Beruflich Dokumente
Kultur Dokumente
June 2012
Trading Warbots
The Impact of High
Frequency Trading on
Markets
Explaining the
Why Most Traders Fall Victim to Mechanics
A High Frequency
False Breakouts
Traders Apology
Vivaldi Revisited
The Benefit of
Seasonality
2
TRADERS EDITORIAL
Placebo Trading
I recently read Brent Penfolds book titled The This raises the question of whether all traders
Universal Principles of Successful Trading. It touches are not placebo traders in the end. Perhaps we
on an interesting concept that every trader really ought ultimately need our setups only to gain confidence in
to give thought to at one time or another the so-called the consistent application of a sound process? This
placebo traders. A placebo trader is someone who would mean that the setup itself was not the direct
has found a trading technique that works and that he determinant of success. Instead, it would be our own
therefore regards as the incontrovertible truth of the behaviour in staying the course of a good trading
market. This may be an indicator in a particular setting, process, and our ability to turn this into a success
a specific chart pattern, or Fibonacci ratios. Whatever story in the markets.
it is it causes the trader to gain an enormous vote of It is arguably impossible to either prove or disprove
confidence in himself and his method so that he can whether Brent Penfolds thoughts have any validity. Find
survive even difficult markets and deep draw downs. out for yourself then whether it is your setup that makes
The amazing thing is that most of these techniques you profitable, or whether those profits are generated
have no statistical significance but can nevertheless by a good trading process applied on a regular basis.
work. In other words, these traders are not that good You may well be amazed by your own abilities.
because they use the tool they trust but because
they are good traders and adhere to their principles Good Trading
which are inextricably linked to their trading approach:
limiting risks, boosting profits and always following
rules. Perhaps they trade on the basis of a nonexistent
relationship, but are nonetheless successful on account
of structured processes. What an insight! Lothar Albert
06/2012 www.tradersonline-mag.com
4
TRADERS CONTENT
PEOPLE
New Products
Stephen Temes
Bookmark Striking out on Ones Own
64 PEOPLE
Stephen Temes 41 STRATEGIES
Candlestick Outliers 61 BASICS
The Benet of Seasonality
Web Review
06/2012 www.tradersonline-mag.com
5
TRADERS INFO
06/2012 www.tradersonline-mag.com
6
TRADERS COVER STORY
06/2012 www.tradersonline-mag.com
8
TRADERS COVER STORY
then can you now see the issue to locate the set up too). By The trend really is your friend
you have with subjective sloping testing a level he means price has when it comes to avoiding false
levels. Most traders will be hit (tested) that level, bounced breakouts.
drawing in their levels differently off that level and then tested it In assessing trends the author
to you therefore meaning that again (this is opposed to simply tries not to overcomplicate it
very few traders will be entering price consolidating around a level and use good old fashion price
at the same level you will be without really testing it). Refer to action, assessing highs and lows F3) True Level of Support/Resistance
entering and without the crowd Figure 3 for an example of three to establish the trend direction.
support the likelihood of the clear tests of a level. He will only go long in an uptrend,
move being a false breakout is short in a downtrend and sit
dramatically increased. Error 3: Not Enough Emphasis on his hands in a non-trending
on Trading with the Trend market. If you want that sustained
Breaking Horizontal Levels Another critical error traders follow through then you need to
Now let us take the same chart make which leads to false trade with the trend.
we used in Figure 1 and ask the breakouts is they attempt to
same room of traders to locate trade breaks against the trend Error 4: Trading off
any horizontal levels of support/ or where there is no clear trend. Only One Time frame
resistance. It is more than likely This is often what a trader will be Some of the more advanced
that the large majority of those doing when attempting to trade traders may be incorporating
traders would return a chart like a break of a sloping level. For trading with the trend as one of Price must test the level, bounce off the level and then retest it again
before it is considered a true level of support/resistance.
the one in Figure 2. example the sloping level trader their criteria but then they often
Horizontal levels are much in Figure 1 would be trading fail to take into consideration Source: www.tradewithprecision.com
less subjective and only trading against a very established what the higher time frames are
the obvious ones will assist us downtrend if they were to doing. Trading off only one time
in ensuring we are only entering go long on the break of the frame is like driving your car on
breaks where a large number of downward sloping trend line. a foggy night. You will have no F4) Multiple Timeframe Analysis
other traders are entering and this We also see a lot of traders trouble seeing what is right in
crowd participation will lead to of horizontal levels make this front of you but it is impossible to
a stronger initial move and more mistake when they find a market see any danger that lies further
follow through as late comers which has formed a consolidation ahead on the road. The biggest
also join the party. box (ie a horizontal level above danger that lurks in the fog for
The author also believes that and below the current price traders is that the shorter term
it is crucial that you only look action) and then they simply enter trend they are trading with is
for what he calls true levels of long if the upper level is broken actually in conflict with a bigger
support/resistance. His definition or enter short if the lower level is more powerful higher time
of a true level of support/ broken. They have absolutely no frame trend. See Figure 4 for an
resistance is a level that has been regard for the current trend and example.
tested two or more times (the therefore often find themselves The most powerful moves with A long trade out of this consolidation box is actually against the higher
time frame trend therefore dramatically increasing the probability of a
more times the better as this will trading against the trend and the greatest follow through will false breakout.
mean a stronger level but also once again a victim of a false occur when you have as a minimum Source: www.tradewithprecision.com
give more people the opportunity breakout. two time frames in agreement.
06/2012 www.tradersonline-mag.com
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TRADERS COVER STORY
Error 5: Waiting for too Much to Figure 5 you will see that the line will always guarantee that the
Confirmation of the trader who has entered on the trader will be getting in at a worse
Break Before Entering break could have potentially hit all price with a much wider stop and
The final critical error occurs three of their targets before the therefore will need the market to
when a trader waits for price to trader seeking confirmation has run on so much further just so
break through and close above/ even entered. they can get a 1:1 target.
below the support/resistance The confirmation trader will If you are trading true levels F5) Trading the Break as It Occurs
level before entering the trade. have no choice but to put their of horizontal support/resistance
On the surface it may seem like stop where the more aggressive in the direction of not only the
a smart thing to do as the trader trader also had theirs. The set up charts trend but also the
is waiting for confirmation that confirmation trader now needs a higher timeframes trend then
the break has held and therefore massive market move just so they there is no need to wait for extra
should not fall victim to as many can get to a 1:1 target (refer to confirmation, enter as the initial
false break outs. But what they Figure 6). break occurs.
do not realise is that by waiting In addition to the above by
for the candle to close they are waiting for one candle to close Conclusion
often getting in far too late and above/below the breakout level is If you are currently trading
missing a large portion of the not going to guarantee the trader breakouts and not getting
move. avoids false breakouts as most the results you desire or you
If a breakout level is obvious false breakouts will see at least have given up all together then Trading the break as it occurs allows for a tighter stop and consequently
multiple targets are hit.
and a large number of other a couple of candles trade above/ hopefully we have demonstrated
traders is also trading it then below the breakout level before to you in this article that they can Source: www.tradewithprecision.com
the break of the horizontal level price rolls over and stops them be an extremely powerful strategy
should be powerful and price will out. Whereas by waiting for that when traded correctly. Ensuring
quickly race away. If you refer close above/below the breakout you have a large number of criteria
aligned is critical for any trading F6) Waiting for the Breakout Candle to Close
strategy and breakouts are no
Strategy Snapshot different. Based on the above
you can now add the following
criteria to your checklist: (1) Trade
Strategy name: Breakout Trading only horizontal levels of support/
Setup: Support/Resistance Level tested twice to be a true level resistance. (2) Ensure it is a level
Entry: As the break occurs of true support/resistance with a
Stop loss: Short: above a recent short-term high; Long: below a minimum of two tests. (3) Trade
recent short-term low
only in the direction of the set up
Take profit: Three targets at a Risk/Return Ratio of 1, 2 and 3
charts trend. (4) Ensure you are
Trailing stop: Optional
also trading in the direction of
Risk and Money Management Conservative
the trend on the next higher time What may seem like a safer option on the surface will actually
dramatically decrease your profitability.
Average number of signals: Depends on market and timeframe
frame. (5) Enter as price breaks
Comments: Hit rate increases if traders avoid errors 1-5
the flat level, do not wait for a Source: www.tradewithprecision.com
close above/below the flat level.
06/2012 www.tradersonline-mag.com
"Fitting trading around your lifestyle is
equally as important as strategy.
On this free webinar we teach you both."
Nick McDonald
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11
TRADERS NEWS
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12
TRADERS NEWS
Green Mountain Chairman Hit with Margin Call US House Prices Inflation-adjusted on the Level of 1895
Robert Stiller, founder and The latest data to the house prices by Robert Shiller show that they
chairman at Green Mountain Coffee have fallen inflation-adjusted to the level of 1895. At that time a high
Roasters (GMCR), has been hit has built in price development that has been reached again today.
with a margin call, following the 51 The data can be accessed on Shillers website.
per cent May 2 when the K-Cup Source: www.econ.yale.edu/~shiller
maker cut guidance. According to
a Form 144 filed Tuesday morning
with the Securities and Exchange
Commission, Stiller indicated he
planned to sell 5 million shares
worth roughly $125.5 million
pursuant to a margin sell-out.
Stiller has long been an active seller StockTwits Unveils Heatmap
of Green Mountain shares. Lately, hes stepped up his activity. In February, Stiller sold 1
million shares, netting more than $66 million in gross proceeds. Looking back, those sales StockTwits is known as a social network for traders, which is, for the most part, accurate. Now the company
look well-timed. Green Mountain has since cut its 2012 outlook. And Starbucks (SBUX) has rolled out a new function that appeals to market-following masses. It is a Heatmap page that provides a
unveiled plans to make its own single-cup coffee brewer that some investors expect will cool visualisation of which stocks the sites 200,000 members are discussing most, in real time. You can break
eat into sales of Green Mountains Keurig brewer. it down by sector and by time frame (last hour, six hours, 24 hours), and the algorithm takes volume, influence
Source: www.marketwatch.com, written by Matt Andrejczak of those discussing the stock, and velocity into account. If a company has never been discussed but suddenly
a small handful of prominent members mention it, it will surface on the heatmap
faster. Naturally Apple dominates discussions. StockTwits founder Howard Lindzon
says Apple has become the Justin Bieber of finance.
Spanish Banks in Crisis Source: www.pandodaily.com, written by Erin Griffith
06/2012 www.tradersonline-mag.com
13
the systems internals we have trade anymore. If it cannot trade Source: www.chartmill.com
to take total abstraction from anymore, it cannot generate
06/2012 www.tradersonline-mag.com
15
TRADERS INSIGHTS
trades and a performance flow. equity curve. To see what on price charts (first order) can
No performance means a flat would have happened if we had potentially be used on the equity
equity curve disabling our equity continued taking trades live curve (second order).
curve analyser to switch the through the system. We resume The most conservative
system back on. This is where live trading as soon as this approach in forward testing is to
paper trading comes in. theoretical equity curve starts initialise the EQA with a paper
going up again. As such, the real trade state. Such a system
Paper Trading (adjusted) equity curve becomes has to prove its worth from the
Paper trading is the act where a dampened, guarded against too beginning, even before it can be
trader pretends to trade a virtual large a draw downs. This whole used for live trading.
account and records everything cycle is shown in Figure 1. The
as he would do with a real results on an actual equity curve EQA Aggregation
account. It is a different kind of are shown in Figure 2. The whole point of building an
discipline to a trader, because EQA and deciding how complex
all emotions are taken artificially Building an EQA it should be, can be taken yet
out of the picture. Nevertheless The Equity Curve Analyser (EQA) one step further. First, there is the
one has to maintain discipline to might seem to be the most idea of an EQA being discrete,
keep recording (and not resetting) important and intelligible part switching the system on/off in
the virtual account. Brokers often of the whole control system. As a very rigid all or nothing way.
provide paper trade accounts. analysis of the characteristics of In a continuous version of the
One place where paper trading markets and financial products EQA idea, a controller could
shines is back testing. Remember shift to an analysis of their turn the tap giving the system
though, what we said about back performance. But in reality such more or less money, based on F2) Results on an Actual Equity Curve
testing in the previous article. an EQA, like most process its recent performance. As such,
Strange enough, the same controllers, can be and are better the amount of money given to
technique of paper trading comes kept very simple. The possibilities a system, or percentage risked
to the rescue in this possible are endless. One could build on any trade could range over
alternative to back testing. an EQA based on trend lines, a [0,1] interval. Zero being the
Paper trading is necessary moving averages (of the equity prohibition of live trading and one
as we must be able to keep curve of course), or even a simple being able to trade or risk the
measuring our (now theoretical) volatility adjusted filter starting maximum amount.
to switch between live/paper Next, one could aggregate a
trading whenever a retracement set of very simple but non- (or
Notes of the equity curve exceeds a low) correlated trade systems
certain Average True Range by multiplexing its money to the Equity curve of a trend following trading system through changing
market environments. Both trend lines and moving averages are
(ATR*) multiple from a record top best performing systems, deriving shown on the chart. Moving averages being slightly better candidates
(*) Average True Range, the average for algorithmic implementation (software). The charts also show the
daily range, taking gaps into account. A
or bottom. Mainly just like the the worst performing systems at new equity curve not only being rescued from a draw down but also
measure for the volatility of a time series. principle behind a volatility based each moment from live trading starting out avoiding one from the beginning. This implies that the
control loop was started in paper trading mode (the most conservative
stop loss such as the chandelier possibilities. Nevertheless, approach through the eyes of a feed forward test).
(**) Independent return streams exit described by Alexander monitoring each system even if Source: www.chartmill.com
Elder. Any technical analysis used its equity curve is composed of
06/2012 www.tradersonline-mag.com
16
TRADERS INSIGHTS
paper trades. After all, remember There is a bit of an analogy Independent Trade Systems). No Where to Start markets, the shorter term systems
the first article of this series. Bad here with computer hardware need any more to back test, fine Many traders and trade systems probably will kick butt.
performance is, in effect, most where we started using a bunch tune curve fit rules and look for a builders probably will have too Just start experimenting and
probably just a synonym for of independent and inexpensive one-size fits all system holy grail. many ideas on what rules and do not forget to share your ideas,
currently out of synch. disks to build one disk far The biggest win in such an systems to combine. But a few feedback and results on your
So the result would be like an more robust than any single aggregate EQA idea is that all places to start looking for non- ASITS with me. There is still a
array of non-correlated** very disk one could buy. This is of the trade systems in the pool correlation could be combining long lot of ground to cover on this
simple systems, together making called a RAID (redundant array can be kept very simple, simply and short systems or retracement idea which I developed in our
for a robust aggregate system of inexpensive/independent being a harbinger for robustness. and swing systems with momentum company (www.chartmill.com).
watched by an EQA playing disks). This far outweighs the After all, simplicity is the ultimate systems and breakout strategies.
the role of a money manager costs building evermore reliable sophistication. Even value systems with growth Next Time
allocating money to the best single disk hardware. This Finally, we should keep systems. It might be even as simple is question time. We will take
performing (in synch) systems application does the same, monitoring the correlation as combining systems making the on some hard questions and
while closely watching the others building a robust system out of between the systems in our same decisions (perhaps built on criticism regarding the ideas in this
(out of synch) by measuring their lots of independent and easy ASITS as that might change moving averages) in different time series of articles that eventually
paper trade performance. As soon to understand (inexpensive) over time as well. There is no frames. That way the true winners led up to the idea of ASITS. Any
as the latter start to improve, these systems. We could introduce need for, or even some danger in longer term time frames will start questions would be very welcome
systems will regain access to real the acronym ASITS (array in, having correlated systems in to shine when markets are trending. by the end of May 2012. Just send
money and resume live trading. or Aggregate of Simple aggregate. In non-trending or more volatile them to dirk@monest.net.
06/2012 www.tradersonline-mag.com
Part 5: Are You an Amateur with a Hobby or a Professional with a Business?
06/2012 www.tradersonline-mag.com
20
The first quarter of 2012 ended
with a whimper. Commodity prices
ended up for the quarter by 3.74
per cent but that is only a small
part of the story. Anaemic trading
dominated commodity price
movement. We have witnessed
some of the smallest ranges in
commodity prices during the first
quarter in memory.
2012 A Year of Low Commodity Volatility? Lean hogs had a range of 11.69
per cent, corn only moved up and
down by 12.72 per cent and live
cattle had a range of 13.22 per
Commodity markets traded in a very narrow range for the first three months of 2012. Range bound trading has returned after a volatile decade with commodity cent. The author views the lack
prices experiencing a secular bull market. This article documents the lower volatility and explains why various markets experienced narrow trading ranges. The of volatility in the commodities
author also looks to the future which promises to be very different from action in the first quarter. market during the first quarter as
21
a significant development. This contracts (1.5 million ounces)
phenomenon is due to a number quickly on the floor of the COMEX
of important factors. exchange. The timing of the order
was interesting. Fed Chairman Ben
Reasons for Low Volatility Bernanke was speaking as the
The MF Global debacle caused order hit the floor of the exchange.
many commodity hedgers, Gold prices plunged due in part
speculators and investors to to the speed of execution of that
lose a lot of money when the order. That order turned all of the
company went belly up and commodity markets around. Gold
apparently misappropriated plunged $100 from the highs on
customer segregated account that day alone. Gold has traded in
funds. Many of the customers of a tight range since.
MF Global have not come back Finally, there has been some
to the futures markets. Many evidence that China, often the
other futures traders have lost demand side of the equation in
faith in the brokerage companies the commodity world, has been
that hold customer segregated attempting to stabilise global
accounts due to the actions of commodity prices as the Chinese
MF Global. This has decreased government fears the effects of
trading volumes. inflation on the tenuous Chinese
Increased activity in computer economy. China is very good at
Andrew Hecht driven, high frequency trading keeping their commodity needs
(HFT), has also narrowed trading quiet to keep a lid on prices. All F1) Gold Daily Chart
Andrew Hecht is a commodity ranges in the commodity markets of these factors contributed to
trader and expert with over 30 that trade on futures exchanges. the low volatility in the commodity
years of trading experience. These computers buy and sell futures markets during the first
He has traded a wide range frequently and often for a few quarter of 2012.
of physical commodities price ticks. The increased activity
and commodity derivatives from HFT trading has increased Highlights of Low Volatility
over the course of his career. volume but has resulted in Precious Metals
Andrew currently writes decreased price ranges. The entire precious metals sector
weekly for the Sovereign The scent of intervention in some combined was up 9.71 per cent
Investor as well as for a key commodity futures markets for the first quarter. The gold and
number of trading services has kept commodity prices stable. silver markets are consolidating
including Trader Hunter and On February 29th a huge sell after the damage done to the
Commodity Trend Alert. order in gold caused the price markets on February 29th. The This chart illustrates the market action in gold after 15,000 contracts
(1.5 million ounces) were sold on February 29th, 2011 as Fed Chairman
Contact: to plummet. Gold was bumping sharp move in precious metals Ben Bernanke was speaking. Gold was approaching the $1800 level
and plunged after the selling.
www.sovereign-investor.com up against its key psychological was primarily due to platinum
resistance level of $1800. A major prices which exploded 17 per Source: www.tradesignalonline.com
Wall Street bank sold 15,000 cent and silver prices that were
06/2012 www.tradersonline-mag.com
22
TRADERS INSIGHTS
15.53 per cent higher during the come! Much lower price ranges range. In 2011 they traded in a
first quarter. All precious metals in the corn; soybean and wheat 25.51 per cent and 39.39 per cent
saw tight trading ranges in Q1 market during Q1 of 2012 was the range respectively. The author
2012 when compared to 2011. outstanding characteristic that believes that these markets will
defined trading. trade in a range during 2012 and F2) Silver Daily Price Chart
Energy that they will continue to make
The energy sector was up 2.56 Soft Commodities a series of higher highs and
per cent for the first quarter of The soft commodity sector higher lows as the bull market for
2012. That is only a part of the was down 1.82 per cent during animal protein continues due to
story. Oil and oil products rallied the first quarter of 2012. Sugar, demographic trends.
sharply during the quarter while cotton and cocoa all posted small
natural gas continued on its gains while orange juice was Base Metals
path lower. When the natural down a touch. The big loser in the Base metals prices moved higher
gas market decides to roll over sector was coffee which dragged during the first quarter of 2012
and rally, watch out the shorts the sector results down. Seasonal with a few exceptions. Aluminium
will have to exit positions and patterns and fundamentals will prices moved 5.53 per cent higher
that liquidation could be very continue to dictate prices. The gaining back some ground from
expensive for them. All energy author believes that softs will losses sustained during 2011. This chart illustrates the market action in silver after 15,000 contracts
(1.5 million ounces) of gold were sold on February 29th, 2011 as Fed
commodities saw lower price regain some ground and prices Nickel prices moved 4.65 per Chairman Ben Bernanke was speaking. Silver had broken through key
technical resistance above $36 and plunged after the selling.
volatility in Q1 2012 than in will edge higher overall during cent lower in the first quarter
2011. Natural gas is the only the balance of 2012. Coffee is the prompting the worlds largest Source: www.tradesignalonline.com
commodity that had a significant authors favourite pick given price nickel producer, Russias Norilsk
range and natural gas prices were action during the first quarter and Nickel, to warn that below $18,000
a one way street-lower. continuing levels of low global a ton five per cent of annual nickel
stocks. The soft commodity production becomes uneconomic. F3) Coffee Monthly Chart
Grains sector saw lower trading ranges With nickel currently trading at
The combined action in the in the first quarter of 2012. $17,840 a ton Norilsk projected
grain markets was up 5.67 per 2012 average nickel prices at
cent for the first quarter of 2012. Live Cattle and Lean Hog $18,000 per ton.
In grain markets the important Live cattle and lean hog prices Zinc prices gained 8.67 per
thing to watch is Asian demand finished Q1 trading mixed. Live cent for the first quarter. A
and the weather. The long term cattle prices were down 4.36 per deficit in the zinc market is likely
fundamental picture remains cent after rising over 12.56 per to emerge by 2014. On going
unchanged. There are more cent in 2011. The lean hogs were demand for the metal coupled
mouths to feed as populations up 7.24 per cent after losing 9.40 with significant mine depletion
grow and arable land is a finite per cent in 2011. was the reason for higher zinc
resource. The grain markets will These two commodities traded prices.
be volatile in the future and price in a narrow range so far in 2012. Lead prices were little changed Coffee is in a long-term uptrend. The price correction during the first
quarter of 2011 has brought the price down close to long-term support.
dips, while scary, create big Live cattle traded in a 13.22 per and down a meager 0.16 per Stocks are low and fundamentally coffee prices should rebound.
opportunities to make significant cent range from high to low while cent for the first quarter. The big Source: TRADERS graphic
profits for months and years to hogs traded in an 11.69 per cent winner in the base metals sector
06/2012 www.tradersonline-mag.com
23
TRADERS INSIGHTS
for the first quarter was the tin Conclusion the first quarter is the tight ranges History tells us to always expect our current economic system.
market. Tin prices plunged last Of all of the commodities that the across all commodity sectors and the unexpected in the world of Eventually, inflation will rear its
year. Indonesia is the worlds author tracks, not one was more the lower volatility of individual commodities. History tends to ugly head as deficits eat away
largest producer of tin accounting volatile in the first quarter of 2012 commodities. repeat itself! at the buying power of the U.S.
for 40 per cent of global sales of than prices ranges witnessed in Looking ahead to the balance The lack of volatility in the dollar and other currencies.
the metal. Indonesia cut supplies 2011. In fact, with the exception of 2012 the author sees a pickup commodity markets during the Higher commodity prices are
late last year after the price of a few most of the commodities in trading activity particularly in first quarter is telling. The MF here to stay in the long run
plunge. Tin was up a whopping traded at a minimum of 1/3 the the grain and precious metals Global scandal resulted in lower and volatility will continue. It
19 per cent for the first quarter! price range. sector. He is looking for higher volumes in the futures markets as is possible that we will see
China is an important factor prices in both sectors. Events some customers of commodity more dips in the commodities
in the base metal markets. The Looking Ahead surrounding Iran will dictate brokerage houses exited the markets over the coming months.
overall rebound in these metals Commodity prices recovered oil and oil product prices in markets. These customers had Global demographics point to
during the first quarter has 3.74 per cent in the first quarter the coming months. Natural lost faith in the futures markets, a continuation of the mega bull
signaled that China may not be of trading in 2012. However that gas prices will surely continue the regulators and the safe trend that started several years
experiencing a hard landing. was not the story. The story for to suffer from over supply keeping of their precious assets. ago in commodity prices in the
conditions unless there is a shock A pick up in high frequency long run it is simply the supply
to the system in the natural gas trading has changed the daily and demand equation with finite
T1) Commodity Volatility Chart Q1 2012 vs. 2011 markets. Base metals prices trading patterns in futures supply and ever increasing
will continue to trade in a range markets with computers trading demand due to more people in
Commodity 2011 price range (high to low) 2012 price range (high to low) Q1 as Chinas recovery weighs on for tiny ticks. February 29th the world.
Gold 46.88% 14.02% the mind of the markets. Animal appeared to be a watershed Just remember, markets do
Silver 89.43% 33.40%
Platinum 39.40% 24.99%
protein should continue to make day in commodities in 2012. The the unexpected and they usually
Palladium 61.12% 18.27% higher highs and higher lows as actions in the gold and silver cause a great deal of pain and
Copper 55.29% 17.60% the year wears on. markets felt like intervention of shake out even the strongest
Sugar 76.86% 16.81% Each year the markets tend to some sort. In an election year the position holders before they
Coffee 48.45% 38.21% experience a shock. Last year it last thing that an administration correct. The author expects
Cocoa 101.58% 23.10% was the earthquake and tsunami in power wants to see is runaway incredible volatility to re-emerge
Cotton 169.12% 14.41%
Orange Juice 38.38% 29.12%
in Japan and the European debt precious metals prices. Volatility in some commodity markets in
WTI Crude Oil 53.21% 15.26% crisis. In 2008 and 2009 we in the commodity markets in the 2012.
Natural Gas 72.68% 51.92% experienced a global financial first quarter was one-third of what In the markets where options
RBOB Gasoline 48.58% 22.03% meltdown. it was in 2011. are not expensive, enhance
Heating Oil 36.11% 14.18% This year we look forward to In the US, Congress and the your portfolio by using long
Soybeans 34.11% 22.07% a hotly contested and perhaps administration cannot agree on commodity option strategies. Due
Corn 49.21% 12.72%
nasty Presidential election in the anything. The level of gridlock to the low level of volatility in the
Wheat 74.57% 13.59%
Live Cattle 25.51% 13.22%
US. The Presidential election in the U.S. is unprecedented. commodity market during the first
Lean Hogs 39.39% 11.69% could be a very close contest. Washington is getting nothing quarter, option premiums have
There is a clear division of done for the American people. gone lower across the board.
61.05% 21.40% ideology in the US at this time. Politicians are spinning their Long options will help an investor
This table shows the range from high to low (as a function of price) of commodity prices for 2011 and compares
it to the range during the first quarter of 2012.
The election or perhaps some collective wheels. sleep at night in these markets,
Source: www.cqg.com other unforeseen event will cause Deficits and the declining which are bound to start moving
the commodity markets to move. value of paper currency define violently sometime during 2012.
06/2012 www.tradersonline-mag.com
StockVest Incorporated
PO Box 47-0420
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25
Flash Orders
Technology has revolutionised trading. Real-time stock tickers, charts and trading platforms have provided investors with an arsenal of tools A Thwarted Scam
that they can apply to use in making their fortune. But, has technology changed things for the worst and do they actually beat the market, as High frequency trading came to
is often claimed? Private investment guru Clem Chambers, CEO of the financial markets website ADVFN.com and author of ADVFN Guide: A prominence due to flash orders.
Beginners Guide to Value Investing, casts his expert eye of the current state of market technology and asks what impact it is having. Flash orders were considered
26
by many in the market to be high frequency guys an edge. dazzle required to sell a hedge by chopping them up into
cheating. Certain traders were You would think so, but having fund to certain kinds of investors. manageable pieces and dealing
given advanced notice of other studied the machine-readable The pitch is basic and well- them out over extended periods.
peoples orders on their way to feeds of key players myself, rehearsed: Invest with a high This tranching of large trading
the market. none demonstrated response tech hedge fund, full of pointy blocks is necessary to get the
This micro-second advanced to news in a way indicating headed geniuses. We are best price for the client.
notice was enough to sweep up superfast traders were Some robots are
cheap shares and feed them getting to the news in working on complex
to the flash order. This let high
frequency traders make a bit of
microseconds.
So, if in theory this Pure speed positions that are,
in practice, large
money on each of these orders.
Small profits turned into huge
is possible, up until
recently and over an however, is not insurance policies for
institutions with huge
ones when repeated hundreds of
times a day. This felt like a scam
extended period of
time, this is not what in itself abuse. exposures needing
to cover them with
and was stopped. is driving the market. hedges. Market
It was a scandal. It was the Another question to robots doing this
advanced notice given to a sub- ask, who is the most successful, trading at the speed of light. Our grunt work are overwhelmingly
set of the market that created the richest trader of all time? The machines are feet away from the the major component of high
inefficiency that allowed this profit answer is of course: Warren stock exchanges computers. frequency trading and for that
not simply the raw speed of Buffett. An ultra-low frequency Lights, cameras, action! matter, the overall trading on the
execution. It was outrageous that trader. Meanwhile, where are City marketing men always sell worlds markets.
exchanges should give advanced the incredibly rich day traders? the sizzle not the steak. High This high frequency trading
warning in the first place. Apart from the emotional logic, frequency trading is the latest is a benign phenomenon that
Once this edge was removed, why should faster be better when reason to be parted with two and improves the efficiency of the
speed was irrelevant for this human plus speed normally 20 per cent as the hedge fund market, but it is not what people
strategy and the free ride equates to hospitalisation? industry piles on the smoke and think of when they hear the
ended. However high frequency Of course, the reason high mirrors. phrase.
trading had by then earned its frequency trading is in the
infamy and has kept it. headlines is because it is so High Frequency Trading Conclusion
This story might not sound sexy. You do not have to be Not What People Think It Means What is feared when it comes to
Clem Chambers convincing enough you say? too bright to conclude that High frequency trading is just the high frequency trading is that its
Surely trading at trans-human high frequency trading sounds kind of slick story that lures in capacities are effectively market
Clem Chambers is CEO of speeds is a way of making like cheating and we all the same kind of investors that abuse. Market abuse is illegal.
ADVFN (www.advfn.com). money? understand cheating is a tried fell for Bernie Madoff and the It is the job of regulators to spot
His book 101 Ways to Pick and tested way to win. Winning legion of funds that lost other activities that disrupt the market
Stock Market Winners was Machine-readable Feeds the financial game by cheating peoples shirts while skimming off and disallow them. Pure speed
published on 24th February Is Faster Really Better? should be a formula for infinite fortunes. however, is not in itself abuse.
2011 by Beautiful Books, If a computer can read news, wealth. What could be more Once you leave the financial Like all tools it can be used as a
Paperback, 6.99. interpret it and jump on a hypnotic than that prospect? Barnums behind, high-speed weapon, but that is no different to
bandwagon before anyone As such, high frequency trading robots sit in the markets any number of potential risks that
else, surely it would give the trading has all the spice and and work out large orders will always stalk the market.
06/2012 www.tradersonline-mag.com
A High Frequency Traders Apology
06/2012 www.tradersonline-mag.com
29
TRADERS INSIGHTS
Automated trading systems Basically the more you trade, single market participant who BUY(owner=Jayne, max_ Why Does Everyone
have replaced these human the more money you make (all believes he can make a profit by price=20.07, quantity=100) received Pile on at the Same Price?
market makers for a very good else held equal). So how can a offering more than $20.05. In that at 10:31:30:639, 212ms too late The astute reader will probably
reason cost. For a strategy market maker trade more? case, Jayne will always trade first, ask this straightforward question
(and note: this strategy works The answer is that he needs to be since he placed his order earliest. This is why automated market why did Mal and Jayne both agree
only for a few securities, no close to the top of the order book. This fact shows why speed making has morphed into high that the best price to offer was
human can track hundreds of As we saw in our previous example, matters. Suppose that at precisely frequency trading, and why $20.07? Isnt it possible that Jaynes
stocks mentally) to be worth Inara traded more than River, and 10:31:30:000 AM, new information so much effort is poured into calculations predicted the right price
a financial professionals time River traded more than Kaylee. The becomes available which suggests creating low latency systems. to be $20.075, while Mal thought it
and effort, it must generate at simplest way to reach the top of that it will now be profitable to Whoever places their order first was $20.071? The answer is yes, it
least $20-200k profit each year the order book is to offer the best place a buy order at $20.07 will be the most likely to trade. is quite possible that Mal and Jayne
(this assumes a human smart price. Supposing Jayne A second reason actually disagreed on the best
enough to day trade would wants to jump to the why speed is price to offer. There is no reason
work for $20k/year). In contrast,
a single server in a data center
top of the queue on the
buy side, he needs to The simplest way to important is because
when the market
whatsoever why Mal and Jaynes
computer programs or trading
can run hundreds of strategies
at a cost closer to $50k/year,
offer a better price than
Mal: reach the top of the moves, traders
often wish to cancel
strategies would both predict prices
identical to within many decimal
and they can do it faster and
more accurately than any SELL(owner=Kaylee, order book is to offer their orders. At
10:31:30:000, an
places.
However, regardless of what
human.
The rise of algorithmic trading
min_price=20.21,
quantity=200) the best price. event occurred which
suggested the price
their trading strategies say, they
are not permitted to place orders
is merely a special case of of the security will at their best prices. SEC Rule
machines replacing humans. SELL(owner=River, go up. It is likely 612 explicitly forbids offering to
Traders are no more immune to min_price=20.10, quantity=50) perhaps a press release has beneficial for River to cancel buy or sell securities in subpenny
this than factory workers. hinted that the price will go up, or her sell order at price 20.10 and increments - i.e., Buy 100 shares
BUY(owner=Jayne, max_ a correlated security has just gone raise it to $20.20. Conversely, @ $20.07 is legal, while Buy 100
Latency and Order Flow price=20.05, quantity=100) up in price. Because of this, both after this event, it might also shares @ $20.075 is not. This
For market makers, the name of Jayne offers a better price than Mal and Jayne want to change be beneficial for another trader is also called the Sub-Penny
the game is order flow. As long Mal, so he will trade first. the price on their orders to $20.07. (say Wash) to pounce on her sell Rule. Prior to 2001, the limit was
as your buys and sells are well Whoever happens to be fastest will order at $20.10. River can make actually $1/16 or $0.0625.
matched (i.e., every time you buy, BUY(owner=Mal, max_ rise to the top of the book: more competitive sell offers if In real markets, with more than
you also sell), your profit is going price=20.00, quantity=100) she has the ability to rapidly pull just four to five participants, you
to be proportional to SELL(owner=Kaylee, min_ them from the market. If Wash can also expect many orders to be
Of course, there is a balance to price=20.21, quantity=200) has the ability to pounce on placed below the top of the book
(# of shares traded) x (Ask price - be struck. Since Jayne will only Rivers orders after the market (the highest bid price), at $20.06,
Bid price). be earning $0.05/share traded, he SELL(owner=River, min_ moves, she will need to be more $20.05, etc. But the phenomenon of
needs to make sure this reward price=20.10, quantity=50) conservative, perhaps offering many people piling up near the top
The constant of proportionality outweighs the risks. Let us only $20.15 even though she of the book does repeat in real life.
depends mainly on the skill of the suppose that the border between BUY(owner=Mal, max_ would be happy to sell at $20.10
high frequency trader at gauging expected profit and loss is $20.05 price=20.07, quantity=100) (that way she only loses $0.05 if This article is reprinted from
the risks. that is to say, there is not a received at 10:31:30:427 Wash pounces). www.chrisstucchio.com/blog
06/2012 www.tradersonline-mag.com
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31
TRADERS TOOLS
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06/2012 www.tradersonline-mag.com
32
BOOKREVIEW
BOOKREVIEW
Top Traders Making Big Profits from the Crash of 1929 to Today
Financial and commodity markets the 2008 subprime mortgage housing bubble; and finally Jesse
are characterised by periodic meltdown, this book will chronicle Livermore, who shorted stocks
crashes and upside explosions. how a select few traders and made a fortune in the 1929
In retrospect, the reasons behind anticipated market eruptions and stock market crash.
these abrupt movements often positioned themselves to reap Author Vince Veneziani
seem very clear, but generally huge profits. describes the economic and
few people understand what Traders and events discussed financial forces that led to each Title: The Greatest Trades of All Time
is happening at the time of the include Paul Tudor Jones, market cataclysm and how these Subtitle: Top Traders Making Big Profits
moves, and fewer still have the who shorted the stocks prior individual traders perceived what from the Crash of 1929 to Today
conviction to make a big bet to October 19, 1987, the most was happening beforehand and Author: Vincent W. Veneziani
to capitalise on their unique severe one-day crash since 1929; decided to place big bets, often Available on: Hardcover, eBook
insights. However, some top Price: 30.99
George Soros, who made an at great risk and in opposition to
traders and investors have the Publisher: Wiley Trading
estimated $1 billion shorting the consensus opinion at the time.
Website: www.wiley.com
ability to stand apart from the British pound during a currency This book brings to life important
crowd, embrace a view that is crisis in the 1990s; Jim Chanos, historical moments in the About the author:
contrary to other market players, who spotted Enron's fraud early financial markets and provides Vincent Veneziani is Markets Medias content
and the willingness to make a big on and shorted the stock prior contemporary traders and development manager and author of the book
bet. When markets break their to its complete collapse; John investors insight on how great The Greatest Trades of All Time: Top Traders
way and there is a mad rush to Making Big Profits from the Crash of 1929 to
Templeton, who's career was traders make great trades.
Today. He has appeared on CNBC, BBC,
get in or out of the market by bracketed by two amazing trades: The Greatest of All Time is Russia Today, Barrons and other financial
the general public, the traders buying undervalued U.S. stocks a fascinating historical narrative publications. He has also written in the past for
who got in early made the huge near the end of the Depression, on how big traders profited Business Insider, Gawker Media, AOL and the
profits. just prior to World War II, and during financial market upheavals New York Daily News. He currently resides in
The Greatest Trades of All shorting Internet stocks just from one of the top business New York City.
Time describes how top traders prior to the collapse of the experts out there. It is for anyone
made huge profits during the Internet bubble in 2001; John interested in the history of trading
most momentous market events Paulson, who shorted subprime and profit and for anyone looking
of the past century. From the mortgages in 2008, capitalising to learn from some of the best
1929 stock market crash to on the collapse of the U.S. traders in our history.
06/2012 www.tradersonline-mag.com
33
TRADERS TOOLS
FusionIQrank.com
It is the investors dream to choose only those stocks or ETFs among the thousands
offered that promise the highest profits. At the same time it would be helpful to
receive information if certain stocks or industrial sectors produce new signals. Other
requirements: Screening should combine not only technical but fundamental criteria
as well. Of course, all this should be affordable and easy to use. Wishful thinking?
Not at all, the web-based software Fusion IQ Rank offers all this and more.
ETFs that are listed at US stock on expected profits and cash Source: www.FusionIQrank.com
exchanges. ow. Both scorings are added
06/2012 www.tradersonline-mag.com
34
TRADERS TOOLS
to one Master-Score that has with a single click. The top-down change. Therefore you get very
a value between zero and 100. approach is easily implemented as good insight into the current
Thus, the user sees at one glance well. You start with the strongest market situation and the various F2) Ranking
if a share is interesting or not. industrial sector and work through sector rotation. The alarm
to the strongest titles. functions have to be highlighted
The most important functions of A highlight for traders is the as well. And for creative treasure
Fusion IQ Rank are: second menu Trading Screens. hunters there is the screening tool
Updated technical signals are that can be set up individually, but
Quantitative rankings of over shown in table form. There are is tied to the rankings.
8000 stocks, industrial sectors a lot of signals to choose from,
and ETFs with clear signals for example breakouts, short Pro-Tool for Everybody
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technically interesting stocks A trader who, for example, wants a success all around. The user
Chart Book: Slide Show- to identify all stocks with a new gets a modern, structured and Investors can nd interesting stocks that are updated daily and
evaluated based on technical and/or fundamental criteria using the
function for charts yearly high gets a list ordered by time saving tool that enables a Rankings menu. There are different rankings for stocks, industrial
sectors and ETFs. After the rst evaluation the user can make further
Portfolio with monitoring und subsectors that full this criteria. systematic choice of interesting limitations, interesting stocks can be added directly to your own
alarm functions Signals from the past are shown stocks, industrial sectors and watchlist. A convenient view of all charts with slide show is possible
as well.
Watchlist with monitoring und in this table as well as information ETFs. The ideal conguration Source: www.FusionIQrank.com
alarm functions about performance, volume and and the ease of use invites you
Individual screenings short interest. If you want to take to do treasure hunting and
a closer look at one stock you analysis. Investors receive several F3) Snapshot
On-Road Test just click on the ticker-symbol. investment ideas; traders can
The core of the platform consists The result is a report based lter attractive candidates from
of three parts (apart from a on the stock. You can print all a huge universe. The use of the
research and charting item) that results, convert them into an watchlist and portfolio function is
are introduced in the following. excel-sheet or save them as PDF. very convenient and helpful. The
Under Rankings investors can And the best: you can also take user is always kept up-to-date
retrieve rankings (updated daily) a look at them in a slide show if the rankings of candidates in
that are based on technical and/ a perfect feature to get a quick his portfolio change or if there
or fundamental criteria. overview of the selected stocks. are new timing signals. Therefore
An example: An investor wants The third part includes all the software serves as a kind of
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click the list appears (see Figure page, select certain main criteria of charting, that allows browsing
2). It is possible to make further (for example market capitalisation, through umpteen stocks within
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technology shares with a buy portfolio and the watchlist. The can apply for a free 30-day trial You can choose one stock and then a snapshot is shown, that includes
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follow this stock in the future, is shown as well as the current per month) and let the software Source: www.FusionIQrank.com
you add it to your own watchlist rankings and their historical convince you of its qualities.
06/2012 www.tradersonline-mag.com
Market Stages and Trading Strategies Part 3
While the news reports focus where fund managers are likely to
on earnings announcements, rebalance.
debt, and other current events, As the S&P 500 climbed higher
technical traders focus on key week after week (above the 50
price levels to anticipate where SMA and above the 20 EMA
markets will likely change on the weekly chart), technical
direction. Earnings reports have traders rely on supply zones to
been good. According to briefing. indicate where fund managers
com, over 70 per cent of reported are likely to distribute, signalling
earnings have beat expectations a trend change from an uptrend
today, but that is actually below (stage 2) to a downtrend (stage
Tillie Allison the almost 80 per cent rate 4). In Figure 1, the supply zone is
posted so far this quarter for identified in advance and when F1) SPY Weekly Chart
As an instructor for Online all companies. Overall, the S&P the S&P 500 began to show
Trading Academy, Tillie began 500 rallied more than twelve per weakness on Friday March 23,
teaching following the financial cent in Q1 of 2012 and on Friday, 2012, technical traders reacted
disruption of 2007. Her goal is to March 23, the S&P 500 closed by either protecting profits in long
educate students on the negative for the week. Again, on positions and/or selling short
realities of the markets and to Friday, March 30, the S&P 500 in stage 3 and stage 4 (stages
teach students how to develop closed negative for the week defined in TRADERS 03/2012).
a skill set to successfully trade suggesting that the S&P 500 was Stage 1 is accumulation, stage
the markets. She is a member weakening. 2 is an uptrend, stage 3 is
of The Market Technicians Fund managers rebalance distribution, and stage 4 is a
Association, The Certified portfolios using tactical asset downtrend.
Financial Planning Board of allocation models and technical
Standards, has an Associates traders use key price levels to Trading Derivate
Degree in the Applied determine where fund managers Markets on Smaller Time frames
Science of Real Estate, and a are accumulating (buying) and The SPY is the most popular
Bachelors Degree in Business distributing (selling) a variety traded Exchange Traded Fund Moving averages are used to determine the direction and the strength
of the trend. The supply zone of 142.84 and demand zone of 136.07
Administration. of global markets. Weekly (ETF) and used primarily for are used to identify trading opportunities.
analysis of the S&P 500 prepares portfolio management. After the Source: www.tradestation.com
technical traders in advance of S&P 500 declined more than four
06/2012 www.tradersonline-mag.com
38
TRADERS STRATEGIES
per cent off the weekly highs, 136 and the exit will be near the The demand zone of 136.07 on
technical traders use the demand 20 EMA of 138.56 on the daily the daily chart is near the 1360.70
zone to anticipate where fund chart and the trade parameters demand zone on the ES. With the
managers will buy back in and/ will be identified on smaller demand and supply zones clearly
or cover short positions. Futures timeframes. labeled on the 240-minute chart,
traders also analyse the SPY and the high line of the demand zone
the cash S&P 500 index to cross Strategy for Buying in a Weekly is identified as 1367.50 and the
reference data. Cross referencing Uptrend and Daily Downtrend high line is used to plan the trade
data means to use the analysis Mean Reversion is a popular entry price. The high line is
from the weekly time frame as a trading strategy. With the demand defined as the proximal demand
point of reference when analysing zone of 136.07 on the weekly line relative to the supply zone.
the daily chart of the same, time frame, futures traders The high line or proximal
related, or correlated demand line was
derivate markets. identified on April
On April 5, 2012,
the SPY closed below The trader must 17 at 8:00 am CST
when the ES clearly
the 20 EMA on the
daily chart confirming understand each traded out of the
zone (labeled with a
a trend termination
(stage 4 downtrend). component of 1 in Figure 3). When
the proximal demand
In Figure 2, there are
key price levels from the plan in detail. line is identified on
the 240-minute time
F2) SPY Daily Chart
the weekly chart and frame, the trader can
there is also a moving plan to use that level
average for the daily trend. The cross reference the data with for an entry zone for buy orders
demand zone of 136.07 is a very the ESM12 (ES) to determine the the next time that price trades
important level since it is a weekly parameters for a high probability into the zone. As price drops into
demand zone. The demand zone trade in the futures market. Since the zone trader will determine
of 136.07 was tested on April 10 the market is in a stage 4 on the trade parameters including the
and the SPY gapped up on April daily chart, the 20 EMA is used entry price, the stop loss, and
11, confirming the validity of the as a dynamic supply zone and profit targets.
demand zone. Planning to buy will be cross referenced with
in the demand zone using the horizontal supply zones on an Pullback Plan and Execution
moving average on the daily chart intraday time frame of the ES. The rally out of the proximal
as a profit target, is called, mean In Figure 3, the chart of the demand zone on April 17 reveals
reversion strategy. Since the 240-minute time frame is used to that there is demand (buying
trade is using a weekly demand cross reference and fine tune power) near 1367.50 on the ES. The SPY closed below the 20 EMA on the daily timeframe on April 17,
2012. This trend termination prepares traders for continuation of stage
zone, the trade is in the direction data points from the higher time On April 19, price trades into 4 and is used to trade the mean reversion strategy as price rallies from
demand zones to the 20 EMA.
of the primary (weekly) trend but frame. The 20 EMA on the daily the zone and the parameters
the daily trend is down. The entry chart is near 138.50 and the ES for the trade are identified on Source: www.tradestation.com
will be near the demand zone of has a supply zone near 1385.50. the 5-minute chart. It is very
06/2012 www.tradersonline-mag.com
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TRADERS STRATEGIES
06/2012 www.tradersonline-mag.com
Examine the Power of Candlestick Reversal Patterns That Are also Bollinger Bands Outliers
Candlestick Outliers
What is a candlestick outlier? It is the combination of a Bollinger Band Outlier while also qualifying as one of the candlestick
reversal patterns. When price closes outside the Bollinger bands (more than two standard deviations) it is an event that
happens only about four per cent of the time. Additionally, if the outlier is also a candlestick reversal pattern, this would lower
the odds of an occurrence considerably and create a truly Blue Moon Event worthy of a speculators attention. However,
by choosing to only apply this strategy to daily charts, it gives the speculator the luxury of scanning across the universe of
tradable asset classes including stocks, forex and commodities increasing the odds of finding one.
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TRADERS STRATEGIES
For the sake of simplicity risk Figure 1: Soybeans Daily 11. Bearish engulfing. Yes, the
is defined by violating the highs 1. Short partial outlier of little body is the same colour
or lows of the candle pattern shooting star. as the big body (normally
and reward is three times 2. Short bearish engulfing partial different). This is an accepted
risk making most of these outlier unprofitable. exception when smaller body
candlestick outliers profitable. 3. Bearish engulfing barely is really small.
Either targets or stops exit qualifies as outlier with both 12. This is a total outlier of bullish
trades. Of course traders may candle shadow just touching harami and yet another
elect to extend the holding the bands. exception. The smaller
period in trending markets. 4. Hammer partial outlier. Was body is usually an opposite
Money management could also preceded with a complete colour. When the pattern is in
be tweaked with adjustments outlier but was not a candle oversold territory for bullish
with stops before hitting the pattern. Almost was a harami, harami this qualifies and
target level to lock in profits or but smaller white body is called a homing pigeon
create a break even situation. needed to be totally inside happens enough to make a
One Cancels the Other (OCO) preceding black candle. note of it. As a bonus the little
orders are recommended. 5. Bullish harami as partial outlier. black body was also engulfed
Let us examine three different 6. Hammer partial outlier. by subsequent white candle
asset classes with three different 7. Bullish harami needed to be (Bullish engulfing Pattern).
scenarios: 1) A sideways patient to cash in on this one. And the engulfing also was a
market with soybeans (future). 8. Bearish engulfing partial partial outlier.
2) An upward trending market outlier. 13. Spinning top not truly a
with BMC (equity). 3) Lastly, a 9. Bullish harami nail biter that reversal pattern, but does
downward trending market with paid off. indicate hesitation of the
USD/JPN (forex; long U.S. Dollar/ 10. Another bullish harami barely trend. Also, notice how the F2) BMC Outliers
short Japanese Yen). touching the lower band. bodies are becoming smaller
and smaller indicating a loss
of momentum as the old
Strategy Snapshot resistance area from February
is approached. Partial outlier.
14. Hammer partial outlier and
Strategy name: Candlestick Outlier unprofitable. Notice how
Strategy type: Buying dips and selling rips support area was violated
Time horizon: Daily charts with swing holding time with first closing low below it
Setup: Bollinger Band outliers; Setups come from the daily charts looking for paving the way for additional
overbought or oversold conditions for short or long positions respectively
declines.
Entry: Candlestick pattern break outs on daily charts or follow up intraday trading
with bias from daily pattern
Stop loss: Above the high or below the low of the candle patterns
Figure 2: BMC Outliers
Take profit: When position rewards 3x the initial risk
1. Partial bullish harami. Could One stunningly great set up with a dip in an up trending market.
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TRADERS STRATEGIES
break even when lower low at mean reversion of Moving indicating hesitation of the
was made. Average (20). existing trend (down) given
2. Partial bullish inverse doji 3. Partial bullish engulfing and extra credence by the high
hammer (being aware of counter trend trade that was a wave pattern just before
potential double bottom). loser. it. The high wave boldly
3. Partial no candle pattern. 4. Barely touching the lower illustrates hesitation of the
No trade taken by this bands with this bullish harami. current trend. Buying above
strategy. However, not to 5. Total outlier of spinning top the shadow of the spinning
forget basic top would be the way
technical to approach this for a
analysis, there
was a significant Any trader little confirmation.
12. Partial as with
declining wedge
that could have will see improved many examples
before this, we
been taken upon
breakout. results by noticing are looking at two
different candle
4. Partial, but body
totally outside candlestick outliers. signals. The black
bar engulfs the
lower band. little white body
This is just a before it forming a
doji not a major reversal which is also part of a bearish bearish engulfing. The little
pattern. However, it is a harami. white body is also a bearish
dip in an uptrend which 6. Partial counter trend hanging man.
is very good. Another piercing pattern. 13. Almost total outlier hammer
interesting observation is 7. Total outlier, but not a candle that is still working. F3) USD/JPY daily
the magnitude of change. pattern. I would be inclined
Notice how the candles to take those that are flowing Conclusion
were getting progressively with the trend and this Constantly referencing the daily
smaller indicating the selling definitely qualifies. chart and candlestick dynamics
is running out of steam with 8. Partial hammer with long can really help deliver very
the doji, by itself, indicating shadow on top. Count trend profitable trades with high risk/
hesitation of the downtrend. trade as loser. reward ratios that can more than
9. Almost total outlier doji overcome many small losses for
Figure 3: USD/JPY Daily hammer. Counter trend trade swing traders. For the day trader,
1. Partial outlier bearish harami loser. paying closer attention to the
which actually was a counter 10. Partial hammer counter overall daily patterns will provide
trend trade from prior price trend trade as yet another (we believe) higher octane entries
action (not shown). loser. See a theme here yet? and exits. Regardless of style, Multiple set ups in a down trending market with some of the
countertrend trades working as well.
2. Partial Hammer that was 11. Partial not one of the any trader will see improved
also part of bullish engulfing. reversal patterns, but small results by noticing candlestick Source: TradeStation
Counter trend that lost steam body is a spinning top outliers!
06/2012 www.tradersonline-mag.com
Confirm Entry/Exit with Less Risk
06/2012 www.tradersonline-mag.com
47
TRADERS STRATEGIES
to use both indicators and get article is to identify the small crossovers of MACD (points #
the most benefit from them. If differences and locate exact entry 1, 6). This shows that there are
we draw MACD below the price and exit points for confirming some correct entry and exit levels
line, you will see some good results. However, this will not in Stochastic between points
accumulation in a stock when happen if a trader takes a long 1 and 6. If we check the trend
the indicator is cutting upward or position and immediately hits between points 1 and 6, it is
the crossover is below/near zero. a stop loss then the price line up and MACD also shows buy
The opposite is true on the other moves on to the target price. By indications.
side, heavy selling pressure or putting MACD and Stochastic On the other hand, point
profit booking can be seen while together below the price line, you 2 which is a sell signal of
the indicator is cutting downward will see two to three crossovers Stochastic occurred immediately
or the crossover is above/near of Stochastic between two after point 1 which is a buy
zero. These events can be seen in crossovers of MACD as indicated signal in MACD. Here, a general
Figure 1. in Figure 2. scenario occurs: A trader will
We will take MACD (12,26,9) take a buy position at point 1 and
and Stochastic (5,3,3) below the Entry makes a stop loss below two per
price line. The general difference The right entry level determines cent or at the recent low level for
between the two crossovers in the profit of a trade. In Figure the target of the next crossover
MACD is 15 to 25 candles, and 2, we can see some crossovers from above zero in MACD. But
five to ten candles in Stochastic. of Stochastic (points # 2, 3, 4, in this case, its stop loss will be
Now, the main objective of this 5) which are between the two triggered because Stochastic is
Strategy Snapshot
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48
TRADERS STRATEGIES
indicating a sell signal at point 2 indicated in Figure 3, as points 7 to Exit The stop level is of the same news, rumours from other
and then the price line reaches 10 in the indicator graph. The exit level measures the profit significance as entry and exit traders or low volume in the
the target level. The trader earned from the position. Only points. For this strategy the underlying occur.
should wait for a buy crossover Position Size a proper exit plan will realise recent three candles lowest
in Stochastic after the buy signal A trader will take a large position profit with less risk. In Figure 3, low level will be the stop level Review and Outlook
in MACD. In Figure 3, point 1 and if he is convinced about the trade. point D which is the crossover for a buy position, and vice The objective of this article is
point 2 are not proper levels to But if any news, rumours or some of MACD above zero, is the exit versa, the recent three candles to identify successful trades by
enter the underlying but point 3 is fundamental information come level if the entry level is point B in highest high level will be the stop combining MACD and Stochastic
the right level for opening a buy out, the price line will be highly the price chart. In simple words, level for a short position. As a crossovers which are two of the
position because its low levels affected and the trader may face an immediate MACD crossover result, the trader will not ruin most well known indicators in
may hit the stop loss if the trader huge losses. Hence, the position after entering the position will be his portfolio should successive the world of technical analysis.
has taken a buy position earlier at size should be determined as to the exit level. Only the most risk loss making trades occur. In With this article we can use and
point A in the price chart. whether it is a confirmed trade or tolerent traders can speculate calculation, risk = entry level - analyse both the indicators not
This strategy is only for short to not. Practically, a trader should and open an inverse position three candles lowest low level only for oversold and overbought
medium term time periods. As we not take risk more than two per against the MACD trend shown in for a buy position, and risk = conditions of the stock but also
discussed earlier about first a buy cent of his margin account. So, Figure 3 as points G (entry) and F three candles highest high level for justifying making successful
and then a sell position, in the same the number of stocks = 0.02 * (exit) i.e. crossovers of Stochastic - entry level for a sell position. trades out of them. This strategy
way, a trader can first do a short margin account / (difference between two MACD crossovers The stop can be triggered if can be used in the 1-hour and
sell and later cover the position i.e. between entry and exit levels). (points 7 and 10). some unexpected fundamental daily chart.
Read in the next TRADERS July issue from 28. June 2012
INSIGHTS
The Long Sought for
by Mustapha Azeez
Ultimately, Holy Grail exists in trading and it is
COVERSTORY what this article is all about. Those who think the
secret lies in a complicated trading system are
Poker for Your Prots wrong. Key is to keep everything safe and simple.
by Thomas Wacker PEOPLE
A successful poker player must know when he should Mark Minervini STRATEGIES
push his stake, wihtdraw, or just pass. This is true for Mark Minervini is one of Americas most Trading with Heikin-Ashi Charts
trading as well. However, here you do not look at the successful stock traders; a veteran of Wall by Christian Kaemmerer
face of your opponent but have to make your decisions
by means of technical analysis. The charts tell the trader
Street for nearly 30 years. Minervini is featured Gradually the more or less familiar Heikin-Ashi
what he has to do: waiting, entering or passing? Playing in Jack Schwagers Stock Market Wizards charts find their way into the world of trading.
poker and trading have a lot in common, therefore it Conversations with Americas Top Stock Let us have a look at the world of Japanese
should be noted: poker for your profits. Traders. candlesticks and be convinced by its visual clarity.
06/2012 www.tradersonline-mag.com
Low Risk, High Reward
Red-White-Red
Pattern Trading
Pattern Trading can be a low-risk and highly profitable style. Ever-returning
formations are easy to describe, and can be easily tested for their profitability. The
pattern introduced here does not only awaken associations with the Austrian flag
but might also fill up your cash box for vacationing. This article will show how we
can use it to our advantage.
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51
TRADERS STRATEGIES
pattern. This day has to be the that the expected uptrend will trade at a loss. Hence, we have
lowest low of the three days. On follow the red-white-red pattern, to define our initial stop and
the last day of the pattern there which we have discoverd. therefore determine the point loss F2) Price Pattern Red-White-Red
is another negative day. The Only when the market exceeds which is the maximum possible
correction of the previous day is the high of the last two candles, for this trade.
over, though the bears are not in other words when the bulls As an entry point we decide to
strong enough to push the price clearly have taken over, is it your enter the market as soon as it is
under the previous days low; the time to enter the market. clear that new highs are forming.
market has to trade above the When the market rises above If this new high proves a bull trap,
low of the white candle, however this point and therefore makes and the market falls below the
close under its opening. In Figure a new high, one can no longer low of the white candle, it is clear
2 we see several examples of this talk about selling pressure. The that in this case the pattern has
pattern. The two upper charts market seems to have made not worked, and we have to close
show the DAX30 index, both up its mind about direction our positions again.
lower charts show the S&P500 after three days of indecision. Therefore, the span between
index. In addition, the low of the white the high of the last two days (=
The idea behind the pattern, as candle of the formation was point of entry) and the low of the Figure 2 shows the appearance of the price pattern in the DAX30 and
S&P 500 indexes. The red-white-red pattern is made up of a total of
we can see in the chart, is that a confirmed by the new high as a formation (= worst-case exit) is three days. The first and the last day close below its opening, the middle
day builds the lowest low of the triplet and closes above the opening
trend reversal is imminent after swing low. the risk that we take when trading rate. If the high of the previous two days is exceeded, another breakout
these three days of indecision In practice, you can make this this formation. to the upside can be expected after three days of indecision.
Source: www.tradesignalonline.com
and todays higher low. Whether entry with the appearance of To determine the number
this pattern is significant enough, this pattern by sending a valid of stocks we should buy from
and how you could trade it, is stop-buy order to your broker on these two values, we remember F3) Position Size
what we will discuss next. the high of the last two days for the old money management rule
the following day. However, you stating that one should never
Entry should only enter the market if risk more than one percent of
With this definition of the pattern, it has not already opened with a ones trading account in a single
we know its setup. However, gap above the formation. trade. The number of the stocks
to be able to make money with we should buy therefore results
such a pattern we have to decide Position Size from the equation: number of
exactly where the position should Paracelsus knew that the dose stocks = 0.01 x trading account
be opened, how large it should decides whether it is poison / (entry level exit level). This
be, and when the position should or medicine, and it is similar approach is visualised in Figure
be closed hopefully with an for us traders when we have to 3.
appealing profit. The pattern determine the size of the next This ensures that we do not
itself (and this is true for all sorts position. ruin our portfolio with several A possible entry into a long position at the high of the two last candles of
the pattern. The worst-case scenario for the first day is when the market
of patterns) is not a sufficient Before we think about how successive losing trades. On takes the old highs, then turns and falls under the low of the formation
(= stop point for the long trade). The position size results from the risk of
reason to jump into the market many stocks we should buy, we the other hand the position size the trade (28.60-28.04 = 0.56) and the account size. In case you want to
immediately and build a position. have to consider the point at is large enough to promote the trade this pattern e.g. with a trading account of 10,000, you would risk
1% of your capital when you trade 10,000 * 1% / 0.56 = 180 stocks.
First of all, the market has to which our trading idea proves development of our portfolio in Source: www.tradesignalonline.com
confirm the idea. It has to show false and we have to close the case of a win.
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TRADERS STRATEGIES
Exit this approach yourself, you will In cases where the market
So far I have shown how to quickly see that you can combine explodes after the appearance
recognise the red-white-red this exit with different patterns of the pattern it is not difficult to
pattern, how large the position and entries. trade further (see Figure 2), we
should be, when to enter the We can see successful merely wait and count the money.
market, and where the initial stop patterns in the chart immediately More challenging are the cases
should be placed. However, this ex post, so I want to show a few where the market does not go up
will not have made us any money, examples in Figure 4 where this after all. Should we always wait
but merely controlled our risk. pattern would not have worked. until we are stopped at the low
In the next step I will show how These examples are far more of the formation, or should we
to minimise our losses, let our important for the development stop, with small losses, when we
profits run, and thereby trade this of the exit than those in which realise that it does not work this
formation with a positive result. the pattern works as planned. time, and that we had better wait
The entry is usually only a From these we can learn what for the next opportunity?
very small step on the way to a may happen, and we can then We have already talked about
successful trade: the money is decide on the method by which the first exit: the initial stop at the
made with the exit, and therefore we can get out of such negative low of the formation. The next
the most consideration has to be examples with the least possible exit deals with the scenario where
put into this exit. When testing damage. we do not see the low of the F4) When It Does Not Work
Freelance Speaker
Your Point of Entry to Ideally you are a practical trader and have considerable knowledge of technical analysis
and all the related subjects like risk and money management, trading software, trading
Finance and Media Industry systems and trading psychology. You will work from home, on your own time-schedule Figure 4 shows you four examples where the expected sustainable
uptrend did not follow the price pattern. Clockwise: In the first
and submit the webinars and seminars at specified deadlines. You should be able to act example, the market could only take the high only one day after the
appearance of the pattern. Thereupon, it stagnated on a high level.
on your own and have experience in presenting. You will not only present and moderate Example 2 shows the case that the market did get above the formation
Please send your but also contribute content. in the first day, then however turned around and fell under the low of
the formation. Example 3 presents a similar problem like in example 1:
the market cannot decide for the uptrend. Example 4 is comparable to
application via e-mail to: example 2, where the market turns after two days and starts to fall. An
jobs@traders-mag.com intelligent exit should be able to limit losses in such situations.
Source: www.tradesignalonline.com
www.traders-mag.com
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53
TRADERS STRATEGIES
formation, however neither does onward, and closes the trade for a fixed number of days for
the market begin to rise. In this when the market falls back to this exit, but rather try and get
case we close the position if it is the entry price. Although nothing out at the high of the previous
not in the plus two days after the is won by this strategy, nor is day as soon as no new high
entry towards the trading end. anything lost, and this is often a has developed for one to two
The purpose of this is to small victory in itself. days. The exit at the entry price
eliminate the time risk. The With these three exits, and the always stays active just in
longer we are in the market, the correctly chosen position size, case. In Figure 5 you can see
higher the risk that something we have risk under control as what these exits look like in
will happen to our disadvantage. much as possible, and can turn practice.
Originally the idea was that our attention to how and when to
the market rises sharply after take profits. Review and Outlook
this formation. If this does not The first exit to profit taking is This article shows us a potentially
happen, our analysis may have a simple profit target. Here, the significant price pattern and a
been wrong. It is often better to profit is realised automatically technique to use this pattern in
close the trade, realising small when the trade has brought in trading. The technique can be
losses, than to wait for our luck three times the amount of the exspanded in many ways, and
and be exposed to the risk of initial risk. The initial risk was the can be combined with other
being stopped out with the worst- distance from the low of the white formations and entry ideas. F5) Exits
case scenario loss at the low of candle to the high of the last two The exits introduced show the
the formation. candles of the formation. importance of bringing the risk of
Tests with the stock basket We can also work with a lower a trade under control as quickly
from the Dow 30 and the DAX30 target. This raises the hit rate as possible. We have to close
show that with these two exits in sideways markets, as the all those trades which do not
we will at the very least survive. target is repeatedly triggered develop as intended. Not only
This strategy does not generate by accidental movements. This does this apply to the losers, but
money, but the losses are kept does, however, prevent larger also to all those cases in which
within a limit. However, this profits during trend phases. This the market only tends sideways
strategy can be improved. can be a clever methode when after the expected breakout. Time
With the second exit, the risk we already have a trend-following is also a risk, and if the trade
was further reduced and those strategy in use, otherwise choose does not develop as intended,
cases where the market does a target no smaller than double it is often best to accept small
not go up further were dealt with. the original risk. losses and wait for the next Figure 5 shows you different possibilities of getting out of a position.
In the first case, the position is closed after four days at the entry
However, one more risk remains If the target is not reached chance. price. This prevented the exit at the low of the formation. Example 2
shows the lucky case of a time exit. Since the position was not in the
to be considered before we think within about six days, I try the By now do you really still win two days after the entry, it was closed. Example 3 demonstrates
about making profits. exit at the high of the previous believe that the Austrian ag how reasonable a profit target can be. The high opening was used for
the exit since it was more than three times the original risk above the
What if the market rises for a day. This usually brings a few can predict the behaviour of entry. In example 4, the position is closed after six days at the high of
few days, but then turns, and extra points of profit compared the markets? Or is it rather the the previous day. The position size was chosen in a way that in every
trade the same amount of money was at risk.
starts to sink? This is what to the possibility of closing consolidated exit plan and the
exit number 3 is made for. It the trade after a fixed time. correct position size which are Source: www.tradesignalonline.com
is activated from the third day It is also possible to not wait responsible for the profits?
06/2012 www.tradersonline-mag.com
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TRADERS BASICS
the exchange rate that work to their markets was clearly visible to release of the latest economic
disadvantage. The more closely a investors in Japan, for example. figures. There are many traders
country is tied to other countries by In addition to the stock markets, specialising in this kind of news
trade and capital transactions, the there was a significant reaction trading. Beginners, at least,
higher also is the forex volume of of the yens exchange rate to the should engage in news trading
its currency, usually. And indeed, news of the earthquake, tsunami, with caution though, as large
the largest economies in the and impending nuclear disaster. price movements are possible
world also boast the currencies In the first few days after the not only during the release of
most commonly traded in the quake, the yen initially made the data but even in the days and
foreign exchange market. The only significant gains against the euro, weeks leading to such a release.
exception to this rule is provided but fell again later.
by countries with strict exchange There is an even more Conclusion
rate regimes, as has already been sustainable influence on Exchange rates are significantly
noted above. exchange rates when the impacted by central bank
following factors come into policies, the key interest rates,
Economic and play: An increase of the political the economic and political
Political Environment imponderables of a country, development as well as by the
Capital is as timid as a fawn, as for example, as a result of volume of trade and capital
the saying goes. Whenever there laws restricting personal and transactions with other countries.
is a worsening of the political or entrepreneurial freedom, lack of Make sure that you keep
economic conditions of a country independence of the judiciary, track of exchange rate related
or such a deterioration is only rampant corruption, increasing news. Be prepared for news
anticipated , investors are liable governmental arbitrariness, and release of data. Know the
to withdraw their capital. As a and diplomatic or even military dates of central bank meetings, F1) External Factors and Exchange Rates: EUR/JPY
result, the value of the currency conflict with neighbouring make an educated guess of
concerned will decrease. As countries. In such cases, not only how the decisions could turn
regards economic stability, one short term oriented speculators out, read between the lines,
should keep an eye on the price but also long term investors (for once) pay attention to the
index, gross domestic product such as investment funds, hedge assessments made by experts,
and unemployment rate. And funds, businesses and banks will and position yourself in advance.
although the degree of correlation withdraw their capital from the Use the chart analysis to check
between equity and currency country concerned. and see where the support and
markets is usually considered to resistance lines are and where
be low, it is still useful to follow Deadlines, Deadlines limit and stop loss orders may
the price trend on the stock Especially prior to important be placed. Also, watch out for
markets because it is especially publication dates, there will be round prices that are, consciously
during stock market crashes that a great deal of movement in the or unconsciously, used by The earthquake, the tsunami and the threat of a nuclear meltdown
in Japan led to a violent reaction in the currency markets. When the
a significant reaction in exchange forex market, which is particularly many market participants as a news increasingly indicated that a meltdown was approaching, the
yen strongly appreciated against the euro initially, but later was again
rates can be expected. the case whenever interest rate reference mark (anchor) and down significantly.
The fact that natural disasters decisions by the central banks where the price remains stuck Source: www.tradesignalonline.de
have an impact on the financial are pending but also upon the even for no particular reason.
06/2012 www.tradersonline-mag.com
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TRADERS BASICS
or demand area plus other with a high degree of accuracy, a low risk high probability trade.
traders edge layers. where price was likely to change But, the confidence to actually
c) Determine supply and demand direction. Traders who do not take the risk and enter the trade
areas within the high to low understand the market timing comes first from a willingness to
ATR from paragraph b) above. strategy based on the universal accept the market timing strategy
d) Plot the current day low plus law of supply and demand will and then consistently repeating
ATR and current day high always say that there is no way to an objectively defined process
minus the ATR. This is done accurately anticipate, with a high that produces positive results.
each time a new current day degree of probability, where price From 18:30 to about 19:00
high or low is made. Now is likely to change direction. attendees were repeatedly asked
we know where price may After being presented with if they would consider going long.
reverse within the high to the 15:30 screen shot, Figure 1 Not one was willing to take the
low ATR from paragraph b) above, the focus immediately long trade. All were surprised
above. Again, look for layers of shifted to the live market. During when price did exactly as
multiple conditions to increase the first 30 minutes and by the anticipated. Take a look at Figure 2.
probability and improve your end of the workshop, attendees Just after 19:00 the pending
edge against other traders. recognised that market timing is limit buy order was filled and
e) Place the stop, entry and possible. simultaneously the predefined
target orders based on high Now let us focus on the result stop and initial target were placed
probability supply and demand of the trade placed into the by the charting platform. Price
areas particularly if the area is market at 15:30 earlier that day. moved sideways and then quickly
enhanced by additional traders rose to the first target. After a
edge layers. How Do We pullback into the demand area
f) Wait to see the results! Wait to Demonstrate Confidence? price again moved up all the way
see the results! Wait to see the The consistently profitable trader to the second target. Obviously F2) Trade Results That Surprise the Naysayers
results! No typo here, the plan is both competent, knows what the rest of the workshop
is to, Wait to see the results! to do, and is confident, knows discussion focused on how to
that he or she knows what to do recognise supply and demand
At about 18:30 the first and does it. Placing a live buy areas in order to implement
workshop attendees arrived. The limit trade into the market at 15:30 market timing trading strategies.
discussion centred on whether required competence, knowing Once competent at objectively
it was possible to anticipate, how and what to do to establish identifying supply and demand on
a chart and applying rule based
market timing strategies that
What is the Smart Traders Edge? consistently result in profits, it
should come as no surprise that
To gain a Smart Traders Edge, Market Timing Traders use Technical Analysis Techniques to
a traders confidence will also
focus on the fundamental law of Supply & Demand in order to make High Probability, High grow. The end result is that when
Reward and Low Risk trades. traders trade with competence Market timing produces another low risk high probability profitable trade.
(For more information on Market Timing Trades based on Supply & Demand go to OnlineTradingAcademy.com) and confidence it puts money into Source: www.esignal.com
their account.
06/2012 www.tradersonline-mag.com
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Stephen Temes
Striking out on Ones Own
Until 2001, Mr Stephen Temes worked as a trader for Wachovia (Wells Fargo), having enjoyed a brilliant career even before
then. Following the terrorist attacks of 11 September and the crash of the market, he decided to quit his 16-hour work days
and take a long break. After spending some time in the Caribbean he became bored, causing his interest in trading to be
rekindled. So he returned to New York and founded the proprietary trading firm Lincoln Capital, which he ran on his own at
first. Over the years, he hired other traders as partners, expanding his company to include as many as 14 traders with offices
in New York and Miami. Marko Graenitz met Stephen Temes for an interview during Traders Expo in New York. Enjoy a top-
notch traders story and his ideas!
TRADERS: Could you please contacts either to find an entry- and landed a job at Butcher and
tell us how you got into stock- level job at a big company. Singer on Wall Street. After a
market trading in the rst short stint there I moved on to
place? TRADERS: How did you Oppenheimer, where I got my
Stephen Temes: I grew up in manage to get by in New York first big break as it were, having
Kentucky and attended Tulane under such unfavourable been all but ready to give up in
University in New Orleans, circumstances? view of the difficult circumstances
majoring in business. Even then Stephen Temes: It was tough prevailing then.
I took a great deal of interest in initially. I did not have an
the stock market programmes on apartment of my own and had to TRADERS: How did that break
CNBC. After I graduated, I knew apply for any kind of job. I quickly happen?
exactly where to go next: New realised that an aggressive Stephen Temes: I got a call from
York City. I was chasing a dream, approach was needed here, so I an insurance company that
and that was working on Wall bought myself a decent suit and wanted to talk to our options
Street. However, I did not know began to cold call one broker department. I had the presence
then what that meant and had no after another. Finally I got lucky of mind to respond by saying,
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TRADERS PEOPLE
You are speaking to the options on the market before we continue to make it all worthwhile. A family
department. At this point, I with the interview. friend was working for a broker
practically created the options and therefore in a position to
business at Oppenheimer TRADERS: You have just been give me good conditions for my
out of nothing and went on to on the phone, how are your trades, so I was not overwhelmed F1) Positive Surprise at Caterpillar
expand it steadily, eventually positions doing on the market right away by the transaction
even becoming a partner of the today? costs. My tactic was to watch the
company. Later on, I left ticker tape indicating
to go to Wachovia and current prices and then
you know what the rest figure out good trading
of the story is. opportunities on that
basis. Those were the
TRADERS: How can good old days when
young traders get into options were often
proprietary trading? priced wrong and it was
Stephen Temes: still relatively easy to
Actually, it does not make a good trade.
matter how much
money you have TRADERS: Did you In January, the Caterpillar (CAT) long position performed very well.
In late January the company reported quarterly results that were a
all that matters in witness the crash of positive surprise, justifying the previous price increase.
trading is discipline. 1987? Source: www.tradesignalonline.com
However, in order to Stephen Temes: Yes,
get into professional that was really hard. I
proprietary trading had been on Wall Street
if you do not have for barely a year when F2) Cummons Stock on the Watch List
enough equity yourself, you first Stephen Temes: One of my it happened. I saw experienced
need an excellent track record. traders is monitoring my traders crying. Something like
For example, I am extremely positions, giving me an update that leaves a lasting impression
picky myself when it comes to from time to time while I am here as a reminder of the risks involved
hiring new traders. Once you at the Expo. I have complete trust in trading.
have managed to be part of a in him. We have just discussed
team of traders, it is important making slight adjustments to one TRADERS: And did you do any
to learn from the best and most of my positions, but the market is trading at all during the crash?
experienced traders in the team. reasonably quiet today. Stephen Temes: I clearly
Trading is a combination of remember that I bought Pepsi
statistics and experience, and TRADERS: Can you remember shares on the day after the
that is what matters. your rst few trades? crash and that I sold them again
Stephen Temes: Yes, absolutely. after a short time as the market Stephen Temes kept track of the Cummons share on his watchlist. If it
meets the screening criteria next time, a long trade will be called for.
Stephen Temess phone rings. I started with options right away recovered. However, I did not
He talks briefly to one of his because I had little money and know what price I had got I only Source: www.tradesignalonline.com
traders about the open positions therefore needed good leverage had that in writing three days
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TRADERS PEOPLE
later. Just imagine that, not until market situation and fundamental mentally easier to build a position
three days later! assessment, I then decide in over several hours or over the
a discretionary manner which course of a day since on the
TRADERS: How would you filtered stocks to actually trade. whole you never buy at the high
describe your trading style (though never at the low either).
today? TRADERS: So you include I use an algorithm that executes F3) Las Vegas Sands for $2.90
Stephen Temes: I am a very fundamental data in your my orders over a certain period
aggressive trader. I usually have trading decisions as well? of time. The algorithm is based
a core position around which I Stephen Temes: Basically, I do. on the volume-weighted average
trade all the time. So I increase Ideally, there is a clear price price (VWAP for short) to execute
or reduce my position depending movement and I can identify each order when price-volume
on how my assessment of the the catalyst early. In principle, relationships are favourable.
stock changes. And if there anything can act as a catalyst
is a complete change in my acquisitions, important upcoming TRADERS: How many
assessment, I also sell the core events, clear estimates by positions do you hold
investment. This approach analysts and so on. concurrently?
spared me a lot of losses in 2008 Stephen Temes: Long and short
because I did not hold on to bad TRADERS: Can you give us an positions combined, eight to ten
trades during the market slump. example of a simple technical on average. During bad periods, I In the case of Las Vegas Sands (LVS), Temes managed a near-perfect
entry at 2.90 dollars, making it one of his best trades ever.
ltering criterion? sometimes only hold four positions,
TRADERS: Which indicators do Stephen Temes: A very simple and in very good times up to 20. Source: www.tradesignalonline.com
you pay special attention to? concept that has always worked Traders with little capital should
Stephen Temes: The first thing I well is the retracement towards hold correspondingly far fewer
always look at is the chart. That the 50-period moving average. positions at the same time. Usually
is the most important thing. In I can tell you that many traders it is best to have just a few well F4) Good Timing at FCX
a more detailed analysis I also watch out for this indicator. When performing trades where you get a
look at indicators such as the prices break above the average sense of the movement behaviour
50-period moving average, the line and a pullback forms right of the stock. I think it is a mistake
Relative Strength Index (RSI) or up to the line later at low volume, to have too many positions.
the stochastics. then this is a very good entry.
It sounds really simple, but just TRADERS: What do you look
TRADERS: How do you select look at a few charts of strongly out for in the stops?
the best trading opportunities trending shares according to this Stephen Temes: I always have
from the multitude of stocks? criterion. hard stops at key chart markers
Stephen Temes: I have a of the market. Everything is
colleague programming my TRADERS: How exactly do you based on my risk management. If
criteria for me. This scanning enter your trades? things are going well for me, I use
process then filters out all the Stephen Temes: In general, my trailing stops in order to use the Here, too, Stephen Temes caught the stock after its final low. The bull
market in the spring of 2009 quickly drove the stock markedly higher.
appropriate setups for stocks rather large position size does money in the market to bet on
and exchange traded funds not allow me to just open my even higher profits. Sometimes Source: www.tradesignalonline.com
(ETFs). Depending on the chart, positions all at once. Besides, it is I then exit in a discretionary
06/2012 www.tradersonline-mag.com
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TRADERS PEOPLE
manner if the behaviour of the TRADERS: Which stocks or usually with large gaps. From
stock changes or key chart sectors do you consider to be a risk-management point of
markers are approached. particularly risky? view this is, of course, less than
Stephen Temes: Obviously, desirable. By the way, this could
TRADERS: Do you have biotech stocks most of all. That in a diluted way also apply to F5) Misjudgement of U.S. Treasuries
something like a time stop? is where I was once affected major stocks such as Johnson
Stephen Temes: Yes, if the myself. I was long on a biotech & Johnson (JNJ) if they were
stock initially does not sued, for example, on
perform as expected, account of one of their
I will exit as soon as major products. Shares
possible. with such a risk profile
should therefore be
TRADERS: Can treated with caution.
you remember any
particularly good TRADERS: What
trades? other principles do
Stephen Temes: Many of you use in trading?
my best trades I made Stephen Temes: The Temes had not expected bond prices to rise further in 2011. The short
trade went underwater although it had opened at an already high level.
right after the major primary goal is to
downward movement of control the risks, i.e. to Source: www.tradesignalonline.com
2008. I well remember trade in such a way that
buying the Las Vegas you can still play the
Sand (LVS) stock for following day. I want my
a mere $2.90. Also, trades to be relatively F6) Out of Favour
Freeport-McMoRan speaking among the
Copper & Gold (FCX) for 16 dollars. stock hit by allegations of fraud first to be in on a movement.
against the management, which And I want to be among the first
TRADERS: Can you give us is always bad. Basically there to be flat again. To a degree, all
an example where you had to is also an inherent risk in the good traders sell too early, and
close a trade with a loss? binary character of alternative shares often continue to perform
Stephen Temes: Obviously this developments. If a biotech well a lot longer. But getting out
happens, too. For example, last company is essentially just too early still beats exiting too
year I underestimated how much developing a major drug or late. Otherwise I stick to keeping
prices of treasuries can increase. something similar, its price at least some short positions in
I went short in summer 2011 reaction, for example, to any weak stocks even during good
when there had been a decent news about the approval process market phases and, vice versa,
rise, but was then surprised by will be highly volatile. In the end, at least a few long positions in A prime candidate for Stephen Temess long list is Bank of America
stock (BAC). I like those stocks that are really totally unpopular. Once
a further upward movement of it will come down either to the relative-strength stocks during the right moment is there, I will pounce. In March 2012, about a month
after the interview, the stock enjoys a high of more than ten dollars.
quotations. I did not think that drug being okayed or not downward phases. The reason
bonds could rise that far (i.e. being okayed. Either way, there for this is that this means that I Source: www.tradesignalonline.com
interest rates would fall that far). will be massive price movements, am automatically moderately
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TRADERS PEOPLE
hedged as far as market direction At 7.15 I am usually the first one this at all. And then people make to do with the question of stops monitoring systems noticing
is concerned. However, I do not to show up at the office. My the mistake of not working hard and position sizing in general. anything. This is made possible,
force any trades that is, I will favourite time for doing research enough to keep improving. Also, I The actual risk is individual for example, by an over-the-
only trade a setup if, on average, is in the morning. From 9.30 to 4 think that most people like buying traders who can really mess counter (OTC) transaction. If a
I benefit from it. Sometimes, oclock in the afternoon I trade on stocks that are fundamentally things up, the so-called rogue gap then occurs overnight that is
though, I need to muster a great US markets. In general, I will be rated favourably. In my view, traders. Examples of this have contrary to the direction of trade,
deal of patience for that. out of the office by 5 pm. however, this is of no benefit to occurred time and again at major this may result in a disaster. Now
anybody. investment banks, but in principle imagine the other traders in the
TRADERS: What does your TRADERS: What are the it can happen anywhere. office not knowing anything about
daily routine look like? biggest mistakes that traders TRADERS: What is the biggest the OTC transaction and the
Stephen Temes: I usually get up and investors keep making? problem in professional TRADERS: Can you describe trader responsible having sloped
at 3.30 am in order to see how Stephen Temes: If you have a bad trading? for us the rogue-trader risk in off. That is the worst that can
the European markets are doing. trade and for some reason do not Stephen Temes: If you own a more detail? happen, and there is no way that
I then go back to bed again to exit it, then this is a disastrous proprietary trading company with Stephen Temes: A classic this residual risk can be resolved
get some sleep. Despite years of error. Doing a part-time job as several partners but also when example is a trader who exceeds in the end.
experience I still have sleepless a trader is also problematic since managing other peoples assets his exposure limits in a big way
nights, but I think this is important you keep having to do something in a hedge fund the biggest when trading on behalf of a TRADERS: Mr Temes, thank
it is a sign that I am focused else as well. Either you do this problem is the residual risk in risk trading firm or a fund and does you for these fascinating
and fully committed to my job. the right way or you do not do management. This has nothing so without any of the internal insights!
Chart Junkie
I trade daily, and I always want to have complete control over
my charts. At Tradesignal Online, I can find the international price
information and professional tools that I need for charting.
And it's all done through my browser free of charge.
06/2012 www.tradersonline-mag.com
69
TRADERS TOOLS
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