THE TRADERS’ MAGAZINE SINCE 1982 www.traders.

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how high
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INTERVIEW
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 CONTENTS JULY 2011, Volume 29 Number 8

10 How High For Crude? INTERVIEW

by Dean Rogers
Here’s a look at the Nymex crude 42 Gail Mercer Of
oil perpetual front-month contract TradersHelpDesk.com
focusing on the use of wave pro- by Jayanthi Gopalakrishnan
jections and retracements. and Bruce Faber
Gail Mercer of TradersHelpDesk.
FEATURE ARTICLE com has dedicated her career to
helping traders achieve success. Her
14 Comparing Seven unique methodology is rooted in her
Money Flow Indicators philosophy that success depends not
REVIEW, website
by Markos Katsanos on a trader’s indicators but the abil- 50 • Professional Flux Tool Set
An overabundance of money flow ity to remain focused and respon- Review: Predictive time-based intra-
indicators can clutter your desktop sive to price. day price turning points for futures,
and could confuse you with contra- stocks, forex, and commodities
dicting signals. But do money flow
indicators have any predictive value 47 Explore Your Options 56 • VisualTrader 8
by Tom Gentile Review: Trading software
and if so, which one is best?
Got a question about options?
28 A Color-Based System For DEPARTMENTS
Short-Term Trading TIPS 48 Profiting In Biotech WM
6 Opening Position
by Mark Messier and
by Edgar Kraut Jeff Dos Santos 8 Letters to S&C
Using the Spdr S&P 500 ex- Is biotech the way to go? 59 †Traders’ Glossary
change traded fund as an example, 62 Traders’ Tips
here’s how you can apply a simple 70 Trade News & Products
swing trading system that utilizes 60 Futures For You
the colors of volume bars. by Carley Garner 72 Traders’ Resource
Here’s how the futures market 74 Advertisers’ Index
32 More Power To really works. 74 Editorial Resource Index
The Subordinates 76 Books for Traders
by Martha Stokes, Cmt 61 Q&A 77 Futures Liquidity
There are primary indicators and by Don Bright 79 Classified Advertising
then there are subordinate ones. This professional trader answers
Here’s how applying the subordi- a few of your questions.
nates can help you see something
that could give you the edge. AT THE CLOSE
82 Calling The Tune
38 Backtesting Option In The Gold Market
Strategies by Donald W. Pendergast Jr.
by John A. Sarkett This trading system shows a glint
Looking for a quick way to back- of promise in trading the volatile
test option strategies? You can precious metal.
use Excel to count occurrences of
historical prices outside a price
band.
This article is the basis for Traders’ Tips
TIPS
this month.

TCA WM
These articles – and articles like them – n Cover art: Leela Corman
can be found online at www.traders.com n Cover concept: Christine Morrison
Copyright © 2011 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 $64.95 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 • July 2011 • Technical Analysis of Stocks & Commodities

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++Full pg Ad Template.indd 1 5/23/11 9:18:01 AM

 July 2011 • Volume 29, Number 8
March 2006 • Volume 24, Number 3 O
Opening Position
PENING POSITION

The Traders’ MagazineTM

The Traders’ Magazine TM

F
EDITORIAL
EDITORIAL
[email protected]
[email protected]
Editor in Chief Jack K. Hutson

O
or a while, we have been saying that
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan
Editor Jayanthi Gopalakrishnan
Managing Editor Elizabeth M.S. Flynn
Managing Editor Elizabeth M.S. Flynn the
nceequity
againmarkets
we got ahave been reeling
reminder of just
Production Manager Karen
ProductionManager KarenE.E.Wasserman
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how sensitive reason. As long
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markets
Director Christine
ChristineMorrison
were making
saw amoney,
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Art
Art Director Morrison are. We the Japanese
Graphic Designer Wayne
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mattered. It’s only
—aasmatter of time before wea
Yamanaka
Staff Writers
Editorial Dennis
Intern D. Peterson,
Emilie Rommel Bruce Faber
markets, which expected — triggered
Webmaster Han J.David
Technical Writer Kim Penn see a major
domino selloff
effect on either
markets as throughout
a correctionthe or
Contributing Dennis John
Staff WritersEditors Ehlers, Bruce Faber
D. Peterson,
Anthony W. Warren, Ph.D. aworld.
reversal.
AddThe markets have
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earnings numbers On
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Webmaster Han J. Kim
corporations have a situa-
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Lund,
Martin
AnthonyPring, Barbara Ph.D.
W. Warren, Star
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tion thatdropped 130.78So
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whatitstarted
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Martin Pring, Adrienne Toghraie alarms
a strongand theended
year mediaupwas on top ofand
correcting, it. Could
rather
OFFICE OF THE Publisher this be the
rapidly. start of
I must a reversal
admit in the market?
that although correc-
Publisher Jack K. Hutson
Credit OFFICE OF Eades
Manager Linda THEGardner
PUBLISHER Had
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market,
PublisherEngineer
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Jack K. Hutson Along
Prior towith
the that
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Reserve’s FOMCmarkets, the price
meeting, of gold,
I usually take which
a look had declined
at the yield
Credit Manager
Project Sean M.
Engineer Linda
Industrial Engineer
Moore
Eades
Jason
Gardner
K. Moore
Hutson
about
curve.10% after its it’s
At present, impressive
looking rally,
a littleappeared
flat, andtogiven
be bouncing
that the off its support
general level.
consensus
Karen
Crude
is that oil
thealso
Fed pulled back, with prices coming close
31sttomeeting,
the low end
I amofconcerned
its trading
Accounting Assistant
Project Engineer Sean M. Moore is going to tighten at their January
Controller Mary K. Hutson
range.
that theAnd with
yield the weakness
curve in the euro
may be heading in thezone, the US
direction of dollar
being actually
inverted.started
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Accounting Assistants Jane Leonard
Controller Mary K. Hutson
Advertising Sales
4757 California Ave. S.W.
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to happen, that would not be a good sign for the US economy. I’m not
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Summer L. Davis
linger bands or channel lines or whatever it is you look at. Even if you don’t have
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Production Coordinator Karen Moore
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the behavior of that
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granted Technical Analysis, Inc. for users registered with
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6 • July 2011 • Technical Analysis of Stocks & Commodities

8 • March 2006 • Technical Analysis of STOCKS & COMMODITIES
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 Jamie Theiss replies:
The editors of S&C invite readers to submit their opinions and information on subjects
Right — the two examples are ordinary
relating to technical analysis and this magazine. This column is our means of communica-
gaps. For larger gaps and flat openings
tion with our readers. Is there something you would like to know more (or less) about?
I use different techniques, such as fading
Tell us about it. Without a source of new ideas and subjects coming from our readers, this
larger gaps and igniting bars from flat
magazine would not exist.
openings. Remember, there might be days
Email your correspondence to [email protected] or address your correspondence
when no setups are found, and having
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
the discipline to not trade on such days
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
is very important. As far as finding them,
name and address for verification. Letters may be edited for length or clarity. The opinions
I used to use a scanner but found I was
expressed in this column do not necessarily represent those of the magazine.—Editor
missing too many entries and chasing
others. So what I did was follow Jesse
Livermore’s advice, which is, “Better to
Putting A Stop To It and specifies “tight” as one standard de- watch too few than too many.”
Editor, viation, “medium” as two, and “loose” Now I have a watchlist of 20 stocks
Very interesting article as three. We are using 150 bars for the that I monitor closely and really trade
by David Garrard in the standard deviation calculation. only eight to 12 on a day-to-day basis.
May 2011 S&C about the Regarding Atr, I have often seen This way, I can start to learn the unique
use of stops. Preservation reference in other literature to following characteristics and patterns of these
of capital is an important the closing price with a 2.5 times Atr stocks and not chase the entire market.
element in any trade. trailing offset. I would suggest that if you
After reading the article, I had several recalculate that offset once a week, as a GAP FILL AND GO (fade the gaps)
points that did not seem to be covered: casual trader, it would be appropriate. If Editor,
the character of the price action of the Excellent article by Jamie Theiss in the
1. Regarding Figure 2, how were the stock changes dramatically, then you May 2011 S&C. Nearly all my trades are
tight, medium and loose stops calcu- would want to update it immediately. done by fading the gaps right after the
lated? The author makes reference to Editor’s note: David Garrard is VP, opening using one-minute candlesticks
“dynamic volatility and an evaluation Asia-Pacific, for Recognia Inc. plus a couple of indicators. Occasionally,
of standard deviations” but there are I will wait around after my exit and look
no hints on how this number is cal- Gap Fill And Go for a continuation back in the direction of
culated. Editor, the gap, as Theiss describes in his article,
I truly enjoyed Jamie and that works too. I’m done by 10:30 at
2. For the 14-day Atr, how does the Theiss’ article in the May the latest every day. His article was very
author suggest applying this number to 2011 S&C. I find his timely for me because I’ve been thinking
the stock price? Do I use a multiple of technique to be simple, about staying around longer more often.
the Atr like 2 or 2.5? Do I simply cal- uncomplicated, and very Thanks for the encouragement.
culate the 14-day Atr daily and apply it effective. I find it to be one of the best Pete
to each different closing price? Another trading methods out there.
way to look at it is, how frequently do I Thank you for his article. ELLIOTT WAVE
calculate and change the Atr? David Editor,
Thank you for Koos van der Merwe’s
Loved the article but the actual applica- GAP FILL AND GO question contribution to the April 2011 issue
tion is vague. Thank you for a fantastic Editor, of Technical Analysis of Stocks &
publication. Thank you for Jamie Theiss’ article in the Commodities (“Today’s K-Wave And
Jeff May 2011 S&C, “Gap Fill and Go.” Beyond”). I have found myself gravitat-
I employed it to my success the other ing more and more towards the work of
David Garrard replies: day for the first time, going short one R.N. Elliott, and I think van der Merwe’s
Regarding how the tight, medium, and stock while going long another. My work has put me over the top.
loose stops are calculated: Recognia question is, how do you find the stocks Craig
(www.recognia.com) uses a proprietary that are opening on a gap? Also, your CYCLES

Kondratieff A Go-Go

Today’s K-Wave

algorithm to generate a “filter line.” You two examples showed what looked like
And Beyond
Trying to make sense of the markets is always been aware of them. However, there is no evidence

ordinary gaps. Do you stay away from

a challenge. Here’s an updated look at the that he ever tied his wave counts to the K-wave.

can find out more about filter lines in a

Kondratieff wave after 2010.
U
But in all my long-term analyses, I do tie the K-

W
hen Nikolai Kondratieff developed his wave and the Elliott wave counts together, because
wave theory, he had never heard of tech- I believe that the K-wave identifies major lows and
nical analysis. He had also never met highs in any Elliott wave count. In my November
Ralph Elliott of Elliott wave theory fame, 2008 S &c article on the K-
a man who lived in the same generation wave, I explained the theory, and I have repeated the

book by Recognia’s chief scientist, Chris larger gaps, or do larger gaps work just
that he did, a man who expressed in a book he had K-wave chart here in Figure 1 for you to study.
written about Latin America: “There is a reason for In that article, I also showed how a chart of the
everything and it is one’s duty
to discover it.”
In 1946, Ralph Elliott pub-
lished Nature’s Law: The Secret
Of The Universe, and sold the
first 1,000 copies quickly to

Satchwell, titled Pattern Recognition as well?

financial analysts. I have of-
ten wondered whether he had
read about Nicolai Kondratieff
and his cyclical theory, which
came to international attention
in Kondratieff’s 1925 book,
The Major Economic Cycles
(also translated as Long Wave
Cycle). Tragically, Kondrati-

And Trading Decisions. From this, Rec- Seth Okun

eff’s conclusions were seen as a
criticism of Josef Stalin’s inten-
tions for the Soviet economy,
causing him to be sentenced to
the Soviet gulag and ultimately
executed in 1938.
Joseph Schumpeter in his
1939 book Business Cycles was

ognia calculates the standard deviation

the first to use the term “Kon-

S&C
dratieff waves,” which means
that Ralph Elliott could have

by Koos van der Merwe, C

8 • July 2011 • Technical Analysis of Stocks & Commodities

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4/14/111:44:04
10:17 PM
AM
 Technically Speaking, That Is

How High For Crude?

Here’s a look at the Nymex crude oil perpetual front-month higher prices might go.
KIM SCARFURO
contract focusing on the use of wave projections and This is happening again now. Here, I will examine the
retracements. Nymex crude oil front-month contract from a purely techni-
cal standpoint and focus on the use of wave projections and
by Dean Rogers retracements. The technicals are good at pinpointing near-term

As
support and resistance and often accurately predict future price
of late spring 2011, the varied response to geopolitics activity. The front-month or “perpetual” contract is a non-
has pushed already firm Nymex Wti crude oil prices normalized continuation chart of the prompt-month futures.
to more than $100 per barrel. Sensing the speculation, Using the perpetual in forecasting allows us a historically
major media and news outlets have caught the “how high will long view of prices and waves.
crude oil go” bug, while the pundits have been suggesting
barrel prices ranging from the $120s to $200-plus. Overview of wave projections
Of course, reacting to these forecasts can be treacherous. Wave cycles consist of three distinct high and low swings,
Pundits often blindly forecast prices without any measure denoted by the labels X, Y, and Z. For an up wave, cycle X
or accountability or responsibility even if they turn out to is the first and lowest point, Y is the swing high, and Z is the
be wildly wrong. And back in 2008, when prices zoomed to pullback low after Y. For a down wave, cycle X is the first
almost $150 per barrel, many people wondered how much and highest swing, Y is the swing low, and Z is the pullback
10 • July 2011 • Technical Analysis of Stocks & Commodities
high following Y.
Within a wave cycle, these three
prices can project to targets using the
golden mean, or phi (Φ = 1.62), and
derivatives of Φ. The formula for a
target is:
Z + (|X – Y| * factor of Φ) for
up targets
Z – (|X – Y| * factor of Φ) for
down targets

The factors of Φ used in this analysis

are 0.62 (1/Φ), 1, 1.38 (1 + (1/Φ)2), 1.62
(Φ), and 2.76 (1.38 x 2). There is one ad- Figure 1: CLQ08 MAJOR WAVE UP TO 147.27. This major wave met its 1.62 extension within 0.03% of the actual
ditional target called the trend terminus, $147.27 high.

which is calculated as Y3/X2.

CLAPERP.CSV - Monthly

Wave projection 147.27

To demonstrate how effective wave 140.00
projections can be, let’s review the
major wave up from $57.61 for the 120.00
August 2008 contract when prices hit 106.95
$147.27 (Figure 1). For this wave, X = 100.00
57.61, Y = 96.44, and Z = 84.33. The
math for the 1.62 projection is 84.33 + 80.00
(|57.61 – 96.44| x 1.62) = 147.23. So this
major wave met its 1.62 extension within 60.00
0.03% of the actual $147.27 high.
35.85
40.00

Overview of 32.4
retracements 20.00

A retracement is the measure of the 9.75 10.35

correction for a wave cycle, so it is 83 85 87 89 91 93 95 97 99 2001 03 05 07 09 11
the measure of how far Z retraces the
XY portion of a wave cycle. Retrace- X Y Z 120 165 220
ments are measured using factors of
9.75 147.27 32.4 0.62 1 1.38
Ф. The most common percentages are
38%, 50%, and 62%. Retracement
Figure 2: MAJOR WAVES UP FROM $9.75. For the wave $9.75 – 147.27 – 32.4 (the entire move up), about $120
levels of 21%, 78%, and 89% are also is the 0.62 projection. Once the 0.62% target has been met, odds favor an extension to the 1 factor, or equal to target.
important. Here, the 1 target is $165. So if prices were able to break above $120, a move toward $165 would be probable.
In strong markets, where traders
often hold onto positions and others are less likely to take op- of targets identify crucial resistance and support. They also
posing positions, corrections are generally shallow — that is, show connections from one target to another. This is useful
21% and 38% retracements. because highly occurring (confluent) wave targets can then be
In weak markets lacking conviction, many traders take compared with targets generated by other technical methods
profit after small moves and are quick to reverse positions. such as retracements.
This causes deeper corrections of 50% to 89%.
Retracements are not only calculated on an entire move Crude oil wave projections
but also from intermediate lows to the high (for an up move) and retracements
or highs to the low (for a down move). However, the most Let’s start this analysis by evaluating the waves up from $9.75
important ones are those that retrace an entire move. (Figure 2). For the wave, $9.75 – 147.27 – 32.4 (the entire
move up), about $120 is the 0.62 projection.
The concept of confluence This is crucial resistance. Research shows that once the
By looking at how the combination of all the wave projec- 0.62 target has been met, odds favor an extension to the “1”
tions relate to one another, specific targets emerge. Clusters factor, or equal to target. Here, the 1 target is $165. So if
July 2011 • Technical Analysis of Stocks & Commodities • 11
 FORECASTING

prices are able to break above $120,

a move toward $165 would become
probable.
Odds look fairly even right now
for $120. However, the market only
tells us what it knows, so these odds
could change rapidly with the onset
of breaking news.
Above $165, the 1.38 target is
$220. This is a much-talked-about
price not only for the past few years,
but even more so over the past few
months. Because $220 is the 1.38
projection for the largest wave on
the chart, it is the important upper
X Y Z 120 148 220 target. In addition, it is confirmed
by the technicals. This does not
32.4 87.15 64.24 1 1.62 2.76
mean that $220 will be met, but
FIGURE 3: MIDSIZE WAVES UP FROM $32.40. This wave already overcame its 0.62 projection, which was $98. There rather that above $165, a continued
is a good chance for the 1 projection, which is $120, to be met. This also means $120 connects the wave structure from move higher to $220 moves from
$32.40 to the earlier wave structure from $9.75. This same wave targets $148 as the 1.62 projection and $220 as the possibility to probability.
2.76 projection.
That said, looking at one large
wave up from a low that was made
in 1986 does not form a complete
CLAPERP.CSV - Daily
forecast; rather, a combination of
106.95 106.69 the waves leading up to the cur-
105.00 rent $103.41 swing high must be
examined to see how confluent
each target is.
100.00

1.38 96.22 95.00 The major wave up from $32.40

92.84
1 (Equal) on the weekly perpetual chart is
88.63 90.00 $32.4 – 87.15 – 64.24 (Figure 3).
84.43 85.00
This wave already overcame its
82.97
83.85 0.62 projection, which was $98.
80.00 So there is a good chance for the 1
80.06
79.25
projection, which is $120, to be met.
75.00
This also means $120 connects the
70.76 70.00 wave structure from $32.40 to the
earlier wave structure from $9.75.
65.00 This same wave targets $148 as
64.24
Jun Jul Aug Sep Oct Nov Dec 2011 Feb Mar
the 1.62 projection and $220 as the
2.76 projection. So this wave not
only shows confluence at $120,
X Y Z 110 120 148 165
but also at $220 with intermediate
64.24 82.97 70.76 2.76 resistance at $148.
" 92.84 83.85 1.38 2.76 The upward wave projections for
70.76 " " 1.62 2.76 Y3/X2 the move up from $64.24 confirm
that $120 is the most important
83.85 106.95 96.22 0.62 1 2.76
target (Figure 4). So not only was
$120 confluent for the waves up
FIGURE 4: RECENT WAVES UP FROM $64.24. This wave has overcome its 1.62 target of $101 and is poised to extend
to the 2.76 target of $120. The important $120 is also a target for the wave $64.24 – 92.84 – 83.85. The $120 target is from $9.75 and $32.4, it is a major
the 1.62 projection for the wave $70.76 – 92.84 – 83.85, which then connects to $148 as the 2.76 projection and $165 target for these waves as well.
as the Y3/X2 projection. The more recent wave, $64.24
– 82.97 – 70.76, has overcome its

Continued on page 26

12 • July 2011 • Technical Analysis of Stocks & Commodities

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14 • July 2011 • Technical Analysis of Stocks & Commodities
 INDICATORS

The Quest Continues

Comparing Seven Money

Flow Indicators
An overabundance of money flow indicators can Market
Cap
Total Total
Symbol Stock Group
clutter your desktop and could confuse you with ($bil) Diverg Direction

contradicting signals. But do these indicators BAC Banking 115 -3,805 300
have any predictive value? If so, which is best? HPQ Computer 95 12,367 27,800

S
AMZN Retail 74 14,377 70,200
SU Oil & Gas 50 48,004 53,800
ince Joseph Granville presented the F Auto 49 21,852 20,000
first money flow indicator in 1963, DOW Chemicals 34.8 43,425 25,400
other technicians have attempted to RIMM Telecomm 29.8 1,385 126,150
improve on Granville’s original for- CELG Biotechnology 28.5 91,238 70,700
mula or devise a completely new approach using NSC Transportation 22.3 7,423 30,400
volume to predict market price moves. On-balance VNO REIT 15.9 25,785 44,650

volume (Obv), Chaikin money flow (Cmf), RHT Software 8 91,098 95,040
DNDN Biotechnology 5.3 276,266 171,450
accumulation/distribution, volume price trend
RMD Medical Appliances 4.8 19,934 32,140
(Vpt), volume oscillator (VO), ease of movement,
ATML Semiconductor 4.1 55,409 71,097
negative volume index, positive volume index, RDC Oil & Gas 3.8 28,371 19,873
Klinger oscillator, volume flow indicator (Vfi), ORI Insurance 3.1 30,268 1,117
and the money flow index (Mfi) are all indicators DRE REIT 3.1 10,614 22,420
that technicians have developed to quantify the ASBC Banking 2.2 1,426 -4,530
relationship between price and volume. ALK Transportation 1.9 -1,214 49,153
Yes, there are many. Bearing in mind that be- MMR Oil & Gas 1.6 139,724 169,500
sides the stock chart and other price-based indica- LPX Materials 1 59,546 51,930
tors there is only room on a 19-inch monitor for BCSI Software 1 10,358 206,076
one or two volume indicators, you will have to PRX Drugs 1 2,408 112,610
choose from more than 15 money flow indicators PNK Gaming 0.8 32,862 25,250

for your standard layouts. An even more critical VVUS Biotechnology 0.6 54,540 26,530

decision would be choosing a volume indicator

DYN Utilities 0.6 235 60,300
SPF Construction 0.4 17,602 82,200
for your trading system, given that two different
SFN Staffing 0.4 17,196 7,900
indicators can produce contradicting signals. SWHC Defense 0.2 82,758 134,150
Which ones work the best? To find out, I tested GAP Retail 0.2 76,166 95,500
seven popular money flow indicators using two Figure 1: Combined total profits of both systems on a stock-by-stock
objective mechanical systems and a visual meth-
LEELA CORMAN

basis for the divergence (fourth column) and the direction test (fifth

od. But first, here’s some background information

column). The stocks are sorted by capitalization and colored according to profitability.
The best performers were small- and mid-cap stocks and the worst performers were the
on these indicators. financials.

To find out which ones work

the best, I tested seven popular
by Markos Katsanos money flow indicators.
July 2011 • Technical Analysis of Stocks & Commodities • 15
 INDICATORS

The basics incorporating money flow indicators in trading systems. Most

Volume or money flow indicators can be divided into five people, however, use money flow indicators to help them in
categories: everyday decision-making concerning their open positions or
to confirm signals picked by other price-based indicators, so I
n Those using volume based on the interday change in decided to evaluate the indicator readings by adding another
price from one day to the next. The best-known indica- visual comparison test simulating these circumstances.
tor in this category is Granville’s Obv. Later variations
include Markstein’s volume price trend (Vpt) and the Testing method
volume flow indicator (Vfi), which I introduced in my Portfolio test simulations were carried out using MultiCharts’
June 2004 Stocks & Commodities article (see “Sug- Portfolio Backtester and the 30-stock sample portfolio depicted
gested reading” at the end of this article). in Figure 1. All tests started with initial equity of $100,000,
n Those focusing on the change in prices on an intraday and $10,000 was allocated per trade. No buying on margin
basis (such as the Cmf and the intraday intensity). was used for either system. The commission charged was $9
and dividends and interest were ignored. I chose a 10-year
n Those showing the periodic volume change without ref- duration span from October 31, 2000, to October 31, 2010,
erence to price (such as the volume oscillator [VO]). which included two bear and two bull markets (including the
current one).
n Those using volume to improve on existing indicators
The buy & hold profit was calculated by buying equal dollar
(such as the volume-weighted moving average con-
amounts of all stocks in the sample ($100,000/30) on the test
vergence/divergence [Macd] or the volume-weighted
start date (October 31, 2000) and selling them on the last day
moving average).
of the test.
n Those using both inter- and intraday price changes. The The indicator period used was one month (21 trading days)
only indicator in this category is the finite volume ele- except for the Obv, Vpt, and Vfi. In the first two cases, the
ments (Fve). Details about this indicator can be found period was irrelevant as they started calculating volume totals
in my April and September 2003 articles. from the first day of the loaded data. In the case of the Vfi,
the default six-month period (130 days) was used as this was
Trading systems and comparison designed as a long-term indicator. Each position was held for
In evaluating the performance of these indicators, I used a two months (42 trading days) at the latest unless an earlier
sample of 30 popular stocks consisting of 10 large-, 10 me- exit, based on bearish indicator readings, was specified by
dium-, and 10 small-capitalization stocks from different sectors the system.
of the economy (see Figure 1). I then designed two trading
systems, the first one for evaluating the predictive value of the Divergence test
money flow divergence between the indicator and price and My objective in designing the following simple divergence
the other for evaluating direction and indicator level signal test was to show the indicators’ general usefulness, not to
accuracy. The test results produced useful statistics at least for construct a state-of-the-art system. So I tried to keep it simple
and did not optimize any parameters.
The problem with mechanical systems is that divergence,
which is obvious from eyeballing a chart, must be calculated
mathematically. In this case, I decided to use the linear re-
gression slope method to compare the divergence between
the indicator and stock price. A buy signal was triggered if
the linear regression slope of price was negative, while the
40-day slope of the indicator was positive.
To improve profitability and filter out trades during heavy
selling, long trades were taken only if the indicator value was
above the bullish threshold (which indicates accumulation).
This wasn’t applied to the Obv and Vpt or the oscillators (VO
and Mfi), as the indicator level is irrelevant. But as I have
pointed out elsewhere, divergence signals by themselves can
produce large drawdowns because the stock can decline con-
siderably further before starting to respond. To improve the
timeliness of the divergence signals I added a third condition,
which required a 15-day stochastic to cross above its six-day
moving average to trigger a trade.
“I was hoping for a permanent govern- The VO was an exception, since it does not use any price
ment shutdown that included schools.” criteria to classify positive or negative volume. So when
16 • July 2011 • Technical Analysis of Stocks & Commodities
 Money flow divergence test results
System Buy & FVE VFI CMF MFI OBV VPT Vol Osc
hold
Account size $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Net profit $86,148 $161,667 $106,713 $146,701 $230,530 $79,954 $238,322 $302,896
Compounded ann. return 6.4% 10.1% 7.5% 9.5% 12.7% 6.1% 13.0% 15.0%
Total number of trades 30 355 195 396 509 362 393 767
Percent profitable 53.3% 56.6% 57.4% 56.6% 53.4% 53.0% 55.2% 50.6%
Avg. win/Avg. loss 4.62 1.34 1.45 1.21 1.41 1.15 1.47 1.62
Profit factor 5.28 1.75 1.96 1.58 1.61 1.30 1.82 1.65
Max intraday drawdown -$164,150 -$50,722 -$50,167 -$73,970 -$109,907 -$98,850 -$93,805 -$145,590
Profit/drawdown 0.52 3.19 2.13 1.98 2.10 0.81 2.54 2.08
Max close drawdown $0 -$40,220 -$41,156 -$59,736 -$63,529 -$83,440 -$67,904 -$85,447
Figure 2: Test results of the money flow divergence system for the 10-year period from october 31, 2000, to october 31, 2010.
JUNEthe2011
All tests were profitable and outperformed • method
buy & hold Technical
by a wideAnalysis STOCKS
ofVPT,
margin. The VFI, and FVE were&theCOMMODITIES
best performers and the OBVmagazine
the worst.

Pleasetocontact
interpreting signals it is important compareKaren Moore with
the direction approval
A number or changes:
of results from this analysis are worth noting. The
and level of the oscillator to the prevailing price trend. Price VO, Vpt, and Mfi outperformed on a net-profit basis, producing
breakdown accompanied with volume(206)
phone: expansion • fax: annualized
is negative,
938-0570 206-938-1307returns•ofemail:
15%, 13%, and 12.7%, respectively.
[email protected]
so one interpretation is that both slopes should be negative We do have to consider risk. The volume oscillator, although
(stock price falling on declining volume). The exception is a it generated the highest net profit, also had the highest draw-
volume blowoff at the final bottom. This is a rare case, and down, which in confluence with the low probability of winning
moreover, the final bottom can only be established in retro- (50.6%) makes it only PROOF suitable #2
for Las Vegas traders. The
spect, so I used the former (both slopes negative) in detecting Fve, on the other hand, outshined in that respect, producing
positive divergence. the highest risk-adjusted return and smoother performance.
All positions were liquidated if the divergence turned The real surprise was the Vpt, which dramatically outper-
negative (positive price slope with negative indicator slope) formed the Obv, returning more than twice the annual return
or after the specified two-month maximum holding period. with less risk. In fact, the Obv was the worst performer on
Again, because of the lag between divergence signals and all metrics.
stock price and in order to eliminate premature exits, I added The Vfi had the highest profit factor and lowest drawdown,
a second condition, requiring the indicator to cross below its less than a third of the underlying investment’s worst draw-
50-day moving average in order to trigger the exit. down. The relatively low number of trades, however, resulted
Due to space considerations, we have only included the in the low net profit and annualized return. This can be blamed
EasyLanguage code for the Mfi tests in the sidebar, “Easy- partly on the relatively short holding period, as the Vfi was
Language Code For Mfi Systems.” The full code for all other
money flow indicators can be found in the Subscriber’s Area
at www.traders.com.

Evaluating the results

The main disadvantage of divergence sys-
tems is the high drawdowns, as divergences
can exist for long periods and signals are
seldom at the exact bottom or top. This was
the case with the current system, but it still produced good
overall results and some spectacular trades.
All tests (Figure 2) outperformed the buy & hold method
considerably and with less risk. In fact, the buy & hold investor
who bought an equal amount of all 30 stocks in the test would
have suffered a traumatic drawdown of ‑$164,000 before re-
covering at the end. The same investor who decided to invest
his entire account in a Standard & Poor’s index fund or the
Spy exchange traded fund (Etf) would have performed even
worse, with his account under water until the end. For more information circle No. 1

July 2011 • Technical Analysis of Stocks & Commodities • 17

 With this much power, you may want
to take a few precautions.

Get your 30-Day FREE Trial at

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 INDICATORS

EASYLANGUAGE CODE FOR MFI SYSTEMS

Shown here is the EasyLanguage code for the systems based on the MFI. The systems based on the other money-flow indi-
cators discussed were similar and used only money-flow criteria except for the volume oscillator, which was used to confirm
a price-based indicator. The full code for the other money-flow indicators can be found in the Subscriber’s Area of our website
at www.traders.com.
If you wish to replicate the tests, keep in mind that for the test to begin producing signals, the indicators and linear regression
should first be calculated, and this requires a minimum of 81 bars to be loaded.

MFI DIRECTION TEST STOCH(0),STOCHAVG(0);

INPUT:MFPERIOD(21),MABUY(50),MASELL(30),MFBUY(50),
MFSELL(60), //MFI CALCULATION
XTIME(42),PREV(7),SDCR(1); TP = (H+L+C)/3;
vars: TP(0),POSMF(0),NEGMF(0),UpSum(0),DnSum(0),MFI(0); PosMF=IFF(TP > TP[1],TP *V,0);
UpSum=Summation(PosMF,MFPERIOD);
//MFI CALCULATION DnSum=Summation(NegMF,MFPERIOD);
IF BARNUMBER>MFPERIOD THEN BEGIN MFI=UPSUM*100/SUMMATION(TP*V,MFPERIOD);
TP = (H+L+C)/3; //STOCHASTIC
PosMF=IFF(TP > TP[1],TP *V,0); IF BARNUMBER>STOCHBARS THEN BEGIN
UpSum=Summation(PosMF,MFPERIOD); IF AV E R AG E ( H I G H E S T ( H , S TO C H B A R S ) -
DnSum=Summation(NegMF,MFPERIOD); lowest(L,STOCHBARS),3) >0 THEN
MFI=UPSUM*100/SUMMATION(TP*V,MFPERIOD);END; STOCH=(average(C-lowest(L,STOCHBARS),3)*100)/
(AVERAGE(HIGHEST(H,STOCHBARS)-
//BUY lowest(L,STOCHBARS),3))
IF MFI CROSSES OVER AVERAGE(MFI,MABUY) AND ELSE STOCH=100;
MFI>MFBUY STOCHAVG=Average(STOCH,STAVGBARS);
AND MFI-MFI[PREV]> SDCR*StandardDev(MFI,30,1) END;
THEN BUY(“MFI”) NEXT BAR AT CLOSE+.05*C/100 STOP;
//BUY
//EXIT IF BARNUMBER>MFPERIOD+LRSBARS THEN BEGIN
IF MFI CROSSES UNDER AVERAGE(MFI,MASELL) AND IF LinearRegSlope(C,LRSBARS)<0 AND
MFI<MFSELL LinearRegSlope(MFI,LRSBARS)>0 AND
THEN SELL(“SELLMACROSS”) NEXT BAR AT MARKET; STOCH CROSSES OVER STOCHAVG
then BUY(“BUY DIV”) next BAR AT market;
IF marketposition=1 and barssinceentry>Xtime THEN //SELL
SELL(“XTIME”)ALL SHARES NEXT BAR AT MARKET; IF LinearRegSlope(C,LRSBARS)>0 AND
LinearRegSlope(MFI,LRSBARS)<0
MFI DIVERGENCE TEST and MFI CROSSES UNDER AVERAGE(MFI,MASELL)
INPUT:MFPERIOD(21),LRSBARS(40), STOCHBARS(10),STAV THEN SELL(“NEG DIV”) NEXT BAR AT MARKET;END;
GBARS(6),MASELL(50), //time exit
XTIME(42); IF marketposition=1 and barssinceentry>Xtime THEN
vars: TP(0),POSMF(0),NEGMF(0),UpSum(0),DnSum(0),MFI(0), SELL(“XTIME”)ALL SHARES NEXT BAR AT MARKET;

designed as a long-term indicator. In fact, by increasing the market capitalization below $8 billion. In addition, Bank of
divergence lookback period to 60 days and the holding period America [Bac], which had the highest capitalization of the
to six months, net profit increased 77% to $190,000, while group, was the worst performer.
drawdown increased only 16% to only ‑$58,000. In addition, Besides capitalization, response to divergence signals varied
the accuracy of trades increased to 62%. The Cmf, which was according to stock groups. In fact, only three biotech stocks
the only representative of the intraday money flow school, did produced almost a third of the total profits. The next-best per-
not perform well on this test. formers were software, semiconductor, and oil & gas stocks.
All systems suffered the maximum drawdown during the
last phase of the 2008–09 bear market, as positive divergence
signals were usually overruled by the general market sentiment All systems suffered the maximum
and ended up losing money. drawdown during the last phase
As you can see in Figure 1, the 14 best-performing stocks of the 2008–09 bear market.
(except Celgene [Celg] and Dow Chemical [Dow]) had a
20 • July 2011 • Technical Analysis of Stocks & Commodities
 DENDREON CORP. (DNDN, NASDAQ)

16.00
XTime
14.00

12.00

XTime
10.00

8.00

XTime Buy Div 6.00

Buy Div 4.00

2.00

Buy Div
FVE (21)

50.00

0.00

40-day linear regression -50.00

MultiChartS
Feb Mar apr May Jun Jul aug Sep Oct Nov Dec 2003 Feb Mar apr May Jun Jul aug Sep Oct Nov Dec 2004 Mar apr May

FIGURE 3: AND THE WINNER IS… Dendreon Corp. (DNDN). Note the divergence between the FVE (bottom window) and price during the 40-day period
preceding each buy signal.

The worst-performing group was financial stocks and banks. be detected by money flow indicators, especially in the case
In Figure 3 you can see some divergence signals triggered of small-cap and low-freefloat stocks because the stock would
by the Fve test superimposed on the chart of Dendreon Corp. be either closing above the midpoint of the day or the volume
(Dndn), which was the best-performing stock producing would be heavier on up days. However, it would be difficult
double the profits of the second best. to detect a few thousand shares of extra activity in large-cap
As Granville pointed out, the key to the effective use of and large-float stocks. It is likely that Bank of America (Bac)
a money flow indicator is the presence of informed smart stock was the worst performer not because there was no insider
money competing with the uninformed general public for trading, but because none of the money flow indicators were
trading profits. If this phenomenon does exist, being able to successful in detecting it.
discern the side of the market that the informed investor is
on and trading in a likewise direction is crucial. Direction accuracy test
Volume action in the large-cap or major index component In addition to being divergence signals, an indicator can offer
stocks, however, tends to be distorted due to program trading, other useful information. These are what I tried to evaluate
portfolio adjusting, tax selling, index trading, and so on. This with the following simple system:
confuses volume-based indicators. Although the sample was
Testing method
too small for a statistically significant conclusion, the fact
A buy signal was triggered if the 21-day Mf indicator crossed
that biotech stocks outperformed all other groups is not a
above its moving average while the indicator level was above
coincidence. This is because information about the progress
the bullish threshold (indicating accumulation). This was
of a company’s research on a new drug is well known in ad-
optimized for each individual indicator.
vance by insiders or their relatives or even statisticians who
In order to deal with the common problem of whipsaws
compiled the application to the Fda. Insider transactions can
around the moving average, I added a second condition to
therefore be easily detected by money flow analysis, as most
filter out marginal crossovers. In the case of the Obv and Vpt,
biotech stocks are usually very thinly traded.
where no such indicator reference point exists and for the sake
In other industries, analyst recommendations entice insider
of consistency, I used the relative position from a long-term
trading. The information of an analyst’s intention to upgrade
moving average. All trades were liquidated if the indicator
or downgrade a stock might be leaked to prospective retail
crossed below its moving average or after the specified two-
customers hoping for future business from the investor (through
month maximum holding period.
investment banking or trading). This increase in activity would
July 2011 • Technical Analysis of Stocks & Commodities • 21
 INDICATORS

PROFIT-LOSS REPORT FROM DIRECTION TEST

System FVE VFI CMF MFI OBV VPT Vol osc.
Account size $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Net profit $185,157 $277,000 $246,180 $214,298 $274,530 $334,920 $370,000
Compounded ann. return 11.0% 14.2% 13.2% 12.1% 14.1% 15.8% 16.7%
Total no. of trades 372 390 421 616 1151 855 688
Percent profitable 57.8% 58.2% 58.4% 46.8% 40.5% 43.3% 51.5%
Avg. win/Avg. loss 1.57 1.96 1.56 2.27 2.48 2.30 1.87
Profit factor 2.15 2.73 2.19 1.99 1.69 1.75 1.98
Max intraday drawdown -$23,965 -$30,520 -$48,341 -$21,586 -$55,610 -$64,540 -$59,351
Profit/drawdown 7.7 9.1 5.1 9.9 4.9 5.2 6.2
Max close drawdown -$17,290 -$16,950 -$41,630 -$13,286 -$46,370 -$47,770 -$55,320
PARAMETERS
MF Period 21 130 21 21 5/21
MA (Buy signal) 60 40 50 50 5 5 50
MA (Sell signal) 60 30 40 30 30 60 10
MF Level (Bullish) 10 0 5 50 70 50 25
MF Level (Bearish) 0 0 -5 60 25
Std. dev. 0.5 0 1 1 0.5 0.5
FIGURE 4: Test results of the money flow direction system for the 10-year period from october 31, 2000, to october
31, 2010. The trading amount was $10,000 per stock and the account size $100,000. The buy & hold results are shown in Figure 2. All tests were
profitable and outperformed the buy & hold method by a wide margin. The MFI and VFI were the best performers and the OBV the worst.

For the reasons mentioned in the previous test, I modified Evaluation of results
the volume oscillator system. I applied the moving average The results of applying the various indicators are displayed
on price and used the volume oscillator only for confirmation. in Figure 4. As you can see, they are stunning. All tests were
This is because I wanted to trigger a buy signal only when profitable and outperformed the buy & hold method and di-
price crossed its optimized moving average on heavy volume vergence test (seen in Figure 2) and with less risk.
(high indicator readings). Admittedly, this testing environment is an uneven match
The money flow indicators on the test used different com- and it is questionable whether the same performance can be
putation methods and philosophy, and as a result, indicator reproduced, as it required optimization of the moving average
readings and speed varied accordingly. For a fair comparison, I period and critical indicator levels, which was not the case
decided to optimize all parameters except the indicator period with the divergence test parameters. The condition setup was
and holding time, both of which were kept constant at 21 and also different. The current system uses volume information to
42 trading days, respectively. gauge the health of existing trends, whereas the divergence test
generated trades while the stocks were still in a downtrend.
None of the systems made any money during the 2000–02
and 2008–09 bear markets, but some of them, such as the Fve,
Vfi, and Mfi, managed to get through with minimal losses.
The Mfi suffered the lowest drawdown and had the highest
risk-adjusted return.
Two indicators stood out: the Mfi based on an outstanding
(nearly 10:1) risk/reward ratio but a lower annualized return
and profit factor, and the Vfi with the highest profit factor and
reliability of trades. The VO, although the most profitable on
a net profit basis, again produced the highest close drawdown
(‑$55,000), which made it unsuitable for risk-averse traders.
Nevertheless, the fact that such a simple indicator would
generate the most profits in both tests is indeed worth notic-
ing and underscores the importance of the role of volume in
supporting price trends.
The Obv was the worst performer again with the lowest
“Alex, are we rich enough to deserve a tax break?” reward/risk and profit factor. This time, however, it performed
22 • July 2011 • Technical Analysis of Stocks & Commodities
better than in the divergence test, producing a respectable 14% the March 2000 Nasdaq top, the October 2002 bear market
annualized return. On the other hand, the Vpt did not perform bottom, the October 2007 bull market top, and the March 2009
as well, barely managing to outperform the Obv. bear market bottom. I decided to use Etf surrogates and not
That the Obv underperformed its descendants doesn’t in the actual indexes because of the confusion concerning an
any way discredit or diminish the importance of Granville’s index’s volume.
work. After all, the Obv was the first technical study to use Although some data providers include volume data for
volume to predict price movement at a time before computers indexes, it is not the actual total volume of the constituent
or even electronic calculators were available for stock analysis. stocks. It is the overall market or exchange volume and could
The Cmf, the only pure intraday indicator used, performed be misleading, as it includes volume of preferred and other
better in this test, but the relatively high drawdown and low interest-sensitive stocks.
profit/reward ratio pushed it down to fifth place. The stock selection was not random, but I tried to include
The Cmf formula allows for intraday price movement rather stocks that suffered an excessive price drop or a breakout
than just close-to-close price differentials. While Marc Chaikin’s because of an event like a positive or negative earnings
premise seems logical, it misses out JULY 2011 • information
on important Technical Analysis of STOCKS
surprise, analysts upgrade&or COMMODITIES magazine
downgrade, takeover announce-
on price gaps from yesterday’s close to today’s open. By look- ment, or a drug rejection by the Fda. Then I evaluated each
ing at the Cmf buy and sell signals and examining
Please contactsome
Karenof the
Mooreindicator’s predictive
with approval orquality and ability to detect insider
changes:
worst losers, a common pattern emerged. In most cases, the activity by grading direction and divergence one day before
Cmf was moving in opposite directions from interday indica- the event using a point system. I awarded one point for nega-
tors like the Vfi and Mfi. Some falsephone: (206)
signals were 938-0570
preceded by • fax: 206-938-1307
tive divergence • email:
at tops, [email protected]
one point for positive divergence at
price gaps and others by brief market rallies in downtrends. In bottoms, and one point for the correct indicator direction.
these cases, the Fve, which was the only hybrid indicator in the To identify a divergence I used the classic method — that
group (taking into account both inter- and intraday differentials), is, when the indicator refused to mirror the respective new
PROOF #1
sometimes resembled the Cmf and at other times the Mfi, but highs or lows of price action. I awarded one point to direction
managed to avoid most of Cmf’s losing trades. You can find signals if the indicator was below its 40-day moving average
examples of contradicting signals between the Obv and Cmf before price reversed direction downward and one point if the
in my S&C April 2003 piece and also in Andrew Tomlinson’s
article in the October 2004 issue of S&C.
As you can see in Figure 1 — it’s déjà vu — small- and
medium-cap stocks were the best performers. In fact, the 10 Safe and Secure since 1992
best-performing stocks (except Rimm) had a market capitaliza-
tion below $8 billion. The stock and industry group selection
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before historical tops and bottoms during the last 10 years: For more information circle No. 2

July 2011 • Technical Analysis of Stocks & Commodities • 23

 INDICATORS

Symbol Industry Date Direction % Event MF indicator predictive quality

group after change
FVE VFI CMF MFI VPT OBV
QQQQ Index ETF 3/27/00 Down -25.2% Nasdaq top 1 1 2 1 0 0
QQQQ Index ETF 10/09/02 Up 39.6% Bear market bottom 0 1 0 0 1 0
QQQQ Index ETF 10/31/07 Down -24.6% Bull market top 2 2 0 2 1 0
QQQQ Index ETF 3/09/09 Up 43.6% Bear market bottom 0 1 0 0 1 0
SPY Index ETF 3/24/00 Down -27.6% Bull market top 1 0 0 0 0 1
DIA Index ETF 3/09/09 Up 44.5% Bear market bottom 0 1 0 0 0 0
VGK Index ETF 11/04/10 Down -11.8% European debt crisis 2 0 1 2 0 0
DNDN Biotech 4/02/09 Up 291% New drug news 1 1 1 2 2 0
ITMN Biotech 5/04/10 Down -75.0% FDA drug rejection 2 2 2 2 1 2
AMLN Biotech 10/19/10 Down -46.2% FDA drug rejection 2 2 2 2 0 0
CADX Biotech 11/02/10 Down -13.0% Analyst downgrade 1 2 1 2 0 1
ADSK Software 2/24/10 Up 35.3% Analyst Upgrade 1 0 0 1 1 2
PUDA Mining 10/08/10 Up 81.3% Analyst Upgrade 2 1 2 2 2 2
BDC Electrical Equip. 3/26/10 Up 20.3% Analyst Upgrade 2 1 2 2 1 1
F Auto 4/27/10 Down -20.4% Analyst Downgrade 2 1 2 2 1 1
PDLI Biotech 3/26/09 Up 11.5% Analyst Upgrade 2 2 2 2 1 1
CRXL Biotech 9/16/10 Up 55.9% Takeover 1 1 0 1 1 2
KG Pharmaceuticals 10/11/10 Up 39.7% Takeover 1 1 1 0 1 1
ADCT Communication 7/08/10 Up 49.9% Takeover 2 0 0 1 2 2
ACTL Semiconductor 10/01/10 Up 30.8% Takeover 1 1 0 1 2 2
STX Data Storage 10/14/10 Up 22.2% Takeover 2 1 2 2 1 1
ISLN Data Storage 9/30/10 Up 28.5% Takeover 0 0 0 0 1 2
GYMB Retail 9/30/10 Up 56.1% Takeover 1 0 1 2 1 0
NC Farm Machinery 11/03/10 Up 10.8% Earnings surprise 2 0 2 1 1 1
AGM Financial 11/09/10 Up 16.3% Earnings surprise 0 0 0 1 1 0
SCR Pharmaceuticals 11/10/10 Up 21.9% Earnings surprise 0 2 0 0 0 0
VRX Pharmaceuticals 11/03/10 Down -12.9% Earnings surprise 1 1 0 1 1 1
ACTU Software 5/03/10 Down -18.9% Earnings surprise 0 2 0 0 0 0
DGIT Services 8/04/10 Down -60.5% Earnings surprise 0 1 0 0 2 1
CSCO Communications 11/10/10 Down -16.2% Earnings surprise 1 1 0 1 0 0
TOTAL SCORE 33 29 23 33 26 24
Figure 5: Performance score based on predictive divergence and direction of money flow indicators one day before a dramatic price-moving
event was announced. In the third column is the date that the performance was evaluated (usually one day before the event was announced or, in the case of index ETFs,
the date of the final market bottom or top). In the fifth column is the percent change until the first short-term (but not the final) bottom or top which, in the case of takeovers or FDA
announcements, was usually the next day.

indicator was above its 40-day moving average at the bottom else concerning stock predictions, nothing is black & white.
and before the breakout. For events like analyst upgrades, when Taking a closer look at the scores in context of the nature
news usually leaks only a few days before the announcement, of an associated event and the relevant chart revealed more
long-term divergence signals were irrelevant so I looked at valuable information about the predictive quality, strong
only the nearest minor tops or bottoms. I decided to exclude points, and weaknesses of each indicator, which can be sum-
the VO from this study since it involved complex subjective marized thus:
interpretation of volume together with price trend.
n None of the indicators excelled in detecting Etf and
market turning points accurately. The Vfi was the best
Evaluation performer in this category, diverging from price in five
As you can see from Figure 5, no indicator was infallible. The
out of six cases, but failing to cross its moving aver-
Mfi and Fve produced the most accurate signals, predicting
age as required by the second rule (see chart of Dia in
the outcome in more than half of the cases. The Cmf and the
Figure 6).
Obv were again the worst performers. As with everything
24 • July 2011 • Technical Analysis of Stocks & Commodities
 DIAMONDS Trust series ETF (DIA, NYSE)
120.00

110.00

All indicators except the

100.00
n
Obv accurately detected 90.00

insider activity concern- 80.00

ing drug development 70.00

news of biotech stocks FVE 33.00

(see chart of Amln in 0.00
Figure 7). -33.00

VFI
n Analyst upgrades or -1.00 x

downgrades were also 2.00 x

easy to detect. In these
cases, faster indicators CMF 1.90 x

like the Fve, Mfi, and

0.01 x
-1.90 x
Cmf performed better MFI
as divergence developed
over a shorter period of VPT
time.
OBV
n In the case of takeovers or
leveraged buyouts, diver- 0

gences took a relatively

Aug Sep Oct Nov Dec 2009 Feb Mar Apr May Jun

longer time to develop Figure 6: Chart of the DIA ETF (surrogate of the Dow Jones Industrials) from August 2008 to June 2009.
and were not as obvious as Only the VFI (third window from the top) correctly predicted the current bull market at the final bottom on March 9, 2009, diverging
from price and making a higher bottom. The VPT was the second-best performer, refusing to make a lower bottom. All indicators were
with other events. This may below their 40-day moving averages at the bottom, but the MFI was the first to cross its moving average five days later, followed by
be because of strict Sec the VFI the next day.
rules concerning corporate
insider activity related to
potential takeover offers.
Therefore, slower indica- Amylin Pharmaceuticals (AMLN, NASDAQ)
tors like the Vpt and Obv 25.00
were the most accurate in
predicting these events. 20.00

n Earnings surprises were 15.00

the most difficult to detect. 10.00

This may be because of
heavy volume before the
FVE

official earnings release or 0.00

because the surprise had

already been discounted by VFI

the market. 0.00

n The performance of the CMF

faster indicators like the 0.10

Fve, Mfi, and Cmf was

MFI
very similar at specific
events suggesting a higher
0.00

correlation, especially be- OBV

tween the Fve and Mfi. 0.00

VPT
In addition to specific event
preferences, certain indica- Mar Apr May Jun Jul Aug Sep Oct Nov
0.00

tors appeared to be better at Figure 7: Chart of Amylin Pharmaceuticals (AMLN) from April to December 2010. All indicators except the OBV and
detecting tops or bottoms. The the VPT correctly predicted the devastating 46% decline in the stock price when the FDA, on October 19, 2010, declined to approve the
Obv and Vpt had a distinct company’s promising diabetes drug. Money flow indicators detected the heavy selling correctly and turned sharply lower even though
upside bias perhaps because the stock price had been going up or sideways more than a month before the announcement.
of the tendency for volume to
July 2011 • Technical Analysis of Stocks & Commodities • 25
 INDICATORS

expand on rising days and contract on declining days. As a tions is essentially redundant, since some of them tend to
consequence, the indicators provided little, if any, warning be highly correlated. Nevertheless, the preponderance of
of trouble at market tops. evidence narrowed my choice to the Mfi, Fve, and Vfi, which
Signals, however, tended to be more reliable and abundant consistently outperformed in all tests. A bottom-up approach
at market bottoms. For example, the Vpt had a score of 20 also exposed two indicators that consistently underperformed:
in detecting bottoms (positive divergence) and only six in Cmf and Obv. The Obv was a huge disappointment, as valid
detecting tops (negative divergence). Similarly, the Fve, Mfi, signals occurred infrequently, especially at market tops, with
and Cmf had a slight bias in detecting positive divergence at the indicator providing little if any warning of impending
bottoms. The score, however, was not so prejudiced on the market downturns.
positive side, with a score of 18 positive to 14 negative for An effective combination of indicators is more likely to
the Fve and Mfi and 13 to eight for the Cmf. The Vfi, on give a clear picture of the strength or weakness of any par-
the other hand, had a slight negative bias and was the best in ticular market move. An effective layout should include a fast
detecting tops (negative divergence). indicator like the Fve or Mfi, the Vfi for uncorrelated and
more reliable longer-term divergence analysis, and the VO
So which is the best? for trend confirmation. It is also important to choose a time
The results in my search turned out to span consistent with your trading style and speed, as different
be somewhat disappointing, as no clear indicator periods will give different results.
winner emerged. The search wasn’t in If you decide to use the trading systems presented in this
vain, however, because I did discover a article, you should keep in mind that while a money flow
number of important findings, and the footprints uncovered system can be a standalone method for trading, it can also
by this quest provided invaluable information, revealing the be combined with a classic price-based technical system.
weaknesses and idiosyncrasies of each indicator. The money flow indicator adds value by filtering out trades
The findings of this study suggest that relying on a single and improving, sometimes dramatically, the profitability of
indicator is not the best approach because it will inevitably your system.
fail. On the other hand, to use several money flow indica-
Markos Katsanos is the author of Intermarket Trading Strate-
HOW HIGH FOR CRUDE? gies, published by John Wiley & Sons, and a Stocks & Com-
Continued from page 12 modities contributor. He can be reached at markos.katsanos@
gmail.com or through his website at http://mkatsanos.com.
1.62 target of $101 and is poised to extend to the 2.76 target
of $120. The important $120 is also a target for the wave
Suggested reading
$64.24 – 92.84 – 83.85. In this case it is the 1.38 projection,
Granville, Joseph E. [1976]. A New Strategy Of Daily Stock
which in turn connects to $165 as the 2.76 projection.
Market Timing For Maximum Profit, Prentice-Hall/Simon
The $120 target is the 1.62 projection for the wave $70.76
& Schuster Professional Publishing.
– 92.84 – 83.85, which then connects to $148 as the 2.76
Katsanos, Markos [2009]. Intermarket Trading Strategies,
projection and $165 as the Y3/X2 projection.
John Wiley & Sons.
The last wave shown in the table, $83.85 – 106.95 – 96.22,
_____ [2003]. “Detecting Breakouts,” Technical Analysis of
shows how $110 is intermediate resistance, with $120 follow-
Stocks & Commodities, Volume 21: April.
ing. The 0.62 projection for that wave is $110, $120 is the 1
_____ [2003]. “Detecting Breakouts In Intraday Charts,”
projection, and $165 is the 2.76 projection.
Technical Analysis of Stocks & Commodities, Volume
Further confirmation of $120 is demonstrated by the retrace-
21: September.
ments of the move down from $147.27 to $32.40, where it
_____ [2004]. “Using Money Flow To Stay With The Trend,”
is the 78% retracement. This means that $120 is not only a
Technical Analysis of Stocks & Commodities, Volume
key wave projection, but a crucial retracement as well. So the
22 : June.
analysis establishes that $120 is a key target and the barrier
Messier, Mark, and Jeff Dos Santos [2011]. “Profiting In
to higher prices.
Retracements to $32.4 Biotech,” Technical Analysis of Stocks & Commodities,
Volume 29: July.
From 147.27 Tomlinson, Andrew [2004]. “A Tale Of Two Indicators,”
78% 122.0 Technical Analysis of Stocks & Commodities, Volume
89% 134.6 22: October.
‡MultiCharts
Before the runup, crude was poised for a major downward ‡See Editorial Resource Index
correction. Many of the waves up from $64.24 indicated that con-
fluent resistance at $92.84 should not have been overcome.
This leads to the conclusion that if the outside factors sub-
Continued on page 27 S&C

26 • July 2011 • Technical Analysis of Stocks & Commodities

 FORECASTING CLAPERP.CSV - Daily
108.00
106.95 106.69 107.00

HOW HIGH FOR CRUDE? 106.00

Continued from page 26 105.00

104.00
side, the negative technicals may again take 103.00
hold. Crude oil could resume its earlier down- 102.00
ward correction. Prices haven’t yet reached 101.00
$110 and have already begun to back off. Let’s 100.00
look at how low oil may fall and when we can
assume the move up is over.
99.00

The one major wave down is $106.95 – 96.22

98.00

– 106.69 (Figure 5). This targets $100 as the 97.00

0.62 projection and then connects to $96 as 96.22

96.00

the 1 projection. This means that should prices 3 4 7 8 9 10 11 14 15 16 17 18 21 22 23 24 25 28 29

fall below $100 before reaching $110, a test

of $96 will become likely. Closes below $96
X Y Z 100 96 90 78
for a few sequential days would be a strong
indication that the move up is probably over. 106.95 96.22 106.69 0.62 1 1.62 Y /X , 2.76
3 3

This is because at $96, a decline to $90 be-

comes likely. This is the 1.62 projection, which FIGURE 5: WAVES DOWN FROM $106.95. This targets $100 as the 0.62 projection and then connects
to $96 as the 1 projection. This means that should prices fall below $100 before reaching $110, a test of
in turn connects to $78 as the Y3/X3 and 2.76 $96 would become likely.
projections.
The wave projections indicate first support
is $100 and followed by $96. A close below $96 would call is near the 21% retracement from $32.4 to $106.95. Because
for $90 and possibly $78. $90 is the 21% retracement of the entire move up to $106.95,
These projections are only generated by one wave. This it is important support. The 38% retracement is $78.
makes judging the relative importance of the targets a chal- So not only is there a connection between $96 and $90 for
lenge. Therefore, the retracements must be added to the mix both the wave projections and retracements, there is also a con-
to confirm the projections. nection between $90 and $78. If $96 is broken, there is a good
The 62% retracement from $96.22 to $106.69 corroborates chance for at least $90 to be reached and possibly even $78.
$100 as crucial support. A decline below $100 would point to a Right now, the technicals don’t call for prices below $78.
lack of confidence in the move up continuing in the near term. However, the next major technical targets below $78 are
$70 and $61, which are the 50% and 62% retracements from
Retracements to $106.69 $32.40 to $106.95, respectively.
From 96.22
21% 104.5
Summary
The major waves up from $9.75, $32.40, and $64.24 all
38% 102.7
show that $120 is highly confluent and the key resistance
50% 101.5
threshold. It is the major barrier that must be overcome for
62% 100.2
any connections to be made to the $220 mark that so many
78% 98.5
in the industry have been discussing. On the downside, a
89% 97.4 correction below $96 will open the way for $90 and possibly
an extension toward $78.
The 50% retracement from $83.85 is $96 and the 78% What can be taken from this analysis? That the technicals
retracement is $90. show good potential for higher prices, with $120 being the
key decision point. Without continued support from outside
Retracements to $106.95
events, $110 will be hard to overcome.
From 32.4 64.24 70.76 80.06 83.85 Next time you hear the experts talking about a $120 or $220
21% 91.3 price for crude oil, you will know each has a solid basis in
38% 78.5 90.6 93.1 technical analysis.
50% 69.7 85.6 88.9 93.5 95.4
62% 60.9 80.6 84.6 90.3 92.7 Dean Rogers is the senior analyst of Kase and Co. For the
78% 48.8 73.6 78.7 86.0 88.9 technical scoop on energy prices or for more information
89% 40.6 68.9 74.7 83.0 86.4 on Kase’s forecasting, trading, and hedging services, email
[email protected].

This is important because $96 and $90 are confluent for ‡TradeStation
both the wave projections and retracements. In addition, $90 &

July 2011 • Technical Analysis of Stocks & Commodities • 27

 Use The Rainbow

A Color-Based System
For Short-Term Trading
Using the Spdr S&P 500 exchange traded fund as an n If today’s closing price is greater than two weeks ago
JOSE CRUZ

example, here’s how you can apply a simple swing trading but volume is not, color today’s volume bar blue.
system that utilizes the colors of volume bars.
n Similarly, if today’s closing price and volume is less than
by Edgar Kraut two weeks ago, color today’s volume bar orange.
n If today’s closing price is less than two weeks ago but

M
ost technical traders use some combination of price- volume is not, color today’s volume bar red.
based indicators to support their trading decisions.
Here’s a very simple swing trading system based It’s a very simple color-based trading system that takes only
on coloring volume bars. It can be used either as a long positions and works as follows:
standalone trading system or in conjunction with other trading
systems. This is how it works: n Buy the green or blue volume bars using a 1% trailing
stop and a one-period trailing stop delay. Stand aside
n If today’s closing price and volume are greater than on red or orange bars.
two weeks ago, color today’s volume bar green.
28 • July 2011 • Technical Analysis of Stocks & Commodities Kraut/revised
 SPY Apr 17 02 - Apr 17 03
SPDR S&P500 ETF (88.3000, 89.7200, 88.1940, 89.5600, +1.31000

Figure 1: daily chart of the SPDR 115

S&P 500 ETF (spy) from April 17,
2002 to April 17, 2003. Here you 110
see the green, blue, orange, and red Volume
bars implemented into the chart. Buy on 105
the green or blue volume bars. Use a 1%
trailing stop and 1.0 period of trailing stop 100
delay. Stand aside on the red or orange
volume bars. 95

How well does

89.5600

this work? 85

With an initial investment of

$10,000 on April 17, 2002,
80

and trading the Spdr S&P 75

500 exchange traded fund
(Spy), this simple mechani- 10000

cal trading system grew to 5000

$11,575.72 as of one year 0

later (April 17, 2003). These

Figure 2: metastock indica- Figure 3: metastock

tor editor. Here you see the buy order form. Just
MetaStock code for the green vol- buy when the bars are
ume bars. Drop the green indicator green or blue.
as a histogram onto the price chart to
create the green volume bars.

numbers do not include commissions or slippage. This is a 15.76% gain

compared to a buy & hold loss of ‑20.59% or ‑$2,059. The system placed
a total of 94 long trades of which 59 were profitable.
I will show you how to construct this trading
system in MetaStock (end of day) and how
Figure 4: SETTING THE 1%
the system can be implemented as an Excel TRAILING STOP. Here’s how to set
spreadsheet. a 1% trailing stop in MetaStock.

MetaStock form
Figure 1 shows a MetaStock chart of the Spy from April 17, 2002, to
April 17, 2003, with the volume bars colored according to the rules of
the system described. The bar colors are implemented as indicators, as
shown in Figure 2 for the case of the green volume bars. To implement
all the colored bars, please refer to the sidebar, “To Produce Colored
Bars In MetaStock,” on page 31. P2 and V2 represent today’s price
and volume, while P1 and V1 are the price and volume as of 10 trad-
ing days (two weeks) ago. To produce the colored volume window, the
green, blue, orange, and red indicators are dropped onto the price chart
as histograms.
The trading system is constructed as follows:
The buy order is illustrated in Figure 3 and the
stop order is shown in Figure 4. There are no

Figure 5: EQUITY GROWTH CURVE for this trading

system. Here you see the equity growth curve for the
strategy using a 10-day lookback period and a 1% trailing
stop with a 1.0 period trailing stop delay. The equity growth
is for an initial $10,000 long position from April 17, 2002, to
April 17, 2003.

July 2011 • Technical Analysis of Stocks & Commodities • 29

 TRADING TECHNIQUES

Figure 6: THE EXCEL VERSION. In column

J (the last column) you see a display of the
volume color for each trading day. In columns
H and I you see the two-week percentage and
volume change displayed.

sell or cover orders. The equity growth

curve for a long position with only $10,000
invested in Spy starting on April 17 2002,
and ending on April 17, 2003 is shown in
Figure 5.

Excel form
Figure 6 is the Excel spreadsheet version
of Figure 1. Column J shows the appro-
priate V2 volume color for each row or
trading day. The two-week percent price
and volume changes are shown as well.
To construct column J, the appropriate
color is first written in each column J
cell using the following formula for row
2 and filling down.

=IF(AND(H2>0,I2>0),”Green”,IF(AND(H2>0,I2<0
),”Blue”,IF(AND(H2<0,I2>0),”Red”,IF(AND(H2<0
,I2<0),”Orange”,””))))

Next, each cell in column J is assigned the color described

by the text written in the cell by first coloring all the cells in
column J red and then applying Excel’s conditional formatting
as shown in Figure 7.
Columns H and I
Figure 7: excel conditional format- are produced by as-
ting. This feature is used to color the cells in
column J, corresponding to the volume bar colors
signing the formulas
that you see in Figure 1. “=100*((C2/F2) –
1)” and “=100*((D2/
G2) – 1)” to cells H2 and I2, respectively, then filling these
columns down.

Optimizing the
lookback period
In my efforts to optimize the trad-
ing system, I looked at the effect
on profitability of shortening the
lookback period from two weeks to
one week, one day at a time, for each
year, from 2002 to 2010. Between April 17, 2002, and April
17, 2003, reducing the lookback period from two weeks (10
trading days) to five days for the Spy increased profits from
$1,575.72 to $2,523.10 and the percentage gain from 15.76%
to 25.23%.
The results for the eight years from 2002 to 2010 using
optimized lookback periods in the five- to 10-day range are
shown in Figure 8. This simple mechanical trading system
based on the color of volume bars produced better than 60%
winning trades for every year from 2002 to 2010. The percent-
age gains varied from a high of 32.40% in 2009 to 2010 to a
30 • July 2011 • Technical Analysis of Stocks & Commodities
 Figure 8: RESULTS FOR SYSTEM PERFORMANCE USING OPTIMIZED LOOKBACK PERIODS IN THE FIVE- TO 10-DAY RANGE. This simple
mechanical trading system based on the color of volume bars produced better than 60% winning trades for every year from 2002 to 2010. The
percentage gains varied from a high of 32.40% in 2009 to 2010 to a low of 15.76% in 2002 to 2003.

low of 15.76% in 2002 to 2003.

To Produce Colored
For discretionary traders, this color-based system can be very flexible. For example,
Bars In Metastock
you could buy only green volume bars or only blue volume bars and short only red
volume bars or only orange volume bars. You can also use different types of stops.
To produce the colored volume window,
There is plenty of room on the price chart for adding additional indicators and the
the green, blue, orange, and red indica-
system can be applied to any instrument for which volume is reported.
tors are dropped onto the monochrome
volume bars of a chart as histograms.
Edgar Kraut is a longtime private trader.
Green Bar:
P2 := C;
Suggested reading
V2 :=V;
Kraut, Edgar [2005]. “The Time According To Wall Street,” Working-Money.com,
P1 := Ref(C, -10); May 16.
V1 := Ref(V, -10); ‡MetaStock ‡Microsoft Excel

If (P2 > P1 AND V2>V1, 1,0) See our Traders’ Tips section beginning on page 62 for implementation of Edgar Kraut’s
technique in various technical analysis programs. Accompanying program code can be found
in the Traders’ Tips area at Traders.com. The MetaStock code given in this article can be
Blue Bar:
found in the Subscriber’s Area of www.traders.com. S&C
P2 := C;
V2 :=V;
P1 := Ref(C, -10);
V1 := Ref(V, -10);

If (P2 > P1 AND V2 < V1, 1,0)

Orange Bar:
P2 := C;
V2 :=V;
P1 := Ref(C, -10);
V1 := Ref(V, -10);

If (P2 < P1 AND V2 <V1, 1,0)

Red Bar:
P2 := C;
V2 :=V;
P1 := Ref(C, -10);
V1 := Ref(V, -10);

If (P2 < P1 AND V2 > V1, 1,0)

July 2011 • Technical Analysis of Stocks & Commodities • 31

 About Indicators

More Power To
The Subordinates
There are primary indicators and there are subordinate Primary indicators
MIKE CRESSY

indicators. Often we get caught up in the primary indicators Among the 250-plus primary indicators, there are a number
and fail to see certain patterns within them. Here’s how of main categories:
applying the subordinates can help you see something that
1 Trend
could give you the edge.
2 Quality
by Martha Stokes, Cmt 3 Accumulation/distribution

T
4 Oscillators
raders are always looking for ways to streamline their
5 Flow of funds
stock analysis process to make it more efficient and
productive. One great way to speed up your indicator 6 Velocity/momentum
analysis is to tweak the way you use your indicators. 7 Hybrid
There are two classifications of indicators, primary and sub- 8 Cycle
ordinate (also known as sub- or child indicator).
32 • July 2011 • Technical Analysis of Stocks & Commodities
 Each of the primary indicator categories
defines the function and use of the indicators.
Hybrid indicators, for example, are the new
indicators written in the past three to four years
for the modern automated market. Hybrids
lead price, actually moving in advance of it.
Subindicators play a key role in faster,
more reliable chart analysis, regardless of
which category of indicator you use. They are
especially important and useful for histogram
indicators and single-line indicators.
Primary indicators can be placed alongside
each other in the same indicator chart window
for comparison between the two indicators
and for confirmation of harmonious or dis-
harmonious trends, patterns, and angles. All
primary indicators are analyzing price and

TECHNITRADER
time, volume and time, or price, APRIL 2011 • Technical Analysis of STOCKS & COMMODITIES magazine
time, and
volume in a unique formula. Some primary
indicators are period-based, while otherscontact
Please are Karen Moore with approval or changes:
Figure 1: A TYPICAL APPLICATION OF THE relative strength index (rsi). Normally, a midtrend
cumulative. bottom lasts three to six months with several tests of the low. RSI, by itself, makes it difficult to see changes

phone: (206) 938-0570 • fax: 206-938-1307 • email: [email protected]

in the oscillator pattern.
Subindicators
What separates subindicators from primary ones is that the The relative strength index (Rsi) is very popular during
former are applied to the latter to employ the formula of the sideways market conditions and bottoming phases. Most trad-
primary indicator in order to derive the line for the subindi- ers limit its use to overbought and oversold conditions as a
cator. While a primary indicator is a formula for smoothing
PROOF #1
single-line oscillator. But all traders know that when a stock is
market data, subindicators are not based on pure price, time, forming an intermediate- or a short-term bottom, energy builds
or volume, but the derivative comparison. within the sideways price action of the bottom and stocks tend
This makes subindicators extremely effective in exposing to move with sudden momentum that is hard to catch. As an
more information about the primary indicator, which can, at oscillator, the Rsi has the ability to reveal momentum price
times, lead price and in particular the explosive price action action energy when you apply a subindicator to assist you in
of momentum or velocity. Subindicators define and expose: finding these patterns.
1 Convergences between the primary and subindicator Figure 1 shows Rsi (14) as it is typically used. Normally, a
midtrend bottom lasts three to six months, with several tests
2 Divergences between the primary and subindicator of the low. By itself, Rsi makes it difficult to see changes in
3 Crossover patterns for signals the oscillator pattern.
4 Angle of ascent or descent of the primary indicator
5 Overextended patterns for nonoscillator types of
indicators
6 Averaging for exposure of above- or below-average
patterns Advanced algorithms deliver
7 Levels of trough and peak patterns low lag, low noise analysis.
8 Extreme patterns that precede bottoms or tops
9 Improving price action within a consolidation, plat-
form, or sideways pattern Now featuring
10 Exhaustion patterns between the primary and sub­ Tools for...
indicator.

By applying a subindicator to a primary one, you can sig- Also for: AmiBroker, Wealth-Lab, MetaTrader, Wavewi$e, Excel, Investor/RT, BioComp Profit, NeoTicker,
nificantly improve your stock chart analysis by allowing the Tradecision, TradingSolutions, MATLAB, TradeStation, Ninja Trader, eSignal, NeuroShell Trader, Financial
Data Calculator, Genesis TradeNavigator and TradersStudio.
subindicator to reveal patterns that are not easily seen. Let’s
look at how subindicators improve the analysis of the most www.jurikres.com • 800-810-3646 • 719-686-0074
popular indicators used today.
July 2011 • Technical Analysis of Stocks & Commodities • 33
 INDICATORS

By adding a moving linear regres-

sion subindicator to Rsi (Figure 2), the
internal pattern of price is revealed. We
can now see that Rsi is actually mov-
ing more aggressively, even though the
candle bars do not appear to be. Along
with the moving linear regression, Rsi
shows:
1 Higher lows on Rsi that are
angling upward
2 A crossover of Rsi over the
moving linear regression line.

Figure 3 shows a convergence between

the primary indicator, Rsi, and the sub-
indicator, the moving linear regression
line. This pattern forms prior to a sudden
move. The two indicators will cross and
form a divergence as price accelerates
upward.
Another wonderful subindicator that
can be used for identifying tops and bot-
toms before the final low or final high
Figure 2: adding a subordinate. By adding the moving linear regression subindicator to the RSI, the is rate of change (Roc). The Roc is a
internal pattern or price is revealed. You can now see that the RSI is actually moving more aggressively, even subindicator that is extremely useful in
certain situations.
though candles don’t appear to be.

Figure 4 is a monthly chart showing

Roc as the subindicator applied to the
volume bars. It signals early that volume
has reached an exhaustion pattern pre-
ceding the extreme price high of 2000
and it exposes the exhaustion pattern of
volume prior to the final low of 2009.
When applied to volume bars during
extreme conditions, Roc can be useful
in preparing for a long-term top of an
exhausted bull market or a long-term
bottom of an exhausted bear market.
The most effective use for Roc to find
exhaustion patterns on monthly volume
bars is to use this tool to find bottoms
and tops prior to the major moves. This
indicator set works extremely well on
industry and sector indexes to expose the
top weeks in advance of the final high and
weeks ahead of the final low (Figure 5).
By knowing that the industry is reach-
ing a peak or trough, traders can build
watchlists in preparation for the change
to the primary uptrend or downtrend.
Another subindicator that works ex-
tremely well for quickly determining a
FIGURE 3: CONVERGENCE BETWEEN PRIMARY AND SUBORDINATE. A convergence between the RSI and
moving linear regression forms prior to a sudden move. The two indicators will cross and form a divergence as
change of trend on the short-term trend is
price accelerates upward. linear regression lines (Lrl). These lines
are straight-line subindicators that can be
34 • July 2011 • Technical Analysis of Stocks & Commodities
 FREE
30-day trial!
Just click on the
Traders.com Advantage
column header at
Traders.com.

FIGURE 4: THE RATE OF CHANGE (ROC) SUBINDICATOR APPLIED TO VOLUME. It signals early that volume
has reached an exhaustion pattern preceding the extreme price high of 2000 and it exposes the exhaustion
pattern of volume prior to the final low of 2009.

Real-world technical
analysis— for all the
timely trading tips
you could want!

DAILY UPDATES ON:

• Charts
• Indicators
• Currencies
• Stocks
• Commodities
• And How-To Advice
FIGURE 5: FINDING TOPS AND BOTTOMS PRIOR TO MAJOR MOVES. The ROC indicator applied to volume
works extremely well on industry and sector indexes to expose the top several weeks in advance of the final high
One-year subscription is $64.99*
and weeks ahead of the final low. To order call toll-free:
1-800-832-4642
or online:
All traders can benefit by employing www.TRADERS.com
subindicators, especially when using primary [email protected]
Ph: 206-938-0570 • Fax: 206-938-1307
single-line or histogram indicators. *Washington state residents add
sales tax based on your locale.
TA09B1

July 2011 • Technical Analysis of Stocks & Commodities • 35

 applied to any primary line indicator. The
formula is today’s close minus X number
of periods ago — in this case, days.
By using two Lrls applied to the pri-
mary indicator such as Chaikin’s money
flow (Cmf), the angles of ascent and
descent are clearly defined and you can
also determine if the shorter-term trend
is angling up faster than the longer-term
trend. In addition, determining where
the two lines intersect and which line is
above the other quickly expose whether
the indicator is moving up more rapidly on
the short-term time frame. This eliminates
the need for tedious and time-consuming
drawing of trendlines. The Lrls appear
and move with the indicator to which
they are applied.
Figure 6 displays the Chaikin money
flow with the Lrls showing that as this
stock was moving in a platform price
pattern, money was flowing into the stock
FIGURE 6: CHAIKIN’S MONEY FLOW (CMF) WITH LINEAR REGRESSION LINES (LRL). As the stock of Gamestop prior to the move up. The Lrls help trad-
Corp. (GME) was moving in a platform price pattern, money was flowing into the stock prior to the move up. The ers see these patterns, which allow for
LRL helps traders see these patterns, which allow for earlier entries into stocks that are moving sideways. earlier entries into platforming stocks.
Figure 7 shows Pharmaceutical Product
Development Inc. (Ppdi) with the Cmf
and Lrl. This combination exposes when
the bottom shifted from downward action
to upward action within the bottoming
sideways price pattern. This aids in enter-
ing bottoming stocks sooner. Cmf with
Lrl exposes that money from funds is
flowing into the stock even before the
stock begins the move out of the short-
term bottom.
In Figure 8, the Cmf with Lrls on the
chart of Nabors Industries (Nbr) show
that money flow into the stock is diverging
away from price. This means few large
funds are moving into the stock. Even
though price continued to move up, the
risk is higher that the move will run out
of buyers.

Summary
Subindicators are useful
tools to apply to primary
indicators to help traders see
patterns within the indicators
FIGURE 7: IDENTIFYING THE SHIFT IN MARKET MOVEMENT. Here you see the shift to the upward price that cannot be easily seen. A
action after the bottoming sideways price pattern. Combining CMF with LRL helps you to enter bottoming stocks variety of subindicators can
sooner so you can gain from the entire upward move. be used on various trend
time frames. Subindicators
work well on stocks, major
indexes, industry indexes,
36 • July 2011 • Technical Analysis of Stocks & Commodities
exchange traded funds, and most charts.
Choosing which subindicator to apply
to each primary indicator depends upon:

• Your trading style

• The current market condition
• The correct primary indicators to
use based on the first two criteria.

Subindicators include: BONUS 2011 • Technical Analysis of StockS & commoditieS

1 Moving averages, simple and
exponential Please contact Karen Moore with approval or changes:
2 Linear regression lines phone: 206-938-0570 ext. 312 • fax: 206-938-1307 • email: [email protected]
3 Moving linear regression line
4 Channels and bands
5 Rate of change proof #1
6 Time series forecast

Subindicators are easy to set up by apply-

ing them directly to the primary indicator in
FIGURE 8: MONEY FLOW DIVERGING FROM PRICE. When this happens, it means that few large funds are
your chart window. They are most effective moving into the stock. Even though price continued to move up, the risk is higher that the run will suddenly
when using one primary indicator per chart run out of buyers.
window.
Using these additional tools, which are
available in most charting programs, allows you to expand
your analysis while reducing the time you spend studying an
indicator in relation to the price chart. All traders can benefit
by employing subindicators, especially when using primary
single-line or histogram indicators.

+
Martha Stokes is a technical analyst and lecturer for Techni-
Trader stock market trading courses, workshops, and virtual ®

classes. In addition, she writes several educational newsletters

for active traders. To learn more, visit www.technitrader.com
or www.marthastokes.com.

Suggested reading
Stokes, Martha [2010]. “Volume, The Forgotten Oscillator,”
Technical Analysis of Stocks & Commodities, Volume Thank you for voting
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July 2011 • Technical Analysis of Stocks & Commodities • 37
 Using Sample Variance

Backtesting Option Strategies

Looking for a quick way to backtest option strategies? You and world markets for intermarket hedging.
LON LEVIN

can use Excel to count occurrences of historical prices Only one aspect of the option trading experience remains,
outside a price band you set to develop an expectation for more or less, as it was years ago — option strategy backtesting.
future price movement. Here’s how. If I put on this Spx or Spy or Rut or Etf or Xyz butterfly,
condor, calendar, or double diagonal, what are my chances of
by John A. Sarkett success based on the recent past? That is the biggest question
for every option trader.

So
much of the option trader’s life has been enhanced For a back-of-the-envelope type calculation, some use
over just the past 10 or so years. We have radically deltas as shorthand for the probability of going in-the-money.
lower commissions — $0.15 to $1.50 per contract, For example, an option with a 10 delta will have roughly a
plus various ticket charge plans; we have tighter 10% chance of doing so. Actual probability math is much
markets, with high-volume contracts just one penny apart; more complex (see my December 1997 S&C article), but
we have better software with risk curves, what-if scenarios, the answers usually come out close enough. Some software
and charting, with brokers and vendors continuing to enhance calculates “probability of expiration” or “probability of touch-
their offerings; and finally, we have easier access to futures ing” (strike) for you. Thinkorswim does this, for example.
38 • July 2011 • Technical Analysis of Stocks & Commodities
 Other traders take on a
much more time-consum- Key EXCEL Formulas For Variance
ing task of establishing
Daily Moves
the trade in their option You can build your own 25.00
software, then clicking variance spreadsheet 21.79
through, day by day, to see or find one to try at
how the trade progresses. http://option-wizard. 20.00

This allows you to insert com. Here are the key 16.84

“adjustments” and see how formulas: 15.00

these fare. Many option

Percent
12.69
• Access five years of
traders have invested many historical data from web
weekend hours in this kind
10.00
8.54
sources (say, Yahoo) in 7.82

of research.
7.18 21.79
a spreadsheet.
Industrial strength op- • Use the offset func-
5.00 4.07
4.71
3.27
tion packages provide this
2.79
2.23
tion of Excel to deter- 1.68

opportunity; OptionVue
0.72 1.20 0.96 1.04
0.24 0.24 0.24 0.24 0.48 0.40 0.16 0.24
0.00 0.08 0.16
mine change from today 0.00
0.00

is still the gold standard, to “x” days back.

-7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 6 6.5

although there are new of-

-7.5 -7 -6.5 -6 -5.5 -5 -4.5 -4 -3.5 -3 -2.4 -2 -1 -0.5 0 0.5 0.5 1 1.5 2. 2.5 3 3.5 4 5 5.5 6 6.5

ferings, too. Typical time

involved for just one ticker: e.g. =(H1265/OFFSET(H1265,-$BO$2,0))-1 Use COUNTIF to count how many times the day’s
FEBRUARY
one year’s worth of data 2011 • Technical Analysis of STOCKS & COMMODITIESclose exceeds the bands: magazine
can be analyzed in 30 to 60 Use the IF function in Excel to determine if the par-
Please
minutes. contact
The data accessedKarenticular
Moore with approval or changes:
day’s change is outside the band you set: =COUNTIF(BQ10:BQ1500,”>0”)
is typically real, historical
option data. (In the case of =IF(BP1265<$BR$2,BP1265,) Divide it by the number of days surveyed.
phone: (206) 938-0570 • fax: 206-938-1307 • email: [email protected]
missing data, some software
programs will insert theo- Use conditional formatting to highlight moves
retical prices.) outside the bands.

PROOF #1
Simple sample variance
Is there a faster or cheaper way? There is: simple sample number of days, and you have the answer — one that would
variance and the power of good old Microsoft Excel. Sim- give a quick indication of the odds of success of any option
ply put, sample variance will tell you how many times Xyz strategy’s probability of staying above breakeven, based on
exceeded 5% up or 4% down in 35 days — or whatever what actually happened over the last five years (see sidebar,
your parameters are — over an extended time period — for “Key Excel Formulas For Variance”). So instead of spending
example, five years. an hour, you would have an answer about as quickly as you
There is a tradeoff. In an analysis like this that takes just a can point and click.
few seconds, there is no provision for adjustments and how
the trade would fare. (An option adjustment is the adding of
an additional position or position(s) to the original position in
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order to protect or enhance profitability.) In addition, instead Stop Losing and Start Winning by Keeping Your Emotions in Check 100% Automated Entry
of using real option data, the strategist would use actual his- and Exit • Forex • Futures • ETF’s • Stocks • Ninja Trader • Muliti Charts • Tradestation
torical prices of the underlying.
Having listed these caveats, my research tells me many
option traders would trade 30 to 60 minutes of logging pro-
spective adjustments, and the use of real option data for a
five-second look at how a particular strategy might perform
on a particular underlying.
That said, here’s how to use sample variance to analyze
the prospect of probability for your option trade. The strate-
gist would establish a time frame of a theoretical trade, for
example, 25 days, and price bands that would contain profit,
for example, up or down 5%. He or she could pose the ques-
tion of how often the underlying moves outside this band The Most Innovative Technical Analysis Tool Available Today
in the chosen time period, say, over the last five years, and Blue Wave Trading: Often Imitated...Never Duplicated

then let Excel tally the occurrences. Divide these by the total www.bluewavetrading.com • 808-281-8391

July 2011 • Technical Analysis of Stocks & Commodities • 39

 OPTIONS

Applying it
Does sample variance matter in the
real world of trading? It does. As an
example, quite a few option traders
trade the Russell 2000 as a condor
vehicle each month, only vaguely
realizing it is often more volatile as
the Standard & Poor’s 500. (If you
do trade it anyway, do the premiums
compensate? Short answer: Depends
on where the market is. It pays to do
a bit of due diligence.)
In this particular example, Spy or Spx vs. the volatile Rut,
a quick study of variance would tell the option trader which is
more volatile. It should not come as a surprise, then, that for
many who trade the Rut month after month with delta-neutral
strategies that profit when the Rut stands still out of nothing
more than habit, the results have been less than sterling in the
recent past.
That’s the competitive edge — working against them, since
they are not fully aware. As of this writing, May 2011, over
the past five years, the Spy close exceeded the close 46 days
ago by 7.5% exactly 20.05% of the time; for Rut, 24.88%.
Going the other way, in Spy, the close has been 7.5% or more
lower than that of 46 days ago, exactly 17.60% of the time;
in Rut, 16.12%. Sometimes, small caps (Rut, Russell 2000)
are in the ascendant, while sometimes they lag; the key is to
be aware of the recent environment, and place your option
strategy accordingly.
Here’s another example. You have in mind to earn some
income with a calendar spread on Big Pharma. Until recently,
Merck (Mrk) retained much of its luster, while Pfizer (Pfe)
was looked down on. Which stock is more stable? Using the
OPTION WIZARD

same measure, incidence of greater than or less than 5% moves

up or down in 50+ days, we find:
Figure 1: breaking out. Once a bull market run began here in the
SPY, it exceeded the daily variance bands (that is, last price was con- n Mrk: 63.57%
stantly equal to or greater than 7.5% versus price 46 days earlier) nearly
every day for two months; there was no regression for those waiting for n Pfe: A higher 69%
a pullback — an important consideration for the option trader who must
be alert and nimble, and typically does not have one or two years, like
n How about a stock that gets less media atten-
a long-term position trader, for a position to come back. tion — Eli Lilly & Co. (Lly): Bingo! 43.78%
Armed with three measurements on three candidates, the
strategist can give a look to particular option strategy prices
for particular companies and compare with a more fully
formed perspective. Or if you do choose Mrk or Pfe, having
specific insight into the sample variance for each will prepare
the trader for quicker and more meaningful adjustments on the
wider mover — for example, turning a calendar into a double
calendar.
This type of strategy testing shows one other important
thing, especially for those who like to dig in their heels. And
you can see it on a spreadsheet (Figure 1).
Prices that move outside of 5% or 7% or 10% bands “x” days
ago are often breaking out, either to the upside or downside.
“At bat is number 8, Sidonski, who leads the league in It pays to exit at breakeven, or adjust and play again another
home runs, Rbis, and product endorsement fees.” day, and protect your option principal. Bodies in motion tend
40 • July 2011 • Technical Analysis of Stocks & Commodities
 any one trade, but putting five years’ worth of probabilities
Everyone has to do their own due in your favor. If you know that a given option strategy should
diligence, everyone has to come to be successful nine out of 12 months, and you decide to try
their own conclusions. Tools like it but lose the first month, get discouraged, and don’t return
for months 2 and 3 and 4, where you would have likely been
sample variance will help you do that. profitable, your probability of failure becomes 100%. And no
one wants to undertake that probability.
to stay in motion, right through and beyond expiration. Bodies
at rest tend to stay at rest. John A. Sarkett designed Option Wizard software (http://
option-wizard.com). He writes frequently for the financial
Time press, and has written for Stocks & Commodities since 1995.
Go out one more expiration and there is only a 42% chance His nonfiction work Extraordinary Comebacks is an Amazon
that Mrk will stay within the 5% borders set here by the option bestseller. Go to Sarkett.com for a full set of his titles, includ-
strategist. There is a 58% chance that it will move beyond the ing Option Wizard Trading Method.
bands set. That might suggest another strategy — if volatilities
were sufficiently low, buying a straddle, a strangle, or a debit Suggested reading
spread, and expecting Mrk to follow its historical precedent Sarkett, John [1997]. “Time And Options Probabilities,”
and, in fact, move out of its 5% bounds. Technical Analysis of Stocks & Commodities, Volume
Everyone has to do their own due diligence; everyone has 15: December.
to come to their own conclusions. Tools like sample variance ‡OptionWizard
will help you do that, quickly, easily, and inexpensively.
A quick study of variance provides either confirmation
of additional fundamental and technical research, or the
jumping-off point for same. Perhaps the most important part
of the whole enterprise here is not any single calculation or S&C

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Find out what other Get info on industry
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Traders’ Tips
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July 2011 • Technical Analysis of Stocks & Commodities • 41

 INTERVIEW

What Indicators Should You Use?

Gail Mercer Of
TradersHelpDesk.com
Gail Mercer, a 15-year veteran of the trading industry who is the founder and Ceo
of TradersHelpDesk, has dedicated her career to helping traders achieve success.
Committed to helping traders grow from amateur analysts to master traders, her
unique methodology is rooted in her philosophy that success depends not on a
trader’s indicators but the ability to remain focused and responsive to price. Self-
responsibility, another cornerstone of her work, provides the mirror for what a
trader needs to learn about him- or herself in relationship to the markets. Working
with both the inner and outer aspects of trading, Mercer provides an integrated
and holistic blueprint for prospering in the markets.
Mercer has recently partnered with Christopher Koozekanani of FulcrumTrader
to bring the concepts of Cumulative Delta to a broader audience. The new website
will launch in early July 2011.
She is a frequent contributor to StoCkS & CommoditieS, Traders World, and
Financial Sense, as well as a presenter at the International Traders Expo. She of-
fers a free trading room where she trades on the live edge of the market. To join,
go to www.tradershelpdesk.com.
S&C Editor Jayanthi Gopalakrishnan and Staff Writer Bruce R. Faber spoke
New traders don’t
with Mercer on May 4, 2011, via telephone. plan. They don’t ask,
“What weaknesses
am I going to bring
ail, how did you get interested some really complex stuff. There was

G
into my trading?”
in trading? nothing I did not have access to. We did
The funny thing is I never it for companies like TradeStation and
thought I would ever be a eSignal.
trader. I actually started out as a para- like or found useful?
legal. When computers came out, I was What was it about those tick bars that At that time, I did not have a favorite
so amazed at how something that would fascinated you? indicator because all I did was jump from
take me hours to do could be done by a It was seeing the price movement of a indicator to indicator to indicator. I went
computer in such a short time. After that, company’s stock intraday. I had always through everything. I don’t think there
I studied everything about computers I been told that you look in your refrigera- was an indicator I did not try.
could get my hands on. I was offered a tor, see what labels were in there, then
job as an indicator specialist at a company you just buy the stocks of the companies Do you use that many indicators
in Greensboro, NC, which I accepted. At behind those labels and hold them for- now?
the time I had never heard about anything ever — and eventually your kids would No, I don’t. I made that change when
like TradeStation and when I saw those get your money. So being able to see a I decided to become a trader instead of
little price bars ticking away during the price bar and actually see the price of a an indicator specialist. Things changed
day, I was in love. That was it. I was company increasing or decreasing had for me when I asked myself, “Am I do-
never, ever going to do anything else me think, “Oh man, what have I been ing this as a hobby? Am I doing it just
again in my life. I just thought that was missing?” It was absolutely astonishing. for the fun of doing it, or do I really
the most amazing thing I had ever seen And I had always loved currencies, so want to make money at it? If I want to
in my life — and I still do. the currencies attracted me like crazy. make money, I have to get serious, and
I was like, “Oh man! I could be sitting it has got to become a business.” I have
You said your job was as an indicator here trading the dollar and the euro when always been good at running a business
specialist? I am at work.” It just blew my mind. and applying business principles.
Yes, at a company that designed more The one issue I had in my trading was
than 500 indicators. They do a lot of As you have developed so many indica- applying a business model to trading.
custom programming. We programmed tors, are there any that you specifically Everybody has a different opinion on
42 • July 2011 • Technical Analysis of StockS & commoditieS
what you need to do in order to succeed can get a hamburger. It is not going to was getting stronger. That was a great
as a trader. So I told myself that if this be a great hamburger, but it is going to concept, but I could not recognize it us-
was going to be a business, I had to go be something very quick we can depend ing his original indicator. So I modified
back to square one. What did I have to on. It was consistent, and I had to put his concept so I could see the trend’s
do to be a trader? that concept into my trading. strength and if the directional movement
The one thing that came to mind was index (dmi) negative was dominant or
consistency. I wasn’t doing anything What steps did you take to do that? if dmi positive was dominant.
consistently, except changing things. I started out with some of the original And I studied a lot about volume. The
Because I was constantly changing J. Welles Wilder concepts on the relative problem was, every time the volume
things I had no idea what would work. strength index (RSi) and average direc- bars started changing colors on me,
I never devoted myself to any particular tional movement index (Adx). I said, I started analyzing. I went back into
methodology. I never sat down and wrote “Okay, there is something there, but I indicator specialist mode, and I didn’t
out a trading plan. If I had a week of los- can’t pinpoint it.” So I decided I was going trade. So I decided I wanted to make a
ers, that was it for that method. Those to change it so I could see the patterns. volume indicator that only changed if I
indicators went straight out the door and needed to think about the volume. I came
I took on a new set. If a particular time What did you do? out with our own Traders’ Help Desk
frame did not work for me, I changed I color-coordinated everything on my (thd) volume indicator. This indicator
the time frame. I changed the market. I charts. That is one of my downfalls, I need will stay blue unless I need to look at
was in a constant state of change. Once I to be able to see it. I said to myself, “I a faster time frame. If the volume bar
said, “No! This is going to be a business. am going to make it into a histogram. I color changes, it is because sellers come
What would a business owner do?” — it am going to put divergence on there. And into the market. So it is not a constant
all became about consistency. I am going to make it so I can identify state of change on volume. It is very
when the market is overbought or over- consistent up until the point that I need
Why consistency? sold.” The purpose of Wilder’s original to know that information.
We go to McDonald’s because we Adx was to let you know when the trend

Now FREE With any

Charting Subscription!

July 2011 • Technical Analysis of StockS & commoditieS • 43

 INTERVIEW

So if the volume bar changes color, that they don’t plan for trading. When we
what kind of trading decisions do you go into other fields, we educate ourselves.
make? Typically, we will do an internship, and
It is more like a negotiation process. then we begin, but not with expectations
A lot of people call it accumulation and of being the greatest. We may have the
distribution, or the buyers and the sellers expectation that we will improve. We
are in a fight over who is controlling price. may become the greatest, or an expert,
I call it “negotiation” because it keeps me but we don’t start out that way. In trad-
in my business perspective mode. What ing, although we have highly intelligent
happens is, if I am in an uptrend, the only people coming into this field, they don’t
time I want to see a red volume bar is if plan that way. They do the exact same
price has moved significantly enough that thing I did.
I can say that sellers have entered this
market. That tells me the negotiation has Which is?
started. I don’t need to trade until there They are so overwhelmed with all
is a winner at the negotiation table. the education out there that they read
everything they can, but they don’t know
So you observe the market, determine how to implement what they learn. They
what is going on with the participants, don’t know how to plan. That’s one of the
and based on that you make your deci- biggest problems with new traders. They
sions. believe that if they just follow someone
Yes. That is correct. else’s plan, that will become their own
business. That’s what I call a franchise
From what I’ve seen, you have an owner. You are just blindly following
YOUR ONLINE interesting set of trading principles. someone.
The first one is that traders must take Trading is more about knowing who
RESOURCE responsibility for their own business you are, what your strengths are, and
FOR actions. Why is that first?
If a trader is blaming the indicators,
where do you need to improve. A big is-
sue for me is that I have attention deficit
TECHNICAL or the software, or the market, or charts, disorder (Add). I have an attention span
they are at a disadvantage, because they of about a three-minute chart. Now I
ANALYSIS are perceiving themselves to be victims can trade a three-minute and have no
of the market. When we are victims we problems. But put me on a 15-minute,
don’t take responsibility, and we don’t I’ll lose money because I cannot stay
change. But if we take responsibility, focused on a 15-minute bar.
regardless of the outcome, it doesn’t New traders don’t plan. They don’t
matter whether you win or lose. You can look at themselves. They don’t ask,
then take action to see what you need “What strengths and weaknesses am I go-
to do to improve. You are accountable. ing to bring into my trading?” You can’t
It doesn’t matter what happens in the overcome a weakness unless you identify
market. You control yourself. You take it. That’s one of the biggest things I have
responsibility. noticed with my students.
Most of the traders we have right
now who are just starting to trade are What else?
extremely high achievers. If they can Probably support for new traders. A
come out of victim mode and get into lot of companies do not offer a lot of
the business mode where they are taking support for their new traders. A lot of
control, then they can succeed. We must people will do a seminar for one or two
be held accountable for what we are do- days and that’s it. There is little or no
ing. To me, that makes a huge difference support mechanism after that. Trading
to your trading. is very isolated. New traders need sup-
port. I designed Traders’ Help Desk to
Since you work with a lot of traders, provide those support mechanisms. We
what are some common mistakes you have forums for all of our clients and
see them make? special sessions every week for seminar
The biggest one, more than anything, is attendees. We have a chat room specifi-
44 • July 2011 • Technical Analysis of Stocks & Commodities
cally for seminar attendees where they a way, holds them accountable for what
can go in and ask questions. they are doing in their business.
Then they have an outline of what time
Do you help traders set up a trading frame they will trade and their entry cri-
plan? teria, and they have to include snapshots
Yep. That is part of the seminar, ac- of their perfect trade setup. I want to
tually. I have a three-day live seminar. see it on a chart. I want to see their exit
We have a software program called strategy, at what point they will say the
Top Scalper. It is the coolest piece of trade is not going their way and they will
software I have ever seen for traders. It have to exit. I also want to know at what
is like a video game for traders where point they say they are at breakeven and
you build your skill level. We build all have to exit their trade. It’s very common
of our trade setups into Top Scalper. to hear traders say, “Once you go green
They have two days in which they can don’t let it go red again.” Well, one tick
either trade the live edge of the market can make a green and that is not giving For more information circle No. 8
or play Top Scalper. During this two-day it enough room. I want those traders to
process, they sit down one-on-one with put a definitive number there that does so I can still make money and not blow
me and we design the beginnings of a not let them wiggle at all. Typically, we out my account?” So I created an Excel
trading plan. It takes more than a day to use eight ticks. spreadsheet and calculated my risk, the
do a trading plan. We start the process. money management, which was 2% of
Then they send me their revisions and we From your website home page it looks my account, and figured out how many
continue to work on their trading plans, like there is a webinar almost every negative trades I would have to have in
because it is so critical to trading. day. Is that for members, or is that for a row to blow my account. Well, it was
anyone? 170 trades.
What are some components of a good That is for anyone. We run a free live
trading plan? trading room that anyone can come into. That would be a lot!
I like to call it their policies and We use one time frame. We have a very Even at the worst point in my career
procedures, which any business should specific entry mechanism. It is listed on I couldn’t do that. So it had potential.
have. First, I want them to outline exactly our website. It tells you exactly when Then I asked myself, “What is my win-
what it is they hope to accomplish with we will go in the market. It tells you ning percentage to at least make a profit,
trading, and what their winning percent- exactly where our stops are. It gives us using a 1:2 risk/reward ratio?” It was
age would be. You recently published caution signs. It also tells us where the actually 40%. That put it in perspective
an article in Stocks & Commodities exits are. for me, because 40% is achievable. To
about mathematical expectations. Well, I me that was very important because it
make them calculate that out. It is funny Is your Traders’ Help Desk strictly gave me hope. It gave me an outline to
because most of them come back on the for daytraders, or can it be applied to work with. I could determine what my
second day with their trading plan all longer-term trading as well? winning percentage would be at the end
laid out with their mathematical expecta- It works on longer-term trading as of the week or at the end of the month.
tion included in there. Just about every well. Silver has been beautiful. We were Then what I did was — and you have
seminar participant will put down that talking about it recently because Thd’s published a lot of the articles on this —
they want 70% as winners. And that is Rsi and Adx were hitting the extremes. take the daily ranges of all of the top
just starting out. This is pulling back to between 35 and futures symbols for the past year. That
40, and actually today, so far, it has been included the ES, the Dow Jones Industrial
That’s pretty optimistic! at 38.94. Average (Djia), the Russell index, all
I suggest they start with 50%. If you the currency futures, silver, gold, and
can get to 50%, then you can bump it Going back to your mathematical expec- crude.
up to 60%, and then bump it up to 70%, tation comment, I remember reading an
but you cannot have an expectation of article you wrote about mathematics for Why did you do that?
making 70% winners on day 1. This, in scalpers that discussed risk to reward. I looked at the volume and daily range
The reason I wrote that article, and this for the last 254 trading days and tried to
goes back to expectations when we come figure out what a new trader could expect
into trading, is that 50% is nonachievable. out of a daily range as a scalper. I decided
You have to go back to basics and say, I could take 10% of that range. That
“Okay, I am not going to be the world’s gave me my profit target. So any time I
greatest trader when I first start out, so went into the market, on any symbol, I
how can I make the numbers work for me knew what my profit target was. I just
July 2011 • Technical Analysis of Stocks & Commodities • 45
 Take Control of Your Financial Future! INTERVIEW
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For more information circle No. 9 quered this, I wanted to have a website sent me 200 screen shots to review. I
that was devoted to helping traders. I reviewed every one of them and walked
divided that by two and that gave me didn’t want to just give them clichés, him through every single trade. He is
my stop. Then, as a business owner, I because we hear so many in this industry. profitable today.
had to decide what my time was valued Like “the trend is your friend.” Define
at per hour. I decided on $150 per hour. that for me. What does that mean to me You said that when you did your original
So within this indicator, I decided that as a new trader? How do you implement analysis, at 40% you were okay. I am as-
every time I went into the market, per that? That is where Traders’ Help Desk suming that you are a lot better than that
contract, I wanted to make $150. With is different. We show you why the trend now. What kind of percentage of win-
this knowledge I know exactly what I is your friend, and why using a higher ning trades can an above-average trader
can trade on any given day. time frame is to your advantage. We show make when he/she gets rolling?
Ironically, in the last three years, traders how to use that knowledge. If they have control over the psycho-
there has only been one change in that logical aspect of their trading, they can
range, and that was the Swiss franc. It If I walked into your classroom and actually achieve 70% to 80% accuracy.
just popped up to the top. said, “I have been trading, but I am The accuracy rate of the guy I trained in
not that good at it. I would like to have September runs about 85% right now. A
Is this how you take the stress out of you set me on the right path,” how long lot of it has to do with whether you have
looking at all the markets that you trade, would it take to turn me into somebody conquered the psychological component.
since you do trade quite a few? who is making this 50% you have been Do you still get emotional in the market?
That is exactly how I do it. If anybody talking about? Are you talking yourself out of trades? Are
comes in the trading room and asks It depends on you as a trader. I have you moving your stop too soon? Are you
me what they can scalp on a particular had traders who made money in 30 days. following your rules? Those things have
market, we can put it up right into the They will have a really, really rough 30 to be conquered. If you conquer them and
screen and tell them exactly what their days, but when they come out of it they learn to read your indicators, you will have
stop and profit targets should be. are much better traders. I have others extremely high accuracy rates.
who take from three to six months. A
Though you follow so many different lot of it depends on the trader. Thank you for your time, Gail.
markets, is there any particular one There was one guy who was trading
that works best for you, like futures or the ES. All he needed was to change from Related reading
forex, as opposed to stocks? trading the ES to trading the euro. After Massel, Stephen [2011]. “What Can You
The euro tops every other market he changed to trading the euro, though, Expect, Mathematically?” Technical
besides crude, and it has done so for the he had a really bad month, but the month Analysis of Stocks & Commodities,
Volume 29: March.
Mercer, Gail [2010]. “Looking At Other
Markets,” Technical Analysis of
Stocks & Commodities, Volume
28: May.
_____ [2011]. “Empowering Traders
With The Russell 2000,” Technical
Analysis of Stocks & Commodities,
Volume 29: March.
_____ [2011]. “Empowering Traders
To Trade Commodities,” Technical
Analysis of Stocks & Commodities,
Volume 29: April.
“This display of irrational exuberance, Sims, could indicate animal spirits are back!” S&C

46 • July 2011 • Technical Analysis of Stocks & Commodities

 Explore Your Options

Got a question about options?

Tom Gentile is the chief options strategist at Optionetics (www.optionetics.com),
an education and publishing firm dedicated to teaching investors how to minimize
their risk while maximizing profits using options. To submit a question, post it to
our website at http://Message-Boards.Traders.com. Answers will be posted there,
and selected questions will appear in a future issue of S&C. Contributing analysis
is by senior Optionetics strategist Chris Tyler.

Tom Gentile of Optionetics

Taking Stock of a Broken Wing cline due to the broken wing’s vertical be out the width of that wider spread
If I’m bearish on a stock but wish to construction and much larger negative minus profits from the tighter bear verti‑
own shares at lower levels, would an vega versus a regular fly, which might cal and initial credit received.
out-of-the-money (Otm) long put bro- maintain long or short vega but smaller To illustrate a recent and slightly
ken butterfly through assignment be a levels of that risk. positive outcome, back on March 4
win-win spread to consider? I like the As for the risks, short vega in an un‑ with Goog shares near $600, the April
idea of participating in larger dollar- favorable higher-volatility environment 550/540/510 put butterfly with expira‑
priced stocks such as Google (Goog) can result in larger paper losses during tion the day after its earnings release
or Apple (A apl) for a credit with these the life of the position. At expiration a was priced for $1.15 credit. If shares
two linked but somewhat different trader ultimately maintains a spread, stayed above the 550 strike, the credit
objectives in mind. At the same time, I which has a maximum amount of limited would be kept. Below $510, the trader
am not completely sure of all the risks risk. But for whatever reason, if the trader would be out $30 from the 540/510 bull
involved. Any light you shed on this wishes to exit or close down the posi‑ put minus $10 profit from the 550/540
would be greatly appreciated. tion prematurely and not pursue buying bear put and $1.15 credit for a net loss
Designing an Otm broken butterfly stock, the cost to do so could be a much of ‑$18.85. The reality turned out to be
can serve both your stated objectives more expensive proposition than during somewhere in between.
of profiting on a bearish move in share flat to lower-volatility conditions. Following a disappointing reaction to
price and build a long stock position earnings on Thursday, April 14, shares
at lower prices. However, there are no closed the next day on April expiration at
guarantees that if the former condition
During the life of the po- $530.70. To close out the spread for fair
is met, the other condition of assignment sition, the broken wing value and removing slippage, the trader
will result in a profitable starting point is also able to realize would have realized a $1.85 profit. The
for accumulating shares. much quicker and larger gain is derived by adding the bear put
First, let’s start with the benefits of vertical’s profit worth $10 plus the initial
this position. Unlike the regular but‑
profits than a regular credit of $1.15 and subtracting a loss of
terfly, which uses equidistant bear and butterfly might manage ‑$9.30, which is the difference of the
bull put verticals in its construction, the to secure. current share price and 540, where the
broken wing put butterfly will purchase trader maintains an extra short put.
a closer to-the-money and tighter strike, By the same token, if the trader
bear put spread relative to a further Second, the nature of the broken decided to take hold of shares through
away-from-the money looser bull put wing’s design means that acquiring assignment and didn’t close the broken
vertical. This design can allow for a shares via assignment could start off on wing butterfly, he or she would be tak‑
credit in entering the position, and the wrong foot with the cost basis much ing ownership of 100 shares from 540
quite often does. That amount can be higher than where shares are trading in but factoring in a profit of $10 for the
kept in full if at expiration the stock is the open market. Remember, the broken 550/540 bear put, plus the credit of
above the upper wing of the butterfly. wing’s tighter relative profits from the $1.15 to reduce the cost basis of the
The trader can then look to repeat the embedded bear put spread begin to get stock to $528.85. That’s an advantage
process for the next option cycle if his chipped away, point for point, below the of $1.85 over the open market price of
or her outlook remains intact. shorted strike as shares enter the area Goog shares at $530.70. However, that
During the life of the position, the of the risk graph dominated by a much ownership is now an unprotected long
broken wing is also able to realize much larger bull put spread. stock position, which could always prove
quicker and larger profits than a regular Unlike with the regular fly’s identical taxing if further action weren’t taken on
butterfly might manage to secure. Profits maximum loss below or above the wings April 15. Yes, that was deliberate.
can begin to accrue if shares stabilize (long strikes) at expiration if shares are
and/or stock and implied volatility de‑ below the bull put vertical, a trader will S&C
July 2011 • Technical Analysis of Stocks & Commodities • 47
 Food and Drug Administration
(Fda) approval. All investors won-
der: Is biotech investing a hopeless
gamble? Without knowing what the
Fda will decide beforehand, is there
a way to trade biotech stocks with a
high probability of success?

Buy the rumor

It may come as a surprise, but there
are ways to make low-risk trades in
the biotech sector. In this article, I
will explore a trading method built
around a predictable anomaly of
stock performance that is unique
to the biotech sector.
The anomaly is the application of
the “buy the rumor, sell the stock”
mentality to Fda decisions. Here
is the secret: Shares of biotech-
nology stocks tend to rise in the
weeks and months prior to major
Fda decisions. Let’s call it a “bio
runup.” This runup allows a trader
to profit from the increase in shares
of companies well before any major
Fda decision date, simply due to the
speculative rally in the stock prior
to the decision. A bio runup trader
tags along for this rally prior to the
announcement, but selling before
the Fda makes an announcement.
This is the “buy the rumor” concept
in its purest form.
It’s simple and theoretically
sound, sure, but does the behavior
of public markets actually support
this strategy? I will examine all Fda
decision date runups from last year
and see if there might have been a
way to build wealth using the bio
runup method.
KIM ROSEN

Analysis

Profiting In Biotech
In 2010, there was a total of 59
runups that included either a Fda
panel or Pdufa decision date (two
of the major Fda decision dates).
Is biotech the way to go? I analyzed all 59, primarily focus-
ing on those companies worth less
by Mark Messier and Jeff Dos Santos than $1 billion. Because adding
data for companies worth more
biotech investing the same as investing in slots? Is there any way to consistently than $1 billion tipped the odds in

Is
build wealth in this sector? Many investors avoid biotechnology altogether, ap- my favor (including risk/reward
palled at the prospect of stocks that can nosedive over 60% within minutes, while ratios), I excluded them to err on
others are attracted to the extraordinary gains possible for companies that receive the side of caution.
48 • July 2011 • Technical Analysis of Stocks & Commodities
 Raw Except 5 Days Raw Except 5 Days
Ticker Raw Position 6 Weeks Prior 4 Weeks Prior Ticker Raw Position 6 Weeks Prior 4 Weeks Prior
Prior Prior
Return Risk Return Risk Return Risk Return Risk Return Risk Return Risk Return Risk Return Risk
ARNA -4.59% 0.95% 89.54% 12.51% 17.19% 3.29% 1.23% 0.83% ACOR 18.90% 0.60% 9.73% 1.21% 7.32% 0.11% 7.45% 1.14%

ITMN 71.20% 10.48% 13.01% 0.25% 6.95% 1.51% -6.79% 0.88% ACUR 21.40% 0.22% 22.63% 0.86% 12.67% 1.04% 9.76% 1.63%

MNKD -20.18% 3.29% -31.47% 6.87% -14.38% 2.21% -6.86% 0.90% ALXA -47.73% 10.64% 13.26% 0.64% 3.10% 0.63% -0.99% 0.66%
APPA 53.73% 4.65% 26.87% 1.54% 26.87% 3.51% -12.37% 3.09%
MNKD
-58.17% 9.02% 0.57% 1.74% 1.01% 0.47% 6.20% 1.89%
2nd date ARNA -76.03% 14.91% -75.00% 14.78% -76.42% 14.47% -14.57% 3.56%
OREX -18.91% 3.10% -11.58% 3.68% -16.16% 2.51% 0.19% 0.61% ARUXF.
15.00% 1.19% 15.00% 0.36% 0.00% 1.17% -1.43% 0.76%
PK
QCOR 40.92% 5.92% 35.38% 3.84% 22.05% 4.14% 6.93% 2.04%
AVNR -16.55% 5.94% -0.69% 2.88% 7.87% 0.20% -10.56% 2.70%
TH.TO -44.12% 6.91% -14.26% 4.11% -12.92% 1.95% -9.37% 1.43%
BIOD -1.09% 3.61% 1.63% 2.50% -18.74% 4.43% -30.02% 6.85%
TH.TO
66.55% 9.78% 69.66% 9.33% 4.46% 1.07% -2.57% 0.02% CADX -1.36% 3.65% 10.11% 1.15% 8.51% 0.31% 6.95% 1.03%
2nd date
THTCF -5.79% 1.13% -13.13% 3.93% -8.91% 1.25% -5.26% 0.56% CRTX 16.33% 0.99% 15.05% 0.36% -1.26% 1.39% -2.18% 0.92%

VVUS -1.38% 0.46% -4.80% 2.60% -1.93% 0.04% -1.93% 0.15% CTIC 18.56% 0.65% 22.68% 0.87% 9.17% 0.43% -3.25% 1.15%
CTIC
40.57% 9.56% -50.00% 10.77% -23.19% 5.20% -32.91% 7.47%
2nd date
Average 2.55% 13.29% -0.26% -1.82%
CXSPY.
Risk Av- (best -25.00% 7.22% -35.71% 8.48% -35.39% 7.33% -33.09% 7.51%
5.10% 4.89% 1.84% 0.93% PK
erage method)
DDSS 12.29% 1.59% 17.88% 0.10% 3.94% 0.48% -9.83% 2.55%
Figure 1: Results Of Study Of Bio runups Prior To FDA Panel Decisions. IGXT -4.84% 4.18% -1.61% 3.02% 8.93% 0.39% 1.67% 0.10%
The “raw except five days prior” method (being long stock from two months to five days
ISTA 33.33% 1.58% 24.40% 1.14% 37.50% 5.36% 33.12% 6.61%
before the company’s FDA panel date) produced the best results. On average, those
ITMN 190.37% 25.25% 210.11% 30.88% 17.10% 1.81% -2.18% 0.92%
using this style generated a return of 13.29%, with almost the best risk management
of all methods (just 4.89% average risk). JAZZ 11.22% 1.76% 11.22% 0.97% 28.48% 3.79% 8.24% 1.30%
MNKD 54.95% 4.84% 24.46% 1.15% 9.54% 0.49% 4.82% 0.58%
MNKD
23.99% 0.17% 28.95% 1.87% 42.64% 6.25% 35.89% 7.20%
2nd date
I gathered two months’ worth of data (44 trading days, to PGNX -9.66% 4.90% -9.84% 4.34% -13.40% 3.50% -25.00% 5.78%
exclude holiday interference) for each runup. For example, PLX 28.80% 0.89% 27.87% 1.70% 12.69% 1.04% 14.29% 2.59%
MannKind’s (Mnkd) drug Afrezza had an Fda panel decision POZN 76.71% 8.12% 77.04% 9.57% 55.95% 8.57% 17.39% 3.25%
date on December 29, 2010, so I collected prices starting on PRX 13.89% 1.35% 3.32% 2.23% 1.39% 0.93% -0.20% 0.49%
October 27, 2010. I then evaluated a variety of holding dura- QCOR 17.53% 0.80% 15.57% 0.27% 17.74% 1.92% 9.39% 1.55%
tions: RHHBY.
13.01% 1.49% 9.82% 1.19% 5.51% 0.21% 6.95% 1.03%
PK
n Raw positions (buying two months prior to the Fda SOMX 472.92% 67.85% 173.61% 25.03% 52.71% 8.01% 42.24% 8.55%
panel date and selling after the panel decision) SPPI -5.78% 4.32% 3.00% 2.29% 2.56% 0.72% 5.48% 0.72%
THTCF 17.09% 0.87% 9.01% 1.32% -0.21% 1.20% 3.74% 0.34%
n Raw except five days prior (selling a raw position VVUS 9.27% 2.05% 5.88% 1.82% -6.46% 2.29% -14.41% 3.52%
five trading days prior to the panel decision) WCRX 17.17% 0.86% 26.92% 1.54% 11.35% 0.81% 6.76% 0.99%

n Six weeks prior (buying six weeks prior and selling XNPT 16.79% 0.92% 23.40% 0.98% 11.55% 0.84% 2.30% 0.04%

five trading days prior to the panel decision) ZLCS 27.59% 0.71% 47.13% 4.78% 31.96% 4.40% 36.17% 7.26%

n Four weeks prior (buying four weeks prior and sell- Average 28.86% 6.01% 21.32% 4.32% 7.64% 2.83% 1.81% 2.84%
ing five trading days prior to the panel decision). w/o
14.98% 4.08% (best method)
Somx
Each trading method was analyzed according to two Figure 2: Results Of Study Of Bio runups Prior To PDUFA Dates. The
metrics: “raw except five days prior” method performed the best of all methods. Based on the
results from this phase, investors benefitted most from a two-month position with
n Return% (percentage gain or loss on the trade) an exit five days before the PDUFA date. This method yielded an average return of
21.32% with a very low average risk of 4.32%.
n Risk average (square root of the spread between
the return and the mean for the appropriate return
average squared divided by the appropriate number days before the company’s Fda decision date.
of holding) I continued this analysis by simply substituting Fda panel
decision dates with Pdufa dates, which are the other major
The results of the study of bio runups prior to Fda panel decision date for the Fda. Using the same holding criteria and
decisions can be seen in Figure 1. risk/return definitions produced the results you see in Figure 2.
The second trading method produced the best results: “Raw Somaxon Pharmaceuticals (Somx) was a significantly
except five days prior,” or being long stock from two months favorable outlier for the bio runup method in terms of both
to five days before the company’s Fda panel date. On average, high return/low risk. Therefore, to err on the side of caution, I
investors using this style generated a return of 13.29%, with excluded Somx from the analysis. Even so, the average return
almost the best risk management of all methods (just 4.89% of raw positions was 14.98%, much higher than the average
average risk). So if you wanted to trade bio runups prior to risk of 4.08%. Moreover, all trading methods showed favor-
Fda panels, the best option would be for you to buy shares
two months prior to the decision date and sell five trading Continued on page 55

July 2011 • Technical Analysis of Stocks & Commodities • 49

 product review

Professional Flux Tool Set

BacktotheFutureTrading.com And unlike optimization or curve-fit- it did this. If today is Tuesday, will it
2906 Denton Road ting, the Flux algorithms compare minute match the same fingerprint?” According
Thomasville, NC 27360 by minute and day after day of historical to observations made by BacktotheFu-
Phone: 336 703-7667 data to display only those patterns that tureTrading.com information manager
Skype: Integra-Michael repeat with enough frequency to show Michael Lydick and trainer Ron Gard-
Internet: www. up clearly on a computer screen. ner, the Flux tools tend to match those
BacktotheFutureTrading.com What that means for the general retail reversal points at least 60% of the time.
Product: Predictive time-based intraday trader like you and me is the potential They offer some evidence of this in the
price turning points for futures, stocks, to know what days would be the best performance section of the website.
forex, and commodities. for trading and when during the day
Requirements: NinjaTrader 6.5 or 7, are the best times to be in or out of the The Flux tools
TradeStation, or MetaTrader 4 chart- markets. The PowerZone is the trend-identifying
ing platform with real-time datafeed. A This review uses the Ninja Trader7 component of the tools. It is displayed as a
minimum of 2.0 gigabytes of Ram. charting platform with Kinetick real-time histogram above and below a center line,
Price: Basic Flux Tool Set: $1,995 in- data to focus on the Professional Flux which displays price movement swings as
cludes a lifetime license and upgrades. Tool Set, which contains all the predictive they occur during the day. The higher the
Professional Flux Tool Set: $2,495 trend, momentum, and volume indicators histogram bars above the line or the lower
one-time fee includes a lifetime license currently being offered. See sidebar on the bars below the center line, the more
and upgrades. page 53, “Professional Flux Tool Set,” significant it is. The program automati-
for a list of the tools. cally places a time stamp on the histogram
by Barbara Star, PhD at those high and low points.
The Flux tool set Based on the well-known momentum

B
en Letto, the computer program- As a spot currencies analyst, Letto indicators, the Amacd, Acci, AStoch,
mer and creator of the Flux tools, noticed there were frequent times dur- and the ADoubleStoch each identify
has discovered a way for traders ing the day when reversals occurred. the smaller moves that occur during the
to view potential intraday price turning He developed a tool that looked for day. The standard parameter names are
points that occur in the future. He has the high-frequency turning times in a present, with the output presented as a
produced indicators based on predictive market. That tool became the engine for histogram, and the peaks and valleys of
algorithms that harness the buying and determining the predictions made by the that histogram being time-stamped with
selling behavior of institutional traders, Flux indicators. their time of day for ease of reference.
revealing high-probability reversal times The Flux tool set refers to six indica- The time of day for each of these histori-
up to seven days in advance. In essence, tors: the PowerZone, the advanced Macd cal momentum turning points becomes
he discovered a way to level the trading (Amacd), the advanced commodity the predicted time of future momentum
field by allowing the individual trader to channel index (Acci), the advanced changes. The Avol algorithm detects
peer through the tunnel of time and view stochastic (Astoch), the advanced significant volume patterns based on
potential price turning points that occur double stochastic (Adoublestoch), and historical data that is then projected into
in the future. advanced volume (Avol). The indicators the future to predict potential volume
The algorithms do this by looking can be used with bar charts, candlestick shifts.
back at thousands of bars of intraday charts, range charts, and tick bars.
data to find exact points in time when In contrast with most trading indica- The Flux setup
buying and selling patterns occurred on a tors, the Flux tools look at time, not price Installation is a breeze because it is done
regular basis. They identify the direction levels. They are concerned with “when” for every new purchaser by a company
and magnitude of those patterns and use rather than “how much.” The statistical representative who also explains the
that information to predict future intraday analytic measures that are used look back function and parameters of each indi-
market turns. Unlike fixed cycles that a minimum of two weeks to identify the cator as it is installed. However, do-it-
use measurements based on a specific time of day when prices have tended to yourselfers can use the installation video
number of days or data bars, the Flux reverse. They then project those findings link that is also provided. Installation
indicator set detects repetitive patterns a week into the future. “Our algorithm,” includes several templates that provide
of institutional and large-scale trading said Letto, “yields a minute-by-minute the basis for useful indicator and trading
behavior that tend to move the markets momentum fingerprint of the market, and strategy setups.
throughout the day. it was finalized a week ago. Last Tuesday, To start to gain an understanding of
50 • July 2011 • Technical Analysis of Stocks & Commodities
the Flux algorithm, it is helpful to view
the seven-day-old predictive histogram
along with a current time price chart, and
this can lead to a complex chart setup.
Unfortunately, none of the charting
platforms permit one chart containing
both the current price and a seven-day-
old histogram. Thus, the basic template
contains two charts on the same monitor
screen or within the same workspace. The
top chart displays price data and the bot-
tom chart displays the Flux histograms
of the PowerZone and the Amacd (see
Figure 1).
Because it is necessary for the software
to look back in order to project future
changes, users need to scroll back one
week on the Flux chart to view the day
of the forecasted time reversals for the
current trading day and to line up the
historical time of day with the current
time of day. Sound confusing? It can be
at first, but the program helps locate the
right date and time.
The computer prints the date on the his-
togram chart that needs to be referenced
and, in NinjaTrader and MetaTrader,
colors the Flux histogram bars only on
both the current day and the date seven
calendar days ago that it is referencing.
On the days not being referenced, the Flux
histogram bars are gray. In TradeStation,
all histogram bars remain colored; it is Figure 1: The basic screen setup. The upper chart contains both the current price information and the time
not possible to gray the histogram bars reversal markers. The lower chart contains the AMACD histogram in the top panel and the PowerZone histogram
in the bottom panel. The price markers were based on the PowerZone and AMACD time reversal histograms that
on nonreferenced days. However, all the were predicted a week earlier.
charting platforms generate a dashed
vertical line on the Flux chart to identify plies a circular marker above or below parameters for the indicators are made
the current time. Everything to the right of the price bar where it occurs and, if ac- known to purchasers of the product
the vertical line is the future projection. tivated, sounds an alert. Very impressive and may be changed to better suit their
Fortunately, the program will trans- technology when you realize that what trading needs.
pose the information from the Flux chart is being seen on the current price chart
to the current price chart. It does so by was based on analysis of information Filter and time setups
placing directional markers in the form gathered two weeks earlier (seen in the Stocks, commodities, indexes, and
of dots on the price bars at all the points Flux chart below price), finalized at the forex markets are measured in different
in time identified by the high and low end of that time, and available for view- pricing units such as tenths, quarters,
bars on the histograms made the week ing a week in advance before the current or hundredths of a point. The program
before. As seen in Figure 1, the larger trading day even existed. automatically plots the proper scaling for
circles are those related to the Power- All of the other indicators in the Flux each indicator and type of market. Each
Zone times and the smaller dots are the tool set may be displayed in the same way indicator also has a filter above and below
momentum turns that occurred on the — as histograms on the lower chart and the center line, which allows the user to
Amacd. In addition, on the right and as markers plus projected turning points filter out small or choppy reversals and
left sides of the price chart, the program on the price chart. When their turning to determine the number and size of the
prints out the actual number of minutes times occur either at, or near, those of reversals to watch. The location of the
until the next reversal is due as well as the PowerZone reversal times, they as- upper and lower filter levels need to be
the projected direction of that reversal. sume more significance. Although the set by the trader. One filter level may
When that time arrives, the program ap- actual algorithms are proprietary, the work fine on several charts, or the filter
July 2011 • Technical Analysis of Stocks & Commodities • 51
 product review

may need to be changed manually from

chart to chart. For those who trade a few
markets or the same markets each day,
that is not a problem. But it could slow
down those traders who typically like
to flip through a different list of several
charts each day.
Because of the nature of the algo-
rithm used, these tools support intraday
analysis only. And the tools leave blank
spaces on a chart during periods when no
intraday data is available. The base setup
uses a default of one-minute data for the
Flux tools and the price charts. However,
that time frame may be changed, and it
has been successfully used up to a setting
of 240 minutes (four hours). Depending
on the charting platform, the calculations
may also be set and displayed as tick or
range bars.

Special time
and market features
In TradeStation and NinjaTrader7, the
Flux tools offer two features not often
found in software programs. One is the
ability to cross-reference time frames.
For example, it is possible to plot five-
minute markers on a 20-or 30-minute
price chart and to see the circular markers
for both time frames. This can be done us-
Figure 2: The High-Probability Entry (HPE) Tool. The colored lines on the HPE chart represent a ing any combination of time periods.
series of past PowerZones that range from one to eight weeks. When all the lines are moving in the same direc- The second unique feature is the abil-
tion, there is a high probability that price will reverse and move in that direction. I drew arrows on the price chart ity to identify intermarket relationships.
when the HPE lines were confluent to the upside from 9:21 to 9:39 am and to the downside from 12:23 to 12:33 An example might be to display a price
pm Pacific time.
chart of a stock but apply the markers
from the emini S&P to the same chart.
That allows the trader to see how well
the stock reversals compare to the turns
in the broader market. The same could
be achieved comparing two indexes or
a stock and a sector.

Other flux tools

High-probability entry (Hpe): This tool
is especially useful for traders who are
unable or might not wish to watch the
market throughout the trading day. The
Hpe overlays multiple PowerZone indi-
cators of different lookback intervals to
help find specific times over the course
of several weeks or even months when
price always moves in the same direction
during a trading session. The program can
combine and average up to 10 weeks of
“Take us to your leader. We want to discuss outsourcing possibilities.” historical PowerZone data. For example,
52 • July 2011 • Technical Analysis of Stocks & Commodities
 The Professional Flux
Tool Set contains
predictive indicators
that work with intraday
data to add the
dimension of time.

an Hpe line of six combines and averages

all the PowerZones of the past six weeks.
It is the most memory-intensive of all the
Flux indicators and requires up to 60 to
70 days of historical intraday price data
to fully implement.
The bottom chart of Figure 2 shows
the Hpe in its default configuration of Figure 3: Fractal Pivot Confluence (FPC). The FPC produced the red intraday support and resistance
one-, two-, four-, six-, and eight-week lines based on market structure pivots. The blue dots are an example of neutral nondirectional PowerZone reversal
lookback periods. Each colored line markers. The red and green dots are AMACD directional markers. A regular 14-period stochastic indicator was
represents a different interval. The added to illustrate how the time-based Flux tools can assist in the identification of price reversals.
trader looks for an extreme high or low
on the lines, which are then followed Fractal pivot confluence indicator calculate the relevant pivots, and project
by directional agreement among all the (Fpc): As its name indicates, this tool the lines of the top 20% forward in time
lines. For trading purposes, all the lines provides price pivot levels. But these to identify support and resistance. The
should point in the same direction for at pivots are not the same as the well- thicker the line, the more often price has
least 10 minutes. On this chart, an easily known floor traders pivots based on a bounced off that level and is considered
recognizable area of confluence occurred mathematical formula. The Fpc pivots a more significant level of support or
at 9:21 am Pacific time and remained in are based on price structure — that is, resistance than the thinner lines. With
effect for almost 20 minutes. actual price levels where prices histori- enough intraday historical data plotted
Historically, when all the lines are in cally stopped and changed direction (see on the chart, it is also possible to plot
agreement, there is a high probability Figure 3). the relevant daily or weekly pivots.
that the market will move in the antici- Select a time of day at which to start Users may increase or reduce the
pated direction. Price action and other for the Fpc and every trading day it will number of pivot lines on a chart. They
technical indicators need to confirm the automatically look back over the last also may decide whether to base the
expected reversal. 5,000 price bars prior to the start time, pivot areas on the open, the close, or use
the default, which is a median between
the highs and lows. And depending on
Professional Flux Tool Set
the charting platform, these lines can be
n PowerZone Advanced Trend Indicator placed on tick, volume, or range bars in
n Advanced Stochastic/Macd/Cci/Double Stoch Indicator addition to time-based intraday charts.
n Advanced Volume Indicator It is even possible to plot the Fpc on
n Flux PowerZone and Advanced Momentum Markers minute-based time frames while viewing
n High-Probability Entry Time Indicator Template a tick chart.
n Flux Multichart/Instrument Markers (tick/volume/range/cross instrument)*
Reverse radar: Currently, this is the new-
n Fractal Pivot Confluence Indicator*
est tool in the Professional Flux Tool Set,
n Reverse Radar**
but it is only available on NinjaTrader.
n 30 Days’ Access Resource Center with archived training videos As each new price bar is displayed, the
n 30 Days’ Access Live Training Room (8 am–12 noon ET, Monday–Thursday) indicator takes a snapshot of the actual
n 30 Days’ Access Advanced Training Room (1 pm–2 pm ET, once a week) candles or price bars over as many as the
n Access to members chatroom past nine weeks and calculates the average
price movement for a user-defined period
* Available on TradeStation and NinjaTrader platforms of time. The tool identifies the future di-
** Available on NinjaTrader platform
rectional probability and number of ticks
or points that price might move during that
July 2011 • Technical Analysis of Stocks & Commodities • 53
 product review

and trading strategies, some also focus

on important issues within the broader
context of trading, such as developing a
trading plan, position sizing, and money
management. The afternoon sessions are
recorded and archived.
Inversions may be one of the most
important concepts related to the Flux
tools discussed during both the live trad-
ing sessions and the advanced training
sessions. Live markets will misbehave
and disregard their historical patterns.
Figure 4: Reverse Radar with April Gold. The colored bars on the right side identify the price direction
for each week and the numbers in the up and down columns next to the green radar image represent the amount
An inversion occurs when price moves
that price had moved during each of those weeks. The trader can decide whether the expected move is worth opposite to the anticipated direction. The
the historical risk. software places a colored marker (usually
red or green) above or below the price
time period. With this tool, traders have up. Further, a PowerZone marker also bars to identify the expected direction
the ability to decide whether the expected appeared on the price chart two minutes of the reversal, which might influence
move is worth the historical risk. earlier, which suggested a down move the traders’ mindset about whether to
As seen in Figure 4, the chart of April was probable. That increased the like- go long or short.
2011 gold contains the reverse radar that lihood that a short position might be Because intraday inversions can occur,
has been set to look back over the prior profitable, which turned out to be the learning to wait for reversal confirmation
four weeks with a 10-minute intraday case, as price declined two points over is essential to trading successfully with
projection for potential price movement the next 10 minutes. the Flux. The software also offers traders
and direction. The colored bars on the the alternative of using neutral-colored
right side identify the price direction for Trading and training markers that appear both above and
each of those weeks and the numbers in Four mornings a week, Back to the Future below the potential reversal bar (seen in
the up and down columns next to the green Trading provides an online educational Figure 3 as blue dots), enabling the trader
radar image represent the amount that price training/trading room from 8:00 am until to plan for a move in either direction.
moved during each of those weeks. noon Eastern time. An additional hour in During the period in which this review
On this chart, according to the reverse the afternoon is provided once or twice a took place, members of the chat room
radar calculations, at that point in time, week for more advanced training. While typically analyzed four futures markets
price had in the past moved down more most of the afternoon sessions focus on prior to the opening bell: the emini S&P
than twice the amount that it had moved in-depth use of one of the Flux tools 500, the emini Russell, crude oil, and
the euro contracts. For each market they
looked for the reversal times predicted
that day by the Flux tools. The trainer
explained how to interpret the indicators,
answered questions about the various
charting platforms, provided guidance
about ways the tools can be integrated
into the users existing trading system,
and encouraged experimentation and
sharing of techniques for using the indi-
cators among the attendees. The relaxed
atmosphere is conducive to learning and
mutual assistance, which often carries
over into the member chat room.
Most traders use the Flux tools as an
adjunct to their primary trading methods.
They seek to find places when time and
price align with their other indicators or
trading signals. For those who do not
have a preferred trading method already
“We all jaywalk, get parking tickets, and do 60 in a 50-Mph zone. My client, like- in place, the trainer offers four or five
wise, did not pay attention to details regarding the filing of business taxes.” different trading indicators and strate-
54 • July 2011 • Technical Analysis of Stocks & Commodities
 are looking to gain an edge by
incorporating the time dimen-
sion into their trading may wish
to sign up for the free 90-minute
webinar offered every week by
the BacktotheFutureTrading.
com company.

Barbara Star, PhD, recently

retired from the University of
Southern California, where she
taught for more than 20 years.
She is a past vice president of
Figure 5: 15-Minute Forex EUR/USD with SuperTrend. The use of a super trend indicator is one of several trading the Market Analysts of Southern
strategies taught in the training room. California and led a MetaStock
users group for many years.
Her articles and software re-
gies to use with the various Flux tools. Summary views have been published in Technical
These range from scalping techniques to The Professional Flux Tool Set contains Analysis of Stocks & Commodities
more trend trading possibilities. Figure unique predictive indicators that work since 1991. Currently, she trades part-
5 illustrates one of those methods with with intraday data to add the often- time and provides individual instruction
a 15-minute forex chart. missing dimension of time. The tools and consultation to those interested in
The trainer often takes trades directly identify in advance the potential buying the technical analysis of the financial
from the charts based on the timing and selling reversal times of day for the markets. She lives in Woodland Hills, CA,
markers and some of the trading strate- coming week. They do not, however, and can be reached at 818 224-4070 or
gies, which the members in the trading predict the number of ticks or amount of by email at [email protected].
room are also free to take. Because price movement that will occur.
the software calculates the number of The use of the Flux tools requires ‡NinjaTrader7 ‡Kinetick
minutes until the next projected signal, some basic knowledge of technical
there is ample time to prepare for an analysis and is better suited for traders
upcoming trade. with some trading experience. Those who S&C

Trader’s notebooK
PROFITING IN BIOTECH
Continued from page 49

able results except the “four weeks prior” method. legitimate trading opportunity with more than a 1:3 risk/reward
The “raw except five days prior” method performed the best ratio. A persistent anomaly exists in biotech stocks in the two
of all methods. Based on the results from this phase, investors months prior to major Fda decisions. Simply stated, biotech
benefited most from a two-month position with an exit five stocks tend to rally prior to Fda panel and Fda Pdufa dates.
days before the Pdufa date. This method yielded an average In a real-world application, it seems as though the most profit-
return of 21.32% with a very low average risk of 4.32%. able method for trading this anomaly is to take long positions
From the results, we can see that the four weeks prior method in biotech stocks starting at two months prior to the company’s
has been the least profit-maximizing method. Second, and major Fda decision date (either panel or Pdufa) and selling
just for fun, I decided to perform a linear regression analysis those shares five trading days prior to the decision date.
of seasonality on the bio runup trading method. Leaving the
complicated mathematics aside — they are available on the Mark Messier is the co-owner of biorunup.com. Consult a cer-
biorunup.com website for you diehard statisticians — I dis- tified professional for advice about whether biotech investing
covered that, for whatever reason, winter provides a seasonal would be appropriate for your personal financial situation.
boost to the bio runup method of 6.78%, spring boosts by
5.72%, summer boosts by 7.15%, but autumn detracts from Current and past articles from Working Money, The Investors’ Maga-
the method by 18.17%. zine, can be found at Working-Money.com.

Conclusion
From the analysis described here, we know that a consistent
anomaly exists in biotech stock market that has provided a S&C

July 2011 • Technical Analysis of Stocks & Commodities • 55

 product review

VisualTrader 8
Nirvana Systems of the first things I noticed with this
7000 N Mopac, Ste 425 newer version was that the processing
Austin, TX 78731 was quicker; the more powerful your
Phone: 800 880-0338, or computer, the better. I tested the software
512 345-2566 on a computer that is a couple years old,
Fax: 512 345-4225 with a 2.33 GHz processor, 2.00 GB of
Email: [email protected] Ram, and Windows XP, and it handled
Internet: www.VisualTrader.com the program well. There was a bit of
Product: Trading software a wait to load large groups of stocks
Requirements: Windows XP/Vista/7, (>500), but it was manageable.
1.6 GHz or higher, 1 GB Ram, Direct For the purpose of this review, I’ll
X 9.0c (included); graphics card with focus on VisualTrader’s approach to
minimum 32 MB Ram and Direct X three steps common to technical trading:
driver support; broadband connection scanning, analyzing, and execution.
(cable, Dsl, T1). Datafeed necessary: more customizing options. Earlier this
OmniData, eSignal, IQFeed, QCharts, year, Nirvana Systems partnered with Scanning
TC2000 (Eod only), and MetaStock another Austin-based company, Tran- VisualTrader’s visual cues are helpful
formatted data (Eod only) are all sup- scend Capital, to create a new retail when scanning for trade candidates
ported by VisualTrader. brokerage, gxtrader. gxtrader features within a defined trading universe. The
Price: As standalone software: $1,495 VisualTrader as the primary platform first step when using VisualTrader is to
professional, $995 real-time, $295 end of offered to clients who establish accounts load the group of stocks or contracts
day. As platform with gxtrader brokerage at www.gxtrader.com. that you are interested in trading. You
account: $99/month; free if you trade 10,000 Overall, VisualTrader is a fairly com- can build your own portfolio or use a
shares/month or 100 option contracts/ plex package. It can be overwhelming predetermined grouping — Standard
month. Commission $0.005 per share. at first, but it doesn’t take long to get & Poor’s 500 stocks, for example. One
accustomed to the interface and start advantage of using the OmniData feed
by Sean M. Moore realizing the potential of the software. is you can add the OmniScan service
The software has a ton of customizable ($10 a month) to your plan. Being able

I
last reviewed VisualTrader in options, but Nirvana has put work into to use OmniScan with VisualTrader is
2008. The latest version, Visual- the default settings, so you have a lot a new feature in VisualTrader 8.0 that I
Trader 8.0, remains unique in its to work with right from the start. One found quite helpful. With the OmniScan
ability to display technical information
and market movement. Nirvana Systems
has continued to add new features and
make improvements to the software.
With VisualTrader and just a few clicks
of the mouse, you can determine which
way the market is moving, find strong
trade candidates, and execute trades.
VisualTrader is available as standalone
software in three different versions: end-
of-day, real-time, and professional. You
will need access to a datafeed to pair
with VisualTrader. There are several
compatible options for both real-time
and end-of-day. For this review, I used
Nirvana’s OmniData feed and it worked
seamlessly. With the professional version
you have access to the OmniLanguage
system, so you can build your own in- Figure 1: OmniScan Window. With OmniScan, you can custom-tailor the stocks in your VisualTrader
dicators and strategies, giving you even universe.

56 • July 2011 • Technical Analysis of Stocks & Commodities

window (Figure 1), you can select one of
the default scans (52-week highs/lows,
volume rising/declining, big bulls/bears,
gaps up/down, and so on) or customize
your own scan using technicals and/or
fundamentals. In a matter of seconds, all
of the matches for your scan are loaded
into the program.
All of the matching symbols will ap-
pear in the list window on the left-hand
side of the screen as well as on the Visu-
alTrader map. Figure 2 shows the list and
map of the Standard & Poor’s 500. The
map is a unique feature of VisualTrader.
Each stock or contract is represented on
the map by a three-dimensional cylinder,
called transforms, since you are trans-
forming indicator information into shape
Figure 2: VisualTrader Map of the S&P 500 Daily. The map shows a fairly mixed day. The leading
and color. indicator in the upper right-hand corner shows the overall market trend is down.
The transforms are grouped onto plates
representing the various industry groups
or sectors by default. You can assign the
various attributes (height, radius, color, As the market changes, VisualTrader
and roof color) of the transform to dif- dynamically changes, so little time is
ferent market measurements designed to wasted.
help you identify trend, reversals, and
breakouts. The default transform settings
built into VisualTrader are acceleration, has an alarm feature that will alert you color and height above or below the map
net percent, and net percentage change, when the market is reversing direction. floor, strategy, and chart pattern signals,
trend, change in trend, reversals in trend, The list window is also helpful for bid/ask data, open/high/low/close data,
velocity, volatility breakouts, and change scanning and sorting. All symbols on the indicator setups, the leading indicator,
in volume. map are also displayed in the list window. and more. Some of these will be covered
Several transform strategies are loaded You can open two list windows, which in more depth in the following “Analyz-
into VisualTrader. For example, if you can be handy for sorting long prospects ing” section.
select the “Trend with Change in Trend” in one and short prospects in the other.
transform, the height of the cylinder The columns of the list can be configured Analyzing
represents trend and the color of the to sort on a number of different measur- The map and leading indicator give you a
cylinder represents change in trend. In able functions: Trend in different time good idea of the general market direction.
this scenario, a red cylinder above the frames, transform measurements like Potential trade candidates will appear
map denotes that the stock or contract is
trending upward, but the change in trend
is losing strength (red). The map gives
you a quick confirmation of what is hap-
pening in the market. It’s also great for
sector trading. You can spot the sectors
that are trending up or down as well as the
strong/weak stocks within each sector.
In the upper right-hand corner of the
VisualTrader screen is the leading indica-
tor. Like the map, the leading indicator
shows market movement by displaying
the rate of change of any measurement you
select, like volatility breakout or short-
term trend change. You can add multiple
leading indicators for different groups or “Every idea you’ve proposed has been successful, Roger. Unfortunately, you’re seen
time frames. The leading indicator also as a threat to senior management and we’re going to have to let you go.”
July 2011 • Technical Analysis of Stocks & Commodities • 57
 product review

VisualTrader also has a powerful chart

pattern recognition engine. The software
can automatically find and draw support
and resistance lines, trendline breaks,
Fibonacci retracements, candle patterns,
gaps, pivot points and more. The patterns
have a strength rating from 1 to 5, with 1
being the weakest. You can elect to only
show patterns that meet a certain rating.
With the patterns column in the list view,
you can see which stocks or contracts are
generating new patterns.

Execution
After scanning the map, organizing the
list, and analyzing the potential trade
candidates, the next step is to execute
some trades. VisualTrader has a paper
Figure 3: Chart Layout. In daily, five-minute, and 15-minute charts for the S&P 500, note how the trendline
drawn on the daily chart appears on the five- and 15-minute charts as well. brokerage and trading simulator for
practice as well as the ability to integrate
with a live brokerage account. Accounts
from a quick scan of the map and list can be added to the charts. There are with gxtrader, Interactive Brokers, and
window(s). VisualTrader is loaded with default chart templates and you can make MB Trading can be automatically linked
other tools to help you analyze the trade and save your own templates. You can to the VisualTrader platform.
candidates and find the ones that fit your tile multiple charts (say, all charts from Entering a trade is as easy as grabbing
trading style best — charts, strategies, a certain group) together on the screen. the yellow chevron on the right-side of
and chart patterns, to name a few. Figure 3 shows the charts for $Spx in a chart with the cursor and moving it to
The VisualTrader Charts will look three different time frames. Another the price that you would like to enter the
familiar to anyone who has used Nirvana new feature in VisualTrader 8.0 is that trade. This will prompt the trade plan
Systems’charting platform, OmniTrader. trendlines drawn in one time frame will window where you can specify the trade
Charts can be displayed by clicking on also appear on a different time frame. specifics — long or short, number of
the symbol name in the list window or The charts can also be displayed in their shares, limits and stops, and so on. When
click on the transform on the map. There own window. This is something useful your buy or sell price is reached, the trade
is a whole library of indicators, systems, when working in a multiple-monitor will be automatically executed.
measurements, and drawing tools that environment. You could have charts on VisualTrader also has a playback
one monitor and the list and map feature and trading simulator that is
on another. You can also separate very helpful when testing strategies or
the list and the map in separate just practicing. You can set up the paper
windows. brokerage to have the same account set-
Along with the charts, tings as your live brokerage, so combin-
VisualTrader includes trading ing this with the trading simulator can
strategies. There are several really mimic a live trading environment.
prebuilt strategies as shown in The toolbars for the playback feature
Figure 4. With the professional and simulator are located at the bottom
version you can also build your of VisualTrader screen.
own custom strategies using Move the slider bar of the playback
OmniLanguage. The strategy feature to go back in time to where you
signals can be displayed in the want to start the simulation. Start step-
list view, on the transforms (a ping through the data with the simula-
pyramid top on the roof of the tor and the map and list window will
cylinder), or on the chart. New in dynamically regenerate. As new trade
VisualTrader 8.0, the strategies candidates appear, you can start entering
are dynamically optimized trades. When the trade conditions are
and have dynamic time frame met, the trade will appear in the position
Figure 4: Strategies Window. Configure the strategies to optimization to help improve window. As you continue to simulate,
meet your trading style. signal accuracy. you can monitor how the trades are
58 • July 2011 • Technical Analysis of Stocks & Commodities
 At-the-Money (ATM) — An option whose the Chicago Board Options Exchange
VisualTrader is fairly strike price is nearest the current price (CBOE).
of the underlying deliverable. Fade — Selling a rising price or buy-
complex and can be Average Directional Movement Index ing a falling price. A trader fading
overwhelming at first, (ADX) — Indicator developed by an up opening would be short, for
but it doesn’t take long J. Welles Wilder to measure market example.
to get accustomed to trend intensity. Fibonacci Ratio — The ratio between
Average True Range — A moving aver- any two successive numbers in the Fi-
the interface. age of the true range. bonacci sequence, known as phi (f).
Backtesting — A strategy is tested or Gap — A day in which the daily range
optimized on historical data and then is completely above or below the
performing. With the trading simulator the strategy is applied to new data to previous day’s daily range.
and brokerage integration, VisualTrader see if the results are consistent. In-the-Money (ITM) — A call option
really does simplify trade execution. Bid and Ask — Highest price and lowest whose strike price is lower than the
price that an investor will pay for a stock or future’s price, or a put option
Putting it all together tradable. whose strike price is higher than the
Nirvana Systems has developed a good Bollinger Bands — Developed by John underlying stock or future’s price.
support system for VisualTrader. In Bollinger. Bollinger Bands widen dur- Long — Establishing ownership of the
addition to the help file, they offer free ing increased volatility and contract responsibilities of a buyer of a trad-
technical support via phone or email. in decreased volatility, and when able; holding securities in anticipation
The software also comes with a CD broken, are an indication that the of a price increase in that security.
seminar titled “Making Money With trend is powerful and may continue Mathematical expectation (ME)
VisualTrader,” which provides a good in that direction. —Mathematical expectation, or ex-
introduction to the program and some Breakaway Gap — When a tradable exits pectancy.
of its intricacies. a trading range by trading at price ME = Win% x R/R ratio – Loss%
VisualTrader is a powerful technical levels that leave a price area where no Money Flow — A number of technical
trading program. Its ability to take a large trading occurs on a bar chart. indicators that incorporate volume
amount of technical information and Breakout — The point when the price and price action to measure buying
display it is unique. The program can be moves out of the trend channel. or selling pressure. Calculated by
customized to any trading style and will Call Option — A contract that gives the multiplying the day’s volume by its
work with stock, future, or forex data. buyer of the option the right but not average price.
The map and leading indicator convey the obligation to take delivery of the Near-the-Money — An option with a
the mood of the market. The list and underlying security at a specific price strike price close to the current price
charts help find trade candidates and within a certain time. of the underlying tradable.
the integrated brokerage makes trade Candlestick Charts — A charting method Out-of-the-Money (OTM) — A call
execution a snap. As the market changes, in which the high and low are plotted option whose exercise (strike) price
the program dynamically changes, so as a single line and are referred to as is above the current market price of
little time is wasted as you monitor your shadows. the underlying security or futures
trades or move on to the next trading Covered Call — Selling a call option contract.
opportunity. while holding an equivalent in the Pairs Trading — Taking a long position
underlying tradable. and a short position on two stocks in
Sean Moore can be reached at SMoore@ Doji — A session in which the open the same sector, creating a hedge.
Traders.com. and close are the same (or almost Put Option — A contract to sell a speci-
the same). fied amount of a stock or commodity
Suggested reading Elliott Wave Theory — A pattern-recog- at an agreed time at the stated exercise
Moore, Sean [2008]. “VisualTrader 4.0,” nition technique published by Ralph price.
product review, Technical Analysis of Nelson Elliott in 1939.. Relative Strength Index (RSI) — An in-
Stocks & Commodities, Volume Euro — European unit of currency, of dicator invented by J. Welles Wilder
26: July. the European Union. and used to ascertain overbought/
Penn, David [2002]. “VisualTrader,” Exchange-Traded Funds (ETFs) — Col- oversold and divergent situations.
product review, Technical Analysis lections of stocks that are bought and S&P Emini — Electronically traded,
of Stocks & Commodities, Volume sold as a package on an exchange, smaller-sized ($50 times the S&P
20: December. principally the American Stock Ex- 500) contracts of the Standard &
‡VisualTrader 8 change (AMEX), but also the New Poor’s 500 index.
‡See Editorial Resource Index
York Stock Exchange (NYSE) and
S&C S&C

July 2011 • Technical Analysis of Stocks & Commodities • 59

 FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? DeCarley Trading senior analyst
and broker Carley Garner answers your questions about today’s futures markets.
To submit a question, post your question at http://Message-Boards.Traders.com.
Answers will be posted there, and selected questions will appear in a future issue of
S&C. Visit Garner at www.DeCarleyTrading.com. Her books, Commodity Options
and A Trader’s First Book On Commodities, are available from FT Press.
Carley Garner

CURRENCY FUTURES Position traders, those looking to hold it comes to forex liquidity there is a lot
What is the best way to build an inter- long or short speculative trades for longer of smoke and mirrors, but with futures
mediate- to long-term position in the periods, might be better off approaching there is true transparency and in many
currencies? the market with a scale-trading strategy cases better trade execution — and that
First, traders must choose a venue — stripped of some of the leverage built into is what matters anyway.
whether foreign exchange, futures, or the market. The most efficient manner The Eur/Usd has a tick value of $1.25
equity products such as exchange traded of doing this might involve the Cme rather than the $12.50 that comes with a
funds (Etfs). If you have been following Group’s relatively newly listed micro standard-sized contract. A trader mak-
this column, you likely know we have forex futures contracts, which provide ing or losing $1.25 per tick will have an
supported arguments for and against traders with a relatively low-leveraged easier time adding to the position should
each method but lean toward the idea alternative to currency speculation. the market move adversely and better
of currency futures. The Cme Group launched its e-micro odds of avoiding a margin call. As of
Here is a quick recap, but keep in forex futures in answer to the micro lots right now, the euro was valued at about
mind these are highlights and do not offered in forex that attracted a new type $1.4800, much higher than the $1.1800
encompass the entire argument: of speculator, one who wants to trade with of summer 2010 that was supposedly the
less than $1,000. Although you may never beginning of the end of the euro. On the
• Currency futures are highly regu- be able to fund a futures account with a other hand, the all-time high in the euro
lated by the Nfa. Forex has recently credit card, the e-micro forex futures at is considerably higher, near $1.6000.
fallen under the wings of the Cftc the Cme Group are a tenth the size of Historically, currencies tend to trade
and Nfa in the US, but there is still the standard contract and offer futures within ranges, although there are no
a long way to go to get regulations traders the same low-margined oppor- guarantees the euro can’t go above
in these markets up to par with those tunity. Smaller contract size translates $1.6000. A move from $1.4800 to
of futures. into a fraction of the risk exposure and $1.6000 in an e-micro euro is equivalent
• Some forex brokers (known as deal- position volatility, and along with tamer to $1,500 profit or loss. A moderately
ing desks) go beyond acting as a bro- profits and losses come lower margin funded account might be able to stomach
ker, which brings buyers and sellers rates. The euro/US dollar e-micro futures the risk of trading a one-lot from the short
together. Dealing desks partake in carries the largest margin requirement at side, and even adding contracts every
the transaction by taking the other a rate of about $430 and the US dollar/ 300 or 400 points. Doing so shifts the
side of their clients’ trade, posing an Swiss franc e-micro involves the lowest breakeven point on the trade to a higher
obvious conflict of interest. at about $206. and more realistic level (the higher the
• Forex traders face counterparty risk I am not advising you open a trading average entry price, the less the market
(that is, the risk of the person on the account with $300 and roll the dice. has to drop for the trader to profit).
other side of the trade defaulting), What I am saying is e-micros might be a Remember, an e-micro is a tenth of
while all currency futures traded great opportunity for moderately funded the standard contract so a trader can
on the Cme Group are guaranteed accounts to establish long-term currency sell a total of 10 contracts on the way
by the exchange. positions with the luxury of scaling in up (at better prices) before reaching the
• Futures brokers must keep customer and out of the trade. same leverage and risk of a standard
funds segregated from their own. The Cme Group itself is the largest contract. The downside of this strategy?
In the case of a broker bankruptcy, regulated forex marketplace in the world. If the market drops without the trader
customer funds are not at risk. However, the e-micro futures aren’t in- having an opportunity to sell all 10 (or
• Etfs involve management fees on credibly liquid just yet. That said, there whatever the desired leverage and risk
top of brokerage commission and are fabulous market makers that keep amount is). But is that such a horrible
are only available for trading limited spreads attractive. Accordingly, don’t outcome? After all, you were right and
hours of the day. let the claims of substantial liquidity are making money. I can think of much
in forex deter you from futures. When worse scenarios. S&C

60 • July 2011 • Technical Analysis of Stocks & Commodities

 Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.

Don Bright of Bright Trading

Reversing the negative effects best offer and taking the risk, many others for the time being.
Mr. Bright, thanks for your column, I read contend you are being taken advantage of. Another benefit my traders are seeing
it every month, it really helps. A while back Those computerized trades are basically is these trades seem to work like the old-
I read about how some of your traders leaning on your offer with a risk of only a fashioned tape-reading, wherein you can
have taken advantage of what seemed to fraction of a cent, while your risk is always see how many shares are working on the
be a negative situation. High-frequency the bid/ask spread of a penny or more. higher end of the pricing, when and at what
and subpenny trades take place with more I won’t go into the dynamics or politics, price levels your stock is being hit by the
frequency these days, and I think you said but I will answer your question. Our trad- Street, and so on. This can show strength
something about how to reverse the nega- ers set their time & sales blotter (ticker) or weakness, and will be more and more
tive effects. Could you possibly go into that for a full four-decimal places. This serves obvious as you watch this action.
again, please? —coyotejk a couple of purposes, primarily to see if I hope this helps.
Sure, let’s start with a quick review the stock you are actively trading is being
of what we’re addressing. Automated subjected to these Hft subpenny trades Dollar valuation
computer programs can and do send in (most major issues are). Now you can I have a question regarding the valuation of
high-frequency trading orders in subpenny see both how many shares and how often the dollar. Do your traders study and watch
increments. The guise is that they may offer these trades are taking place. You should such things as the relationship of the US
some price improvement to the other side also see where they are being made (which dollar to other currencies? Is this important
of the order. Much has been analyzed about in trading equities? — erichod
the pros and cons of this type of trading. I Automated computer pro- Good question. As most traders know,
suggest you check out www.defendtrading. there is an inverse relationship between
com for background and continuing infor-
grams can send in high- the value of the US dollar and overall
mation about these very important aspects frequency trading orders market pricing. The basic thought is that
to trading these days. in subpenny increments. the company is worth the same; it just takes
For example, let’s assume you purchased more dollars to buy it based on when the
500 shares of Xyz at 20.12 and decided to electronic communications network or value of the Usd goes down. Traders need
offer the stock back at 20.45. You see the exchange). You cannot enter subpennies, at to check their stocks to see if they are not
current displayed bid and offer as 20.44 least not yet, but you can see if your offer keeping up with the overall market but
bid, and your offer at 20.45. Great, right? is being leaned on. You have a choice to seem to be maintaining similar earnings. If
Well, now you see multiple trades go by retract your order and simply hit the cur- all else seems good, then you should check
at what appears to be 20.44, but the bid rent bid, use a market order (not generally domestic vs. international sales and other
remains. A bit disconcerting. Upon further a wise alternative), or simply back away currency-related factors.
(ANF/AEO,D) Dynamic, 0:00–24:00
review, you see that these trades 4.957909 But it’s more than that. I checked
are actually going by at 20.447, with my expert, Rob Friesen,
or 20.449. These subpenny trades 4.50 president of our PairCo wing (www.
are going up in front of your of- 4.00
pairtrader.com). He says A eo
fer, even though you are the best (American Eagle Outfitters) and
“displayed” offer for the world 3.50 Anf (Abercrombie and Fitch) are
to see. good examples. Anf had a 61% net
At first glance, it may look as increase in international sales in the
3.00

though the benefit of a fraction of a 2.50 fourth quarter reported February

cent is going to the buyer, who was1219260209162330 13202704111825010815 290613 270310 24310714 28071421280411 25020916 2011. The attached ratio chart will
© eSignal, 2010

trying to pay 20.45. This can be a Aug Sep Oct Nov Dec 2011 Feb Mar Apr May
show you what I mean (Figure 1).
point of discussion, but since you Figure 1: ANF vs AEO Daily Ratio Chart
are the trader who is displaying the S&C

July 2011 • Technical Analysis of Stocks & Commodities • 61

 For this month’s Traders’ Tips, the focus is
Edgar Kraut’s article in this issue, “A Color-
Based System For Short-Term Trading.”
Code for MetaStock is already provided
A Color-Based System
For Short-Term Trading
in Kraut’s article. Subscribers will also find
Use The Rainbow

Using the S

the same code at the Subscriber Area of our

S&P 500 exchange traded fund as an
example, here’s how you can apply a simple swing trading
system that utilizes the colors of volume bars.
If today’s closing price is greater than two weeks ago
but volume is not, color today’s volume bar blue.
Similarly, if today’s closing price and volume is

website, www.Traders.com. Presented here

by Edgar Kraut less than two weeks ago, color today’s volume bar
orange.

M
ost technical traders use some combination of price- If today’s closing price is less than two weeks ago but
based indicators to support their trading decisions. volume is not, color today’s volume bar red.
Here’s a very simple swing trading system based
on coloring volume bars. It can be used either as a It’s a very simple color-based trading system that takes only
standalone trading system or in conjunction with other trading long positions and works as follows:
systems. This is how it works:

is an overview of possible implementations

Buy the green or blue volume bars, use a 1% trailing
If today’s closing price and volume are greater than
stop, and stand aside on red or orange bars.
two weeks ago, color today’s volume bar green.

for other software.

Traders’ Tips are provided to help the reader implement
a selected technique from an article in this issue. The en-
tries are contributed by various software developers or pro-
grammers for software that is capable of customization.
Readers will find all the code listings that accompany
the following Traders’ Tips at our website, Traders.com.
Provided here is some discussion of the technique’s im-
plementation by the Traders’ Tips contributors as well as
some example charts.
To locate Traders’ Tips at our website, use our site’s
search engine, or click on the Traders’ Tips link from our
home page. For past Traders’ Tips, click on the “StockS
& commoditieS” link from our home page in the red box
on the left, then click on the “Article Abstracts” link in the
red box on the left, then click on the issue of interest, then Figure 1: TrADeSTATiON, COlOr-BASeD SySTem. Here is a daily chart of the
on “Traders’ Tips.” SPY with Kraut’s indicator and strategy plotted. Entries are on the next bar following
a green or blue volume bar, and the exit is a trailing stop based on a percentage
amount below the highest bar close since entry.

F TrADeSTATiON: COlOr-BASeD SySTem

In “A Color-Based System For Short-Term Trading” in this
issue, author Edgar Kraut describes a swing-trading system F meTATrADer 5: COlOr-BASeD SySTem
that utilizes the color of volume bars. It is based on the rela- This tip is based on “A Color-Based System For Short-Term
tionship of the current bar’s close and volume as compared Trading” in this issue. The code for MetaTrader 5 to implement
to the close and volume 10 bars ago. Edgar Kraut’s color-based system can be found at Traders.
We have prepared indicator code (_RainbowVolume_Ind) com, both as a text file and as a downloadable .mq5 file named
that plots the volume and is colored based on the criteria “Rainbow.mq5.” The indicator is named rainbow.
specified in Kraut’s article, and a strategy (_RainbowVol- A sample chart is shown in Figure 2.
ume_Strat), which enters on the next bar if the current bar is —Bulat Latipov
a green or blue bar. The exit is a percentage trail of the high- MetaQuotes Software Corp.
www.metaquotes.net, www.metatrader5.com
est bar close since entry.
To download the EasyLanguage code for this indicator and
strategy, go to the TradeStation and EasyLanguage support
forum (https://www.tradestation.com/Discussions/forum.
aspx?Forum_ID=213) and search for the file “_RainbowVol-
ume.eld.” The code can also be viewed at Traders.com.
A sample chart is shown in Figure 1.
This article is for informational purposes. No type of trading or
investment recommendation, advice, or strategy is being made, given, or
in any manner provided by TradeStation Securities or its affiliates.
—Chris Imhof
TradeStation Securities, Inc.
A subsidiary of TradeStation Group, Inc.
www.TradeStation.com

Find the complete collection of

Traders’ Tips and code at our website, Figure 2: meTAQuOTeS 5, COlOr-BASeD STrATegy. Here is a sample Meta-
www.Traders.com. Trader 5 chart implementing Edgar Kraut’s color-based system on a daily EUR/
USD chart.

62 • July 2011 • Technical Analysis of StockS & commoditieS

Figure 3: BLOOMBERG, Color-Based System. This chart shows the active
futures continuous chart for the S&P 500. After almost four months of consolidation,
the S&P 500 broke out to the upside in September 2010, with a confirmation from
volume, particularly when analyzed using the additional conditions we have provided.
There was a breakout under similar volume conditions in December 2010 after a
shorter consolidation period during the overall bullish trend.
FIGURE 4: AMIBROKER, COLOR-BASED SYSTEM. Here is a daily price chart of
SPY (upper pane) with the color-coded volume chart (lower pane).

F BLOOMBERG: COLOR-BASED SYSTEM The color-coded volume chart, color-coded spreadsheet,

Figure 3 shows the S&P 500 futures with volume bars under- and trading system can be easily implemented using Ami-
neath that are colored according to the conditions detailed in Broker Formula Language (Afl). A ready-to-use formula
Edgar Kraut’s article in this issue, “A Color-Based System is shown at Traders.com. To use it, enter the formula in the
For Short-Term Trading.” Afl Editor and then press “Insert Indicator,” or go to the
Many technicians look for volume spikes to accompany Tools→Exploration menu to get a color-coded spreadsheet,
breakouts and breakdowns as additional confirmation of a or the Tools→Backtest menu if you want to test the system.
move. By coloring the volume bars on this chart as described It is worth noting that the high percentage of profitabil-
by Kraut, we can see that when the S&P 500 futures broke ity in this system could be because a one-bar delay was not
through resistance points established by recent highs, the applied to the trailing stop. Once the more realistic one-bar
condition was confirmed by green volume bars that quickly delay is applied, the profitability drops significantly.
establish the area where volume buildup corresponded to the A sample chart is shown in Figure 4.
—Tomasz Janeczko, AmiBroker.com
upside breakout in the market in both September and December www.amibroker.com
2010. Both of these moves followed consolidation periods, and
neither was contradicted by a fall below the 1% stop before
profits could be locked in.
Using the CS.Net framework within the Stdy<GO>
function on the Bloomberg Terminal, C# or Visual Basic code F eSIGNAL: COLOR-BASED SYSTEM
can be written to display the colored volume bars. The C# code For this month’s Traders’ Tip, we’ve provided the formulas
for this indicator is shown at Traders.com. All Bloomberg code Kraut_ColoredBars.efs, Kraut_ColoredBarsInd.efs, and
contributions to S&C’s Traders’ Tips column can also be found Kraut_ColoredBarsIndWL.efs, based on Edgar Kraut’s ar-
in the sample files provided with regular Sdk updates, and the ticle in this issue, “A Color-Based System For Short-Term
studies will be included in the Bloomberg global study list. Trading.”
—Bill Sindel All studies contain a formula parameter to set the lookback
Bloomberg, LP periods, which may be configured through the “Edit Chart”
[email protected] window. The Kraut_ColoredBars.efs formula displays the price
chart (Figure 5) and allows backtesting. This study also contains
one additional formula parameter to set the trailing percent.
The Kraut_ColoredBarsInd.efs formula displays the histogram
indicator. The watchlist study — Kraut_ColoredBarsIndWL.
F AMIBROKER: COLOR-BASED SYSTEM efs (see Figure 6) — displays all the values and columns from
In “A Color-Based System For Short-Term Trading” in this the Excel example given in Kraut’s article.
issue, author Edgar Kraut presents a simple system based on To discuss these studies or download complete copies of
the 10-day momentum of price and volume. The relationship the formulas, visit the Efs Library Discussion Board forum
between price and volume now and 10 days ago is used to under the Forums link from the support menu at www.esignal.
assign colors to volume bars. com or visit our Efs KnowledgeBase at http://www.esignal.
July 2011 • Technical Analysis of Stocks & Commodities • 63
 Figure 5: eSIGNAL, Color-Based System

Figure 7: THINKORSWIM, Color-Based System

The code is shown at Traders.com along with instructions

for applying it. A sample chart is shown in Figure 7.
—thinkorswim
A division of TD Ameritrade, Inc.
www.thinkorswim.com

Figure 6: eSIGNAL, WATCHLIST

F WEALTH-LAB: Color-Based System
In his article in this issue, author Edgar Kraut presents a simple
com/support/kb/efs/. The eSignal formula scripts (Efs) are system that consists of two rules for taking long positions.
also available for copying and pasting from the Stocks & Formally, it does not share traits of classic swing-trading sys-
Commodities website at Traders.com. tems (as the author states in the article) except for its sensitive
—Jason Keck 1% trailing stop, so with its trend condition rule and a volume
Interactive Data Desktop Solutions confirmation rule seeking to identify and hold a rising stock
800 815-8256, www.eSignal.com/support/ for a short period of time, we would rather classify it as pure
momentum trading.
Our C# version of the system allows Wealth-Lab 6 users to
easily change the lookback and exit parameters by dragging
the parameter sliders in the lower-left corner of Wealth-Lab’s
main workspace. We replaced the default trailing exit with
F Thinkorswim.com: Color-Based System a combination of a profit target and a stop-loss, and made
Edgar Kraut’s article in this issue, “A Color-Based System For the system exit on red and orange bars. For traders willing
Short-Term Trading,” outlines the use of a volume coloring to tweak the rules further, here’s a very simple trend-iden-
system that can be used to support a swing-trading system. The tification idea of the same kind to go along with the volume
system compares the volume and closing price of a given day confirmation rule:
versus their values two weeks ago to generate four different 1. Bullish trend starts after x consecutive closes above
types of color signals on the volume. the trailing close from y days ago,
We have prepared two strategy files and one chart study
2. Bearish trend starts after x consecutive closes below
file written in our proprietary language, thinkScript. The en-
the trailing close from y days ago.
try strategy is based on the color system that Kraut outlines
in his article; the exit is based on the 1% trailing stop he rec- A sample chart is shown in Figure 8.
ommends. The study file outlines the coloring of the volume —Eugene/Robert Sucher
bars themselves. www.wealth-lab.com

64 • July 2011 • Technical Analysis of Stocks & Commodities

 up or down from 10 bars ago.
You can see stocks in other lists that are passing the setup
condition by adding the Pcf as a column, as we’ve done in
Figure 9. The column with the yellow checkmarks indicates
symbols that are currently passing the setup conditions. In this
example, they’re all checked because we’ve already filtered
out stocks not passing with the EasyScan, but you get the idea.
On any other list, such as the S&P 500, Russell 1000, and so
on, you can add this Pcf as a column and then sort the column
to see symbols passing the setup conditions (Figure 9).
For more information on TC2000 or to start a free trial, visit
Figure 8: WEALTH-LAB, Color-Based System. This sample Wealth-Lab www.TC2000.com. You can also access your watchlists, scans,
Developer 6.2 chart shows the color-based system applied to a daily chart of SPDR and chart template while away from your computer using the
new TC2000 Mobile app (www.TC2000.com/Mobile).
S&P 500 (SPY).
—Patrick Argo
Worden Brothers, Inc.
www.TC2000.com

F WORDEN BROTHERS TC2000: F AIQ: COLOR-BASED SYSTEM

SCANNING FOR SHORT-TERM TRADES The Aiq code based on Edgar Kraut’s article in this
In his article “A Color-Based System For Short-Term Trading” issue, “A Color-Based System For Short-Term Trad-
in this issue, author Edgar Kraut discusses a trading strategy ing,” is provided at the websites noted here. I coded the color
that compares price and volume to a previous point in time. indicators and three systems that use the indicators. Two of
Broken down to its simplest form, if price and volume are the three systems are discussed here.
both higher than x bars ago, then enter a long trade with a I ran backtests using the Aiq Portfolio Manager module from
1% trailing stop. 1/1/1998 to 5/13/2011 trading the Nasdaq 100 list of stocks.
In TC2000, you can scan for this setup using a Personal In Figure 10, I show the test results of simulated trading using
Criteria Formula (Pcf). Once you create a Pcf, you can use the system that was proposed in Kraut’s article for trading the
it as a condition in an EasyScan, as a column in the watchlist, Spy with the following capitalization parameters:
and even plot the Pcf on the chart as an indicator.
In Figure 9, we show an EasyScan we’ve named “SC Traders 1) Maximum positions per day = 3
Tips July 2011” with a single condition, a Pcf created using 2) Maximum total positions allowed = 10
the formula (C>C10 and V>V10). At the time the scan was 3) Choose candidates using highest volume on the day
run, 33 stocks in the Russell 3000 passed the scan and these of the signal
stocks appear in the watchlist on the left. You can change the 4) Size each position at 10% of total account equity
formula to include stocks where price is up but volume is recomputed every day.
not (the “blue” volume bars discussed in the article) by using
the following formula: (C>C10). You don’t need to test for For the test period, the original system using the 1% trailing
volume at all if you want to include stocks where volume is stop as the only exit showed an average annual return of 4.95%
with a maximum drawdown of 78.52% on 10/9/2002.
Since the drawdown of 78.52% on the original system
was more than most traders could tolerate, I added trend and
market trend filters and also changed the buy rules and exit
rules as follows:

• Buy if there is a green or blue bar today and if yesterday

there were six consecutive bars of orange or red color and
the 200-bar simple moving average of both the stock and the
S&P 500 index are higher than they were 10 bars ago.

• Exit if there are four consecutive bars of orange or red.

Figure 9: TC2000, Color-Based System. Here, the new TC2000 version All trades for both systems are executed at the next open
11 displays real-time scan results of stocks passing the green or blue volume bar after a trade signal occurs. A commission of $0.01 per share
setup conditions. round-turn was used. The same capitalization parameters
July 2011 • Technical Analysis of Stocks & Commodities • 65
 31.55% on 5/25/2000.
In Figure 12, I show the color-based indicators applied to
both the price and volume on a chart of Adsk. The arrows on
the chart also show a sample trade from the modified system.
The code and Eds file can be downloaded from www.
TradersEdgeSystems.com/traderstips.htm.
—Richard Denning
[email protected]
for AIQ Systems

F TRADERSSTUDIO: COLOR-BASED SYSTEM

I have coded three systems that use the color-
based rules presented in Edgar Kraut’s article in
Figure 10: AIQ SYSTEMS, Kraut’s Color-Based System. Here is a sample
equity curve for Edgar Kraut’s system trading the NASDAQ 100 list of stocks compared this issue, “A Color-Based System For Short-Term Trading.”
to the S&P 500 index over the test period 1/1/98 to 5/13/11. This original system uses The last input to the system determines which of the three
a 1% trailing stop as the only exit. systems is run. An explanation of the system parameters is
shown in the table in Figure 13.

sysType = 0: System that was defined in the article with

the 1% trailing stop.

sysType = 1: Added rule that requires a certain number of

orange or red bars to occur before the green or blue bar
plus a rule that requires the stock’s trend to be up (such that
the 200-bar simple moving average of the stock is higher
than it was a certain number of bars ago); exit if there are
a certain number of red or orange bars in a row.

sysType = 2: Same rules as sysTypes 0 and 1 plus a rule that

requires the trend to be up on the S&P 500 index.
Figure 11: AIQ SYSTEMS, MODIFIED System equity curve. Here is a sample
equity curve for my modified system trading the NASDAQ 100 list of stocks over the I tested the above systems on the following Etf portfolio:
test period 1/1/98 to 5/31/11 compared to the S&P 500 index.
Dia, Iwm, Mdy, and Spy. In testing sysTypes 0 and 1, I found
that they had too much drawdown for my taste. Consequently,
I focused on sysType 2 by running robustness tests using the
TradersStudio optimizer and 3D parameter maps (see Figure
14). The system appears robust, as all of the parameter sets
showed a profit and there are no sharp spikes on the maps.
The “len1” parameter was the most sensitive, with a peak
value of 16 with falloff on either side.
After examining the parameter map, I chose a parameter
set of (15,200,1,1,6,2) and ran a backtest using the
Tradeplan module from 4/1/94 to 5/13/11 choosing the
“TS_StockTradingPlanSimple” tradeplan script that ships with
the product. This tradeplan divides the capital into four equal
Figure 12: AIQ SYSTEMS, MODIFIED System example. Shown here is
dollar pieces so that all signals could be taken. In Figure 15, I
a chart of ADSK with color studies and arrows showing sample trades from the show the Tradeplan equity curve and in Figure 16, I show the
modified system. Tradeplan underwater equity curve. Most of the drawdowns
are limited to about 9%. For the test period, the compound
annual return was 3.79% with a maximum drawdown of
were used in testing both the modified system and the origi- 11.88% on 7/6/2010.
nal system. The TradersStudio code for this system can be
In Figure 11, I show the test results of simulated trading downloaded from the TradersStudio website at www.
on the Nasdaq 100 list of stocks using this modified system. TradersStudio.com→Traders Resources→FreeCode or www.
For the test period, this modified system showed an aver- TradersEdgeSystems.com/traderstips.htm. The code is also
age annual return of 20.24% with a maximum drawdown of shown at Traders.com.
66 • July 2011 • Technical Analysis of Stocks & Commodities
 Parameter Default What it does Applies to System#
len1 15 Lookback length in bars for color rules 0,1,2
maLen 200 Simple moving average length for trend determination 1,2
trailStopPct 1 Percentage value for trailing stop 0
entryRObars 1 Count of red or orange bars in a row (minimum) for entry 1,2
exitRObars 6 Count of red or orange bars in a row (minimum) for exit 1,2
sysType 2 Chooses which of three systems to run 0 or 1 or 2
Figure 13: Tradersstudio, parameters

F STRATASEARCH: COLOR-BASED SYSTEM

When we first read “A Color-Based System For Short-Term
Trading” by Edgar Kraut, our initial thoughts were that the
author had found the holy grail. Nearly 98% of all long posi-
tions profitable since 2002? A minimum of 58% profit per
year? A bust year of 2008 still gaining a profit of 220% on
long positions? Even without commissions or spreads, these
are some stellar results. So our goal was to not only provide
Figure 14: TRADERSSTUDIO, color-based system, system 2. This shows this code to our users, but to confirm this incredible system
the three-dimensional parameter maps for sysType 2 trading one share each of the performance.
ETF portfolio. In an attempt to duplicate the author’s tests, we created a
system that entered long positions on blue or green bars, and
sold based on a good-till-canceled trailing stop of 1%. But
running this system against Spy from 2002 to 2010 didn’t
produce anywhere near the stunning results for us. In fact, our
tests produced only 35% profitable trades, with an average
annual return of -3%. (See Figure 17.)
Using the author’s intended platform of MetaStock, we were
able to confirm the article’s results. However, it appears that
the positive results can be largely attributed to MetaStock’s
trailing stop, which automatically exits positions a small
fraction away from the day’s high price. Some traders might
Figure 15: TRADERSSTUDIO, system 2 equity curve. Here is the Tradeplan
equity curve for sysType 2 using equal equity sizing, trading all signals from the
question the ability to sell so close to the high price in actual
ETF portfolio. trading, since the high price isn’t actually known until the
trading day is over. But during a backtest, it certainly does
create some stunning paper trades.
Despite not being the holy grail after all, the color-based
indicators may still have some potential when used alongside
the proper supporting trading rules. StrataSearch users can
explore this further by downloading this month’s plugin from
the Shared Area of the StrataSearch user forum and running
an automated search for supporting rules.
//*********************************************************
// Colored Bars - Green
//*********************************************************
days = parameter(“Days”);
Figure 16: TRADERSSTUDIO, UNDERWATER EQUITY CURVE FOR SYSTEM IsGreen = if(close > ref(close, -days) and
2. Here is the Tradeplan underwater equity curve for sysType 2 using equal equity volume > ref(volume, -days), 1, 0);
sizing, trading all signals from the ETF portfolio.
//*********************************************************
// Colored Bars - Blue
//*********************************************************
—Richard Denning days = parameter(“Days”);
[email protected] IsBlue = if(close > ref(close, -days) and
for TradersStudio volume <= ref(volume, -days), 1, 0);

July 2011 • Technical Analysis of Stocks & Commodities • 67

 Figure 17: STRATASEARCH, COLOR-BASED SYSTEM. The equity performance
Figure 18: NEUROSHELL TRADER, Color-Based System. Here is a sample
of Kraut’s color-based system (in yellow) didn’t match the performance of buy and
NeuroShell Trader chart showing the color-based volume and short-term trading
hold (white) in our tests.
system as described by Edgar Kraut in his article in this issue.

//*********************************************************
// Colored Bars - Orange
//********************************************************* To recreate the color-based trading system, select “New
days = parameter(“Days”); Trading Strategy” from the Insert menu and enter the following
IsOrange = if(close < ref(close, -days) and
volume <= ref(volume, -days), 1, 0); formulas in the appropriate locations of the Trading Strategy
Wizard:
//*********************************************************
// Colored Bars - Red
//********************************************************* Generate a buy long market order if ONE of the following is
days = parameter(“Days”); true:
IsRed = if(close < ref(close, -days) and
volume > ref(volume, -days), 1, 0); And2( A>B(Close, Lag(Close,10)), A>B(Volume, Lag(Volume,10)) )
And2( A>B(Close, Lag(Close,10)), A<B(Volume, Lag(Volume,10)) )
—Pete Rast
Avarin Systems, Inc.
Generate a long protective stop order:
www.StrataSearch.com
TrailPrice%( Trading Strategy, 1 )

F NEUROSHELL TRADER: COLOR-BASED SYSTEM If you have NeuroShell Trader Professional, you can also
The color-based system for short-term trading as choose whether the parameters should be optimized. After
described by Edgar Kraut in his article in this issue backtesting the trading strategy, use the “Detailed Analysis”
can be easily implemented with a few of NeuroShell Trader’s button to view the backtest and trade-by-trade statistics for
800+ indicators. the strategy.
To show color-coded volume bars in NeuroShell Trader, Users of NeuroShell Trader can go to the Stocks &
simply select “New Indicator” from the Insert menu and use Commodities section of the NeuroShell Trader free technical
the Indicator Wizard to create the following indicators and to support website to download a copy of this or any previous
color each indicator appropriately: Traders’ Tips.
A sample chart is shown in Figure 18.
Green: —Marge Sherald, Ward Systems Group, Inc.
IfThenElse( And2( A>B(Close, Lag(Close,10)), A>B(Volume, 301 662-7950, [email protected]
Lag(Volume,10)) ), Volume, * ) www.neuroshell.com

Blue:
IfThenElse( And2( A>B(Close, Lag(Close,10)), A<B(Volume,
Lag(Volume,10)) ), Volume, * )
F NINJATRADER: COLOR-BASED SYSTEM
Orange: We have implemented VolumeColors and VolumeColorsStrat-
IfThenElse( And2( A<B(Close, Lag(Close,10)), A<B(Volume, egy as an automated strategy and indicator based on Edgar
Lag(Volume,10)) ), Volume, * ) Kraut’s article in this issue, “A Color-Based System For Short-
Term Trading.” The indicator and strategy are available for
Red:
IfThenElse( And2( A<B(Close, Lag(Close,10)), A>B(Volume, download from www.ninjatrader.com/SC/July2011SC.zip.
Lag(Volume,10)) ), Volume, * ) Once they have been downloaded, from within the
68 • July 2011 • Technical Analysis of Stocks & Commodities
Figure 19: NINJATRADER, Color-Based System. This screenshot shows
the VolumeColorsStrategy and related indicator applied to a daily chart of the SPDR
ETF (SPY).
FIGURE 20: UPDATA, Color-Based System. This sample Updata chart shows
the 10-period rainbow volume bars as applied to the S&P 500 ETF (SPDR).
NinjaTrader Control Center window, select the menu File →
Utilities → Import NinjaScript and select the downloaded file.
This file is for NinjaTrader version 7 or greater.
You can review the strategy source code by selecting the
menu Tools → Edit NinjaScript → Strategy from within
the NinjaTrader Control Center window and selecting F Tradesignal: COLOR-BASED SYSTEM
“VolumeColorsStrategy.” The strategy proposed by Edgar Kraut in his article in this
You can review the indicator source code by selecting the issue, “A Color-Based System For Short-Term Trading”
menu Tools → Edit NinjaScript → Indicator from within can be implemented using our online charting tool at www.
the NinjaTrader Control Center window and selecting tradesignalonline.com.
“VolumeColors.” At the site, simply check the “Infopedia” section for our
NinjaScript uses compiled Dlls that run native, not lexicon, where you will find the indicator and strategy. Click
interpreted, which provides you with the highest performance on it and select “Open script.” The indicator and/or strategy
possible. will be immediately available for you to apply to any chart
A sample chart implementing the strategy is shown in you wish to. A sample is shown in Figure 21.
Figure 19. —Sebastian Schenck, Tradesignal GmbH
—Raymond Deux & Ryan Millard [email protected]
NinjaTrader, LLC www.TradesignalOnline.com, www.Tradesignal.com
www.ninjatrader.com

F UPDATA: COLOR-BASED SYSTEM

This is based on the article by Edgar Kraut in this
issue, “A Color-Based System For Short-Term Trading.”
The author has developed a swing-trading system based
on price and volume momentum to trade the S&P 500 Etf,
the Spdr. Care needs to be taken in factoring in the expense
ratio to any Etf strategy, as well as any tracking error when
Etfs are used for hedging purposes.
The Updata code for this concept in both indicator and
system form has been added to the Updata Library and may
be downloaded by clicking the Custom menu and then either
“Indicator” or “System Library.” Those who cannot access the
library due to a firewall may paste the code [shown at Traders.
com] into the Updata Custom editor and save it.
A sample chart is shown in Figure 20.
—Updata support team FIGURE 21: TRADESIGNAL ONLINE, COLOR-BASED STRATEGY. Here is a sample
[email protected] chart produced from Tradesignal Online with Edgar Kraut’s color-based indicator and
www.updata.co.uk strategy applied to a daily chart of Google, Inc.

July 2011 • Technical Analysis of Stocks & Commodities • 69

 F VT TRADER: COLOR-BASED SYSTEM
Our Traders’Tip this month is based on “A Color-Based System
For Short-Term Trading” by Edgar Kraut in this issue.
In the article, Kraut describes a trading system that only
takes long positions and uses colored volume bars to identify
potential trading opportunities. A long trade is initiated on blue
or green volume bars using a 1% trailing stop-loss for exits
while remaining out of the market for red or orange bars.
Since there is no centralized dollar volume data for the Figure 22: VT TRADER, Color-Based System. Here is an example of the
forex industry, we used a two-period average true range (Atr) modified color-based trading system on a daily EUR/USD candlestick chart.

indicator as a proxy for volume. Kraut describes his color-based

trading system as being very flexible for discretionary traders, instructions for creating the modified color-based trading
so we constructed it with that premise in mind. Our clients can system can be found at Traders.com.
customize the lookback periods, define which colored bar(s) To learn more about VT Trader, visit www.vtsystems.
to use for entry (including short trades if desired), and choose com.
from three different types of trailing stop-loss logic to use for Risk disclaimer: Forex trading involves a substantial risk of loss
exits. A sample chart is shown in Figure 22. and may not be suitable for all investors.
—Chris Skidmore
We’ll be offering our modified version of Kraut’s color- Visual Trading Systems, LLC
based trading system for download in our VT client forums 212 871-1747, [email protected]
at http://forum.vtsystems.com along with hundreds of other www.vtsystems.com
precoded and free trading systems. Meanwhile, the VT Trader S&C

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70 • July 2011 • Technical Analysis of Stocks & Commodities

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July 2011 • Technical Analysis of Stocks & Commodities • 71

 Newsletters And Publications
TRADERS'
Where can traders turn for market insight, RESOURCE

trade recommendations, and education about

trading and investing? Perhaps the question TOP 10 VIEWED
LINKS
should be where can’t you? These days, PUBLICATIONS
financial information is put out in print, on
TV, on your handheld, and over the Internet
in various formats, but there’s still nothing Publication/newsletter Company
more readable, reliable, or researchable than 1. Chaos Trader’s Email MicroMedia
a regularly published newsletter or magazine.
2. Mansfield Stock Chart Service
In the Traders’ Resource area of our website, www.Trad-
ers.com, we present a listing of publications on a variety 3. The Zanger Report ChartPattern.com
of subjects — printed on paper, on the World Wide Web, or 4. Cash in on Chaos Newsletter MicroMedia
delivered straight to your email inbox — that may help you 5. Steve Woods’ Floatcharts.com FloatCharts.com LLC
improve your trading. Some publications have been around for
6. Wavespeak.com R-Group, LLC
quite a while (in fact, this magazine itself has been published
since 1982), and they can be well worth the asking price for 7. PitNews.com eMagazine Gecko Software, Inc.
the information they deliver. 8. TNT Commodity Newsletter Gecko Software, Inc.
In the listing, you’ll find information about each publication, 9. Formula Research Formula Research, Inc.
such as how many years it’s been published and whether it is
10. Attain Research & Analysis e-newsletter Attain Capital Mgmt.
available on the newsstand.
These are the 10 data services clicked on most often on the Traders’ Resource
Traders’ Resource at traders.com website. Each company is listed in order of clicks received. This is not an edito-
rial rating or ranking. For more information on specific products and services, try
Traders’ Resource is available at our website, www.Traders. checking store.Traders.com for archived S&C product reviews.
com, where you’ll not only find the publications listing, but
also information on other products and services in numerous
other categories, such as data services, brokerages, consultants,
seminars, hardware, software, and trading systems. Just click
on the Traders’ Resource link. Then follow the Publications
category link, or use the search feature to find products or
services with specific attributes in this or other categories.

S&C

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 [email protected].

72 • July 2011 • Technical Analysis of Stocks & Commodities

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74 • July 2011 • Technical Analysis of Stocks & Commodities

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 Ben Graham Was A Quant: Raising The what the market has been trying to tell you. The Mejt System: A New Tool For Day
IQ Of The Intelligent Investor (338 pages, Trading The S&P 500 Index (184 pag-
$49.95 hardcover, Mastering Trade Selection And Man- es, £44.99 hardcover, 2011, ISBN 978-
2011, ISBN 978-0- agement: Advanced Strategies For 0857190352) by Jeffrey Tennant, published
470-64207-8) by Long-Term Profitability (230 pages, $55 by Harriman
Steven P. Greiner, hardcover, 2011, House. The
published by John ISBN 978 - 0 - 07- Mejt system
Wiley & Sons. Ben- 175498-9) by Jay is a new tool
jamin Graham, the Norris with Al for use with
pioneer of value in- Gaskill, published other techni-
vesting, believed in by McGraw-Hill. cal analysis
a philosophy that This guide provides techniques in daytrading the S&P 500. It is
continues to be fol- proven strategies based on the idea that price action at certain
lowed today. Part of this philosophy in- for generating prof- times of the day can allow traders to make
cludes adhering to your stock selection pro- its on a consis- predictions regarding future support and re-
cess. If a quant designs and implements tent basis under all sistance levels. It also defines which trends
mathematical models for predicting stock economic conditions. The secret lies not in might have staying power and which should
or market movements, what better way to predicting the market, but in managing your retrace. This system is designed to work
remain objective than to invest using al- trade from beginning to end. You will be with the S&P 500 and will appeal to experi-
gorithms in a quantitative method? The given instructions for selecting a market to enced daytraders already familiar with tech-
book focuses on the factors used in select- trade, determining which direction to trade, nical analysis of the stock market. If that is
ing “Graham” stocks and demonstrate how what to look for prior to trading, and when to you, then this book will give you information
to test these factors with current software, enter and exit a trade. The simple five-step you can, and will, use every day.
then combine them into a quantitative mod- system will make you a more consistent
el. Quantitative investing ultimately leads to and profitable trader. By using the graphs, The Technical Analysis Course: Learn
disciplined, and intelligent, investing. This charts, and trading example presented, you How To Forecast And Time The Mar-
book will help you achieve this goal. can research, set up, and test your trades to ket, 4th ed. (395 pages, $60 paperback,
fine-tune them for the real world. 2011, ISBN 978-0-07-174902-2) by Thom-
Investing With Volume Analysis: Identi- as A. Meyers, Cfa, published by McGraw-
fy, Follow, And Profit From Trends (333 The Naked Trader: How Anyone Can Hill. Technical anal-
pages, $49.99 hardcover, 2011, ISBN 978- Make Money Trading Shares, 2d ed. ysis is the most re-
0-13-708850-7) by Buff Pelz Dormeier, (367 pages, £21.99 hardcover, 2010, ISBN liable method for
C m t, published 978-1-905641-51-2) by Robbie Burns, forecasting trends
by FT Press, an published by Har- and timing mar-
imprint of Pear- riman House. ket turns. It is as
son. If price is Completely updat- close to a scientific
the market’s tes- ed and expanded, trading method as
timony, then vol- this edition gives you can get. This
ume is the mar- you the strate - course provides
ket’s polygraph. gies you need to the essential foundation for using time-test-
Volume tells you make money from ed technical analysis techniques to profit
more about the the stock market. from the markets. You will learn how to iden-
real force and ex- It contains more tify profitable chart patterns, utilize key ana-
tent of the investor’s conviction about pric- essential tips, key lytical tools, perform advanced analysis us-
es. By analyzing the market’s volume, you facts, ideas, and insights. Beginners can ing the many technical indicators available,
can uncover trends sooner and with more start here, while more experienced trad- and the way to purchase securities when
reliability — and be in a better position to ers can learn some new ideas. You will find prices are near their bottom and sell them
capture the profits those trends might deliv- out how to pick good stocks and avoid the when they are near their highs.
er. By using volume analysis you’ll learn to stinkers. The author’s top 10 winning strat-
uncover shifts in investor enthusiasm, iden- egies are revealed to ensure only the best For more information
tify disparities in market opinion, and sniff shares get bought. Everything is explained www.wiley.com
out coming trend reversals. You’ll also learn simply, without the jargon found in many www.ftpress.com
how to assess strength and weakness in other books. This book will work for you www.mcgraw-hill.com
supply and demand, and integrate volume whether you want to just make a little ex- www.harriman-house.com
analysis with other portfolio allocation tech- tra, or if you want to make the market your
niques. Turn on the volume and discover full-time job. &

76 • July 2011 • Technical Analysis of Stocks & Commodities

 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
Eurodollar Interest Rate CME 0.1 1.7 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
3 Mo Euribor Interest Rate LIFFE 0.1 1.2 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
3 Yr. Cmmnwlth T-Bonds SFE 0.0 0.5 1 •••••••••••••••••••••••••••
Short Sterling LIFFE 0.1 2.4 6 •••••••••••••••••••••
Mini S&P 500 Index CME 8.5 17.1 8 •••••••••••••••••••••
30 Day Federal Funds CBT 0.0 0.1 1 ••••••••••••••••••••
Crude Oil - Light Sweet NYM 8.4 12.3 4 ••••••••••••••••••
DJ Euro Stoxx 50 Index EUREX 7.8 12.7 11 •••••••••••••••••
Natural Gas NYM 9.5 4.3 3 •••••••••••••
Brent Crude Oil IPE 3.6 5.4 4 •••••••••
S&P 500 Index CME 8.5 17.1 2 ••••••••
10 Yr Treasury Notes CBT 1.8 11.4 14 ••••••••
Corn CBT 6.3 8.4 9 •••••••
Gold 100 troy oz NYM 4.5 8.3 3 ••••••
5 Yr Treasury Notes CBT 1.2 8.7 16 ••••••
10 Yr German Euro Bund EUREX 1.1 9.6 13 ••••
Xetra DAX-30 Stock Index EUREX 5.5 10.6 2 ••••
2 Yr Treasury Notes CBT 0.6 7.3 16 •••
Soybeans 5000 bushels CBT 6.9 11.1 6 •••
Gas Oil ICE-EU 3.5 6.9 6 •••
FT-SE 100 Index LIFFE 7.0 26.4 11 •••
Mini Russell 2000 CME 4.9 9.3 6 •••
RBOB Gas NYM 9.3 12.6 3 •••
2 Yr Euro Schatz EUREX 0.3 6.4 34 ••• CBT Chicago Board of Trade
US Treasury Bonds CBT 3.0 18.2 13 ••• CME Chicago Mercantile Exchange including
5 Yr German Euro BOBL EUREX 0.7 7.2 17 ••• the International Monetary Market (IMM)
Heating Oil #2 NYM 6.9 11.7 4 ••• CMX Commodity Exchange, Inc. CME Group
CAC-40 Stock Index MATIF 6.4 11.0 8 •• EUREX European Exchange, Zurich & Frankfurt
Silver 5000 troy oz NYM 12.3 16.1 2 ••
ICE-EU Intercontinental Exchange-Futures - Europe
Wheat - Soft Red CBT 9.9 15.7 10 ••
ICE-US Intercontinental Exchange-Futures - US
Aust. Share Price Index SFE 5.1 11.9 5 ••
KCBT Kansas City Board of Trade
Mini-Nasdaq 100 Index CME 7.5 13.3 10 ••
Long Gilt LIFFE 2.1 14.1 9 •• LIFFE London International Financial Futures and
3 Mo EuroSwiss LIFFE 0.0 1.5 8 •• Options Exchange
Sugar-World #11 CSCE 9.8 15.2 16 • MATIF Marché à Terme International de France
Cotton #2 NYCE 12.3 16.4 4 • NYM New York Mercantile Exchange
Euro Currency € CME 3.0 22.5 11 • SFE Sydney Futures Exchange
Soybean Oil CBT 5.9 9.3 12 •
Copper NYM 5.6 8.5 4 •
Mexican Peso CME 5.1 5.6 7 •
Swiss Market Index EUREX 3.1 6.6 8 •
Coffee C CSCE 7.5 11.7 4 •
Japanese Yen ¥ CME 3.5 10.3 5 •
Australian Dollar CME 2.2 5.2 6 •
Cattle - Live CME 3.7 11.2 18 • 1107
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).

July 2011 • Technical Analysis of Stocks & Commodities • 77

 AT THE CLOSE
Continued from page 82

1.344.00 Technical definitions

Here are some definitions provided by
The more violent TGCJ11: April 2011Comex
the market the Gold Futures, 5 minute bars
greater the need
for a valid system 1 1.342.00 Mike Bryant, the creator of Adaptrade
that can make 3 Builder, the software used to create this
code after I programmed it to seek a
statistical sense of
its seemingly 1.340.00
random, chaotic
structure
specific set of system performance char-
1.338.00 acteristics for the intraday gold futures
market:
4 1.337.40

1.336.00

2
NBarEnL4: Number of bars for entry,
1.334.00
long side. This input is used in calculating
the long entry price, where it determines
1.332.00
the number of bars back that the high-
Two recent days of hypothetical, walk forward
trading in the fully mechanical Eldorado gold
est function looks when calculating the
futures trading system yielded 3 wins and 1 1.330.00
highest of the low prices — that is, it
calculates the highest of the lows over
loser – all trading the short side. Net gain
before commissions and slippage was 13
the past NBarEnL4 bars.
points, with no overnight exposure and no 1.328.00
METASTOCK

trader discretion required prior to entry.

EntFrL: Fraction of the price difference

Figure 1: the eldorado gold system. This gold futures trading system showed real promise in hypotheti- for long entries. This is also used in cal-
cal, walkforward mode, and also demonstrated a reasonably good propensity to identify tradable reversal and culating the entry price. The EntFrL value
is the multiple of the price difference that
breakout areas in a variety of market conditions.

is subtracted from the high to calculate

erate a consistent profit from. If you look at this five-minute the long limit entry price. The price difference is the absolute
chart of the full-sized Comex gold futures contract (April value of the difference between the high and the highest low
2011 contract), you can see just why this is so; this market over the past NBarEnL4 bars.
generates more chaos than a heavy metal rock concert (and
just about any other liquid futures market), making it very TimeExS: The time at which short trades are exited.
hard for trading systems that depend on sustained directional When time reaches this point, the short trade is exited
movement to earn any meaningful profits at all. at market next bar.
I don’t know about you, but the prospect of attempting
to daytrade this market without a statistically viable system Here are some other details in the code:
would not be appealing to me. It is all over the place, lacking
any kind of rhyme or reason. Like some forms of music, the (EntriesToday (Date) < 1: This simply is an instruction
“sound” of this market is dissonant, and only a trained “ear” that limits the system to a maximum of one new trade
— say, an appropriate trading system — can even begin to entry (either long or short) on any given day.
appreciate its potential.
In the case of gold and silver futures, swing trading systems Essentially, this system is seeking a statistically logical price
and long-term position trading systems tend to deliver more area where a reversal is likely before initiating a new position.
reliable profits for trend-followers, so keep that in mind when This works much better in a market that is just coming out of
you’re shopping for your next precious metals futures trad- a trading range/consolidation phase just prior to embarking
ing system. That brings us to our intraday gold swing trading on a sustained intraday/multiday trend move than it does in a
system, which I’ll call “GoldTascMaster.” market already ensconced in a major trend thrust. In testing,
The GoldTascMaster gold futures system tends to go long the system also liked the idea of cutting short trades off early
or short early in the daily session and allows a position to run in the trading session, and the obvious reason for this is the
until stopped out by a time exit (short entries only) or until a upward bias of this market over the test period. Cutting trades
long position is closed out as a new short signal is generated short early seems to help lock in at least some profit rather
by the system (making it a stop & reverse logic), never taking than allowing a modestly profitable open trade to be stopped
more than one trade entry on any given day. The system trades out instead as a loser as the gold bull continued higher.
a five-minute bar using the front-month, full-sized Comex gold This is not a magic or be-all/end-all system, one that you
futures contract and also relies on a fixed stop-loss of $600. should go out and trade tomorrow morning. No, this is a simple
No trailing stop is utilized. Commissions and slippage was system test, one designed to show that a potentially profitable
included at a rate of $12.50 per contract, per side. You can gold futures trading system can be created without a lot of high-
find the EasyLanguage code in the sidebar, “EasyLanguage level math, programming, or chart reading skills. TheS&C system
Strategy Code,” on page 80.
Continued on page 80
78 • July 2011 • Technical Analysis of Stocks & Commodities
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July 2011 • Technical Analysis of Stocks & Commodities • 79
 AT THE CLOSE
Continued from page 78

easylanguage Strategy Code

Population member: 52 If (MarketPosition = 0 or time = SessionEndTime (0, 1)) and (EntriesToday (Date)
< 1 or time = SessionEndTime (0, 1)) and EntCondL then begin
Created by: Adaptrade Builder version 1.1.1.0 Buy next bar at H - EntFrL * AbsValue (H - Highest (L, NBarEnL4)) limit;
www.adaptrade.com end;
TradeStation code for TS 6 or newer If (MarketPosition = 0 or time = SessionEndTime (0, 1)) and (EntriesToday (Date)
Build Dates: 11/5/2010 to 5/5/2011 < 1 or time = SessionEndTime (0, 1)) and EntCondS then begin
----------------------------------------------------------------- Sell short next bar at market;
Inputs: NBarEnL4 (26), end;
EntFrL (4.25), If MarketPosition < 0 and time <> SessionEndTime (0, 1) then begin
TimeExS (1030); If time >= TimeExS then
Var: EntCondL (false), Buy to cover next bar at market;
EntCondS (false); end;
EntCondL = true; setstoploss (600);
EntCondS = true;

does pass a basic TradeStation walkforward, out-of-

sample stress test, so perhaps the code is something to
be reckoned with, or one you can improve upon as you
seek to apply it to other markets and time frames.
In Figure 2 you see the basic TradeStation system
performance statistics. Yes, it’s only a six-month test,
but there is enough to suggest the method may be
workable. For example:
n It makes money on both sides of the market,
impressive for such a bullishly biased market
n Profit factor of 1.78
n Average win/loss ratio is 2.35
n Stays with a winning trade nearly three times longer
than with losers
n No gap exits; the initial stop of $600 held in
every case during the test
n Percent of time in the market is less than 19%
— minimal exposure for traders.

Okay, so it’s a foundation upon which to build.

Maybe. Let’s run it through the TradeStation walkfor-
ward optimizer (Wfo) and see if the system receives
a “pass” or “fail” rating from this brand-new tool that
is now available for use in TradeStation 9.0.
The Wfo will periodically reoptimize using differ-
ent system parameters (specified in the strategy for-
matting section of TradeStation) to see if this system
is a pile of numerical trading debris or the seed of a
truly viable and successful trading system.
In Figure 3 you see the equity curve of the continu- Figure 2: tradestation performance summary. This system is a foundation that
could be used to create a workable system.
ously reoptimized system. It actually improved its
performance compared to the static, single-parameter
set of runs that were originally conducted in TradeStation. It that means the system has a very good chance of being profit-
may not be the straightest equity curve on record, but it got able going forward.
a pass rating in each of the five key categories tested by the Figure 4 displays the summary report for the walkforward
Wfo (overall profitability, walkforward efficiency, consistency optimizing tests. This is what you want to see when the
of profits, distribution of profits, maximum drawdown), and Wfo test is over. Things are looking encouraging for the
80 • July 2011 • Technical Analysis of Stocks & Commodities
 AT THE CLOSE
25000 GoldTascMaster, but let’s look at one
more test result to get a better numerical
handle on what’s going on here.
20000 The Wfo test results in Figure 5 are
demonstrably improved over the best-
case backtesting runs originally done
15000
at the time of system development in
TradeStation. Reoptimizing the original
10000
system every 700 price bars or so helped
keep the system in better time with the
band calling the tune in the intraday gold
5000 market, or so it seems. There are those
who believe that static, unchangeable
system parameters are the best way to
0 develop and then operate a winning
trading system, but I am not a believer
FIGURE 3: WFO EQUITY CURVE. This may not be the straightest equity curve but it did pass in overall profitability,
walkforward efficiency, consistency of profits, distribution of profits, and maximum drawdown. of that philosophy. And this Wfo perfor-
mance summary tells me that periodic
reoptimization is the wisest way to keep
a good system profitable over the long haul.
Remember that these are the preliminary steps that go
into developing and then testing a trading system and that
raw backtest results are one thing, but only the process of
continual optimization, stress testing, and forward-testing
will ultimately determine if the GoldTascMaster will be
able to perform as well in real-life trading as it has in the
statistical-theory world of computer-generated modeling and
backtesting. I will be doing just that kind of testing and hope
to provide further updates and summaries in future issues.
Highly focused, goal-oriented repetition is the only way to
achieve success in any field, whether it involves playing 64th
notes at lightning speed on a Les Paul guitar or designing a
reliable futures trading system that can consistently generate
trading profits in a market that looks more like a World War II
FIGURE 4: WFO TEST RESULTS. Considering it got the pass as its overall result, we minefield than a level playing arena in the financial markets.
could have a system here that could be profitable. Only after it produces consistently profitable walkforward,
out-of-sample results will I be able to determine if it is a
virtuoso performer or just another one-hit wonder.
Stay tuned for further updates, and we’ll see if the Gold-
TascMaster system has what it takes to make it in the world
of gold futures trading or other gold tradables.

Donald Pendergast is a trading systems developer in

Jacksonville, FL. He currently has two trading systems for
the silver futures market at Striker Securities in Chicago,
IL. The out-of-sample track record for the systems can be
viewed at www.striker.com. He may be reached at www.
linearjax.com or via email at [email protected].

Suggested reading
Pendergast, Donald [2011]. “Gold Futures System Music
To The Ears?” Traders.com Advantage, February 4.
_____ [2011]. “Making A Good System Great,” Techni-
FIGURE 5: WFO PERFORMANCE SUMMARY. The walkforward optimizer test results
cal Analysis of Stocks & Commodities, Volume 29:
are drastically better than the original test results. The original system was reoptimized January.
every 700 price bars or so. ‡MetaStock S&C

July 2011 • Technical Analysis of Stocks & Commodities • 81

 AT THE CLOSE

Calling The Tune In The Gold Market

This trading system shows a glint of promise in trading the volatile Comex gold futures contract and it showed some promise,

RUSS SPITKOVSKI
precious metal. but after much forward-testing and further optimization, I
decided to lay it aside until I could learn how to garner more
ust about everyone seems to be aware of the long- consistent profits in the daytrading environment. I discovered,
running uptrend in the gold market, one that is now however, that a swing trading system, one that is allowed to
about 10 years old. Gold market traders, on the other hold positions overnight (as needed), seemed to allow for more
hand, realize that the shorter-term swings and cycles in this consistent equity growth with fewer drawdowns. Here, we’ll
highly emotional commodity are chaotic and unpredictable, and look at the basic code for this gold swing trading system and
that a highly disciplined discretionary or mechanical trading examine why it appears to work. We’ll also determine if the
system is an absolute must in order to make and retain trading method offers promise for budding system builders and trad-
profits. Here is a closer look at an intraday, fully mechanical ers as they seek to work with and even enhance this simple
trading system for gold futures. trading method (see Figure 1).
The gold futures trading system showed real promise in
A gold trading system walkforward mode and also demonstrated a propensity to
Recently, I wrote an article based on an intraday gold futures identify tradable reversal and breakout areas in a variety of
trading system. The strategy trades the full-sized, front-month market conditions. Intraday trend-following methods in the
gold and silver markets are difficult to trade, much less gen-

by Donald W. Pendergast Jr. Continued on page 78

82 • July 2011 • Technical Analysis of Stocks & Commodities

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