Link].
The code provided computes the indicator values for the
A sample chart is shown in Figure 6. HHS and LLS indicators as well as allowing us to plot the
—Tomasz Janeczko, [Link] indicator on a chart.
[Link] Figure 8 shows the indicator on a chart of Align Technology
(ALGN).

February 2016 • Technical Analysis of Stocks & Commodities • 53

 • Indicator plot HHS_
LLS_IND: Plots the
two lines HHS and
LLS on a single indi-
cator window.

Figure 9 shows
the indicator on a
chart of the S&P
500 full-size futures
contract (SP using
data from Pinnacle
Data Corp.).
The code is also
shown here:

Figure 8: AIQ. Here, the HHS and LLS indicators are shown on a chart of ALGN.

!HIGHER HIGHS AND LOWER LOWS 'HIGHER HIGHS AND LOWER LOWS
!Author: Vitali Apirine, TASC Feb 2016 'Author: Vitali Aprine, TASC Feb 2016
!Coded by: Richard Denning, 12/09/2015 'Coded by: Richard Denning, 12/10/2015
![Link] 'TradersEdgeSystems com

! ABBREVIATIONS: 'Function to compute HHS & LLS:

C is [close]. Function HHSLLS_Stoch(stochLen,ByRef LLS)
C1 is valresult(C,1). Dim LH,HH,HS,HHS
H is [high]. LH = Lowest(H,stochLen)
H1 is valresult(H,1). HH = Highest(H,stochLen)
L is [low]. If (HH-LH)<>0 Then HS = IIF(H>H[1],(H-LH)/(HH-LH),0)
L1 is valresult(L,1).
O is [open]. Dim LL,HL,LS
LL = Lowest(L,stochLen)
!INPUTS: HL = Highest(L,stochLen)
len is 20. If (HL-LL)<>0 Then LS = IIF(L<L[1],(HL-L)/(HL-LL),0)

!INDICATOR CODE: HHS = XAverage(HS,stochLen)*100

LH is lowresult(H,len). LLS = XAverage(LS,stochLen)*100
HH is highresult(H,len). HHSLLS_Stoch = HHS
HS is iff(H>H1,(H-LH)/(HH-LH),0). End Function
'----------------------------------------------------
LL is lowresult(L,len). 'For plotting the HHS LLS indicator:
HL is highresult(L,len). Sub HHS_LLS_IND(stochLen)
LS is iff(L<L1,(Hl-L)/(HL-LL),0). Dim HHS,LLS
HHS = HHSLLS_Stoch(stochLen,LLS)
HHS is expavg(HS,len)*100. !PLOT plot1(HHS)
LLS is expavg(LS,len)*100. !PLOT plot2(LLS)
End Sub

Again, the code and EDS file can be downloaded from www. —Richard Denning
[Link]/[Link] and is also shown info@[Link]
for TradersStudio
in the Traders’ Tips area at [Link].
—Richard Denning
info@[Link]
for AIQ Systems

F TRADERSSTUDIO: FEBRUARY 2016

TRADERS’ TIPS CODE
The TradersStudio code based on Vitali
Apirine’s article in this issue, “Higher Highs & Lower Lows,” is
provided at [Link]/[Link].
The following code files are provided in the download:

• Function HHSLLS_Stoch: Computes the indicator values Figure 9: TRADERSSTUDIO. Here, the HHS and LLS indicators are plotted on a
HHS and LLS chart of the S&P 500 futures contract (SP).

54 • February 2016 • Technical Analysis of Stocks & Commodities

Figure 10: NINJATRADER. The HigherHighLowerLowStochastics indicator is dis-
played both on the S&P 500 index and on the DJIA using daily data.

FIGURE 11: UPDATA. The 20-period HHLLS indicator is applied to the daily Dow
Jones Industrial Average.

indicator library. Those who cannot access the library due

F NINJATRADER: FEBRUARY 2016 TRADERS’ TIPS CODE to a firewall may paste the code shown here into the Updata
The higher high lower low stochastics indicator, as presented custom editor and save it.
in “Higher Highs & Lower Lows” by Vitali Apirine in this
issue, is available for download at [Link]/SC/ PARAMETER "Period" #PERIOD=20
[Link]. DISPLAYSTYLE 5LINES
INDICATORTYPE CHART
Once you have it downloaded, from within the NinjaTrader PLOTSTYLE THICK2 RGB(0,0,0)
Control Center window, select the menu File → Utilities → PLOTSTYLE2 THICK2 RGB(200,0,0)
PLOTSTYLE3 LINE RGB(150,150,150)
Import NinjaScript and select the downloaded file. This file PLOTSTYLE4 LINE RGB(150,150,150)
is for NinjaTrader Version 7. PLOTSTYLE5 LINE RGB(150,150,150)
NAME HHLLS
You can review the indicator’s source code by selecting @PeriodHiHigh=0
the menu Tools → Edit NinjaScript → Indicator from within @PeriodLoHigh=0
the NinjaTrader Control Center window and selecting the @PeriodHiLow=0
@PeriodLoLow=0
“HigherHighLowerLowStochastics” file. @HS=0
NinjaScript uses compiled DLLs that run native, not @LS=0
FOR #CURDATE=#PERIOD TO #LASTDATE
interpreted, which provides you with the highest performance 'CREATE RATIOS
possible. @PeriodHiHigh=PHIGH(HIGH,#PERIOD,1)
@PeriodLoHigh=PLOW(HIGH,#PERIOD,1)
A sample chart demonstrating the indicator is shown in @PeriodHiLow=PHIGH(LOW,#PERIOD,1)
Figure 10. @PeriodLoLow=PLOW(LOW,#PERIOD,1)
—Raymond Deux & Cody Brewer 'PLACE IN % TERMS WHEN HIGH GREATER THAN PRIOR HIGH
IF HIGH>HIGH(1)
NinjaTrader, LLC @HS=100*(HIGH-@PeriodLoHigh)/(@PeriodHiHigh-@PeriodLo-
[Link] High)
ELSE
@HS=0
ENDIF
'PLACE IN % TERMS WHEN LOW LESS THAN PRIOR LOW
F UPDATA: FEBRUARY 2016 IF LOW<LOW(1)
TRADERS’ TIPS CODE @LS=100*(@PeriodHiLow-LOW)/(@PeriodHiLow-@PeriodLoLow)
Our Traders’ Tip for this month is based on “Higher Highs & ELSE
@LS=0
Lower Lows” by Vitali Apirine in this issue. ENDIF
In the article, the author proposes a momentum indicator to 'EXPONENTIAL SMOOTHING
@PLOT=SGNL(@HS,#PERIOD,E)
define trend directions based on exponentially smoothed ratios @PLOT2=SGNL(@LS,#PERIOD,E)
of high prices relative to their previous period high and low 'LEVELS AT 10,50,60
@PLOT3=10
values, and exponentially smoothed low prices relative to their @PLOT4=50
previous period high and low values. Two stochastic lines are @PLOT5=60
NEXT
created, whose crossovers and divergences with underlying
prices indicate reversals and trend continuations (Figure 11). —Updata support team
The Updata code for this article is in the Updata library support@[Link]
and may be downloaded by clicking the custom menu and [Link]

February 2016 • Technical Analysis of Stocks & Commodities • 55

 F TRADE NAVIGATOR: FEBRUARY 2016
TRADERS’ TIPS CODE
A special file has been created based on “Higher Highs &
Lower Lows” by Vitali Apirine in this issue to make it easy
to download a library for this technique in Trade Navigator.
The filename is “SC201602.” This library contains two in-
dicators, HHS and LLS, and a template named “higher high
lower low.”
Users can download this file via the blue telephone but- Figure 12: TRADE NAVIGATOR, lls & hhs
ton. Type in the filename “SC201602” (without the quotes),
then click the start button. When prompted to upgrade, click
the yes button. If prompted to close all software, click on the
continue button. Your library will now download.
For your convenience, we have added a template in the li-
brary that allows you to modify your chart with a prebuilt
indicator package and settings. Open the charting pulldown
menu, select the templates command, then on the submenu
that opens, select the “higher high lower low” template. If
you are prompted to “save the current chart settings as tem-
plate,” your answer will depend on whether you have made
any changes to your current chart template that you would Figure 13: TRADE NAVIGATOR, hhs & lls
like to keep. If you choose “no,” these changes will be dis-
carded, and a “yes” choice will save the changes into the prior menu, selecting the add to chart command, then on the indi-
template on your chart before switching the template to the cators tab, find your named indicator, select it, and click the
“higher high lower low” template. add button. Repeat this procedure for additional indicators
if you wish.
TradeSense code for the indicators: If you have difficulty creating or using the indicators and/
HHS:
or template, our friendly technical support staff is happy to
&HH := High Of "$SPX" help. Either call 719 884-0245 or click on the live chat tool
&HHH := IFF (&HH > (&HH).1 , (&HH - Lowest (&HH , 20)) / (High- under the help menu. Support hours are M–F, 6am–7pm
est (&HH , 20) - Lowest (&HH , 20)) , 0) Mountain Time. Happy trading!
MovingAvgX (&HHH , 20) * 100
—Genesis Financial Technologies
LLS: [Link]
&LL := Low Of "$SPX"
&LLL := IFF (&LL < (&LL).1 , (Highest (&LL , 20) - &LL) / (Highest
(&LL , 20) - Lowest (&LL , 20)) , 0) F MICROSOFT EXCEL: FEBRUARY 2016
MovingAvgX (&LLL , 20) * 100
TRADERS’ TIPS CODE
In “Higher Highs & Lower Lows” in this issue, author Vitali
Manually creating indicators
Apirine presents a pair of stochastic indicators that, when used
If you would like to create these indicators manually, click
on the edit dropdown menu and open the trader’s toolbox (or
in combination, can assist with recognition of trend direction
use CTRL+T) and click on the functions tab. Click on the new and even anticipate trend turning points.
button and a new function dialog will open. In its text box, Apirine also suggests usages that include overbought and
type in the code for the above highlight bar. Ensure that there oversold tests, indicator crossovers as trade signals, and
are no extra spaces at the end of each line. When completed, indicator vs. price divergences as signals.
click on the verify button. You may be presented with an add Figure 14 replicates Figure 2 from Apirine’s article showing
inputs popup message if there are variables in the code. If so, an extended uptrend.
click the yes button, then enter a value in the default value Figure 15 looks at emerging trends similar to Figure 6 from
column. If all is well, when you click on the function tab, the the article. To reduce the level of chart clutter for this multiyear-
code you entered will convert to italic font. Now click on the long interval, Apirine used weekly data for this chart.
save button and type a name for the indicator. Yahoo history retrievals (see the InputPriceData tab) can
provide daily, weekly, or monthly bar data on request. Weekly
Adding to your chart bars generally use Monday dates, which means we have six-day
Once completed, you can insert these indicators onto your
chart (Figures 12 & 13) by opening the charting dropdown Continued on page 58

56 • February 2016 • Technical Analysis of Stocks & Commodities

 Free Information From Advertisers
Advertiser Page Advertiser Page
Brokerages Trading Systems How to reach us
Fidelity 03 GorillaTrades 64 For questions, address changes, or
[Link]/AlwaysBe [Link]/sc ordering information for Technical
Interactive Brokers 05 NinjaTrader 43 Analysis of Stocks & Commodities
[Link]/sc101 [Link]/Futures magazine and its online publications:
TDAmeritrade 17
[Link]/mobile
Websites
Toll-free 800 832-4642
[Link] 02, 41
(800-Technical) or:
TradeStation 07 [Link]
[Link]/TASC
206 938-0570.
Stocks & Commodities 63
Courses/Seminars [Link], [Link] Email us at:
MetaStock 19 circ@[Link].
[Link]/traders-summit Editorial Resource Index
[Link] . . . . . . . . . . . . . . . . 09 Or write to us at:
MoneyShow 31
The Ultimate Charting Software 4757 California Ave. SW,
[Link]
(Market Traders Institute) . . . . . . . . . . . . . 11 Seattle, WA 98116-4499.
[Link] 02, 41 MetaStock . . . . . . . . . . . . . . . . . . . . 21
[Link] Microsoft Excel . . . . . . . . . . . . . . . . . 25 Do your magazines arrive tattered
eSignal (Interactive Data) . . . . . . . . . . . . . 26 and torn? Polybagging of magazines
Publications
Stocks & Commodities 63 NADEX (domestic delivery) is available for
[Link], [Link] (North American Derivatives Exchange, Inc.) . . . . 29 $6/year.
[Link] (Tom Gentile) . . 45 Single back issues from the current
Software The Money Calendar year (subject to availability) are $8
AbleSys 13 (TomsTradingRoom, LLC) . . . . . . . . . . . . . 47
[Link]/SCM TC2000 (Worden Brothers, Inc.) . . . . . . . . . 50
prepaid. Subscribers have access to
TradeStation . . . . . . . . . . . . . . . . . . . 50 our digital archive of all past articles.
eSignal / Interactive Data 33
thinkorswim . . . . . . . . . . . . . . . . . . . 51 Individual articles can be purchased
[Link]/trial
Wealth-Lab . . . . . . . . . . . . . . . . . . . 52 from the Online Store at our website,
Jurik Research 37
Amibroker . . . . . . . . . . . . . . . . . . . . 53 [Link].
[Link], [Link]/jurik-online
Neuroshell Trader (Ward Systems Group) . . . 53
MetaStock 19 AIQ . . . . . . . . . . . . . . . . . . . . . . . . 53 Editorial feedback
[Link] TradersStudio . . . . . . . . . . . . . . . . . . 54 We always want to know more about
NinjaTrader 43 NinjaTrader . . . . . . . . . . . . . . . . . . . 55 the needs of our readers: What kinds of
[Link]/Futures Updata . . . . . . . . . . . . . . . . . . . . . . 55 articles would you like to see more of?
Vectorvest 35 TradeNavigator . . . . . . . . . . . . . . . . . 56 What do you find useful? Address your
[Link]/SC written questions and comments to edi-
Ward Systems 09 tor@[Link] or to: Editor, Stocks
[Link] & Commodities, 4757 California Ave
Worden Brothers 23 SW, Seattle, WA 98116-4499. Sorry, we
[Link] cannot perform research on individual
financial questions not related to this
For more information about our advertisers, go to [Link]/reader where magazine and we cannot respond to
you will find the alphabetized list of this month’s advertisers. For reference, the all mail. Letters or emails containing
list is also printed above along with the corresponding page number for each ad. questions or information that other
Just follow the simple directions below and the advertisers will get your requests readers may enjoy or that relate to
the same day! our articles or technical analysis top-
ics may be published in our Letters to
Step 1: Go to [Link]/reader and
S&C column.
scroll through the list of our current month’s
advertisers. Join us on Facebook
at [Link]/
Click the box for each advertiser you’d like
STOCKSandCOMMODITIES
to hear from. At the bottom of the list, click
Continue when finished.
Follow us on Twitter
Step 2: Fill out your contact information @STOCKSandCOMM
and click Send Request. Your request will
then be sent to the advertisers you selected. To receive information on the products and services listed in the Editorial
and Advertisers’ Indexes, go to: [Link]/reader/. These indexes are
And that’s it! published solely as a convenience. While every effort is made to maintain
accuracy, last-minute changes may result in omissions or errors.

February 2016 • Technical Analysis of Stocks & Commodities • 57

 Continued from page 56

gaps between the dates of bars in our

weekly history data. And we have the
possibility of larger gaps for intervals,
which include Monday holidays.
For those who have not used weekly
or monthly data with a Traders’ Tips
spreadsheet previously, see the notes
tab of this spreadsheet for a brief step-
by-step to retrieving these data types.
Picking dates without reference to
a calendar led to my guessing dates Figure 14: EXCEL, Uptrend. This chart is similar to Figure 2 from Vitali Apirine’s article in this issue.
that were not necessarily Mondays.
And they were definitely not the
dates on any weekly bars for this
time period.
Figure 16 shows the results of one
of my guesses as to the appropriate
end-point dates to replicate Figure
6 from the article. The #NA values
indicate that the dates are not found
in the data. Since these turned out to
be Thursday and Friday dates, one
certainly could apply a bit of finger
counting to adjust these forward or
backward to Monday dates.
But there still might be a problem Figure 15: EXCEL. Looking at emerging trends with weekly data.
if the oldest date in the downloaded
history is newer than the user-
specified dates, even when the dates are manually adjusted
to the Monday nearest our original guess.
To speed things up a bit, the Traders’ Tip spreadsheet
template now has a “Resolve #NA errors” button to drive a
macro designed to resolve #NA situations. The macro will
check the user-specified date that is causing the #NA (date
not found) and take one of three paths:

1) If the user-specified date is less (older) than the oldest date

on the input data tab, then the date specification will be set Figure 16: EXCEL, WILD GUESS. Here’s an example of a wild guess at weekly
forward to the date of the oldest available bar. bar dates from a couple of years ago.
2) If the user-specified date is younger (more recent) than the
youngest date on the input data tab, then the date specifi- To arrive at Figure 15, I used the new “Resolve…” button to
cation will be set back to the date of the newest available clear the #NA problems shown in Figure 16. Then I used the
bar. “I would like to chart…” button to finish replicating Figure
3) If neither of the first two choices applies, then the user- 6 from the article.
specified date falls somewhere between dates that do exist The spreadsheet file for this Traders’ Tip can be downloaded
on the input data tab. from [Link] in the Traders’ Tips area. To
successfully download it, follow these steps:
For daily data, this could be the result of the user specifying • Right-click on the Excel file link (“[Link]”), then
a weekend, holiday, or any other date where the market was • Select “save as” to place a copy of the spreadsheet file on your
closed. For weekly or monthly data, we know for sure that hard drive.
there will be significant date gaps between bars. —Ron McAllister
As a fix for this case, I am using logic based on the Excel Excel and VBA programmer
match function to locate and return the closest existing date rpmac_xltt@[Link]
that is newer (younger) than the user-specified date.
58 • February 2016 • Technical Analysis of Stocks & Commodities
 Advisory Services BROKERAGES trading systems

Beat The Market! [Link] Self-Adaptive

Sector Rotation and Market Timing.
Trading Strategies
Deep Discount Rates!!
Buy stocks with high relative strength
Proprietary Research
FREE Platforms 1(949) 424 2399
Free weekly newsletter! [Link]
[Link] educational
Yes, You Can Cash In On Chaos! Certified Unique Options Strategy
Chaos Traders Courses teach you how. Feeling technically overwhelmed? No Iron Condors • No Credit Spreads
Learn to earn at [Link] Fast track to success in 1 month with
EMini MoonTide Hotline up 166 months in a row 1 stock, 1 strategy, trading SPY options [Link]
[Link] in 1 hour a day.
Free Introductory e-book. Free Trial.
I CAN SHOW YOU HOW TO FIND INVESTMENT-
QUALITY STOCKS THAT WILL DOUBLE OR TRIPLE [Link]
IN 6–18 MONTHS WITH A REASONABLE NUMBER
OF CANDIDATES AND A HIGH % OF ACCURACY.
SOFTWARE
WRITE — RETIRED PRO TRADER
515 EAST CAREFREE HWY. STE. 884
PHOENIX AZ 85085 Build and test
®
systems without
BROKERAGES coding!
[Link] Dr. H. Singh, Ph.D.
[Link]
[Link]
Check us out! Divergence Software, Inc.
A wide variety of studies and indicators 90% Success, 35 Yrs Exp
for the eSignal platform. Custom
To Advertise contact: programming, code translation services.
ESchramm@[Link] • (206) 938 0570 [Link]
TRADERS'
RESOURCE

LINKS
With the explosion of ex- of the exchanges handling your tradable, then go to
changes around the world and the site to get the specifics of the trading vehicle.
the increasing poaching of Better yet, get several equivalent products at several
products between exchanges, exchanges and be sure your broker can direct your
traders should be aware of all business to the venue of your choice.
the places where trading op-
portunities occur. No longer Traders’ Resource
bound by national borders or at [Link]
even physical locations, exchanges can be no more In addition to our listing of exchanges at Traders.
than a box in the corner of an office. Differen­tiation com, you’ll also find listings of other trading-related
comes in the form of product, volume, speed, pricing, products and services such as software, publications,
and investor protections. courses and seminars, brokerages, data services,
Look for an exchange with extensive trade docu- trading systems, and more. We hope this will help
mentation so that disputes can be resolved quickly you learn about products to help in your trading
and with quick reference to events. Since more and endeavors.
more alternatives are rapidly becoming available, To reach the Traders’ Resource area of our
don’t be afraid to direct your business to the exchange website, just click on the Traders’ Resource link
of your choice. The plethora of investor choice is from [Link]. Then follow the category link
forcing a rapid decline in transaction costs already, for exchanges, or use the search feature to find
and exchange monopolies are a thing of the past. products or services with specific attributes in this
Use the listing of exchanges in the Traders’ Re- or other categories.
source database at our website to find the websites

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].

February 2016 • Technical Analysis of Stocks & Commodities • 59

 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
E-Mini S&P 500 GBLX 3.8 11.8 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
Crude Oil WTI NYMEX 14.2 6.4 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Natural Gas NYMEX 14.1 5.2 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
E-Mini Nasdaq 100 GBLX 2.4 5.5 2 •••••••••••••••••••••••••••••••••••••••••••••••••
Euro FX CME 1.8 6.3 2 ••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 Mini ICEUS 3.9 14.3 3 •••••••••••••••••••••••••••••••••••••••
Soybeans CBOT 10.5 12.2 2 ••••••••••••••••••••••••••••••••••••
Gasoline RBOB NYMEX 11.4 7.2 1 ••••••••••••••••••••••••••••••
Japanese Yen CME 2.6 5.8 2 •••••••••••••••••••••••••
Australian Dollar CME 2.3 4.8 3 ••••••••••••••
Sugar #11 ICEUS 9.7 26.1 15 •••••••••
Canadian Dollar CME 1.5 3.7 3 ••••••••
E-Mini S&P Midcap GBLX 3.2 11.2 2 ••••••••
DJIA mini-sized CBOTM 3.2 11.7 4 •••••••
Eurodollar CME 0.1 27.9 78 •••••••
Platinum NYMEX 9.1 8.6 2 •••••••
British Pound CME 1.4 9.2 7 ••••••
CBOE S&P 500 VIX CFE 6.5 10.8 8 •••••
Cotton #2 ICEUS 7.9 14.4 5 •••••
Mexican Peso CME 7.5 17.6 8 ••••
Swiss Franc CME 1.7 7.9 3 ••••
Crude Oil Brent (F) NYMEX 13.4 6 1 •••
U.S. Dollar Index ICEUS 1.3 6.5 5 •••
Feeder Cattle CME 2.8 4 2 ••
New Zealand Dollar CME 2.6 8.3 4 ••
10-Year T-Note CBOT 1.2 21.1 13 •
5-Year T-Note CBOT 0.6 12.6 16 •
Lean Hogs CME 6.4 4.5 3 •
S&P GSCI CME 10.1 8.2 1 •
T-Bond CBOT 2.1 11.4 3 •
Ultra T-Bond CBOT 2.7 17.2 4 • CBOT Chicago Board of Trade, Division of CME
2-Year T-Note CBOT 0.1 10.5 33 CFE CBOE Futures Exchange
30-Day Fed Funds CBOT 0 28.5 131 CME Chicago Mercantile Exchange
Canola WCE 5.7 14.8 26
COMEX Commodity Exchange, Inc. CME Group
Class III Milk CME 6 8.7 5
GBLX Chicago Mercantile Exchange - Globex
Cocoa ICEUS 5.7 15.5 8
ICE-EU Intercontinental Exchange-Futures - Europe
Coffee ICEUS 11.2 12.3 2
Corn CBOT 14.4 14.5 5 ICE-US Intercontinental Exchange-Futures - US
Ethanol Futures CBOT 9.8 6.4 1 KCBT Kansas City Board of Trade
Gold COMEX 8.7 14.1 1 MGEX Minneapolis Grain Exchange
Hard Red Wheat KCBT 10.4 13.4 5 NYMEX New York Mercantile Exchange
High Grade Copper COMEX 10.4 12 2
Live Cattle CME 2.9 6.2 4
Lumber CME 5.8 10.1 6
Oats CBOT 11.8 8 6 1602
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).

60 • February 2016 • Technical Analysis of Stocks & Commodities

 AT THE CLOSE
Regardless of the financial instru-
ment you are trading or the time
horizon for which you plan to hold
the security, trading with the larger
overall trend for your holding time is
the safest and least risky of trades to
take. Whether bear or bull, long-term
or scalp trading, it is best to follow
the market instead of fighting it.
So why do so many traders take
countertrend trades when the odds
are stacked against them? Many are
not aware of the reasons or motiva-
tions that lead them to take such
low-probability trades.
Here is a list of possible explana-
tions of why countertrend trades
are taken.

1. There has been a small pull-

back or hesitation, so the trend
has ended.

2. A countertrend trade was prof-

itable, so it will work again.

3. The indicators for a trend trade

have not reached the levels
needed, so a countertrend
trade is called for.

4. I was in a trend trade and exited

when my target was hit, so the
market has exhausted itself.

5. The market has reached prede-

termined support or resistance
levels and so should start to move
in the opposite direction.

Yes, It Hurts 6. A trend trade was stopped

Stop Shooting Yourself

out, signifying the end of the
trend.
Photo: Jose Gil/No Sign: Carla Donofrio/Shutterstock

In The Foot
7. The trend has lasted a defini-
tive amount of time and should
start to reverse itself.

The idea of following the trend is nothing new, yet we often tend to ignore it. Here’s These are not valid reasons for coun-
why you shouldn’t. tertrend trading. So how does a trader
stop this damaging behavior?
by Alan Kindrick It would be great if a trading plat-

If
form would flash a red warning sign
you have read anything about trading, you will come across the mantra “the when a trader is initiating a coun-
trend is your friend.” It is a cliché as old as the markets themselves and as true tertrend trade before it is executed,
today as it was when it was first stated. but this is not the situation. The best
February 2016 • Technical Analysis of Stocks & Commodities • 61
 AT THE CLOSE
Trade 60-minute 15-minute 1-minute Safest
setup chart chart chart direction
1 Long Long Long Long

2 Short Short Long Short

3 Short Long Short None
FIGURE 1: WHICH DIRECTION ARE PRICES TRENDING? Having a simple table
will help you note which direction charts of different time frames are moving.

remedy is to be aware that you are taking countertrend trades

that are positioned against the overall larger trend. Sneak preview …
How do you gain this self-awareness?
You need to keep track of what the market is doing for each Where Price Action Meets Momentum Trading
by Paul Langham
time frame that you monitor. As an example, assume a trader
What are the possible price patterns that you should combine
wants to scalp trade a financial instrument. He utilizes a with the concept of momentum trading to know which ones will
one-minute, 15-minute, and 60-minute chart. Each chart has respect the rules of price action? We’ll find out.
a five-period simple moving average (SMA) and a 15-period
SMA. If the SMA(5) is over the SMA(15), it signifies that the A New Method For Picking Stocks
market is in an upward trend, whereas if the SMA(5) is under by Martii Luoma & Jukka Sihvonen
the SMA(15), it signifies a downward trend. Using screening criteria that incorporate stock valuation
Before executing a trade, you should note what each chart variables can prove to be an asset to a technical analyst.
is signaling. All you need is a simple table such as the one Here’s an intuitive and simple technique you can incorporate
displayed in Figure 1. If you took the time to fill out such a into your stock selection process.
table before initiating a trade, you could easily determine
Reading An Option Chart
whether the higher-probability trade is long or short. Under by Jayanthi Gopalakrishnan
trade setup #1, what advantage would you have going short An interview with veteran option trader Price Headley of
when all trends are pointing long? For setup #2, is a trader will- [Link].
ing to initiate a short position solely based on the one-minute
chart, knowing that it conflicts with the 15- and 60-minute Readers’ Choice Awards
chart? With setup #3, is any trade—long or short—worth the In addition, look for our annual Readers’ Choice Awards for
risk with such conflicting data? favorite products and services, coming in the 2016 S&C
Trading is difficult enough without fighting the greater Bonus Issue.
movement of the market. Knowing how the market is acting ...Coming soon!
in each time frame along with information such as time of
day and trade results should provide you with information that
increases your chances of having a successful outcome.

Go with the flow

Are you fighting the larger time frame you are working in?
What are your results when you take trades that counter the Continued from page 9
smaller time frame? What results are achieved when you trade
with the larger time frame? Maybe you need to remember that Comment 2: Based on this material, the cost range is very
your best friend in trading is the trend. wide (my assumption is the higher cost is associated with
drilling/fracking), which would require the price of oil to be
Alan Kindrick is an independent index futures trader utiliz- over $80 long-term.
ing technical analysis. He may be reached at akindrick@
Comment 3: Historically, whenever oil prices drop (as OPEC
[Link].
increases supply), it can push high-cost producers out of the
supply side.

Keep track of what the market is doing Comment 4: Lower-cost producers (and stock price) have an
for each time frame that you monitor. advantage during dips in price.
Ed

62 • February 2016 • Technical Analysis of Stocks & Commodities

 Subscribe Or Renew Today!
A subscription to Technical Analysis of Stocks & Commodities magazine
gets you so much more than just a magazine:

• Full access to our Digital Edition

The complete magazine as a PDF
you can download.

• Full access to our Digital Archives

That’s 33 years’ worth of content!

• Complete access to Working Money

The information you need to invest
smartly and successfully.

• Access to [Link] Advantage

Ideas, insights, evaluations, tips
and techniques that can help you
trade smarter.

8999
1 year.........................
$

2 years.................... 149
$ 99

3 years.................... 199
$ 99

Or try our best value subscription:

PROFESSIONAL TRADERS’ STARTER KIT

5-year subscription to S&C magazine that includes everything above
PLUS a free* book, Charting The Stock Market: The Wyckoff Method,
$
29999
all for a price that saves you $150 off the year-by-year price! only around
*Shipping & handling charges apply for foreign orders. $$
5 a month!

Visit [Link] to find out more!

Email: Circ@[Link] • Phone: 206-938-0570 [Link]/STOCKSandCOMMODITIES @STOCKSandCOMM
 Silly Name. Serious Stock Picks!

The Hottest Commodity available Today:

GorillaTrades stock Market advice
GorillaTrades is a risk controlled investment system, made for today’s modern investor.

GorillaTrades simplifies investing by telling you GorillaTrades includes option recommendations

which stocks have the greatest potential for double for its most aggressive investors looking for fast
to triple digit capital appreciation, while also gains, along with daily market commentary to
preserving your gains and limiting your losses. keep you up to speed on every market move.
2015 Top Closed sToCK Trades 2015 Top Closed opTion Trades
sToCK sYMBol Gain sToCK sYMBol Gain
skechers (sKX) +108% pall Corp (pll) +185%
advance auto parts (aap) +92% Facebook (FB) +100%
pall Corp (pll) +78% resMed (rMd) +75%
Monster Beverage (MnsT) +77% Constellation Brands (sTZ) +65%
abbott labs (aBT) +69% raytheon (rTn) +60%

Try GorillaTrades Absolutely FREE For 30 Days! No Credit Card Required!

[Link]/sc