2018APR

THE TRADERS’ MAGAZINE SINCE 1982
www.traders.com APRIL 2018
Survivorship Bias
A wake-up call for
backtesting results 8
The V-Trade
Part 2: Technical analysis
for making buy & sell
decisions 12
Adaptive Averages
To identify turning points 18
Volatility
What’s the best measure? 22
INTERVIEW
Independent trader
Gareth Burgess on his
pivot level technique 32
REVIEWS
n Elliott Wave Turning Points
n NeuroShell Trader
APRIL 2018
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CONTENTS APRIL 2018, Volume 36 Number 5
FEATURE ARTICLE 28 RaS: An Alternative

Charting Technique
8 Survivorship Bias — by Marco Alves
A Wake Up Call Technical analysts rely on charts
by Dion Kurczek to make their trading decisions.
There’s more to trading systems 55 Explore Your Options
Some prefer to look at bar charts,
than developing buy and sell others prefer candle charts, renko by Jay Kaeppel
signals. Here’s one aspect you charts, line charts, or … There Got a question about options?
may not have been aware of that are many options to choose from.
could make a difference to your Here’s another one to add to your 60 A Range-Bound Strategy
backtesting results. list. It combines bar and candlestick by Solomon Chuama
charts and makes your charts more
Markets move in trends and markets
12 The V-Trade, Part 2: visually appealing and intuitive.
move in trading ranges. Looking at
Technical Analysis any chart makes it plain to see that
INTERVIEW a trader can make money during
by Sylvain Vervoort
Making buy and sell decisions are 32 Pivot Levels With trends, but we shouldn’t rule out
critical for any trader. But in some Gareth Burgess the possibility of making successful
market environments, it’s difficult trades during trading ranges. Here’s
by Jayanthi Gopalakrishnan how one forex trader does it.
to gauge which way prices will After spending many years
move. Are institutional traders just dabbling in the financial markets,
pushing prices to make a quick Gareth Burgess decided to take the
buck? What’s a retail trader to do? leap to becoming an independent
product reviews
Here’s one way to know. trader. Many years of research into 38 Elliott Wave Turning Points
charts led him to come up with Dynamic Trend module.
18 Adaptive Moving TIPS a trading system that he believes
Averages is similar to Jesse Livermore’s 44 NeuroShell Trader Version 6.5
by Vitali Apirine tape-reading techniques. His
Neural network trading software.
research into charting techniques
The biggest challenge for any trader and backtesting to discover what
is identifying turning points in price works and doesn’t work also led to
movements. You never know if his book Trading And Investing In
DEPARTMENTS
you’ll end up getting whipsawed The Forex Markets Using Chart 6 Opening Position
out of a trade. Here’s one way to Techniques. We spoke with him
avoid those whipsaws. 7 Letters To S&C
to find out more about his trading 41 †Traders’ Glossary
system.
22 Volatility: What’s The 48 Traders’ Tips
Best Measure? 42 Q&A 57 Advertisers’ Index
by Mike B. Siroky, MD by Rob Friesen 57 Editorial Resource Index
Volatility has often been measured This professional trader answers 58 Futures Liquidity
by standard deviation but there are a few of your questions. 59 Classified Advertising
other ways to look at volatility. 59 Traders’ Resource
Here we look at how true range
can be used as a reliable volatility 46 Tape Reading Breakouts
measure. by Ken Calhoun
The time & sales window can
reveal valuable information about
27 Futures For You the strength of a trend. Learn more
This article is the basis for
TIPS Traders’ Tips this month.
by Carley Garner about how trading professionals
Here’s how the futures market use it and how you too can use it to n Cover: Roy Wiemann
really works. your advantage. n Cover concept: Christine Morrison
Copyright © 2018 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
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4 • April 2018 • Technical Analysis of Stocks & Commodities

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April 2018 • Volume 36, Number 5
Opening Position
The Traders’ MagazineTM
As
EDITORIAL
editor@traders.com the US economy continues to
Editor in Chief Jack K. Hutson chug along, with close to full
Editor Jayanthi Gopalakrishnan employment and inflation under control—
Production Manager Karen E. Wasserman
for the moment—it’s likely we’ll see some
Art Director Christine Morrison
interest rate hikes in 2018. With a changing
of the guard at the Federal Reserve, it’ll be
Graphic Designer Wayne Shaw
Webmaster Han J. Kim
Contributing Editors John Ehlers,
interesting to see if the economy continues
Anthony W. Warren, Ph.D. to move along the same path. During Jerome
Contributing Writers Thomas Bulkowski, Martin Pring, Powell’s first testimony to Congress in March
Barbara Star, Markos Katsanos
2018, he hinted the US economy continues
to be strong. Does that mean 2018 will be
OFFICE OF THE Publisher
Publisher Jack K. Hutson
similar to 2017?
Industrial Engineer Jason K. Hutson We know how the markets reacted at the first hint of interest rate hikes in early
Project Engineer Sean M. Moore February 2018. It initiated a selloff in which the Dow Jones Industrial Average
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2018 WINNER
AI TRADING SOFTWARE
The editors of S&C invite readers to submit their opinions and information on subjects
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Build powerful
expressed in this column do not necessarily represent those of the magazine.—Editor trading systems in
MINUTES
THE V-TRADE SERIES trading plan for this upcoming year.
without coding
Editor, I was wondering if he has coded his
It’s great to hear from strategies for either platform, preferably
author Sylvain Vervoort the former. Does he offer the code/strat-
again in the magazine. egy for sale? (And I wouldn’t be adverse ®
I am a subscriber to to signing a nondisclosure agreement, as

S&C and I can’t wait I realize how much work he has put into
to read his new series developing it.)
of articles! If he does not use either of these
Looking forward to trying his system. platforms to implement his strategy, I
I have a MetaTrader 4 account and am would be interested in how he is in fact
www.NeuroShell.com
ready to go! putting it into practice and how I may 301.662.7950
Mark do the same.
Drew
MORE Author Jay Leavitt replies: VIEWING CHARTS
Editor, Thank you for writing. I can send you Editor,
I really like that Sylvain Vervoort is the code. As a long-time reader of your publication,
sending in updates again! I’ve missed and as a particular fan of the Traders’ Tips
seeing his work. EMOTIONS AND TRADING section (I like to dabble in code), I often
Mike Editor, struggle to see all the detail in the charts
I found the Q&A column that appear in the Traders’ Tips section
Sylvain Vervoort’s current article series by Rob Friesen in your of the magazine, especially charts with
in S&C is “The V-Trade,” which began March 2018 issue excel- a black background. Is there any way to
with our March 2018 issue and steps the lent (“The Probabilities see larger copies of these charts?
reader through approaching a trading On Regret”). Alexander
system.—Editor I know from experi-
ence how important the emotional Thank you for your interest. You can
THROUGH THE STRATOSPHERE component is when it comes to financial view the Traders’ Tips section at our
Editor, decisions. Regret is not only painful, but website (Traders.com) as well as in the
Than k you for Jay an emotion that all traders need to learn print magazine. At our website, you can
Leavitt’s very interest- how to deal with. Friesen does an excel- right-click on any chart to open it in a
ing article in the March lent job of taking the intensity out of this new tab or window and view the chart
2018 issue of S&C, emotion by providing a rational scenario at full size. Oftentimes, this will be three
“Through The Strato- of different probabilities. I also think to four times larger than the size we are
sphere On The @NQ.” I that using the word “probability” helps able to show in print.
have to admit I am still trying to digest it to quantify a difficult emotion. That in As a side note regarding Traders’ Tips,
all as I am not a skilled mathematician, itself is very helpful to being able to deal we’d like to let readers know that we
but the results look outstanding. with it when the feeling of regret raises now are presenting a new contributor to
I currently trade an equity account its ugly head in the next trade. the Traders’ Tips section, Quantacula.
using two platforms, TD Ameritrade’s Claudio Demb whose contributions began with the
thinkorswim and TradeStation. His Individual trader and investor, February 2018 issue.—Editor
system sounds like something I would and contributor of trading
really like to implement as part of my psychology articles to S&C
April 2018 • Technical Analysis of Stocks & Commodities • 7
TRADING SYSTEMS
No Cherry-Picking
Survivorship Bias—
A Wake-Up Call
There’s more to trading systems than developing buy • Position size: 10% of current equity per posi-
and sell signals. Here’s one aspect you may not have tion.
been aware of that could make a difference to your
backtesting results. Backtest results
W
In Figure 2 you see the equity curve for the Nasdaq
hen I first began my research into techni- 100 stocks using the backtest settings I used.
cal analysis and trading system develop-
ment—that would have been around the
year 2000—I was focused on trading sys-
tem rules and code. I spent countless hours devel-
oping my own backtesting platform, and ensuring
the logic for my trading models was expressed cor-
rectly and that the results were accurate. But there’s
more to system trading than developing buy and
sell rules. I neglected to pay sufficient attention to
the data I was using in my backtesting, and it came
back to bite me.
Quantacula Studio
Example system: 4x2
To illustrate what I did incorrectly, I’ll use the 4x2
FIGURE 1: BUILDING THE STRATEGY. The 4x2 trading system was replicated. The
trading system that was published by James Altucher strategy is simple: Buy after four consecutive days of falling price (closing price); sell
in his 2004 book Trade Like A Hedge Fund. The rules after two consecutive days of rising price.
are concise and simple:
• Buy after four consecutive days of falling price

(closing price)
• Sell after two consecutive days of rising price.
In Figure 1 you see how I built the 4x2 strategy in

Quantacula Studio using building blocks. With the
trading strategy built, I can backtest it, as the book
suggests, on the Nasdaq 100 stocks. I used the fol-
lowing backtest settings:
FIGURE 2: BACKTEST RESULTS. The system’s theoretical annualized percentage
ROY WIEMANN
• Data range: most recent 10 years return as shown by the backtest is 18.28% with a Sharpe ratio of 1.23. Furthermore,
its maximum drawdown percentage is -28.32%, compared to a maximum drawdown
• Starting capital: $100,000 percentage of -51.03% for the benchmark SPY.
by Dion Kurczek
It’s as if the backtest knew
what the winning lottery
numbers were and acted on
that information. This flaw in
backtesting methodology is
called survivorship bias.
added. You can read about these changes in the Wikipedia

entry for the Nasdaq 100.
FIGURE 3: THE REALITY OF IT. After adjusting the data set, the annual percent- The first backtest used the 100 stocks that are currently in
age return is 10.11%, barely beating the benchmark SPY over the 10-year period. the Nasdaq 100. Here’s the problem. Poor-performing stocks
The Sharpe ratio is now below 1 at 0.75. And the maximum drawdown percentage
increased to -32.40%.
are removed from the index over time, and better-performing
stocks are added. In a way, this backtest can be thought of as
The results look remarkable. The system’s annualized percent- cheating, because it used hindsight to include those stocks
age return is 18.28% with a Sharpe ratio of 1.23. Furthermore, that have performed exceptionally well. It’s as if the backtest
its maximum drawdown percentage is -28.32%, compared to a knew what the winning lottery numbers were and acted on that
maximum drawdown percentage of -51.03% for the benchmark information. This flaw in backtesting methodology is called
SPY. If you were running this analysis, you might decide to survivorship bias.
start trading this strategy right away. And if you did so, you’d The second backtest used a more correct approach, by keeping
be in for a disappointing surprise. a record of all the changes in the Nasdaq 100 and using only the
companies that were in the index at the time a backtested trade
Reality check was signaled. Factoring this into a backtest is not simple. You
Look at the equity curve in Figure 3. This is the result of run- need access to historical data for the index components over
ning the 4x2 system on the Nasdaq 100, just like in the previous time, including companies that might have become delisted. And
backtest. Only this time, it’s a different Nasdaq 100. you must correctly account for the dates the companies were
The results on the equity curve are less impressive. The an- added and removed from the index. But the effort is necessary
nual percentage return is 10.11%, barely beating the benchmark to obtain valid results.
SPY over the 10-year period. The Sharpe ratio is now below To drive the point home, in Figure 4 you see a chart of both
1 at 0.75. And the maximum drawdown percentage increased equity curves together. The blue area represents the original,
to -32.40%. flawed backtest, and the orange area represents the backtest
What’s different about the second Nasdaq 100? The differ- that is not subject to survivorship bias.
ence is that it has the intelligence to accurately represent the If you are backtesting portfolios of stocks, survivorship bias
composition of the index over the historical period. Since 2007, can be a genuine concern. Even if you are not using an index
when the backtest began, the index experienced numerous portfolio like the Nasdaq 100, take care to not select stocks
changes, with some companies dropping out, and some being based on your knowledge of their performance. You can fall
added in. On December 24, 2012 alone, for example, 10 stocks into survivorship bias by relying on your own subconscious
where removed from the Nasdaq 100 and 10 new ones were tendencies. To remove the bias, find a way to backtest using
data that accurately represents the history of the index you are
using. Use an objective way to select stocks, without the benefit
of future information. If you are careful, you won’t be caught
off guard once you start trading your strategy.
Dion Kurczek is an independent trader and backtesting soft-

ware developer. He is the founder of Quantacula, LLC, and
prior to that, Wealth-Lab, Inc. He can be reached via email
at info@quantacula.com.
‡Quantacula Studio
‡See Editorial Resource Index
FIGURE 4: COMPARING BOTH BACKTEST RESULTS. The blue area represents
†See Traders’ Glossary for definition
the original, flawed backtest, and the orange area represents the backtest that is not
subject to survivorship bias.

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Tricked You!
The V-Trade
Part 2: Technical Analysis
Making buy and sell decisions are critical for any trader. But I’ll explain how I apply these techniques to make manual and
in some market environments, it’s difficult to gauge which automatic buy & sell decisions.
way prices will move. Are institutional traders just pushing
prices to make a quick buck? What’s a retail trader to do? Chart types
Here’s one way to know. Over the years I have used just about every type of chart. As
you are aware, you have many choices when it comes to chart
In
by Sylvain Vervoort types. Lines, bars, and candlestick charts use a fixed time
period for the x-axis. This period can be tick data, seconds,
WAVES: KEO/V: ARBUZ/V: ARBUZ/SHUTTERSTOCK/
this second part of my V-Trade article series, I’ll minutes, hours, days, weeks, or months. Most traders use
discuss the process of making buy and sell deci- candlestick charts related to fixed time periods, but is this
sions. I’ll focus on what you should know about the best solution?
COLLAGE: CHRISTINE MORRISON
technical analysis in order to successfully apply Institutional traders trade on price levels and look for the
the five basic trading rules I outlined last time in part 1. I’ll strongest levels of supply & demand without worrying about
go over several important components of technical analysis the time it takes to reach that support or resistance. Because
including chart types, passive support & resistance, active of this, I prefer to use charts not related to time. I have found
support & resistance, chart patterns, and wave count. Then the renko chart to be the best one to use, even though it comes
TRADING SYSTEMS
with its share of problems. I’ll first illustrate the dif-

ference between a candlestick and renko chart.
In Figure 1 you see a 15-minute candlestick chart
of the EURUSD. Each candle represents a 15-minute
period price move. The candle’s body is green when
the close is above the open. It’s red when the close
is below the open. Wicks above and below the body
indicate the high and low price during the 15-minute
candle period.
I have highlighted areas of the chart in Figure 1
MetaTrader4
to show the disadvantage of using this chart type. In
the highlighted areas, price is moving within a small FIGURE 1: 15-MINUTE CANDLESTICK CHART OF EURUSD. This is your typical candlestick
range. These small price moves impact everything chart displaying the body and wicks on a fixed-time scale.
that is derived from the basic chart, including moving
averages, indicators, and so on. As a result, you’ll see
a greater number of false buy and sell signals during
these timeframes.
Compare the 15-minute candle chart in Figure 1 to
the time period from October 13 to 14 on the modi-
fied renko chart in Figure 2. Most of the small price
moves from the 15-minute candlestick chart cannot
be seen in the four-pip modified renko chart.
The renko chart provides a clearer and more com-
pact view of the price move, which makes it easier to
make buy and sell decisions. It makes counting waves
straightforward. To give you a better understanding
of the modified renko chart, let me give you some
more details. FIGURE 2: MODIFIED RENKO CHART. In this four-pip chart of EURUSD, you’ll notice that
price moves are clearer and more compact compared to looking at a candlestick chart. This
The standard renko chart makes it easier to visualize price movement.
The renko chart, possibly named after the Japanese

word renga, which means “brick,” takes only price into ac- More challenging are the
count. A renko chart places a brick in the next column once appearance of gaps. You
the price surpasses the top or bottom of the previous brick by could end up with more
a predefined number of pips. A green brick indicates when buy or sell signals just after
price closes at the brick’s high, while a red brick indicates a gap. For example, if the
when price closes at the low side of the brick. Note that gaps gap’s size is five bricks,
larger than the brick’s size are filled with virtual bricks. your autotrade backtest
In Figure 3, the five-pip brick size (0.0005) renko chart system buys after the first
of EURUSD looks clean but you can’t see if there are any virtual brick created. That
virtual bricks. There are no wicks indicating the high or low way, gaps filled with virtual
price. Even the open and close prices may not be where you bricks give erroneous re- FIGURE 3: WHERE’S THE HIGH OR LOW?
think they are. sults, because you can only This standard chart may look
clean but you can’t see if there
Virtual bricks can be confusing, especially when it comes buy at the close of the last are any virtual bricks. There are
to historical backtesting based on opening a trade at the open virtual brick. no wicks indicating the high or low price.
of the next bar after a buy or sell signal is triggered. Profit Even the open and close prices may not
and loss calculations may be incorrect. Suppose you open a The modified be where you think they are.
long trade at the close of the bar marked 1 in Figure 3. The renko chart
backtest program uses the next bar’s open marked 2, which is Given the shortcomings of the standard renko bar chart, I
incorrect. The open is at the level of the closing price of the use a modified version like the one shown in Figure 4. This
bar marked 1, and that is a difference of five pips. modified renko chart uses the correct opening price for the
Closing the long trade at the open of the bar marked 3 next bar and shows wicks for the lowest or highest price. A
gives the correct result. If you are opening a long trade at green upward-moving brick can have a wick only at the bot-
the close of the bar marked 4, the backtest program initiates tom side and a red downward-moving brick can only have a
the trade at the open price of the bar marked 5, which again wick at the upper side.
is incorrect. This modified renko chart is a more accurate representa-
When there is a fake resistance
break, that is, price moving
above resistance within a flat
price move, there is a good
chance that professional
traders triggered that break.
FIGURE 4: MODIFIED FIVE-PIP RENKO CHART. Here you see the correct opening minimum green double brick size. If price continues the up
price for the next bar and wicks for the lowest or highest price. Compared to the move, a single additional brick is added after price moves up
standard renko chart, this modified renko chart is a more accurate representation
by the minimum basic brick size used in the chart. The wick
of the price move made within a single bar.
that’s below the body shows the lowest price reached before
tion of the price move made within a single bar. However, the the completion of that brick’s closing price.
problem concerning gaps filled with virtual bricks remains. The beginning of a downward reversal (point 2 in Figure 4)
Virtual bricks have no real buy and sell prices. With forex needs a minimum of a red double brick size. If price continues
pairs like the EURUSD or any instrument with a 24-hour to move downward, a single additional brick is added after
notation, the problem is limited, but if you are using under- price moves down by the minimum basic brick size used in the
lying instruments having large gaps, you must be careful chart. The wick that’s on top shows the highest price reached
and preferably avoid trading when a larger gap is expected. before the completion of that brick’s closing price.
Virtual bricks have no upper or lower wicks. You can use What if there is a reversing double brick but no price con-
that knowledge to recognize a series of virtual bricks in the tinuation in the direction of the reversal such as in points 3
modified renko chart. and 4 in Figure 4? In such cases, there needs to be a move
Let’s take a closer look at Figure 4 to better understand of three basic bricks—one double brick to compensate the
how these modified renko bricks form. A red body means an previous double brick and another single brick continuing
open at the body’s upper side and a close at the body’s low the previous down or up move.
side. A green body has an open on the low side and a close When you apply this last rule, you avoid a series of double
at the body’s top. An upward-moving green brick can only bricks that are not useful. This keeps the chart more com-
have a wick on the low side and a down brick can only have pressed, and longer series of double bricks do not influence
a wick at the upper side. indicators and averages. I am using MetaTrader4 here, which
The start of an up reversal (point 1 in Figure 4) needs a does not store historical tick data. Historical bricks are therefore
created using historical minute
data. Real-time tick data create
real-time bricks. As a result, the
same chart may show differences
depending on your starting point
of historical data and the real-time
starting point of the chart.
Long-term modified
renko chart
I’ll walk you through a longer-
term modified renko bar example
using the S&P 500 index (Figure
5). The brick size is 450 ticks
or 4.5 points. The chart starts
in mid-August 2017 and ends
on November 17, 2017. Note the
compact structure of the chart
where Elliott waves can be easily
FIGURE 5: LONG-TERM CHART OF THE S&P 500 INDEX USING A BRICK SIZE OF 450 TICKS (4.5 POINTS).
The compact structure of the chart makes it easy to recognize Elliott waves. A Fibonacci projection over wave (1) gives recognized. A Fibonacci projec-
exact targets for intermediate waves 1 and 3. It looks like wave (5) is completed. You can also see a head & shoulders tion over wave (1) gives exact
pattern. targets for intermediate waves 1
Noisy indicators
delay your analysis
and 3. It looks like wave (5) is completed. You can also see
a head & shoulders pattern. I assume the first correction will
move down to the level of intermediate wave 4, the 100-brick
average (green), and the low side of the volatility channel,
forming correction wave C.
Passive support & resistance

Jurik algorithms
Earlier I mentioned how institutional traders deliver low lag,
trade based on price levels—they buy to ac- low noise analysis
cumulate stocks or sell to distribute stocks.
This accumulation and distribution will vary
and will keep prices in a limited range before
there is a breakout in either direction.
This means price always moves in waves and goes through See Jurik Tools on NinjaTrader
multiple support & resistance levels. At a bottom, price is sup- https://tinyurl.com/jurik-ninja
ported by sufficient buyers and at a top, price is pushed down
by increased selling pressure. These forces form support &
resistance levels similar to what you see in Figure 6.
A price increase attracts sellers but decreases the number of Jurik Research
buyers. When there is a balance between sellers and buyers,
a resistance line establishes. When a resistance line breaks,
it becomes a support line for future price levels. 2010 -- 2011 -- 2012 -- 2013
Horizontal support & resistance lines connect through price Add-In software
turning points. A support confirmation appears if the price

turns against this line. If the closing price crosses a support jurikres.com • 800-810-3646 • 719-686-0074
or resistance line, consider the support broken.
In Figure 6, when price turns down at 1, you draw a future
resistance line (red) through the top of 1. When price turns up same amount of funds as your live account to get used to the
at 2, you can draw a future support line (green) through the profit and loss sizes.
bottom of 2. Note how at 3 and 5 price cannot break resistance In relation to support and resistance, be careful with breakout
at 1. It’s only at 6 when resistance breaks. On the support side, trading. When price moves above resistance or below support,
price turns up at 4 from support of the bottom at 2. many traders will jump in, expecting higher or lower prices.
At 7 a new resistance level forms and at 8 a new support Sometimes, this will be the case but at other times it may
level shows up. At 9, the 7 resistance is broken, but price falls only be for a short period after price returns back below the
back to 10. The previous resistance 7 now becomes support, resistance or above support. Why?
and price turns up to a new resistance at 11.
From 11 price falls downward again. It finds
little support at 12, falls through, and moves up to
13, finding resistance from 7 and 10. It finally falls
down to 14, confirming the support level at 8.
We now have a move up to 15 and 16. At 15 there
is still some resistance and support from previous
levels, and 16 confirms the 11 resistance line.
The next correction brings price down to 17,
with a lot of previous support and resistance levels.
Turning up from 17, we find limited resistance at
18 from 11 and 16, and finally, this resistance is
broken at 19. I will look at more ways to use pas-
sive support in the next few parts of this series of
articles on the V-Trade.
Trading and emotions

Trading can be emotional so it’s a good idea to
FIGURE 6: SUPPORT & RESISTANCE LEVELS ON A 40-TICK MODIFIED RENKO CHART OF
use a demo account first. Trade the demo account EURUSD. Horizontal support & resistance lines connect through price turning points. A support
as if it were a real account with your own money confirmation appears if the price turns against this line. If the closing price crosses a support or
at risk. It’s best to keep a demo account with the resistance line, consider the support broken.

creating a trigger signal to initiate a
further move up by the nonprofes-
sionals. Finally, they can start closing
their long positions at higher prices
and make a good profit. By that time,
and by being on the wrong side of this
fake down breakout, you most prob-
ably closed your own short position
with a loss.
Fake resistance break

When there is a fake resistance break,
that is, price moving above resistance
within a flat price move, there is a good
chance that professional traders trig-
FIGURE 7: FAKE RESISTANCE BREAK ON THE 32-POINT MODIFIED RENKO CHART OF THE GERMAN DAX gered that break. They want to build a
INDEX. The modified renko chart is practical for counting waves. Here you see ABC zigzag waves, reaction waves, large opposite (short) position for them-
and how you can use Fibonacci retracements to make projections. selves, mainly set up from a large batch
of short stop-loss orders from existing
positions at higher price levels.
With price close to the resistance
line, they open long positions, forc-
ing price to break the resistance line.
Nonprofessional traders follow the
break, invoking a further up move.
The professionals now open short limit
orders at the level of the large batches
of short stop-loss price levels.
When the up move reaches these
price levels, the short limit orders are
executed and the professionals end
up with a large short position in their
portfolio. The professionals will wait
for buying power to run dry while sup-
porting selling action. At some point
FIGURE 8: FAKE RESISTANCE BREAK ON THE FOUR-HOUR CHART OF THE GERMAN DAX INDEX. From this they will force price to break support,
chart it’s clear where institutions were artificially pushing prices to meet their needs.
creating a trigger signal to initiate a
further move down by the nonprofes-
Fake support break sionals. Then they will start closing the short positions at
When there is a fake support break with lower prices with a good profit. By that time, and by being on
price moving below support, it is likely that the wrong side of this fake up breakout, you most probably
professional traders triggered this break. They closed your own long position with a loss.
want to build a large opposite (long) position Let’s look at some examples of fake breakouts to better
for themselves, preferably from a large batch recognize them.
of long stop-loss orders at lower price levels
from existing positions in the market. Fake resistance break examples
With price close to the support line, they start selling to force In Figure 7 and Figure 8 are some examples of what was
price to break the support line. Nonprofessional traders follow probably a fake resistance break. In Figure 7 you see a
the break and invoke a further down move. The professionals 32-point modified renko chart of the German DAX index
now open long orders by placing long limit orders at the level from mid-June until mid-August 2017. The modified renko
of the large batches of long stop-loss price levels. chart is practical for counting waves. On June 20, 2017 the
When the down move reaches these price levels, the long index reached a long-term top. A first smaller zigzag wave A
limit orders are executed and the professionals end up with a brings the index down to the 200-bar simple moving average
large long position in their portfolio. The professionals will (SMA). Reaction wave B is commonly a 50% reaction for wave
wait for selling power to run dry while supporting buying ac-
tion. At some point they will force price to break resistance, Continued on page 47
Traders take many paths to reach their destination.
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Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
risk capital should be used for trading and only those with sufficient risk capital should consider trading.
but has subtle differences.
The AMA is designed to account
for the location of the close relative
to the high–low range. You’ll find
that AMA closely follows prices
and can be combined with KAMA
to identify turning points and filter
price movements.
How’s it calculated?
The values 10, 2, and 30 are the
typical settings used with the AMA;
however, other values can be sub-
stituted depending on your trading
style and goals. These settings are
similar to KAMA.
• 10 is the number of periods

for the fastest EMA constant
for the slowest EMA
constant.
The multiplier (MLTP)
MLTP = ABS[(Current Close -

Lowest Low) - (Highest High
- Current Close)] / (Highest
High - Lowest Low)
where:
Lowest low = Lowest low for the
lookback period (10+1)
Highest high = Highest high for the
lookback period (10+1)
“ABS” stands for absolute value.
Keeping Up With Changes
Adaptive Moving
MLTP fluctuates between 1 and
zero and has a value from 0.8–1 if
Averages
price is near its high or low for the
given time period. When the close
is in the middle of the range, MLTP
equals zero.
Smoothing constant
The biggest challenge for any trader is identifying turning points in price movements. (SC)
You never know if you’ll end up getting whipsawed out of a trade. Here’s one way to The smoothing constant uses the
LANDSCAPE: TANYADZU/SHUTTERSTOCK/
T
avoid those whipsaws. MLTP and two smoothing constants
based on an exponential moving
by Vitali Apirine average.
COLLAGE: NIKKI MORR
he term adaptive moving average is associated with the Kaufman adaptive SC = [MLTP × (fastest SC - slow-
moving average (KAMA), developed by Perry Kaufman. In this article I will est SC) + slowest SC]2
discuss the adaptive moving average (AMA), which is based on the KAMA
ABS (Close - Close
Periodic Volatility
Multiplier ABS[(Current Close-Lowest Low) -
Smoothing Con-
Smoothing Con-
Smoothing Con-
Smoothing Con-
10 periods ago)
stant 2/(30+1)
(Highest High - Current Close)] / (Highest
Slowest EMA
stant 2/(2+1)
Fastest EMA
stant KAMA
stant AMA
Efficiency
Direction
Ratio ER
KAMA
Close
AMA
High
Date
SCK
SCA
Low
High - Lowest Low)

11/1/2012 828.48 818.43 827.85
11/2/2012 830.55 814.34 814.37 13.48
11/5/2012 820.46 812.13 819.54 5.17
11/6/2012 826.89 821.52 825.81 6.27
11/7/2012 818.91 802.23 804.52 21.29
11/8/2012 806.68 793.65 793.65 10.87
11/9/2012 800.72 789.25 795.02 1.37
11/12/2012 797.73 792.90 793.76 1.26
11/13/2012 795.97 788.77 789.01 4.75
11/14/2012 792.10 772.43 773.20 15.81 773.20 773.20
11/15/2012 775.08 765.03 769.48 58.37 3.72 0.69 0.86 0.67 0.06 0.23 0.34 772.33 771.93
11/16/2012 777.08 763.55 776.28 38.09 6.80 0.49 0.62 0.67 0.06 0.13 0.19 772.85 772.76
11/19/2012 793.07 782.37 793.06 26.48 16.78 0.30 0.07 0.67 0.06 0.06 0.01 774.05 772.99
11/20/2012 794.15 788.96 793.81 32.00 0.75 0.38 0.04 0.67 0.06 0.09 0.01 775.78 773.16
11/21/2012 798.38 793.42 798.38 6.14 4.57 0.09 0.26 0.67 0.06 0.01 0.05 776.10 774.38
11/23/2012 807.19 800.93 807.18 13.53 8.80 0.21 1.00 0.67 0.06 0.04 0.44 777.23 788.95
11/26/2012 809.04 802.50 809.02 14.00 1.84 0.22 1.00 0.67 0.06 0.04 0.44 778.43 797.85
11/27/2012 812.59 807.28 807.74 13.98 1.28 0.21 0.80 0.67 0.06 0.04 0.30 779.53 800.82
11/28/2012 813.56 798.51 813.50 24.49 5.76 0.37 1.00 0.67 0.06 0.08 0.44 782.34 806.43
11/29/2012 823.33 817.95 823.20 50.00 9.70 0.83 1.00 0.67 0.06 0.32 0.44 795.44 813.83
11/30/2012 824.58 818.90 821.92 52.44 1.28 0.91 0.91 0.67 0.06 0.38 0.38 805.40 816.88
12/3/2012 826.58 818.93 820.80 44.52 1.12 0.86 0.82 0.67 0.06 0.34 0.31 810.60 818.09
12/4/2012 823.03 816.08 822.12 29.06 1.32 0.80 0.80 0.67 0.06 0.30 0.30 814.02 819.29
12/5/2012 824.52 816.21 820.60 26.79 1.52 0.72 0.68 0.67 0.06 0.25 0.23 815.65 819.59
12/6/2012 822.90 817.74 821.79 23.41 1.19 0.69 0.71 0.67 0.06 0.23 0.24 817.08 820.12
12/7/2012 825.32 819.83 822.27 15.09 0.48 0.59 0.69 0.67 0.06 0.18 0.23 818.00 820.62
12/10/2012 826.28 822.74 826.26 17.24 3.99 0.62 0.98 0.67 0.06 0.19 0.43 819.60 823.02
12/11/2012 835.32 830.06 834.99 27.25 8.73 0.78 0.98 0.67 0.06 0.28 0.43 823.96 828.17
12/12/2012 837.29 828.58 829.39 15.89 5.60 0.45 0.59 0.67 0.06 0.11 0.18 824.58 828.39
12/13/2012 831.28 822.17 824.20 1.00 5.19 0.03 0.23 0.67 0.06 0.01 0.04 824.58 828.21
12/14/2012 827.24 821.82 823.75 1.83 0.45 0.06 0.28 0.67 0.06 0.01 0.05 824.57 827.97
12/17/2012 835.13 825.14 835.00 14.20 11.25 0.36 0.78 0.67 0.06 0.08 0.29 825.38 830.00
12/18/2012 847.69 835.50 847.69 25.57 12.69 0.50 1.00 0.67 0.06 0.13 0.44 828.37 837.86
12/19/2012 851.83 845.06 847.89 27.29 0.20 0.55 0.78 0.67 0.06 0.16 0.28 831.41 840.71
12/20/2012 852.50 845.73 852.49 30.70 4.60 0.58 1.00 0.67 0.06 0.17 0.44 834.99 845.94
12/21/2012 848.54 842.31 847.92 25.65 4.57 0.45 0.72 0.67 0.06 0.11 0.25 836.44 846.43
12/24/2012 846.35 843.43 844.74 18.48 3.18 0.33 0.49 0.67 0.06 0.07 0.13 837.00 846.21
12/26/2012 845.98 838.31 838.89 3.90 5.85 0.07 0.11 0.67 0.06 0.01 0.02 837.03 846.08
12/27/2012 839.74 827.72 837.40 8.01 1.49 0.16 0.02 0.67 0.06 0.03 0.01 837.04 846.03
12/28/2012 838.36 832.08 832.10 7.90 5.30 0.16 0.33 0.67 0.06 0.03 0.07 836.91 845.07
12/31/2012 849.89 831.18 849.35 25.60 17.25 0.39 0.79 0.67 0.06 0.09 0.29 838.00 846.33
1/2/2013 873.99 849.35 873.42 38.42 24.07 0.49 0.98 0.67 0.06 0.13 0.43 842.51 857.87
1/3/2013 878.43 870.76 872.60 24.91 0.82 0.37 0.77 0.67 0.06 0.08 0.28 844.99 861.98
1/4/2013 880.47 873.19 879.15 31.26 6.55 0.42 0.95 0.67 0.06 0.10 0.41 848.49 868.94
1/7/2013 876.71 873.74 875.80 23.31 3.35 0.32 0.82 0.67 0.06 0.07 0.31 850.31 871.09
1/8/2013 876.32 871.01 874.70 26.78 1.10 0.39 0.78 0.67 0.06 0.09 0.29 852.48 872.12
1/9/2013 879.54 877.01 879.51 34.77 4.81 0.49 0.96 0.67 0.06 0.13 0.42 856.01 875.19
1/10/2013 883.19 876.58 881.24 42.35 1.73 0.64 0.93 0.67 0.06 0.20 0.39 861.08 877.55
1/11/2013 882.62 877.44 880.77 43.37 0.47 0.66 0.91 0.67 0.06 0.21 0.38 865.31 878.76
FIGURE 1: Spreadsheet calculations. Here you see the calculations for KAMA and AMA using an Excel spreadsheet.

TRADING SYSTEMS
SC = [MLTP × (2/(2+1) - 2/(30+1)) + 2/(30+1)]2
The fastest SC is the smoothing constant for shorter EMA

(two periods). The slowest SC is the smoothing constant for
Spreadsheet
area the slowest EMA (30 periods). Note the superscripted “2” at
the end squares the equation.
Adaptive moving average

The first AMA is the close. The current AMA can be calcu-
lated using this formula:
Current AMA = Prior AMA +SC ×

(Price - Prior AMA)
METASTOCK
The table in Figure 1 shows the KAMA/AMA (10,2,30)

FIGURE 2: VISUAL REPRESENTATION OF KAMA AND AMA. Chart of Russell values for the Russell 2000 index. The corresponding chart
2000 index with overlay of KA (10, 2, 30). is displayed in Figure 2. Note that the red line on the charts
represents AMA.
The KAMA/AMA values in the spreadsheet are not very
accurate. But if you increase the lookback calculation period
to over 250 days, the values become more accurate.
Signals
Typically, the KAMA/price crossover
system will generate many signals
and whipsaws, but KAMA/AMA can
reduce the number of whipsaws. When
the AMA moves above KAMA, you
could look for bullish crosses and when
AMA moves below KAMA you could
look for bearish crosses. Crossovers
can last from a few days to a few weeks. It depends on the
move’s strength.
The chart in Figure 3 shows the S&P 500 index with
FIGURE 3: BULLISH CROSSES. On this chart of the S&P 500 index with KA (10,
2, 30), the green vertical lines identify low-risk entry points.
KA(10,2,30). Bullish crosses, displayed as green vertical
lines, provide low-risk entry points to participate in the strong
uptrend.
The chart in Figure 4 shows London Financial Times Index
(FTSE) with KA(10,2,30). Bearish crosses, displayed as red
vertical lines, provide entry points to participate in the strong
downtrend. Note that the bearish cross in late September 2015
was negated when the FTSE index exceeded the September
peak in early October.
You can use KAMA/AMA crossovers for swing trades.
Resistance break
Figure 5 shows the Dow Jones Industrial Average with KA
(10,2,30). Note there were some good signals and some bad
ones. Bullish/bearish crossovers (green/red vertical lines)
work better when price swings are relatively big (that is, prices
are up over 5%).
Note the whipsaw in early October 2004 was short-lived.
AMA’s requirement to hold the cross for a set number of days
could avoid this whipsaw.
FIGURE 4: BEARISH CROSSES. This chart of the London Financial Times Index
(FTSE) with KA (10, 2, 30) displays bearish crosses as red vertical lines. These The benefit of two
lines identify entry points to participate in the strong downtrend. KAMA/AMA can be used together to generate crossover
signals. Both have the same parameters and their crossovers
The AMA closely follows
Whipsaw
prices and can be combined
with KAMA to identify
turning points and filter
price movements.
‡MetaStock
‡See Editorial Resource Index
†See Traders’ Glossary for definition
FIGURE 5: SWING TRADING WITH KAMA/AMA. On this chart of the Dow Jones
Industrial Average (DJIA), you’ll notice there were some good signals and some
bad ones. Bullish/bearish crossovers (green/red vertical lines) work better when The code given in this article is available in the Article Code sec-
price swings are relatively big (that is, when prices are up over 5%). tion of our website, www.Traders.com.
See our Traders’ Tips section beginning on page 48 for commen-

produce relatively late signals. Note that this system employs tary and implementation of Vitali Apirine’s technique in various
two lagging-style indicators. You could use KAMA/AMA in technical analysis programs. Accompanying program code can be
conjunction with price analysis and RSI to define overbought found in the Traders’ Tips area at Traders.com.
and oversold levels.
Vitali Apirine is a programmer engineer with an interest

in technical analysis, especially the application of relative
strength index to trading. He may be reached at vitapirine@
mediacombb.net.
Further reading
Apirine, Vitali [2018]. “Weekly & Daily Percentage Price
Oscillator,” Technical Analysis of Stocks & Commodi-
ties, Volume 36: February.
[2016]. “The Middle-High-Low Moving Average,”
Technical Analysis of Stocks & Commodities, Volume
34: August.
MetaStock code for KAMA and AMA

Periods:=10; 1)),PREV+Constant*(C-PREV));
Pds:=Periods+1; KAMA;
FastSC:=2/(2+1); {Adaptive Moving Average}

SlowSC:=2/(30+1);
Mltp:=Abs((C-LLV(L,Pds))-(HHV(H,Pds)-C))/(HHV(H,Pds)-
{Kaufman Adaptive Moving Average} LLV(L,Pds));
Direction:=Abs(CLOSE-Ref(CLOSE,-periods)); Volatility:=Sum SSC:=Mltp*(FastSC-SlowSC)+SlowSC;

(Abs(ROC(CLOSE,1,$)),periods); Constant:= Pwr(SSC,2);
ER:=Direction/Volatility;
AMA:=If(Cum(1) = Pds,Ref(C,-1)+Constant*(C-Ref(C,-
SSC:=ER*(FastSC-SlowSC)+SlowSC; 1)),PREV+Constant*(C-PREV));
Constant:= Pwr(SSC,2); AMA;
KAMA:=If(Cum(1) = Pds,Ref(C,-1)+Constant*(C-Ref(C,- —Vitali Apirine

Finding The Best Yardstick
Volatility: What’s The Best

Measure?
Volatility has often been measured by standard deviation but returns remains the most commonly used volatility estimate,
there are other ways to look at volatility. Here we look at how but newer measures have appeared in the last two decades that
true range can be used as a reliable volatility measure. are thought to offer some significant advantages. The main
A
problem has been that different measures produce different
by Mike B. Siroky, MD estimates of volatility. It turns out that the level of volatility
depends on your measuring stick. So, what is volatility and
century ago, John D. Rockefeller was asked what how is it best measured?
ALEX MOE/SHUTTERSTOCK
he expected Standard Oil stock to do. According

to legend, he answered, “I fully expect it to fluctu- Let’s take a look
ate.” Today we use the term “volatility” instead We can define volatility very simply as the variation in price
of “stock price fluctuation.” Standard deviation of of tradable assets over any time interval. Volatility may be
TRADING TECHNIQUES
measured either by returns or range. In other words, volatility

may refer to the variability in price (that is, the range) or the Newer measures of volatility
variability in price change (that is, the return). Furthermore, build on Wilder’s concept of
volatility may refer to the past, present, or future. Past volatil-
ity is called historical volatility and is calculated from past
true range as logarithmic ratios
data. Future volatility is calculated from various option price rather than price difference.
models and is called implied volatility. Present volatility is
current market action that has not yet entered the realm of
either the past or future. During the trading day, we do not by Parkinson listed in further reading at end.) Parkinson’s
yet know what the high, low, or close for the day will be until measure emulates the standard deviation of return, except that
trading is halted. the “return” refers to the ratio of intraday high to low price
rather than interday close to close. We will see this pattern
Classifying volatility measures repeatedly in all the newer volatility measures.
One way to classify volatility measures is according to prices. The Parkinson estimate is said to be more efficient than the
In the table shown in Figure 1, the time interval is labeled by standard deviation because it takes intraday price movement
subscripts from time 0 to time t where t refers to days. into account. However, it has two drawbacks in that it does not
Note that the first three are based on returns while the last account for opening gaps and assumes there is no significant
three are based on range. As already noted, range usually price drift. This can be seen from the construction of the
refers to price itself while return is the first derivative of price. Parkinson measure, which does not consider close-to-close
Another difference between return and range is that the time price change or overnight price change.
associated with returns is known. Meanwhile, for a range, we Garman and Klass in 1980 extended Parkinson’s method
generally only know the beginning and ending time. We know by adding the opening and closing prices to the calculation.
when opening and closing prices took place, but not when the However, the Garman-Klass formula was still unable to handle
intraday high or low occurred. Interestingly, all of the newer significant price drift.
volatility measures are based on range. To address these deficiencies, Rogers and Satchell developed
The first of the newer volatility measures was developed the following formula:
by physicist Michael Parkinson in 1980. Parkinson’s volatility
measure is based on the logarithmic ratio of intraday high For any time 0–t,
and low prices: Rogers-Satchell =
For any time 0–t,
Parkinson = � 0.361*∑ln(Ht / Lt )2 [1]
� ∑ln(H /C ) ln(H /O ) + ln(L /C ) ln(L /O )
t t t t t t t t [2]
For each day, the logarithmic ratio of high to low price is In this formula, H is intraday high, L is the intraday low, O
calculated and squared. The sum of these squares is multiplied is the open, and C is the close. Because it uses the ratio of high
by a constant (0.361) and then the square root is taken. Note to open and close and low to open and close, this formula is
that by taking the logarithm of the high–low ratio, the high– able to measure volatility even when drift is present unlike the
low range (which is a price difference) has been converted Parkinson or Garman-Klass formulas. However, it still could
to a logarithmic return based on the intraday low. Also note not account for opening gaps. This is easily remedied if we
that by taking the square root of the sum of squares, the Par- modify the Rogers-Satchell formula by adding the square of
kinson volatility measure is actually the root mean square of the log ratio of opening price to the previous day’s close.
the high–low ratio. (For the derivation, see the 1980 article
For any time 0–t,
Modified RS =
Price movement Term
Closet-1 to closet Inter-day return � ∑ln(Ot/Ct-1)2 + ln(Ht/Ct) ln(Ht/Ot) [3]
Closet-1 to opent Overnight return
Opent to closet Intra-day return
Volatility criteria
Hight to low t Intra-day range A close study of the range-based volatility measures reveals the
Max(hight,closet-1) to Min(closet-1),low t) Wilder true range following requirements for a successful volatility estimate:
High0-t to low0-t Time segment range
FIGURE 1: VOLATILITY MEASURES CLASSIFIED ACCORDING TO PRICES. 1. It should include intraday prices and close-to-close prices
The first three time intervals are based on returns while the last three are based in order to include intraday volatility.
on range. What’s the difference between the two? “Range” refers to price from a
beginning and end time, whereas “returns” refers to the first derivative of price of 2. It should account for opening gaps to include overnight
a known time. volatility from news occurring when the market is closed
Compared to standard deviation
of returns, true range accounts
for intraday price movement
FIGURE 2: Correlation between the modified Rogers-Satchell
formula and root mean square of Wilder’s true range (RMS-TR%).
while still measuring opening
Here you see 10 years of data on SPY ending September 29, 2017. The x and y gaps and drift.
axes both represent annualized percent volatility.
(such as earnings announcements). extracted and the result is multiplied by 100 to give the re-
3. It should be able to estimate volatility even in the pres- sult as a percentage. The result of equation 5 is annualized
ence of significant price trend or drift. by multiplying by √(N/n) where N=1 year in days and n=the
period of calculation. In this case, the period of calculation
The modified Rogers-Satchell formula in equation 3 is one month or about 25 trading days and one year is 256
should satisfy these requirements. How do the newer vola- trading days. Note these numbers were selected because they
tility measures compare to Wilder’s true range, a volatility are perfect squares. So the annualization ratio is √256/√25
measure commonly used in technical analysis? Wilder’s true = 16/5 = 3.2. We will refer to this measure as the annualized
range already meets two of the above criteria by including root mean square true range or RMS-TR% and compare it
intraday prices and handling opening gaps quite well. In to the newer volatility measures, all of which are annualized
order to compare Wilder’s true range to other measures, it is root mean squares.
necessary to put Wilder’s true range (TR) in the same terms Figure 2 shows the excellent correlation in annualized
as the other measures. volatility between the modified Rogers-Satchell volatility
measure in equation 3 and the simpler RMS-TR% measure
For any time t, in equation 5. This demonstrates that the true range, when
TRt= ln[max(Ht,Ct-1)/min(Ct–1,Lt)] [4] expressed in logarithmic terms, competes well with the newer
volatility measures.
This formula uses the maximum of today’s high and yester-
day’s close and compares it to the minimum of today’s low and Comparing volatility estimates
yesterday’s close, thus calculating the single day true range as We will use as our benchmark the volatility index published
a natural logarithmic ratio. If desired, the result of equation 4 by the Cboe Options Exchange commonly called the VIX.
can be expressed as a percentage by multiplying by 100. This measure uses the prices of out-of-the-money calls and
The following equation provides the root mean square true puts to estimate market perception of the volatility of the S&P
range% (RMS–TR%) over any time interval 0–t. 500 index over the next 30 days, which is then annualized. The
VIX has been calculated daily since 1990. We will compare
For any time 0–t, the following to the VIX:
RMS-TR%0–t =
1. The logarithmic true range (RMS–TR% from equa-
100* √ ∑ [ln[max(Ht,Ct-1) / min(Ct-1,Lt)]]2 [5] tion 5)
2. Wilder’s original true range
The results of equation 4 are squared, then summed over
3. The standard deviation of returns
time interval 0–t. The square root of the sum of squares is
4. The modified Rogers-Satchell formula from equation
3, and
5. Parkinson’s measure from equation 1.
To make each indicator comparable to the VIX, each of the

five volatility measures was calculated over a 25-day window
and then annualized as described earlier. The chart in Figure
3 illustrates an example.
We can now compare each volatility measure’s R2 as an
indicator of how well it tracks the VIX. The table in Figure
4 shows some surprising results. The R2 value of standard
deviation of return% was lower than the R2 of the range-based
FIGURE 3: Comparing annualized 25-day standard deviation of
volatility measures in tracking VIX. This is probably because
returns VS. VIX. Each of the five volatility measures was calculated over a standard deviation of return% is based on closing prices
25-day window and annualized. The R2 equals 0.6851. only and does not consider intraday price movement. Even
Wilder’s original true range tracked VIX
better than standard deviation of returns.
However, it is also important to note that
R2 only tells us that two measures move
together. It doesn’t tell us anything about
how accurately either measure captures
volatility because we can only estimate
volatility. The best measure in terms of
VIX is the RMS TR% from equation 5
with R2 equal to 0.7449. What we can
conclude is that range-based measures
are better measures of volatility than
standard deviation of return.
Figure 5 shows the close correlation
between RMS true range% and VIX.
This suggests that by using equation 5,
we can calculate a volatility measure
that emulates VIX for any stock or ETF,
not just the major indexes. Furthermore,
we can expect RMS TR% will perform
better than standard deviation of returns
as an estimate of volatility.
What is high volatility?

While true range provides an excellent
estimate of volatility, we still need to
know what high volatility and low volatil-
ity is. This would be especially useful for
comparing one stock with another. The
annualized volatility is going to vary from
one stock to another since some stocks
are persistently more or less volatile
than others. So each stock’s volatility
must be compared to its own historical
volatility. For example, in Figure 5 it
seems that an annual volatility above
20% is associated with excessive risk of
a downturn in prices.
One of the simplest ways of normalizing
volatility is to compare it to its annual
median value. Note in Figure 6 that under
extreme conditions, such as in 2008, the
median rises to meet volatility after the
bottom in March 2009 and indicates a safe
entry point. Note also the low volatility
indicated over the past 18 months.
Why it works
Welles Wilder stated in his 1978 book
on technical trading systems, “The one
thing that is directly proportional to
volatility is range.” His true range indi-
cator anticipated many of the formulas
currently being developed in academia.
These newer measures build on Wilder’s
concept of true range as logarithmic ratios
Volatility measure R2 value rather than price dif- the median absolute annual
RMS TR% .7449
ference. Wilder’s key drift is 13.5%. In contrast,
insight was that in the median annual range is
Modified Rogers/Satchell .7445
order to fairly assess 21.6% or about 60% more.
Wilder’s True Range .7409 volatility, you must Compared to standard
Parkinson .7362 use the maximum deviation of returns, true
Standard deviation return% .6851 price movement in range accounts for intraday
FIGURE 4: ThE GOODNESS OF FIT. The R value2 any period and that price movement while still
of standard deviation of return% was lower than means using intraday measuring opening gaps
the R2 of the range-based volatility measures in highs and lows and and drift.
FIGURE 7: USING INTRADAY hIGhS
tracking VIX. the prior day’s close AND LOWS AND PRIOR DAY’S CLOSE. In
when necessary. hoW vaLid is true example A, you see two days’ trading with
Note in Figure 7 how Wilder’s true range takes the opening range? no opening gap. The red arrow indicates the
gap into account by using the lowest of the prior day’s close The results presented in close-to-close change. The vertical double
or the intraday low, thus maximizing the range. If there is a this article show that true
arrow indicates the true range. In example
B there is an opening gap, since the low of
down gap, it works in reverse to account for the opening gap. range, when calculated the second day is above the close of the
Wilder did not concern himself with accounting for price properly, can compete well previous day. In B there is a larger return
drift, indicated by the red arrows in Figure 7. But note that with newer volatility mea- and also a larger true range.
in example A there is minimal change in closing prices, but sures. The true range can be
the true range is at least twice as large. The standard devia- standardized against its own median, thus producing a useful
tion would pick up little volatility because it ignores intraday normalized volatility. Periods of high volatility are associated
price movement. When drift expands, as in example B, true with short, violent declines in price. Avoiding the high-volatility
range also expands. periods allows you to markedly reduce risk of loss.
It is possible to have a large change in closing price with a
smaller oscillation of intraday prices. In example B, the intraday Mike B Siroky, MD, is a retired surgeon living in Phoenix, AZ.
excursion and the price drift are almost equal. However, the He has more than 25 years of investment experience and is
construction of the true range ensures that range will always particularly interested in quantitative technical analysis and
be larger than drift. Looking at SPY data for the last 10 years, indicators. He can be reached at mike.siroky@yahoo.com.
further reading
Garman, Mark B., and Michael J. Klass [1980]. “On the estimation
of security price volatilities from historical data,” The Journal
of Business, Vol. 53, No.1, www.jstor.org/stable/2352358.
Parkinson, Michael [1980]. “The extreme value method for estimat-
ing the variance of the rate of return,” The Journal Of Business,
Vol. 53, No. 1, http://www.jstor.org/stable/2352357.
Rogers, L., and S. Satchell [1991]. “Estimating variance from high,
low and closing prices,” The Annals Of Applied Probability, Vol.
1, No. 4, www.jstor.org/stable/2959703.
Siroky, Mike B. [2018]. “Measuring Risk With The Normalized
FIGURE 5: 10 YEARS OF CLOSING PRICES OF SPY AS A PROXY FOR ThE Risk Index” Technical Analysis of StockS & commoditieS,
S&P 500. The VIX index is in green and the RMS true range% is in red. Both Volume 36: January.
measures are annualized. Wilder, J. Welles Jr [1978]. New Concepts In Technical Trading
Systems, Hunter Publishing.
Yang, Dennis, and Qiang Zhang [2000]. “Drift-independent
volatility estimation based on high, low, open, and closing
prices,” The Journal of Business, Vol. 73, No. 3, www.jstor.org/
stable/10.1086/209650.
What we can conclude is that

range-based measures are better
measures of volatility than
standard deviation of return.
FIGURE 6: COMPARING VOLATILITY TO ANNUAL MEDIAN VALUE. Here, the
annualized RMS TR% volatility (red) is compared to its own annual median (green).
This data is from 10 years of SPY data ending September 29, 2017 (n=2216).
26 • April 2018 • Technical Analysis of StockS & commoditieS

FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner, where she also works as a
broker. She has written four books on futures and options trading, with the latest
being a new edition of her book A Trader’s First Book On Commodities (third
edition, October 2017) as well as Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free subscrip-
tion, visit www.DeCarleyTrading.com. To submit a question, email her at info@
carleygarnertrading.com or via www.DeCarleyTrading.com. Selected questions Carley Garner
will appear in a future issue of S&C.
What do we need to know about cash market price of bitcoin and cash- a futures contract with an experimental
bitcoin futures? (Part 2 of 2) adjust trading accounts accordingly. cybercurrency as the underlying “asset”
Last month, we looked at the contract Thus, there is no digital wallet necessary could leave bitcoin futures prone to ma-
specs for the two versions of bitcoin fu- because there is no actual bitcoin to take nipulation and inefficient pricing.
tures. This month, we’ll focus on market possession of.
characteristics and logistics. As a broker who has seen cash settle- Illiquidity is an issue
ments pick the pockets of speculators for Despite widespread chatter surround-
Are two bitcoin futures a crowd? years, I strongly recommend offsetting ing the bitcoin market and the newly
In my opinion, the listing of two compet- positions prior to expiration to avoid listed futures contracts enabling the
ing futures contracts with a new asset as unnecessary slippage in pricing. Keep masses to trade cryptocurrencies, the
the underlying is unfortunate. It divides in mind, the cash market bitcoin is far trading volume has been light. To be
liquidity between two different market- from being a transparent and central- fair, all newly listed futures contracts
places and creates challenges for brokers. ized arena. Instead, there are dozens of go through growing pains and it takes
For instance, not all futures brokers brokerages that are creating synthetic several months or years to acquire liquid-
offer Cboe products on their trading markets for their clients to buy and sell ity. In reality, many newly listed futures
platforms and not all stockbrokers offer bitcoin. In other words, it is a lot like the contracts are eventually delisted due to
CME Group futures on their platforms. a lack of interest so this isn’t necessarily
Further, those who use brokers with unexpected.
access to both might experience some If you venture into the Nevertheless, sparse volume in bitcoin
confusion on which is most advanta- game of bitcoin trading, futures creates an environment of wide
geous to trade. the futures markets are bid/ask spreads and poor fill quality.
I wish I could say it was uncommon For example, the BTC bid/ask spread is
for online traders to mistake similar
likely the most efficient generally around $50 but because of the
contracts for one another, but it isn’t. means of doing so. contract size for five bitcoins, this equates
Green traders using platforms with ac- to a hidden cost of $250 to execute a trade.
cess to both the BTC and the XBT might forex market, where there is the ambigu- The smaller contract size offered by the
unknowingly trade the larger contract ity of pricing from broker to broker. As a XBT seems to have attracted more specu-
after researching and being comfort- result, the futures exchange’s cash settle- lative interest, creating a tighter bid/ask
able with the smaller, and vice versa. ment price is somewhat arbitrary. spread (between $20 and $40), but there
After all, most platforms are capable of Most commodity-based futures con- is still plenty of room for improvement.
searching for futures contracts by term tracts are not cash-settled. Instead, those To put this into perspective, the emini
rather than by symbol. It isn’t far-fetched holding positions beyond the exchange’s S&P 500 futures offers a bid/ask spread
to imagine a trader typing in the word first notice day are subject to receiving of a single tick, or $12.50.
bitcoin and getting in over his head with delivery of the underlying commodity,
the five-bitcoin contract rather than the or make delivery of it if they are short Bitcoin futures are regulated, and
one-bitcoin contract. the futures contract. (Of course, this is a transactions are guaranteed (unlike
simplified statement; those not wishing the bitcoin cash market)
Bitcoin futures are cash-settled to make or take delivery can always get Unlike buying and selling bitcoin in the
Both versions of the bitcoin futures are out of the obligation). cash market, the futures market is regu-
cash-settled. This means traders who The delivery relationship between the lated. Further, the exchanges guarantee
hold a long futures contract until expi- cash market and futures market works to the integrity of every trade. This means
ration won’t be delivered actual bitcoin; keep commodity prices efficient. Some
instead, the exchange will determine the worry that the lack of physical delivery of Continued on page 37
RaS RaS: An Alternative
Let’s Paint Our Screen
Charting Technique
Technical analysts rely on charts to make their trading deci- histograms, and so on), to those that are not time-uniform
ART: M STASY/SHUTTERSTOCK/COLLAGE: CHRISTINE MORRISON
sions. Some prefer to look at bar charts, others prefer candle (such as renko, kagi, point & figure, and so forth), to the most
charts, renko charts, line charts, or … There are many op- popular ones—bar and candlestick charts.
tions to choose from. Here’s another one to add to your list. It A traditional bar chart (HLC) uses three values per obser-
combines bar and candlestick charts and makes your charts vation—high (H), low (L), and close (C)—to produce a basic
more visually appealing and intuitive. plot of price evolution, which reveals the sequence of highs,
M
lows, and the relative position of closing prices in each bar.
by Marco Alves Older bar charts used standard black bars, but most charting
platforms these days allow for conditional coloring, usually
any types of charts are available to plot price dependent on closing price variation or, in more sophisticated
over time—from those that rely solely on closing ways, by combining indicators and color-coding them into the
prices (such as line charts, symbols, area graphs, price bars (the Elder impulse system, for example).
NEW TECHNIQUES
Japanese candlestick charting, by adding a fourth value— displayed (more on this later). Figure 2 illustrates the three
open (O)—and combining it with the close (C) to produce a possible constructions for a given set of HLC values.
“body” (connected to H and L by “wicks”), became one of By highlighting one performance over the other, with a
the most sophisticated techniques available to display price different color and a pronounced thickness, a colored strip is
evolution. The relative positions of O, C, and the previous formed, as if painted by a roller (thus the name “RaS,” which
close, along with the relative sizes of the wicks, allow for a stands for roller and strip). The roller’s “handle” represents
vast array of configurations. More than 40 patterns (reversal the opposite pressure, displayed with a neutral color, and a
and continuation) are described in literature and while this thick marker is used for the close (the “roller”). I will use
technique may be an effective sentiment indicator and pre- green and orange coloring to represent positive and negative
dictive tool for the short term, its complexity frequently goes performance, respectively.
beyond the needs or skills of many analysts. The main difference between the RaS “strip” and the candle-
HLC bars are much simpler and easier to read (they don’t stick’s “body” is the emphasis, by the former, on the relation
look so cluttered when compared to candlesticks) but are more of the close to the extremes, in contrast to the relation of the
limited on the information they can transmit. This article pro- C to O highlighted by the Japanese symbol. Also, with RaS,
poses a new chart type, and it’s aimed at those who dispense there is only one wick (the “handle”) for each strip, whereas
with the opening price (and, thus, with the Japanese technique) candlesticks frequently have two wicks extending from the
but still appreciate a visually appealing and informative chart body. (The “opening marubozu” would be an exception, visu-
that goes beyond the traditional HLC technique. ally resembling an RaS icon. See “further reading” at end for
one primer on candlesticks.)
The duality of the closing price
If you look at a traditional HLC bar, it is easy to recognize that Interpretation
the closing price records a dual performance: a decline from Chart analysis is all about understand-
the high and an advance from the low (Figure 1). This duality ing how bulls and bears push prices—
reflects two types of pressure (buying and selling) within the that is, who is gaining control and who
H–L range, and the distances that separate the closing price is losing it. Reading RaS charts should
from the extremes serve as measures of those pressures. be straightforward: If a positive strip is
It is possible to design a new HLC icon that effectively displayed, it means the buying pressure
RaS
displays those pressures, but we must decide on a criterion was sufficient to carry price from the lows to a higher close
for choosing which component will be highlighted (by color than the previous observation, winning over the declining pres-
and thickness differentiation, for example). Although the sure. If a negative strip is formed, the bear’s selling pressure
largest distance from the close to an extreme could be such a forced prices to a lower close over any bullish performance
criterion, that approach wouldn’t add much to what is already above the low. In a neutral bar, the battle between bulls and
provided by a traditional bar. bears, regardless of the apparent winner (as measured by the
Another, more intuitive differentiation criterion is the varia- distances of the close to the extremes), was insufficient to
tion of closing prices: if the close in question is higher than change the price on a closing basis and indecisiveness is the
the previous one, then the advance should be distinguished; keynote of that observation.
the decline would be highlighted in the case of a lower close. Naturally, the relative sizes of the strip and of the handle
In the less common situation of an unchanged close, no must be compared, and this is where the differentiation
performance would be preferred and a regular bar would be provided by the proposed design becomes useful: A long
handle with a short strip
High (H) indicates a relatively
High (H) weak pressure, whereas
Decline
(selling pressure)
long strips with short
handles denote strong
Close (C)
Previous C>C 0 pressures. For instance,
C=C0
Close (C0) a relatively short posi-
C<C0 tive strip (say, one-third
of the handle) following
Advance
(buying pressure) a positive trend (a se-
quence of higher highs
and higher lows) may
Low (L) indicate exhaustion and
Low (L)
the possibility of a trend
FIGURE 1: DUAL PERFORMANCE OF CLOSING PRICE. FIGURE 2: THREE POSSIBLE CONFIGURATIONS FOR AN RaS
This depicts a decline from the high and an advance from ICON. The relative position of C, regarding the previous close, will
reversal initiating.
the low. determine the displayed icon: a positive strip (green), a negative strip Some patterns are
(orange), or a neutral bar (unchanged close, no strip). common to bars and
RaS
candlesticks so it’s only natural they occur when charting
with RaS icons. Here are a few:
The RaS charting method
• Inside action: when an entire H–L range is containable is aimed at simplifying
by the H–L range of the previous observation
analysis (when compared to
• Outside action: The H-L range totally comprehends the
previous range
candlesticks) while adding
relevant information absent
• Gaps: when there is no overlap between adjacent icons
(the L is higher than the previous H, or the H is lower from traditional bar charting.
than the previous L)
• Island reversal: a gap in one direction, followed by a
consolidation encompassing several icons (the “island”)
and by a gap in the other direction figure out what textbook pattern would best match a real
data configuration.
• Double tops and double bottoms
Note some of the differences that may emerge between
• Triple tops/bottoms and the “head & shoulders” pat- candlesticks and RaS icons, for the same observations (the
tern. terms inside quotation marks are terms used in candlestick
interpretation):
Information on how to interpret these patterns is easily
available in literature and on the Internet, so I will not rep- A. The neutral/negative “spinning top” candlestick con-
licate it here. trasts with a positive RaS.
Other patterns, similar to those present in candlestick B. A “spinning top” candle followed by a bullish “opening
charting, may have correspondence in an RaS chart (the marubozu” compares to a neutral RaS followed by a
“hammer” and “hanging man” come to mind), but validation slightly negative RaS.
of those patterns would require statistical analysis on a large
database regarding frequency and performance (winning/
losing percentages, net profit/loss, etc.), and that goes beyond
the scope of this article.
Just remember not to “over-read” an RaS chart and main-
tain a simple approach. If you find yourself trying to extract
very elaborate information out of this technique, you would
probably find your efforts best served by studying Japanese
candlesticks instead. Again, the proposed charting method is
aimed at simplifying analysis (when compared to candlesticks)
while adding relevant information absent from traditional
bar charting.
As with any other chart type, RaS charting will benefit from
the blend with technical indicators that complement price
behavior, producing a more comprehensive picture. Choosing
from the dozens available is a matter of personal choice.
Comparing the three

techniques
Figure 3 compares, for the same data,
the three types of charts discussed so
far, presenting the RaS chart as an
interesting alternative to traditional
HLC bars and to candlesticks.
One obvious advantage of RaS
charting over bar charts is the visual appeal: The dominant
pressure is immediately recognizable in each observation, in
opposition to the pressure revealed by the handle’s length.
Compared to candlesticks, the RaS charts are more intui- FIGURE 3: RaS CHARTING VS. TRADITIONAL BARS AND CANDLESTICKS. The
tive, as you’ll just need to take notice of the type and rela- axes were removed to improve readability. Points A, B, and C identify situations
tive strength of the dominant pressure, without the need to where RaS provides readings that contrast candlesticks’ readings.

C. A bearish “spinning top” on the verge of being a doji a marginal variation.
compares to a positive RaS before a significant upward However, for those who prefer to assign a neutral tone
impulse. to a very small variation, a threshold (a percentage of the
H–L range) could be defined as a trigger for the formation
of the respective colored strip, and that could be part of the
RaS and spreadsheets customizable settings, along with strip/handle colors and
Even if this type of chart is to appeal to the interest of ana- “roller” thickness.
lysts, we will have to wait for programmers to implement it
on existing platforms. In the meantime, how can we use this Slim RaS: An alternative design
technique with the available tools? If you use a spreadsheet For analysts who still want the cleaner look of traditional bar
to do your charting, you can use candlestick-type charts and chart, or want the ability to compact more data into a given
borrow the “body” to create the strip by modifying the open chart area, a slimmer design like the one displayed in Figure
value, forcing it to match H, L or C. 4 may be preferable. The “roller” is replaced by a small dot,
Starting with a spreadsheet with date, open, high, low, and the “strip” is now the colored portion of an H–L line.
and close columns of data, you would create a new column
named modified open (MdfO), where each cell uses the fol- Marco Alves discovered technical analysis in 2003 and
lowing formula: started to adapt some of the classical indicators and design
new ones to fit his own investment and trading goals. He may
=IF(Close < Previous Close; High; IF(Close > Previous be reached at macalves.pt@gmail.com.
Close; Low; Close))
Further reading
We then need to create a candlestick-type chart using the Morris, Greg [2006]. Candlestick Charting Explained,
RaS
MdfO, high, low, and close columns as source data, and McGraw-Hill.
define a marker (the “roller”) to display the closing price.
If you need an example file, feel free to email me and I will
send you one.
Neutrality and marginal changes

The frequency of unchanged closes—situations displayed
with neutral bars—raises a question about the precision to be
used when deciding whether a close is unchanged from one
observation to the next. Should any variation, no matter how
small, be considered strictly a variation to be displayed with the
correspondent colored “strip,” or should it be considered neutral
if it is insignificant in
the H–L range of the
observation?
One thing to re-
member, whether the
variation of closing
prices is large or
small, is that the
positive and nega-
tive pressures, as
described in the first
section, are always
present, and the de-
cision to highlight
one of them does
not imply denying
the other. If nothing
else, at least it makes
it visually conclusive
whether the price
closed higher or FIGURE 4: A “SLIMMER” VERSION. In this condensed version of the RaS chart, the “roller” is replaced by a small dot and the “strip”
lower in the case of is now the colored portion of an H–L line.
INTERVIEW
Trading Livermore Style
Pivot Levels
With Gareth Burgess
After spending many years dabbling in the financial markets, Gareth
Burgess decided to take the leap to becoming an independent trader.
Many years of research into charts led him to come up with a trading
system that he believes is similar to Jesse Livermore’s tape-reading
techniques. His research into charting techniques and backtesting to
discover what works and doesn’t work also led to his book published
by Wiley, Trading And Investing In The Forex Markets Using Chart
Techniques.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke
with Gareth Burgess on February 8, 2018 to find out more about his
trading system.
Gareth, tell us about how For a short time after, I

you got interested in the tried creating charts on my
markets. Amstrad PC with spread- There is no comfort zone in
My grandfather worked sheet software called Su- trading, which makes this
at Coutts Bank in London. percalc 3. It was the answer business difficult. It’s an
When he died, he left a port- to investing blind in the uncomfortable feeling and you
folio of company stocks be- stock markets. I’d phone in
hind, so even though I didn’t understand to listen to a recording of have to find a way around it.
anything about the financial markets the market closing prices
when I was young, it wasn’t new to me and then pump these into my spreadsheet. old and software companies were up and
when I eventually got involved in trad- It wasn’t that successful but it was my coming. I opened an account with a bank
ing and investing. The first investment I first attempt at charting. that had offered telebanking. You type
made was in 1987, and that was through a pin into the telephone and get right
a student friend of mine who had a small That sounds cumbersome. It sounds through to the trading room.
portfolio of stocks in energy companies like you were determined to find a way I was buying small amounts of shares
such as British Gas. I had just returned to gain more insight into the markets. in software companies. It was wild. These
to university after working the summer What followed those early attempts at IPOs were coming out on the market at
holidays to get some money together for charting? €30, and two weeks later they would be
the winter semester. My friend told me I was studying history at the time and trading at €80. But that only went on for
that his broker had recommended buying later did a post-graduate degree that took about two years, and the Neuermarkt was
shares of Harley-Davidson. So I joined me to Germany where I also worked in changed to the Nemax and then later to
him and together we sent money to his archaeology for many years. Around the TecDAX. People said afterwards it
broker to invest in Harley-Davidson. The 1998 I was offered a permanent position was a bit of a con. Certainly, it was fast
investment ended up being a disaster. I working in international customer sup- money!
watched my £3,000, which I had worked port for a German company in Freiburg, Eventually, I was able to place my
so hard for over the summer, go down where I was living. They gave me my orders online and by the year 2001 it was
to about £1,600. own office and this allowed me, during all done online. I could also research on
Apparently, there had been an attempt quiet times, to start investing this time the Internet from my office, and because
at a reverse takeover. The broker was in companies listed on the Neuermarkt. of that I wasn’t blindly buying stocks as I
going on about something good hap- It was the German version of the US had been. Commerzbank was one of the
pening and said the company shares technology index, the Nasdaq. There first to offer online access to the markets
are going to go up and that it would be was a lot of hype about this market at and provided charts and fundamental
quick money. But it ended up being the the time. information.
other way around. The Neuermarkt was only a few years
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That must have felt like a big to change direction. When I
improvement over the earlier see some change taking place
attempts at charting. I will usually mention it on
It worked out well. I saved my Twitter feed. That’s what
some money. My portfolio interests people. I have also
grew slowly and then by 2003 I since developed a method for
set myself up as an independent timing my entries.
trader. I’ve been doing that ever
since. I also got into charting Could you share with us a
at a much deeper level and did little about your method for
huge amounts of backtesting. timing entries?
A friend of mine who was I can tell you about part of
working at the Royal Bank my method. I look at volume
of Scotland had clients who to find pivot levels, and I use
wanted Asian market cover- an MACD indicator around
FIGURE 1: PIVOT LEVELS. To find pivot levels, use a short timeframe chart and
age. Since I had a lot of charting look for support & resistance levels. It’s volume that confirms the significance of these pivot levels. I developed
experience, I started analyzing pivot levels. Here, you see volume from 63.76 to 63.98 and back to 63.76. this system after reading Remi-
charts for his clients. niscences Of A Stock Operator,
They were interested in which is a book about legend-
the Australian dollar, New ary trader Jesse Livermore.
Zealand dollar, Hong Kong After reading it, I was disap-
dollar, Singapore dollar, those pointed that there wasn’t much
markets. But many of the meth- information about his actual
ods I was using for technical trading method that I could try
analysis didn’t work well so I to adopt, so I thought I must
spent a lot of time researching have been reading it with the
these chart techniques, espe- wrong questions in mind. The
cially rate of change indicators. amount of information about
But I still had a hard time find- his trading methods in that
ing entry levels, even though book is limited. You could
the longer-term prediction probably write out what he tells
was correct 80% of the time. you about his system in one
I would still get into a market FIGURE 2: PROJECTING PIVOT LEVELS. Noting the significant support & resis- page. But there are two points
and spend days literally biting tance levels can give you insights for the following trading day and further out. worth taking away with you
my nails. when you read that book.
That led me to do more of my own futures account and trade products on
research. And that’s how the book came the CME energy contracts, metals, and And what are those two takeaways?
about. It was a result of painstaking re- grain contracts. I also invest in ETFs. The first is that Livermore was a tape
search going back five years or longer, Marijuana stocks are looking very reader and was therefore using pivot
checking out rate of change indicators future-orientated. levels for his directional bias and because
like MACD and the stochastic indicators, he was reading the tape was able to see
also moving averages, and candlesticks. And how do you analyze these where the price would precisely find re-
I did chart analysis for clients and also markets? sistance (or support). So I started reading
gave seminars, both private and for the Basically, I still look at charts and look between the lines and figured that he was
general trading community, such as those for markets that are moving upwards and observing what we would consider pivot
that I held for the World Of Trading in I also look for markets that are ready levels on the short timeframe.
Frankfurt and Stuttgart. Around 2012 I Remember, he didn’t use charts
stopped doing chart analysis and semi- himself. So I started looking for these
nars because it was getting in the way pivot levels on charts. They are not your
of my own trading, which by this time typical daily highs and lows. You won’t
was on a much shorter time scale than I find these pivot levels without short time
had previously been doing. charts or volume.
What do you trade? And where are these levels on the chart?
I have a Eurex account and trade How do you find them?
lots of German bonds. I also have a If you look at the chart in Figure 1,
you’ll see volume from 63.76 to 63.98 row of numbers right next to
and back to 63.76. I look for those sup- it and have the spreadsheet
port & resistance levels and note the deduct it for me. (For an I look at the one-minute
significance of these levels, even for example of the spreadsheet, chart to see where the
the following trading day and further see Figure 3.) market has been finding
out (Figure 2). At the 63.85 and 63.87
And this is important—I look at the levels, when the market goes
a lot of resistance or a
one-minute chart to see where the market back up again, there are pivot lot of support. But it’s the
has been finding a lot of resistance or a lot levels. They are difficult to volume that confirms the
of support. What level on the one-minute see on the one-minute time significance of that pivot
bar chart does the price get over and then chart or otherwise, and it is
find support at? But it’s the volume that not easy to see how much the
level.
confirms the significance of that pivot volume has changed when
level. On the first attempt higher, I record you’re looking at total vol-
the volume. It’s demanding because you ume. For example, at 63.85
have to be quick. I take a print copy of there were 1,056 more contracts traded You have to keep looking at volume and
the depth of market (DOM), copy the at that price on the second attempt. You keep adding it to your Excel table. Keep
volume out into an Excel spreadsheet, get that by deducting the total volume watching where the highest amounts of
and then wait for the market to move of the first attempt higher from the vol- volume are. In the spreadsheet in Figure
through this region again, either a return ume seen on the second attempt higher. 3, volume from the second attempt was
move or a return move followed by an- Volume should be higher and lower on subtracted from volume on the first at-
other attempt higher. Then I put the next either side of the pivot level. Then you tempt. The large volume on the bar chart
look back at the chart, and draw that is where the pivot levels are. The final
First Second line on the chart or confirm that line price touch would have been the same
Price Total
Attempt Attempt you have already suspected on the chart pivot level from yesterday. You can draw
6398 19 is the pivot line worth trading around. a line at around 85 and you’ll see that the
6397 321
It gives you, as a trader, a greater feel market hit that price during the trading
for the market. Keep in mind that the session of the following day.
6396 612
professionals who work in banks and
6395 566
financial institutions are going to have Do you use your technique for both
6394 567 more information than you as a retail longs and shorts?
6393 862 or prop trader. But afterwards, you have I don’t like to work from the short
6392 693 693 0 these important price levels recorded on side because I find that markets are far
6391 624 667 43 your Excel spreadsheet. more random when they’re selling off.
6390 900 1040 140 For whatever reason, the market trades If you’re working from the long side, it’s
6389 1534 1871 337
around these levels. It is a significant level important because these pivots work well
and you can eventually trade it. That’s from the long side as buy signals. It’s
6388 2573 3069 496
how I find my entry points. If you’re just usually three buyers to one seller, and
6387 2066 3357 1291
looking at price charts, it’s difficult to a market may only need one seller to
6386 1737 2232 495 find an entry level without having some knock the market down, and that creates
6385 1188 2244 1056 anxiety. I find the pivot lines through fear and price becomes random. When
6384 1071 2202 1131 volume, and then place them on the chart. you buy the market or buy a market as
6383 1071 1366 295 I then place the MACD indicator on a it is going up, it is not random and to me
6382 1130 1678 548 three-minute chart. I watch how price that’s professional investment. A market
6381 1879 2296 417
reacts to these levels. The MACD is a is going upwards because professionals
confirmation tool that indicates price are trading and investing in that market.
6380 2042 2560 518
direction. If it’s moving away and you’re And by the way, all the rate of change
6379 1698 2682 984
expecting the market to move back to that indicators that I have researched on
6378 1350 2571 1221 pivot level, which is where you want to charts work better as buy signals.
6377 1704 2485 781 buy, then you look for the last histogram I got that out of my research. So I look
6376 1715 1860 145 bar on the MACD to make its deepest at volume to find these levels, and then
FIGURE 3: FINDING PIVOT LEVELS USING A point. I often look for divergence as a enter them on an Excel spreadsheet so I
SPREADSHEET. A spreadsheet is used to record confirmation signal. But, you’ll only am aware of these levels for long periods
volume from the depth of market. When the market
moves through these regions again, these regions
find these pivot levels if you look at the ahead. For example, I got the bottom in
become significant. The market tends to trade around volume. They are too well hidden even oil recently, which was based on a pivot
these levels, so they can be used as entry points. on the one-minute chart. level from a while back. I look up and
How do you manage your or technique is not complete. A good
positions? technique will generate reliable signals.
I look at volume to find pivot If you find the market They will be very good and you will
levels, and I enter them into gyrating around these lev- have tested your system and know what
an Excel spreadsheet so I els, eventually the market the risk/reward ratio is. Like this pivot
am aware of these levels for makes its final touch and
the MACD will confirm or
level method using volume. You’ve got to
find your own method and break it down
long periods ahead. there is divergence form- and understand it. If your system is not
ing and you’ll see volume working then try something new.
increase. Then you step in My pivot level method is time-con-
and place your stop just on suming and I am developing a software
down the column for these levels. They the other side. But if the market doesn’t program that will project all these levels
go on like that sometimes for weeks. move away very fast—in the futures for me.
market, they usually move very fast—
How do you use these pivot levels? then there’s something wrong. You can We’ve seen the markets putting up a
They’re market entry levels and if you place your stop on the other side so you strong rally. Any thoughts on if the
want to scalp off those levels, you can can get in and out two or three times if rally will continue this year?
use your short-term chart. If the price you are trading short term. You’re risk- Long-term investors were buying the
is not going to hold, the price will go ing two or three ticks, but you’re going second contracts behind the front month
below that level. You’ll see if it’s not to make a lot more than that once you’re back in 2017. The short-term traders
going to hold. If it holds, the market in rather than letting your position go eventually move on to those contracts but
won’t drop below that level any longer deep into a loss. they are buying and selling, not buying
and you’ll see volume increase while If you find a method, you must research and holding. But then larger sell orders
above that level. it by going back at least five years. Then appear from the longer-term investors
At the end you’re jumping on someone you’ve got to test going forward for at and fear is generated on a grand scale.
else’s “coat tails.” For whatever reason, least six months on paper. The futures Bids get pulled from the markets and
they have been buying and/or selling markets are a tug of war and as a trader, consequently there is a short-term abyss.
at that level. It’s interesting once you you want to maximize your gains, and You can see that in the open interest.
understand it but you have to do your at the same time minimize your losses. Everyone’s long, but eventually, there’s
own research. These two forces are always in conflict. no one left to buy and hold. So there has
Jesse Livermore was reading the tape, But if you find a method, this conflict to be a selloff. It’s always dramatic with
and he kept a book and kept seeing the balances itself out. If you find a method the media covering it.
same thing happen. It’s like looking on that fits your expectations, your trading I also have a pivot level system I use
an hourly chart and seeing a big run in will become good. The technique that for longer-term investments. It is useful
the market. But that’s not necessarily the you use as an entry signal, a buy signal, for finding market turns. For example,
high or the low for the day. The market becomes trusted to you. That counteracts I tried to look at the big picture in oil,
runs higher, drops back down, stays in these conflicting forces and balances which I think could still go down to 57
a range for a few hours, and then it goes it out for you emotionally. There is no or 58. (This has happened!) I think gold
up and makes the new high. But that last comfort zone in trading, which makes has come off a lot more than I thought.
final high is not a significant pivot level. this business difficult. It’s an uncomfort- I’m expecting gold to get back up into
It’s the first one after the initial run higher. able feeling and you have to find a way that pivot range of 134.50 and 136.50
I think that’s what he was looking at. If around it. that I identified and then for it to go
you look at a longer-term chart, you will If you find yourself looking for the higher. We’ll have to see what happens
see how the market gyrates around these opinion of other traders or chartists and/ there but certainly the levels to watch
levels. This happens all the time and I or you are experiencing fear or anxiety, are defined.
have mentioned that in my book. that is a sure sign that your method I don’t listen to fundamental news or
any other chartists or technical analysts
You said that there are two points about but I did learn from studying history that
Livermore that are worth taking with you have to read between the lines with
you. What is the second point? fundamental news. I listen to the evening
That he shot himself! He took huge news in general and think Germany is
risks and he blew his account out on more doing its best to keep the euro down.
than one occasion. He liked to short and The euro is important for the German
he liked to trade large. These are two economy but if it gets up too high it’s
aspects of market speculation that I think going to hurt their exports, and given that
a retail trader should avoid. it’s an industrial nation, this is important
for that country. Maybe not so much for Thanks for sharing your approach with [2011]. “Channels In The Forex
other EU countries using the euro. us, Gareth. Best of luck with developing Markets,” Technical Analysis of
I try to understand the bigger picture your software product. Stocks & Commodities, Volume
and then drill down by looking at different 29: March.
timeframes on my own financial charts. I Gareth Burgess can be contacted via [2010]. “Forex Entry,” Technical
enjoy doing this type of analysis and can’t Twitter at @Futures__Trader. Analysis of Stocks & Commodities,
wait to get my software developed. It’s Volume 28: October.
tough to watch two or three markets, but Further reading LeFèvre, Edwin [1923]. Reminiscences
when my software is completed and up Burgess, Gareth [2009]. Trading And Of A Stock Operator.
and running, I should be able to trade up to Investing In The Forex Markets Using
20 different markets because the software Chart Techniques, Wiley.
will find and record the levels for me. I _____ [2014]. “Measured Income,”
am also thinking about starting my own Technical Analysis of Stocks &
investment company in the future. Commodities, Volume 32: June.
FUTURES FOR YOU

GARNER hacked computers, compromised email transaction fees; they aren’t in the busi-
Continued from page 27 accounts, or simply losing an associ- ness of judging which asset classes have
ated pin number. While a bitcoin holder long-term viability (although they prefer
if you buy a bitcoin futures contract and digitally “robbed” of the asset will never to choose such assets to create derivative
the price goes up, assuming you sell it be made whole, bitcoin futures traders markets). In short, the exchanges can’t see
at a profit, the proceeds of that trade know the CFTC and NFA are working into the future any better than we can,
are guaranteed. This sounds like an to create and enforce regulation aimed but for them, it’s worth taking a shot in
elementary concept that should be true at protecting traders’ funds and the ex- the dark to see how things pan out.
of all markets, but it isn’t. changes guarantee all transactions.
There are some serious consequences Which should you trade?
of holding spot market bitcoin compared In my opinion, the answer to that ques-
to buying a futures contract that those
Unlike buying and tion right now is neither! Yet I would
chasing bitcoin on cash market exchanges selling bitcoin in the have said the same months ago and
aren’t necessarily accounting for. The cash market, the those who opted to throw caution (and
security risks of participating in the spot futures market is logic) to the wind might have fared very
bitcoin market include the possibility well. That said, speculation in a volatile
that massive gains might never be real-
regulated. environment is a dangerous game; where
ized due to challenges in logistics and there are claims of riches to be made,
regulatory safeguards. Bitcoin futures Does the listing of futures imply there will always be a trail of despair in
traders, on the other hand, need only legitimacy? its wake. Until bitcoin can be used for
worry about being on the right side of On a side note, some argue that the listing everyday, legitimate transactions or to
the trade and having the proper margin of bitcoin futures contracts by the CME pay taxes, I’ll continue to think of it in
on deposit. Group and Cboe provide proof to the the same way I think of buying credits
To illustrate, one of the appealing long-term viability of cryptocurrency. for online games such as Candy Crush or
aspects of bitcoin is that it bypasses Yet the reality is that futures exchanges Farmville—money paid into the system
banks and other financial intermediar- will list anything they believe will attract by those with blurry perceptions of value,
ies. This introduces a counterparty risk speculators or hedgers. but it rarely makes its way out.
that most other financial transactions US futures exchanges, including the With that said, if you venture into
and assets aren’t exposed to. There have CME Group, have listed multiple prod- the game of bitcoin trading, the futures
been a handful of bitcoin brokers leave ucts over the years that didn’t necessarily markets are likely the most efficient
the business because of solvency or become a legitimate marketplace (such means of doing so and comes with better
fraud issues, and those holding bitcoin as weather futures, real estate futures, safeguards of speculator funds than a
at those particular brokerages are out of ethanol futures, single stock futures, spot market broker could provide.
luck. Also, the Internet is riddled with and others). Futures exchanges are in
stories of bitcoin holders who have lost the business of creating products that
access to their bitcoin assets due to generate trading activity and therefore
product review
Elliott Wave Turning Points

Dynamic Trend, Inc.
689 West Turkeyfoot Lake Road
Akron, OH 44319
Phone: 330 645-0800
Fax: 330 645-0804
Email: sales@dynamictrend.com
Internet: www.DynamicTrend.com
Product: Trading signals and targets
for stocks, commodities, and forex
markets based upon Elliott wave,
Gann, and Fibonacci concepts
Requirements: Windows version 7 or
higher. Works with eSignal and other
datafeeds. Broker linkage available
with TradeStation and Tradier. Figure 1: Elliott Wave Turning Points Applied to the SPDR Dow Jones Industrial Average
Price: $245 per month includes real- ETF (DIA). Elliott Wave Turning Points displays a pivot symbol plus an entry level, target, and cancel line, which
time data (exchange fees extra). automatically appear as shaded areas on the chart, as does a trailing stop once an entry is triggered. The color
and shape of the pivot identify the type of trade, which can range from very short term to long term.
by Barbara Star, PhD
EWTP will plot turning point symbols software. The current EWTP module
E
lliott Wave Turning Points is a on daily, intraday, weekly, or monthly combines his knowledge of Elliott wave,
real-time trading module recently price charts. Gann analysis, and Fibonacci techniques
designed as an addition to the op- Each turning point is marked by a pivot plus price & time projections into one
tions program from Dynamic Trend symbol, which does not change after the proprietary algorithm. The result is
that was reviewed in the July 2009 issue signal bar is completed. That enables a study that displays a visual entry,
of this magazine (see “Option Dynam- traders to take trades in the direction of target, and price level at which a signal
ics” in Further Reading). The good news an impulse or corrective wave without gets canceled on the chart once a pivot
is the new Elliott Wave Turning Points turning point appears (Figure 1).
module can be used for stocks, futures,
and forex trading. And for those who Elliott Wave Turning Elliott Wave Turning
also like to trade options, the even-better Points offers less Point pivots
news is that you receive both the Elliott guesswork for traders EWTP are represented by five colored
Wave Turning Points module plus access pivot symbols, each denoting a time and
to the options features at no additional
who are looking to find price that ranges from very short term to
charge. This review will focus mainly directional trades and a long term. The user can choose to display
on the features within the Elliott Wave realistic assessment of one or all of the pivots on the chart.
Turning Points module but will provide price and time targets. Once the algorithm has identified
some linkage to the options features. and displayed a turning point pivot, the
program automatically places colored
Elliott without the having to know anything about Elliott horizontal shaded zones for the entry
wave counts wave theory. So instead of wondering and the target. It places a single line on
Elliott Wave Turning Points (EWTP) which wave they are in, traders only need the chart, which can be used to cancel
takes a unique approach to identifying to know that a pivot displayed under or the trade in the event the trade does not
Elliott waves. Rather than provide the over a price bar alerts them to a potential trigger. The horizontal shaded bands not
typical numeric wave counts, which are directional trade. only identify the price levels but also the
subject to change as prices change, this The creator of the EWTP, Tom Jo- length of time in which to look for the
module uses Elliott wave–based concepts seph, is no stranger to Elliott and Gann entry to take place and the price target
and rules plus proprietary indicators to doctrine. He was an early developer of to be reached.
identify price direction and then locate computerized Elliott wave analysis with Once price has entered in the pre-
the trading points within that direction. the 1986 release of the Advanced GET dicted direction, the program places an
automatic momentum trailing stop in
the form of dots. The trailing stop helps
to keep you in the trade until it is hit by
price, which, as seen in Figure 1, may
be well after the projected price target
is reached.
Let the mouse hover over any current
or prior pivot symbol on the chart, as
was done on the blue pivot in the lower
left side of Figure 1, to see specific in-
formation about the type of pivot, price
direction, two entry levels, two targets,
and the cancel price. Or click on any prior
pivot symbol to see the visual colored
horizontal entry and target levels as well Figure 2: Chart of Intel (INTC) with Tom’s Strength Levels (TSL). Four strength levels above
and below a neutral zone indicate price trend strength. The yellow level warns that price is becoming overex-
as its actual outcome. tended.
The software provides users the flex-
ibility to select their trading preferences
and risk tolerance. For example, rather
than display all turning point pivots,
traders can enable only the type that
matches their trading style—short term,
medium term, and so on. Users may
also choose a more aggressive entry,
change the distance of the initial cancel
line/stop-loss, and tighten or loosen the
trailing stops.
Tom’s Strength Levels

Tom’s Strength Levels (TSL) is among
the more than two dozen charting in- Figure 3: TOM’S STRENGTH LEVELS (TSL) WITH GOLD FUTURES. Trading in the direction of the TSL can
dicators available for display. TSL is a help to confirm the EWTP signal that took place in November–December. Also, an X has been manually placed
proprietary indicator that provides two under a pivot signal to show that the pivot signal in October was not confirmed by the TSL.
additional pieces of information. It iden-

tifies four levels of price strength above entry into a continuation move after not confirm the signal. I placed an X
or below a neutral zone. It also offers a the correction has completed when an under the orange pivot to indicate the
normalized view of price trend, which EWTP short or intermediate symbol nonconfirmation, which turned out to be
means it can be used in all timeframes appears. An example of this is illustrated a short-lived countertrend rally. The blue
and markets without needing to make in Figure 2 of the stock Intel (INTC), in EWTP signal that appeared above price
adjustments (Figure 2). which I numbered the places where a TSL in November signaled a potential con-
Each strength level is marked with a level 4 was reached. EWTP pivots led tinuation move to the downside. Because
different color. Trends are in full swing to a trend reversal at point 1 and trend- the TSL did not move above the neutral
during the second level (purple), third continuations following the pullbacks at zone, it served to confirm the subsequent
(orange), and fourth (yellow) levels. points 2 and 3. move from sideways to down.
However, the fourth level also acts as a The TSL helps traders qualify or con- To lend further support to the potential
warning that price has become overex- firm a turning point pivot if it is above the validity of an EWTP pivot, the program
tended. It often precedes a price reversal neutral zone when the EWTP flashes a includes a feature that estimates the next
or consolidation. buy pivot, or below the neutral zone when higher timeframe’s strength level. It is
A correction following the yellow- the EWTP displays a sell pivot. based on a Fibonacci cross-reference
colored level 4 does not necessarily Figure 3 shows two EWTP symbols instead of the more usual daily, weekly,
mean a change of trend. A video on the during the down-to-sideways price move or monthly timeframe reference. It can
Trend Dynamic website that delves more in Comex gold futures. The orange be seen as a green line in the TSL panel
deeply into the strength levels points out symbol in October appeared beneath of Figure 4.
the likelihood of a continuation move price, signaling a potential trade to the
in the direction of the initial trend. It upside. However, at that time, the TSL Scanning matrix
recommends that traders consider an was below its neutral zone, which did The matrix is a real-time scanning tool
moves above or below moving averages;
or from scans of gaps, reversals, candle-
stick patterns, under- and overpriced
options, or potential option candidates.
It is possible to filter from more than
one category. For example, you could
scan the top point gainers that also had
a three-bar reversal to the upside. The
resulting list can be culled even further
by selecting from the additional filters
feature for sector or group strength and
earnings. Scan results can be saved and
used as a watchlist.
It is the addition of the DT EWTP
Figure 4: Matrix with Qualcomm (QCOM). The matrix is a real-time scanning tool for stocks and ETFs filter tab that permits selecting the vari-
that can also filter those that meet the criteria for Elliott Wave Turning Points and Tom’s Strength Levels.
ous turning point pivots and/or Tom’s
strength levels. For the EWTP, users
may request a daily, two-day, three-day,
or weekly interval search, in an up or
down direction, with a signal generated
at the current price bar, the previous bar,
within the past three bars, or within the
past five bars. These selections can be
combined to scan with any of the five
EWTP pivot signals.
TSL can also be set for the same in-
tervals as the EWTP as well as to any of
the four levels above or four levels below
the neutral zone or even in the neutral
zone. When used in conjunction with
Figure 5: QCOM with an Option Chain. Two clicks brought up the QCOM at-the-money option chart for
the current and following contract month. The DT Options over/underpriced indicator was added. the EWTP, the various strength levels
help locate stocks in strong trends that
have generated a recent signal. Used
without the turning point signals, a TSL
filter set to +4 or -4 is useful for finding
overextended markets that may be ready
to reverse.
Figure 4 shows a search of all stocks,
which contained a medium-term EWTP
pivot that had occurred within the past
three days and also had a TSL above
level 1. One of the results was the stock
Qualcomm (QCOM), which seemed to
be consolidating and had not yet trig-
gered an entry.
Under the Qualcomm price chart in
Figure 6: The Strategy Builder for Alaska Air (ALK). Click on the EWTP pivot symbol to open a
strategy builder that displays several possible option strategies related to that specific pivot symbol. Figure 5, I added the TSL and also the
DT Options over/underpriced indicator.
Since the green Fibonacci cross-refer-
for stocks and ETFs that contains more stock exchange, all stocks, and ETFs or ence in the TSL panel was still positive
than 100 scans within 13 different cat- only those in a specific sector, or only and the DT Options over/underpriced
egories. Nine of the categories are for ETFs (Figure 4). indicator showed that the options were
stocks and four are for options. Scan The array of search choices to find underpriced, a trader might want to look
from the Dynamic Trend database or possible trade setups is enormous, with into buying a call. Because the program
your own custom list. Narrow the field selections from basic scans such as gain- allows all screens to be linked, it only
by price range, average volume, specific ers and losers, new highs and lows, and took two clicks to call up the options
screen for QCOM. which automatically happen, it might be interesting to check wave principles without the need to be
displayed the bid & ask for three strike out a few option ideas. A right-click on an Elliott practitioner. The program is
prices above and below the at-the-money the orange pivot brings up a strategy easy to navigate, with fast execution and
strike for the current and following builder label for the two targets that smooth transitions within and between
contract months. match the upper and lower price levels features. Whether used as a standalone
of the horizontal shaded orange target program or incorporated with your own
Special features zone. Click on one of the choices listed trading system, Elliott Wave Turning
There are a few other aspects of the Points offers less guesswork for traders
program that seemed useful. One is a who are looking to find directional trades
training feature that enables users to click Users can enjoy the and a realistic assessment of price and
on the chart and watch a bar-by-bar replay benefits of Elliott wave time targets for option traders.
from that point to the current bar. This principles without the
would be especially helpful for learning need to be an Elliott Barbara Star, PhD, is a frequent con-
how the turning points set up along with tributor to Technical Analysis of Stocks
the way other indicators can be used in practitioner. & Commodities magazine. She lives in
conjunction with them. California and can be reached at 818
The other feature is a strategy builder on the label to bring up the strategy 224-4070 or by email at star4070@
that compares the profitability of vari- builder, which automatically selects the aol.com.
ous option strategies. Sometimes, just ideal option contract month and offers
flipping through charts brings up an spreads and outright directional option Further reading
interesting potential trade, like the one plays to consider. Peterson, Dennis [2009]. “Option Dy-
in Alaska Air (ALK) shown in Figure 6. namics,” product review, Technical
The orange turning point pivot symbol Summary Analysis of Stocks & Commodities,
suggested a possible decline to retest With the development of the Elliott Wave Volume: 27: July.
the November lows. A moving average Turning Points module, Tom Joseph
was added as another visual aid. Even has created valuable tools that allow
though that price decline may never traders to enjoy the benefits of Elliott
Average true range—A moving average of Resistance—A price level at which rising prices on a price chart.
the true range. have stopped rising and either moved side- T-statistic—The probability distribution used
Adaptive filter—Smoothing and/or forecast- ways or reversed direction; usually drawn to test the hypothesis that a random sample
ing prices with continuously updated as a horizontal line on a price chart. of n observations comes from a normal
weighting of past prices. R-squared (R2)—The percentage of variation population with a given mean.
Breakout—When price moves strongly above in the dependent variable that is explained Trading range—The difference between
the top of a chart pattern or below the by the regression equation. A relative the high and low prices traded during
pattern bottom. measure of fit. a period of time; in commodities, the
Curve-fitting—Developing complicated Standard deviation—A widely used statisti- high/low price limit established by the
rules that map known conditions. cal concept that describes how a given exchange for a specific commodity for
Mean-reverting—A state when price is oscil- distribution varies around its mean ob- any one day’s trading.
lating randomly about some (unknown) servation. In the case of the P/L statistic, Trendline—A line drawn that connects either
mean value. That is, it is not trending. a high standard deviation would indicate a a series of highs or lows in a trend. The
Normalization—Adjusting a data series so widely varying P/L, while a low one would trendline can represent either support
that the series lies in a prescribed normal, suggest a more stable performance. Also: as in an uptrend line or resistance as in
standard range, often from 1 to 100; adjust- The square root of the expected value of a downtrend line. Consolidations are
ing values measured on different scales the square of the difference between a marked by horizontal trendlines, appear-
to a notionally common scale, often prior random variable and its mean. A measure ing as a channel.
to averaging; rescaling to arrive at values of the fluctuation in a stock’s monthly Volatility—A measure of a stock’s tendency
relative to some size variable. return over the preceding year. to move up and down in price, based on
Pairs trading—Taking a long position and a Stop-loss—The risk management technique its daily price history over the last 12
short position on two stocks in the same in which the trade is liquidated to halt any months.
sector, creating a hedge. further decline in value. Volatility index—A widely used measure of
Pin (options trading)—When a stock’s Support—A historical price level at which market risk. Sometimes referred to as the
price closes near the strike price of falling prices have stopped falling and “investor fear gauge.”
heavily traded options on that stock at either moved sideways or reversed direc-
expiration. tion; usually drawn as a horizontal line
Q&A
SINCE YOU ASKED

Confused about some aspect of trading? Professional trader Rob Friesen, president
& COO of Bright Trading (www.stocktrading.com), an equity trading corporation
hosting independent proprietary traders, an online trading school, and the Stock-
Odds database, answers a few of your questions. To submit a question or suggest a
topic, email him at robfriesen@brighttrading.net. Selected questions will appear in
a future issue of S&C.
Rob Friesen
Chicken or Egg? policies that affect many aspects of the • The forces that are underpinning
I sometimes ask traders this question: economy and ultimately our lives. Henry any economy and market movement
“What moves the stock markets?” The M. Littlefield wrote an article suggesting may well have been at work for
responses I receive are quick, varied, and that the Wizard Of Oz novel, by L. Frank some time but do not necessarily
for the most part they are all correct. The Baum was a parable on populism and a translate into a trend that confirms
traders’ comments are reactive. political allegory. I do agree with his those forces.
If I ask traders, “What moves the analogy and comments and agree that • You cannot say with certainty that
stock market the most?” their responses this allegory written in 1900 was really the “trend is your friend.”
are slower, more thought-provoking, about the policies of central bankers, • Often, before events occur, red flags
vacillating as they second-guess their money, and banking, reminding us to have popped up, whether visible to
thoughts, and ultimately reveal they follow the yellow brick road. In the 1939 the onlooker or chatted about by
aren’t sure. The traders’ comments are movie version of the book, Dorothy’s the media.
reflective. magic silver slippers were changed by • An abrupt reversal of trend can occur
Normally, reflective thinking is more MGM to ruby slippers in order to take even when the most astute traders
powerful and accurate than reactive least expect it.
thinking. This reveals to me that in • Patterns cannot lead to a definitive
the trading community, there may be Many newcomers to conclusion. They are only reflections
a vacuum in knowledge. The current the markets can’t say, of the past but they can produce
generation and newer breed of short- probabilities from which to view
term and swing traders isn’t the same
“I’ve seen this movie the present and future.
bunch that was trading from 1997–2003. before.” • Contrarian thinking is necessary but
Others who are trading today weren’t is more of an art than a science.
trading in the 2007–2009 period either. • Trend traders can be those traders
Many newcomers can’t say, “I’ve seen advantage of the new Technicolor pro- trying to buy dollars for $0.90 all
this movie before.” cess of the time. With this color change, the while standing on a trap door
I have touched on the subject of what the relevance of silver and gold was lost, in the floor boards that could open
contributes most to market movements if it was truly meant as an educational at any time.
several times since 1998, which was the allegory, not to children, but to the adults • Contrarian traders can be those try-
year I moved from retail trading to a of his time. ing to sell dollars for $1.10 all the
professional trading career. I have now I want to encourage the millennials while trying to keep from getting
been with Bright Trading, a proprietary reading this column that not everything flattened by the steamroller.
trading firm, for 20 years, and I’ve wit- is new, the poets of our day are not that • Running scenarios of all possible
nessed firsthand many types of market much different than the poets of the past, outcomes to any open order you
conditions. From my perch, I see that and therefore, knowledge, sometimes submit, any fill you receive, and any
history repeats itself and some things even wisdom, can be garnered from the position you maintain, and having a
never seem to change. This is a timely penmanship of past authors. plan for each scenario is the only way
subject considering the 1987-like start to R.N. Elliott (1871–1948), the creator to take the “startling or surprised”
2018 with the stock market rout. of Elliott wave, said: “At best, news is words out of your vocabulary.
I feel that what moves the stock mar- the tardy recognition of forces that have • It is true that news is late and most
ket the most are macro influences and already been at work for some time and of the information has been factored
things that relate to the actions of the is startling only to those unaware of the in already.
Federal Reserve (the “Fed”). Central trend.”
banks control the money supply, set inter- Adding my thoughts about that This brings us to the chicken or egg
est rates, and engage in other monetary quote: question …
Q&A
The largest and most influential market observation) play style “alien”: It sometimes wins by
participants factor in everything they • Historical volatility as low as 1994 offering counterintuitive sacrifices, like
know or can anticipate. They have an and lower than 2007 offering up a queen and bishop to exploit
underlying sentiment and bias. Their • Consumer confidence above 95. a positional advantage. “It’s like chess
psychology is to worry about what is from another dimension.”
approaching on the horizon and start On January 29, 2018: I think the day is coming when AI is
adjusting for it. just given the object of investing and the
Most other participants simply watch • The 10-year treasury bond yield regulatory rules governing securities and
things unfold and react to it as if the moved higher told to figure it out for itself … Then we
observable trend that is going higher • The VIX moved higher will see some different market action,
will always go higher, and as if a falling • The S&P 500 and many other in- but for now, we have hive sentience. In
instrument will fall forever. Neither of dexes moved down to sit exactly on simple terms, this means the independent
those beliefs are true, but since recent their respective trendlines. bodies feel and perceive experiences
market action is given the most weight, subjectively, and move together as one
that is how this group of “unprepared” The next day, January 30, 2018, the mind. We have seen all “insects” of the
participants respond. market gapped down through the trend- collective market hives move as one
Media observations can be helpful line as the bond yields soared. Is it the into stocks, into sectors, into bonds,
to recognize herd mentality, such as tail that wags the dog, or the dog that has into crypto, out of bonds, out of stocks,
when every commentator is bullish, or a tail wags it? Of course, the latter, which and so on.
when confidence and pessimism are is to say interest rates impact the stock In summary, I have learned over the
at extremes. The media in general is market and not the other way around. years that things start out as what the
late, promoting the obvious, that which The Fed could, however, be prompted to market can anticipate or what the “hive”
is sensational, and encouraging the change monetary policy by significant expects to occur. Therefore, things run
consumers of that media outlet to do stock market changes, as we have seen ahead of the confirmation. Then, once
whatever the “flavor of the day” talking historically. you have the proof of what was antici-
head suggests. pated, things can move again. This is the
Was it the technical break on January difficult part. Sometimes when you get
30, 2018 that caused the market to pick up Media observations can confirmation of what was anticipated,
speed to the downside? Most likely that be helpful to recognize you get an adverse directional move …
contributed, but it is still just a chart. and sometimes you get the move in the
An observation on a chart directs us
herd mentality. The same direction. Patterns can be helpful,
to ask, “What were the macro catalysts media in general is but you must ask what caused it. You can’t
that preceded that eventual technical late, promoting the obsess over each in too much detail or
break?” obvious. the result can be neurosis.
Can we identify something that pre- The markets may continue an upward
ceded the January 30th gap down? journey, but most likely, price discovery
Here is some prior context or back- Yes, the world is changing rapidly, is over for now, creating more resistance
drop: converging technologies are disruptive to the upside. If we happen to move lower
to many industries, but as to the stock or trade in a range for the next few years,
• S&P 500 up 20% in 2017 market, human nature is still entrenched pairs and long–short baskets can help.
• S&P 500 up 7% for January alone in the many lines of code that enable the
(up to the close on January 26) machines to buy or sell.
• USD declining rapidly despite Artificial intelligence (AI) that is
expectations of Fed rate hikes this
year
self-learning, separated from human
bias and examples, can act differently
Become An Author!
• Fed’s stance is quantitative tighten- from most computers being used on If you are knowledgeable about
ing (QT), which means shrinking Wall Street today. technical indicators, charting, trading
the balance sheet while projecting DeepMind stated in a reprint that, systems, money management,
to raise interest rates this year “Alpha Zero is a generic reinforcement intraday trading, trading psychology,
• USD decline contributing to rise in learning algorithm—originally devised options, cycles ... and more ... we’d
commodities and in the market for the game of Go—that achieved like to hear from you!
• VIX at historically low levels superior results within a few hours,
• Week of January 22–26, 2018 VIX searching 1,000 times fewer positions,
was rising along with the market given no domain knowledge except the
rising (I was talking about this rules.” DeepMind’s Demis Hassabis, a Click on ‘CONTACT US’ at Traders.com
for more information.
oddity with our traders during that chess player himself, called Alpha Zero’s
product review
NeuroShell Trader
Version 6.5
WARD SYSTEMS GROUP Tech support damper on testing and paper-trading.

7820 B Wormans Mill Rd #383 NeuroShell has an exhaustive amount of Walk-forward optimizations can further
Frederick, MD 21701 help files and examples. Ward Systems slow a trader’s progress. But Neuro
Phone: 301 662-7950 has created support websites, forums, shell is able to perform all these tasks
Email: sales@wardsystems.com; videos, tutorials, and examples to the tune efficiently.
support@wardsystems.com of over 400 indexed pages of help within
Sales: www.neuroshell.com NeuroShell. It also has over 100 videos of Features
Support: http://nstsupport.wardsys- examples and training. A new user has a I have tested NeuroShell in earnest a
temsgroup.com gamut of information with which to get couple of times over the last 12 years,
Product: Neural network trading started, and Ward Systems has worked once in 2005 and once in late 2017 as
software hard to help you
Price: Trader Professional $1,495; understand what
Trader Power User $2,295; Day Trader is going on within
Professional $2,495; Day Trader Power t hei r sof t wa re.
User $3,495. Their tech support
website at http://
by Jason K. Hutson nstsupport.ward-
N
systemsgroup.com
euroShell’s programming interface contains almost
can get any trader started down a 20 years of ex-
path of building trading systems amples and hun-
quickly. The point-and-click interface dreds of pages of
for the various types of trading systems, documentation and
indicators, and neural nets that can be cre- support.
ated and debugged reduces the learning NeuroShell
curve. You get a grasp of the numerous Trader combines
capabilities of NeuroShell when using t raditiona l a nd
many of its built-in operations, indica- artificial intelli- FIGURE 1: PROCESSOR CORES. Here you see an example of NeuroShell Trader
tors, and examples. gence techniques using all eight processing cores.
Ward Systems Group has for decades to build trading
been considered a solid and well-thought- systems that can
of company. NeuroShell Professional be backtested and
has won the top Technical Analysis optimized. So, a
of Stocks & Commodities Readers’ trader can combine
Choice Award in the category of artificial traditional indi-
intelligence software for 16 years in a cators and neural
row. The company produces software networks to create
solutions for education, research, and their own trading
forecasting outside the realm of finan- system. Dreaming
cial markets as well, such as medical up logical or not-
and scientific applications and process so-logical schemes
control. The company has software pack- to make profits in
ages that are used in hundreds of other trading can take
applications. Their software is stable, time and effort.
easy to use, well-documented, useful Running complex
across many disciplines, and appreciated models with mas-
by its users. sive amounts of FIGURE 2: TO OPTIMIZE OR NOT TO OPTIMIZE. By clicking a datastream you can
variables, data, and change whether NeuroShell uses a set parameter and whether it optimizes the pa-
ranges can put a rameter. You can also choose which parameter range to use in the optimization.
FIGURE 3: Example of THE interface FOR
choosing data. This strategy used an optimization
that worked best during the eight-year optimization
FIGURE 4: OPTIMIZATION EXAMPLE. The equity curve is seen in the subchart below the price chart.
and two-year paper-trading amount of data. Then you
can see how the model worked in real trading over the
following two years.
I write this. While recently running spectacular during backtesting. NeuroShell provides the ability to test
optimizations on my home computer, The trading system can move forward trading systems directly on the price
I was pleasantly surprised with how through future unknown data while still chart. All you do is open up one or
NeuroShell took advantage of all my providing correct signals. This could several charts for a specific time period
computer’s processor cores (Figure show how profits could be made when and insert a trading system. Then you
1). This greatly increased the speed at trading your account (Figure 3). run an optimization and analyze at the
which I could debug and test new ideas. There are precise backtesting inputs system equity indicator. If you’re satis-
While using the program in 2005, I for approximating cost and trades associ- fied, see how the system performs in an
would just leave my computer be and ated with different-size orders, pyramid- out of sample period by expanding the
let it work through a complex amount ing, and brokerage fees. To simulate real chart. In Figure 4 you see out-of-the-box
of data. Today, my fairly old 2013 eight- trading, everything has to be accounted example optimization for Apple stock
core AMD processor whipped through (AAPL) while showing an equity curve
the same tasks. This means I can now in the second blue section. The data used
dream up new ideas and test even larger Having the system move went back to 2006 with eight years of
data-crunching ideas. This software is forward through future backtesting, two years of paper-testing,
fun to use. unknown data while and two years of actual trading.
The new interface in this version still providing correct You can use hundreds of built-in
allows you to control parameter opti- technical analysis indicators, create
mization on a case-by-case basis and signals can show how custom indicators within the NeuroShell
to choose or change the range. I found profits could be made interface, or pass data from NeuroShell
this to be a great feature since it can be when trading your to an external .dll. And if you’d like to
easy to curve-fit and over-optimize. Be- account. manipulate data or provide inputs from
ing able to turn off parts or change the other applications, you can do that by
optimization ranges helped me speed calling a .dll. The external .dll can return
up my thought process and debug my for, and NeuroShell gives you the op- an array or value to NeuroShell. This
systems and models (Figure 2). portunity to input every cost. There is ability extends the use of combining
You can backtest, optimize, and then also the ability to optimize for many programming that may be complex or
test on different amounts of new data. different objectives. Some examples are you already have from other programs
You can also backtest, optimize, and Maximize #Winners - #Losers, Minimize or languages. You can create an interface
use best parameters from paper-trading Max Drawdown, Maximize Return on between your work and NeuroShell by
results on a forward data range. You can Account, Maximize ReturnOnAccount* creating a .dll in a C, C++, or PowerBasic
test that best model on amounts of new EquityCurveCorrelation, among others. compiler and work directly with data to
data moving forward to simulate what Each objective pushes your model closer and from NeuroShell. You’re not limited
could happen if you traded your idea. to matching up with your real trading to stocks. You can test your models on
Thinking about trading systems in terms goals. Keep in mind that trading costs forex, commodities, indexes, and options.
of performance can be useful because and slippage can change your model and
you can curve-fit any system to look real-life trading scenarios. Continued on page 56
TRADING ON MOMENTUM
Time & Sales
Tape Reading Breakouts

The time & sales window can reveal valuable information action can break out above each 10-cent increment.
about the strength of a trend. Learn more about how trad- In this example, you want to see if it can get over $21.20, and
ing professionals use it and how you too can use it to your then how long it takes until it gets over $21.30, and so on. Every
advantage. $0.10 is seen as a small battle between buyers and sellers. When
following the tape, pay careful attention to how quickly price
If
by Ken Calhoun rises through each $0.10 increment during a breakout. Note
that tape reading is best used for early-morning open range
you rely on charts to manage your entries in real breakout daytrades between 9:30 am and 10:30 am ET.
time, daytrading momentum stock breakouts can The second signal is to look in the “size” column for large-
be a challenge. But adding the use of time & sales, volume trades of at least 400 shares or more. These “block
also known as “tape reading,” can help you detect trades” indicate institutional buying and are likely to drive
important entry signals and reduce the likelihood price higher, when large trades occur at the ask price.
of entering false breakouts. Reading the order flow in time The third signal is to look for an imbalance of size in the
& sales provides an important advantage you can use when “sizes” column. Look for a series of larger bids compared to
deciding whether or not to enter your next trade. ask sizes during a breakout lasting over a minute or longer.
The reason tape reading is a preferred technique used by
professional traders is that it reveals valuable data regarding Step-by-step action plan
directional trend strength. One key to successful daytrading Here’s how you can start using tape reading to confirm break-
is to make sure you enter at a price at which momentum is outs when daytrading:
likely to continue in your favor before consolidating or revers-
ing. Using time & sales properly is an essential technique to Step 1: Look for charts in which price breaks out above the
accomplish this. prior day’s high and continues up, as seen in Figure 1.
Top three Technical Breakout Signals Step 2: Visually check to see how long price action takes
You can see a daytrading chart and time & sales window in to break out above each $0.10 increment.
the chart of Chicago Bridge & Iron Co. N.V. (CBI) in Figure
1. It shows you the correct way to set up your workstation. The Step 3: Look to enter your trade when price action is moving
first signal to look for is provided in the price column. When faster than usual, as seen in the “price” column in time &
following the tape, you want to pay attention to how fast price sales. An initial entry trigger is set at the nearest $0.10 value
above the current high observed in
the price column.
Step 4: Confirm your entry if you

also see larger numbers on the bid
(left) compared to the ask during
a one-minute interval, preferably
accompanied by an increasing
number of block trades of 400
shares or larger.
Insights: Why this

technique works
Time & sales reveals real-time order
flow, which cannot be seen by using
only a one-minute chart. What you’re
looking for is increasing momentum
defined by the orders filled in the
tape, from which the visual bars or
candles are derived every minute.
esignal
Figure 1: DayTrading Breakouts with Tape Reading (CBI). Here you see a breakout in progress using
the time & sales window to follow price action. Continued on page 56
vervoort/The v-trade
Continued from page 16
Institutional traders trade on
price levels and look for the
A and is moving back up to the 100-bar SMA. Mostly you
can estimate wave C’s size by taking wave A’s size, the blue
strongest levels of supply &
rectangle, and copying this rectangle from the top of wave demand without worrying about
B, the green rectangle. the time it takes to reach that
There’s now an ABC zigzag, possibly expecting a further support or resistance.
move down for a longer-term reaction with a double zigzag.
Wave C then becomes a new wave (A) of a higher degree. Next,
you can expect a correction wave (B) in the first instance. This
is an ABC correction retracing wave (A) between the Fibo- approximately the size of wave (A), they may close their short
nacci 50% and 61.8% retracement levels. There’s additional positions near that level with a large profit. A nonprofessional
passive resistance at the first wave a level and the upper side may have taken a long position at the fake resistance break.
of the volatility channel. But you know better. You would have realized it was fake
Once wave (B) is complete, you can estimate the expected and closed your position quickly.
size for wave (C) by projecting the size of wave (A) down-
wards from the top of wave (B). This is a five-wave impulse Next time…
wave. It becomes clear that you are addressing a longer-term Stay tuned for part 3, in which we’ll continue to look at pas-
reaction for the long-term up move. It’s possible the reaction sive support & resistance with Fibonacci projections and
is incomplete. The (A)(B)(C) wave is probably the first wave daily pivots. And there’ll be an indicator that shows pivot
down and you can now expect a second zigzag down. If that levels on a chart.
is the case, I assign the first wave with X, the reaction wave
with Y, and the wave down with Z. Sylvain Vervoort is a retired electronics engineer who has
The reaction wave Y goes up to the 100-bar SMA, which been studying and using technical analysis for more than
is the upper side of the volatility channel and the passive 40 years. Currently, he experiments with trading forex and
resistance of the previous correction wave 4, a common reac- CFDs with rule-based systems. His book Capturing Profit With
tion target. You can estimate the size of wave A, projecting Technical Analysis received a bronze medal from the 2010
Fibonacci targets using the last pullback. The index finds some Axiom Business Book Awards in the category of investing.
small support at previous low levels at Fibonacci 161.8% but His Band Break System Expert is available on DVD. More
continues the move down to the 261.8% second Fibonacci information about the V-Trade System will become available
target to form wave A. on his blog under construction at http://blog.stocata.org.
I will now copy the wave count from Figure 7 into Figure Vervoort may be reached at sve.vervoort@scarlet.be or via
8, which is a four-hour candlestick chart. That makes it easier his website at http://stocata.org.
to visualize where price is within the bigger move. The high-
lighted yellow parts retrace against the impulse or correction Further reading
waves, wave types B, 2, and 4. Note how these reactions almost Gopalakrishnan, Jayanthi [2014]. “Swing Trading With Syl-
always take the form of a flag or pennant pattern. vain Vervoort,” interview, Technical Analysis of Stocks
When price breaks above the resistance line A on July & Commodities, Volume 32: May.
12, 2017, which is the first wave in the (B) zigzag correction Vervoort, Sylvain [2013]. “An Expert Of A System,” Tech-
wave, you can assume a fake resistance break. It is likely nical Analysis of Stocks & Commodities, Volume 31:
that professional traders triggered this break to build a large October.
opposite (short) position from a large batch of short stop-loss [2013]. “The 1-2-3 Wave Count,” Technical Analysis
orders at higher price levels. of Stocks & Commodities, Volume 31: June.
On the following day, you can see how nonprofessional [2009]. Capturing Profit With Technical Analysis:
traders possibly followed the break by invoking a larger up Hands-On Rules For Exploiting Candlestick, Indica-
move. The professionals have open short limit orders around tor, And Money Management Techniques, MarketPlace
these levels. Books, Inc.
When the up move reaches these price levels, the short limit [2012]. Ground-Breaking Band Indicators: Newly
orders are executed and professionals end up with a large short Discovered Tactics for Timing Profit, DVD, http://stocata.
position in their portfolio. The professionals wait for buying org. Includes an autotrading expert system.
power to run dry. With the help of the professionals, price ‡MetaTrader 4 (MetaQuotes Software Corp.)
falls out of the flat channel move, which is the trigger signal ‡See Editorial Resource Index
to initiate a further move downward by the nonprofessionals. †See Traders’ Glossary for definition
When the professionals know the target for wave (C), which is
For this month’s Traders’ Tips, the focus is
Vitali Apirine’s article in this issue, “Adaptive
Moving Averages.” Here, we present the April
2018 Traders’ Tips code with possible imple-
mentations in various software.
The code for the following Traders’ Tips se-
lections is posted here:
• Traders.com  Home–S&C Magazine 
Traders’ Tips
At Traders.com you can also right-click on any chart to
open it in a new tab or window and view the chart at a
much larger size.
The Traders’ Tips section is provided to help readers
implement a selected technique from an article in this Figure 1: TRADESTATION. Shown here is a daily chart of Apple (AAPL) with the
issue or another recent issue. The entries here are con- adaptive moving average indicator and strategy applied.
tributed by software developers or programmers for soft-
ware that is capable of customization.
if AlertEnabled then
begin
if AMA crosses over KAMA then
Alert( "AMA crossing over KAMA" )
else if AMA crosses under KAMA then
Alert( "AMA crossing under KAMA" ) ;
end ;
F TRADESTATION: APRIL 2018 TRADERS’ TIPS CODE
Strategy: Adaptive Moving Average
In “Adaptive Moving Averages” in this issue, author Vitali
Apirine introduces an adaptive moving average (AMA) tech- // TASC APR 2018
nique based on Perry Kaufman’s KAMA (Kaufman adaptive // Adaptive Moving Average
// Strategy
moving average). His update to the original KAMA allows the // Vitali Apirine
new method to account for the location of the close relative
to the high–low range. The author describes a trading system inputs:
Periods( 10 ),
that combines the AMA and KAMA, suggesting that the FastAvgLength( 2 ),
combination may reduce the number of whipsaws relative to SlowAvgLength( 30 ),
using either moving average by itself. Capital( 100000 ) ;
Here, we are providing the TradeStation EasyLanguage variables:
code for an indicator and strategy based on the author’s AMA( 0 ),
work. We have also included the code for an AMA function KAMA( 0 ),
TradeSize( 0 ) ;
so you can easily include the AMA in your own EasyLan-
guage code. AMA = _AMA( Periods, FastAvgLength,
SlowAvgLength ) ;
Indicator: Adaptive Moving Average KAMA = AdaptiveMovAvg( Close, Periods,
FastAvgLength, SlowAvgLength ) ;
// TASC APR 2018
// Adaptive Moving Average TradeSize = MaxList( 1, Capital / Close ) ;
// Indicator
// Vitali Apirine if AMA crosses over KAMA then
Buy TradeSize shares next bar at Market
inputs: else if AMA crosses under KAMA then
Periods( 10 ), Sell Short TradeSize shares next bar at Market ;
FastAvgLength( 2 ),
SlowAvgLength( 30 ) ; Function: _AMA
variables: // TASC APR 2018

AMA( 0 ), // _AMA
KAMA( 0 ) ; // Function
// Vitali Apirine
AMA = _AMA( Periods, FastAvgLength,
SlowAvgLength ) ; inputs:
KAMA = AdaptiveMovAvg( Close, Periods, Periods( numericsimple ),
FastAvgLength, SlowAvgLength ) ; FastAvgLength( numericsimple ),
SlowAvgLength( numericsimple ) ;
Plot1( AMA, "AMA", Cyan ) ;
Plot2( KAMA, "KAMA", Magenta ) ; variables:
PDS( Periods + 1 ),

Figure 3: WEALTH-LAB. Here’s an example of setting up the system in Wealth-
Lab’s rules wizard.
Figure 2: eSIGNAL. Here is an example of the studies plotted on a daily chart issue, “Adaptive Moving Averages.” The study is designed
of $INDU.
to assist you in identifying turning points and filtering price
movements.
FastSC( 2 / ( FastAvgLength + 1 ) ), The study contains formula parameters that may be con-
SlowSC( 2 / ( SlowAvgLength + 1 ) ), figured through the edit chart window (right-click on the
SSC( 0 ),
CST( 0 ), chart and select “edit chart”). A sample chart is shown in
MLTP( 0 ); Figure 2.
To discuss this study or download a complete copy of the
MLTP = AbsValue( ( Close - Lowest( Low, PDS ) )
- ( Highest( High, PDS ) - Close )) formula code, please visit the EFS Library Discussion Board
/ ( Highest( High, PDS ) - Lowest( Low, PDS ) ) ; forum under the forums link from the support menu at www.
esignal.com or visit our EFS KnowledgeBase at www.esig-
SSC = MLTP * ( FastSC - SlowSC ) + SlowSC ;
nal.com/support/kb/efs/. The eSignal formula script (EFS)
CST = Square( SSC ) ; is also available for copying & pasting from the Stocks &
Commodities website at Traders.com in the Traders’ Tips
if CurrentBar = 1 then
_AMA = Close[1] + CST * ( Close - Close[1] ) section.
else —Eric Lippert
_AMA = _AMA[1] + CST * ( Close - _AMA[1] ) ; eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
To download the EasyLanguage code, please visit our
TradeStation and EasyLanguage support forum. The files
for this article can be found at https://community.trades-
tation.com/Discussions/Topic.aspx?Topic_ID=142776.
The filename is “TASC_APR2018.ZIP.”
For more information about EasyLanguage in general, see F WEALTH-LAB: APRIL 2018 TRADERS’ TIPS CODE
www.tradestation.com/EL-FAQ. In an attempt to improve the way that whipsaw signals may
A sample chart is shown in Figure 1. typically be generated by price/KAMA crossovers, Vitali
This article is for informational purposes. No type of trading Apirine, in his article in this issue, “Adaptive Moving Aver-
or investment recommendation, advice, or strategy is being made, ages,” combines two adaptive moving averages to create a
given, or in any manner provided by TradeStation Securities or
simple AMA/KAMA crossover system.
its affiliates.
By installing the TASCIndicators library’s latest version
—Doug McCrary
TradeStation Securities, Inc. from our website and restarting Wealth-Lab, users can re-
www.TradeStation.com build this system from the flexible blocks known as “rules.”
By simply combining and reordering them, one can come up
with some fairly elaborate strategies. Figure 3 illustrates the
easiness of it; the process can take less than a minute and
frees you from writing code.
The system naturally works better on stocks, which
steadily move in the direction of the trend rather than go
F eSIGNAL: APRIL 2018 TRADERS’ TIPS CODE sideways (even with higher volatility) or less volatile ones.
For this month’s Traders’ Tip, we’ve provided the study It’s the sideways movement that is one of the biggest perfor-
KAMA_AMA.efs, based on Vitali Apirine’s article in this mance killers of a moving average system like this. A market
Figure 4: WEALTH-LAB. This shows successful trend trades followed by losses in
a sideways market in INTC (Intel).
filter might help avoid further whipsaws (Figure 4). Figure 5: THINKORSWIM. Shown here is a daily chart of the DJIA with an adap-
For those of you who’d like to customize every aspect and tive moving average and KAMA plot in blue, AMA plot in yellow.
build even more complex logic, C# language and the power
of the .NET framework is at your disposal in Wealth-Lab.
The code follows:
Wealth-Lab strategy code (C#):
using System; F THINKORSWIM: APRIL 2018 TRADERS’ TIPS CODE

using System.Collections.Generic;
using System.Text;
We have put together a study for thinkorswim based on the
using System.Drawing; article “Adaptive Moving Averages ” by Vitali Apirine in
using WealthLab; this issue. We built this study using our proprietary scripting
using WealthLab.Indicators;
using TASCIndicators;
language, thinkscript. We have made the loading process ex-
tremely easy; simply click on the link http://tos.mx/MYXu1P
namespace WealthLab.Strategies then choose to view thinkScript study and name it “Moving
{
public class MyStrategy : WealthScript
AverageAdaptive_Updated.”
{ Overlaid on the daily chart of the Dow Jones Industrial
protected override void Execute() Average (DJIA) in Figure 5 is the KAMA (blue) and the
{
var ama = AMA.Series( Bars, 10);
AMA (yellow). See Apirine’s article for more details on in-
var kama = KAMA.Series( Close, 10); dicator interpretation.
—thinkorswim
PlotSeries( PricePane, ama,Color.Red,LineStyle. A division of TD Ameritrade, Inc.
Solid,2); www.thinkorswim.com
PlotSeries( PricePane, kama,Color.
DarkGreen,LineStyle.Solid,2);
for(int bar = GetTradingLoopStartBar(11 * 3); bar <

Bars.Count; bar++)
{ F NEUROSHELL TRADER: APRIL 2018 TRADERS’
if ( IsLastPositionActive ) TIPS CODE
{
Position p = LastPosition; The Kaufman and adaptive moving average indi-
if ( CrossUnder( bar, ama, kama)) cators described by Vitali Apirine in his article in this issue,
SellAtMarket( bar + 1, p); “Adaptive Moving Averages,” can be easily implemented in
}
else NeuroShell Trader using NeuroShell Trader’s ability to call
{ external dynamic linked libraries. Dynamic linked libraries
if ( CrossOver( bar, ama, kama)) can be written in C, C++, and Power Basic.
BuyAtMarket( bar + 1);
} After moving the MetaStock code given in Apirine’s ar-
} ticle to your preferred compiler and creating a DLL, you can
} insert the resulting indicators as follows:
}
}
1. Select new indicator from the insert menu.
—Eugene (Gene Geren), Wealth-Lab team 2. Choose the external program & library calls category.
MS123, LLC
www.wealth-lab.com 3. Select the appropriate external DLL call indicator.

Figure 6: NEUROSHELL TRADER. This NeuroShell Trader chart displays the Figure 7: NINJATRADER. The adaptive moving average (orange) and Kaufman
Kaufman and adaptive moving averages on an S&P 500 chart. adaptive moving average (blue) indicators are shown on a daily ES 03-18 chart.
4. Set up the parameters to match your DLL. jaScript → Indicator from within the control center window
5. Select the finished button. and selecting the AMA file.
NinjaScript uses compiled DLLs that run native, not in-
terpreted, to provide you with the highest performance pos-
Users of NeuroShell Trader can go to the Stocks & Com- sible.
modities section of the NeuroShell Trader free technical A sample chart implementing the strategy is shown in
support website to download a copy of this or any previous Figure 7.
Traders’ Tips. —Raymond Deux & Jim Dooms
A sample chart is shown in Figure 6. NinjaTrader, LLC
—Marge Sherald, Ward Systems Group, Inc. www.ninjatrader.com
301 662-7950, sales@wardsystems.com
www.neuroshell.com
F Quantacula Studio: APRIL 2018 TRADERS’ TIPS CODE

We added the adaptive moving average (AMA) indicator based
F NINJATRADER: APRIL 2018 TRADERS’ TIPS CODE on Vitali Apirine’s article in this issue, “Adaptive Moving
The adaptive moving average (AMA) indicator, as discussed in Averages,” to our TASC Extensions for Quantacula.com and
“Adaptive Moving Averages” in this issue by Vitali Apirine, is Quantacula Studio.
available for download at the following links for NinjaTrader Since the AMA is a data smoother, you can use the same
8 and NinjaTrader 7: techniques with it that are applicable to any smoother, such
as indicator/price or indicator/indicator crossovers. While ex-
NinjaTrader 8: www.ninjatrader.com/SC/April2018SCNT8.zip perimenting with the AMA, we discovered that the 200-pe-
NinjaTrader 7: www.ninjatrader.com/SC/April2018SCNT7.zip riod setting is useful for identifying buying opportunities as
the underlying price deviates from the indicator.
Once the file has been downloaded, you can import the We mocked up a simple model on Quantacula.com’s Q-
indicator in NinjaTader 8 from within the control center by Web. To follow along yourself, first go to the Quantacula.com
selecting Tools → Import → NinjaScript Add-On and then Market Place link and install these two free extensions:
selecting the downloaded file for NinjaTrader 8. To import in
NinjaTrader 7, from within the control center window, select • TASC Extensions (indicator)
the menu File → Utilities → Import NinjaScript and select • Indicator % above/below indicator (building block)
the downloaded file.
You can review the indicator’s source code in NinjaTrader With the extensions installed, you can recreate our mod-
8 by selecting the menu New → NinjaScript Editor → Indi- el using the setup shown in Figure 8 in Q-Web. Be sure to
cators from within the control center window and selecting change the parameters for the entry condition to 4% below,
the AMA file. You can review the indicator’s source code and set the period parameter of the AMA indicator in both
in NinjaTrader 7 by selecting the menu Tools → Edit Nin- instances to 200.

Figure 10: TRADERSSTUDIO. The AMA (white line) and the KAMA (yellow line)
indicators are shown on a chart of the emini S&P 500 futures contract (ES) during
part of 2013 and 2014.
Figure 8: quantacula. An example setup is shown here for the AMA cross
model in Q-Web.
F TRADERSSTUDIO: APRIL 2018 TRADERS’
TIPS CODE
The TradersStudio code based on Vitali
Apirine’s article in this issue, “Adaptive Moving Averages,”
can be found at www.TradersEdgeSystems.com/traderstips.
htm as well as at the Stocks & Commodities website at
traders.com in the Traders’ Tips section.
Figure 10 shows the AMA (white line) and the KAMA
(yellow line) indicators on a chart of the mini S&P 500 fu-
tures contract (ES) during part of 2013 and 2014.
TradersStudio code
'ADAPTIVE MOVING AVERAGE

'Author: Vitali Apirine, TASC April 2018
'Coded by: Richard Denning, 2/12/18
'www.TradersEdgeSystems.com
Figure 9: quantacula. Here is an example of the AMA cross model on a Quan-
tacula chart of the stock FAST. Function AMA(periods,fastSC,slowSC)
Dim pds
pds = periods + 1
Dim mltp
We ran the backtest on the Q-Premium Nasdaq 100 mltp = Abs((C - Lowest(L,pds)) - (Highest(H,pds) - C)) /
stocks, which are not subjected to survivorship bias, with the (Highest(H,pds) - Lowest(L,pds))
Dim SSC
following settings: SSC = mltp * (fastSC - slowSC) + slowSC
Dim cons
• Starting capital: $500,000 cons = SSC * SSC
Dim theAMA As BarArray
• Position sizing: 10% of equity If BarNumber = periods Then
• Data range: 10 years theAMA = C[1] + cons*(C - C[1])
Else
theAMA = theAMA[1] + cons * (C - theAMA[1])
The backtest resulted in a respectable APR of 17.42% End If
and a Sharpe ratio of 1.04, handily outperforming the SPY AMA = theAMA
benchmark. End Function
'-------------------------------------------
On Q-Web, you can click on a trade in the backtest results Function KAMA(periods,fastSC,slowSC)
positions list in order to examine it more closely on a chart. Dim pds
Figure 9 is a chart of one of the model’s trades on the stock pds = periods + 1
Dim dir As BarArray
FAST. Note how the stock deviates from the 200-day AMA, dir = Abs(C - C[periods])
presenting a buying opportunity, and then quickly reverts Dim vola As BarArray
back. vola = SUMMATION(Abs(C - C[1]),periods)
—Dion Kurczek, Quantacula LLC Dim ER As BarArray
ER = dir / vola
info@quantacula.com Dim SSC
www.quantacula.com SSC = ER * (fastSC - slowSC) + slowSC
Dim cons
cons = SSC * SSC
If BarNumber = periods Then

Figure 12: AMIBROKER. Here is a daily chart of the Dow Jones Industrial Aver-
age with KAMA and AMA moving averages, replicating a chart from Apirine’s article
FIGURE 11: UPDATA. The adaptive moving average (blue) is applied to the daily in this issue.
SPY, shown with exponential and simple moving averages for comparison.
PARAMETER "PERIOD" #PERIOD=10
Dim theKAMA As BarArray PARAMETER "SC1" #SC1=2
theKAMA = Close[1] + cons*(C - C[1]) PARAMETER "SC2" #SC2=30
Else DISPLAYSTYLE LINE
theKAMA = theKAMA[1] + cons*(C - theKAMA[1]) INDICATORTYPE TOOL
KAMA = theKAMA PLOTSTYLE THICK2 RGB(0,0,200)
End If NAME AMA
End Function @MULT=0
'--------------------------------------------- @SC=0
Sub AMA_IND(periods,fastSC,slowSC) @AMA=0
Dim theAMA As BarArray FOR #CURDATE=#PERIOD TO #LASTDATE
theAMA = AMA(periods,fastSC,slowSC) @MULT=ABS((CLOSE-PLOW(LOW(1),#PERIOD))-
plot1(theAMA) (PHIGH(HIGH(1),#PERIOD)-CLOSE))/
End Sub (PHIGH(HIGH(1),#PERIOD)-PLOW(LOW(1),#PERIOD))
'--------------------------------------------- @SC=ExpBase(@MULT*((2/(#SC1+1))-(2/(#SC2+1)))+(2/
Sub KAMA_IND(periods,fastSC,slowSC) (#SC2+1)),2)
Dim theKAMA As BarArray IF #CURDATE=#PERIOD
theKAMA = KAMA(periods,fastSC,slowSC) @AMA=MAVE(#PERIOD-1)
plot1(theKAMA) ELSE
End Sub @AMA=HIST(@AMA,1)+(@SC*(CLOSE(1)-HIST(@
'--------------------------------------------- AMA,1)))
ENDIF
@PLOT=@AMA
—Richard Denning NEXT
info@TradersEdgeSystems.com
for TradersStudio —Updata support team
support@updata.co.uk
www.updata.co.uk
F UPDATA: APRIL 2018 TRADERS’ TIPS CODE

Our Traders’ Tip for this month is based on
the article by Vitali Apirine in this issue, “Adaptive Moving
Averages.” F AMIBROKER: APRIL 2018 TRADERS’ TIPS CODE
In it, the author gives an analysis on a certain adaptive In “Adaptive Moving Averages” in this issue, author Vitali
moving average, which, as the name suggests, seeks to adapt Apirine presents exponential moving variables with a variable
its output depending on past conditions. Parameters in its smoothing factor. The AmiBroker code listing shown at the
formula dynamically adjust for periods of trend or mean re- Stocks & Commodities website at traders.com in the Trad-
version to better track price action. ers’ Tips section contains a ready-to-use formula. To adjust
The Updata code based on this article is in the Updata li- parameters, right-click on a chart and select parameters from
brary and may be downloaded by clicking the custom menu the context menu.
and indicator library. Those who cannot access the library A sample chart is shown in Figure 12.
due to a firewall may paste the code shown here into the —Tomasz Janeczko, AmiBroker.com
Updata custom editor and save it. www.amibroker.com

FIGURE 13: EXCEL. The DJIA with crossovers is displayed. Note the whipsaws that occurred near 10/11/2004 and 12/01/2004.
F MICROSOFT EXCEL: APRIL 2018 TRADERS’ TIPS CODE Several readers have reported receiving the following fail-
In his article in this issue, “Adaptive Moving Averages,” author ure message:
Vitali Apirine demonstrates an application of two complemen-
tary adaptive moving averages as a potential swing trade signal "User Defined Type Not Defined"
generator. Crossovers of these two averages can confirm trend
If the user selects the debug option, the following statement
changes within a couple of bars of what the eye would call a
is highlighted in the VBA code:
local bottom or top.
The article suggests that compared to a simple KAMA/ Dim MSXML2Object As MSXML2.XMLHTTP
price crossover system, by adding AMA, whipsaws are re-
duced (though not eliminated). For anyone having this failure and who is comfortable with
The article also suggests that whipsaws can perhaps be the VBA editor, two simple edits have proven to fix the
further reduced by requiring that a crossover should not be problem. First, find:
considered official until an AMA/KAMA cross has been Dim MSXML2Object As MSXML2.XMLHTTP
sustained for a number of bars.
In Figure 13, there are two whipsaw examples. In the first (which is failing) and change it to:
example, a downtrend is interrupted for two bars and then
Dim MSXML2Object As MSXML2.XMLHTTP60
resumes. The second is a one-day interruption of an uptrend
in progress. Later in the code, find and make a necessary mirroring
Deciding on the correct number of bars to delay the deci- change, from
sion to accept a signal is a conundrum for any trading sys-
tem. For this chart, one or two bars clearly is insufficient Set MSXML2Object = New MSXML2.XMLHTTP
to prevent dumping out of what the chart shows to be the
to
prevailing trends. Yet in an active market, a three- to five-
bar delay could mean a significant hit if the reversal signal Set MSXML2Object = New MSXML2.XMLHTTP60
is sustained.
The spreadsheet file for this Traders’ Tip can be down- The problem does not seem to be universal; at least one reader
loaded from Traders.com in the Traders’ Tips section. To has reported having a different experience on two different
successfully download it, follow these steps: computers, with the spreadsheet working correctly on one
yet failing on the other. When edited as described above, it
• Right-click on the Excel file link, then then works.
• Select “save as” or “save target as” to place a copy of the This month’s Traders’ Tips already has this change incor-
spreadsheet file on your hard drive. porated.
—Ron McAllister
Important note regarding Yahoo Finance interface: Excel and VBA programmer
rpmac_xltt@sprynet.com
This note applies to Excel spreadsheets that I have provided
here for Traders’ Tips from the December 2017 issue (which
was my first spreadsheet to support the new Yahoo Finance
interface) through the March 2018 issue:

Explore Your Options
30 days later. In this scenario, Trader A’s
Got a question about options? Jay Kaeppel has over three decades of experi- option will expire worthless, since the
ence in the options markets. He was a head trader for a CTA firm, an options stock price is below the option strike
trading software developer, and is a portfolio manager for an investment price of 21, thus generating a loss of
management firm. He also spent several years writing a weekly column titled -100%. Trader B’s option will still be
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http:// worth at least $200 plus whatever time
jayonthemarkets.com). He is the author of several books, including The Four premium exists (since the option still has
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability, 90 days left until expiration). So if you
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques- assume the option is trading at $2.20, then
tions or topic suggestions to Jay Kaeppel at jaykaeppel@gmail.com. Selected Trader B has a loss of -$30, or -12%.
questions will appear in a future issue of S&C.
Scenario 3: The stock is trading at $19
a share 30 days later. In this scenario,
Trader A’s option will expire worthless,
THE KEYS TO BUYING CALL OPTIONS tions will react to price movements and since the stock’s price is below the op-
Should I buy an in-the-money (ITM), at- also to the passage of time. So if you tion’s strike price of 21, thus generating
the-money (ATM), or out-of-the-money have a specific opinion as to how far and/ a loss of -100%. Trader B’s option will
(OTM) call option if I am bullish on a or how soon the price of the underlying still be worth at least $100 plus whatever
stock? shares will rise, this will influence your time premium. So if you assume the
It’s important to recognize that there decision. option is trading at $1.20, then Trader
is no uniformly “correct” answer to that Let’s consider two examples. Example B has a loss of -$80, or -52%.
question. Before proceeding, let’s also 1: A stock is trading at $20 a share. Trader
note for the record that an ITM call has a A buys an OTM $21 strike price call op- Now reconsider the questions posed
strike price that is below the price of the tion with 30 days left until expiration for earlier. The advantages for Trader A
underlying shares, the ATM call is the $0.50 per call ($50 per contract). Trader are that: 1) he pays a lot less to buy
strike price that is closest to the current B buys an ITM $18 strike price call with one option contract ($50 per contract
price of the underlying shares, and the 120 days left until expiration for $2.50 versus $250 for Trader B), and 2) if he
OTM call has a strike price that is above per call ($250 per contract). is correct and the stock rallies immedi-
the price of the underlying shares. ately and significantly, then buying the
The two decisions that have to be cheap, short-term, out-of-the-money
made when buying a call option in order The other key to call would have allowed him to net a
to express a bullish market opinion on achieving success is very large profit. However, the tradeoff
a given security are the strike price to to understand how is that under any scenario other than a
buy, and the expiration month to buy. significant advance in the near term, his
These decisions can and will have a options of different most likely outcome is a 100% loss of
profound influence on the success of strike price/expiration the premium paid.
any given trade and/or any given trading month combinations The primary advantage for Trader B
campaign. will react to price is that he has 120 days for the stock to
The key factors to consider when move higher, and time decay will not
making these choices include (but are movements and also to likely hurt his position much prior to the
not limited to): the passage of time. last 30 days before expiration. He also
enjoys leverage—just not nearly as much
• How much are you willing to invest as Trader A. The downside is that he pays
to enter the trade? Scenario 1: The stock rises to $25 in 30 a lot more to buy one option contract and
• How much of what you invest are days; In this scenario, Trader A’s option will not profit nearly as much as Trader A
you willing to risk? will be worth $500, generating a profit of if the best-case scenario—an immediate
• Do you have a specific price target 900% ($450 profit on a $50 investment). and significant advance in the price of
in mind? Or are you looking to ride With the stock at $25 a share, Trader B’s the underlying security—unfolds.
a trend indefinitely? 18 strike price call will be worth at least In sum, the key to answering the ques-
• Do you expect the security to move $700 plus whatever time premium exists tion of which call option to buy is to
soon? Or do you simply think it will (since the option still has 90 days left until realistically assess the following:
“get there eventually”? expiration). So if we assume the option
is trading at, say, $7.20, then Trader B 1. What your expectations are for price
The other key to achieving success is has a profit of $470, or +188%. in terms of time and distance
to understand how options of different 2. Whether your objective is to
strike price/expiration month combina- Scenario 2: The stock price is unchanged maximize profitability at all costs
Explore Your Options
or to balance the tradeoff between leverage—that is, buy an option with a taking a more conservative approach—
reward & risk. strike/expiration that will profit the most that is, buying an option with plenty of
from your expected scenario. time left until expiration and possibly an
If your objective is to maximize your If you merely think that a stock “will ITM strike price in order to minimize
profitability on a specific time/price trend higher” but don’t have a specific the effect of time decay—is generally a
movement opinion for a given security, target regarding how far it will go and more favorable approach.
then it can make sense to utilize more how long it will take to get there, then
REVIEW/NEUROSHELL TRADER like to try and predict.

Continued from page 45 I loaded a few neural net predic- NeuroShell Trader
tion models that I created several combines traditional and
years ago based on fundamental
As with everything else about Ward and technical data. One of my
artiﬁcial intelligence
Systems and NeuroShell Trader, there more complex neural nets showed techniques to build
are numerous help files and example extremely good performance for trading systems that
programs to get you on your way. the out-of-optimization two-year can be backtested and
“real-life” trading period with zero
STRETCH YOUR IMAGINATION adjustments. Real-life trading ver-
optimized.
If you have the data, NeuroShell will sus system-testing, or in my case,
do the work. You can feed different following up on previous work, is
inputs, outputs, and various data into an entirely different subject, but had limits to your success are your imagina-
a model to come up with a prediction I persevered, it would have certainly tion and ability to follow through while
based on different patterns found using made significant profits. testing all of your strategies.
neural networks. You choose the data In that context, I found the price to be
and NeuroShell Trader can look for pat- well worth it and for that you get robust, Jason Hutson can be reached at
terns in all your datastreams to make solid, and well-documented software. JasonHutson@traders.com.
predictions a future price. Predictions The time you spend learning, practicing,
work tick by tick using any timeframe. and paper-trading your systems with it ‡NeuroShell Trader (Ward Systems Group)
They can be adjusted out into the future can give you a trading edge. ‡See Editorial Resource Index
based on how far into the future you’d With NeuroShell Trader, the only
TRADING ON MOMENTUM
CALHOUN / TAPE READING BREAKOUTS

Continued from page 46 When following the tape, you want to
pay attention to how fast price action
can break out above each 10-cent
Tape reading is like looking inside the candles to see even
more information, which is critical for successfully daytrad- increment.
ing breakouts.
Note that this is a brief overview of a complex subject
and I’m highlighting the most important signals for you. It In working with thousands of traders since 1999, I have found
takes years of practice to master the art of professional tape that the two biggest errors my students report are using large,
reading. amateurish stop-out levels, and overtrading choppy charts. The
tape, when used correctly, can help you tighten up your entries
TRADE MANAGEMENT TIPS: and exits for a more professional trading approach.
USING TIME & SALES TO EXIT
Whenever I am in a live trade, the only thing I use to exit my Ken Calhoun is a producer of trading courses, a live trading
positions is time & sales. That’s because it shows me what is room, and video-based training systems for active traders. He
going on in price action. In this chart example, if I were long is the founder of TradeMastery.com, an educational resource
here, I would put a sell stop order in at $21.10, the nearest $0.10 site for active traders, and is a UCLA alumnus.
increment under the current price. The tape is vital in helping
you time your entries and exits with precision and accuracy.
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accuracy, last-minute changes may result in omissions or errors.

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

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
S&P 500 E-Mini (Mar ’18) GBLX 4.6 13.4 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>>>
Ultra T-Bond (Jun ’18) CBOT 2.4 9.2 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Russell 2000 E-Mini (Mar ’18) GBLX 3 7.6 1 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Apr ’18) NYMEX 3.6 6.2 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
10-Year T-Note (Mar ’18) CBOT 0.9 7.5 5 •••••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Mar ’18) GBLX 4.6 10.4 1 •••••••••••••••••••••••••••••••••••••••
Euro FX (Mar ’18) CME 1.5 9.8 3 ••••••••••••••••••••••••••••••••••••
Eurodollar (Dec ’18) CME 0.1 2.3 12 ••••••••••••••••••••••••••••••••••
Gold (Apr ’18) COMEX 2.9 14.3 3 ••••••••••••••••••••••••••••
5-Year T-Note (Mar ’18) CBOT 0.5 7.1 8 •••••••••••••••••••••••
T-Bond (Mar ’18) CBOT 1.9 8.1 2 •••••••••••••••••••
Dow Indu 30 E-Mini (Mar ’18) CBOTM 4.6 11.3 1 ••••••••••••••••
Sugar #11 (May ’18) ICEUS 7.3 8.5 6 •••••••••••••
Gasoline RBOB (Apr ’18) NYMEX 3.7 6.7 2 •••••••••••
Japanese Yen (Mar ’18) CME 1.9 12.8 4 •••••••••••
2-Year T-Note (Mar ’18) CBOT 0.2 5.4 10 ••••••••••
High Grade Copper (May ’18) COMEX 4.3 11 2 ••••••••••
ULSD NY Harbor (Apr ’18) NYMEX 3.7 6.5 1 ••••••••••
Natural Gas (Apr ’18) NYMEX 9 20 6 •••••••••
Soybeans (May ’18) CBOT 2.7 13.8 7 •••••••••
Ultra 10-Year T-Note (Mar ’18) CBOT 1 6.6 3 ••••••••
Corn (May ’18) CBOT 3.2 15.6 18 •••••••
Silver (May ’18) COMEX 5.4 18.7 3 •••••••
Soybean Meal (May ’18) CBOT 3.4 10 5 •••••••
30-Day Fed Funds (Apr ’18) CBOT 0 2 11 ••••••
British Pound (Mar ’18) CME 2 14 5 ••••••
S&P Midcap E-Mini (Mar ’18) GBLX 4.3 12 1 ••••••
Coffee (May ’18) ICEUS 5.1 11.2 3 ••••
Canadian Dollar (Mar ’18) CME 1.8 13.8 7 •••
Live Cattle (Apr ’18) CME 3.3 10.4 4 •••
Wheat (May ’18) CBOT 4.6 15.9 10 •••
Australian Dollar (Mar ’18) CME 1.8 13.9 7 •• CBOT Chicago Board of Trade, Division of CME
Cocoa (May ’18) ICEUS 5.7 10.5 6 •• CFE CBOE Futures Exchange
Cotton #2 (May ’18) ICEUS 5.4 16.8 5 •• CME Chicago Mercantile Exchange
Crude Oil Brent (F) (Jun ’18) NYMEX 3.7 6.3 2 •• COMEX Commodity Exchange, Inc. CME Group
Hard Red Wheat (May ’18) KCBT 4.6 17 10 •• GBLX Chicago Mercantile Exchange - Globex
Mexican Peso (Mar ’18) CME 3.7 13.7 10 •• ICE-EU Intercontinental Exchange-Futures - Europe
Palladium (Jun ’18) NYMEX 6.9 12.3 1 •• ICE-US Intercontinental Exchange-Futures - US
Soybean Oil (May ’18) CBOT 3.4 15.2 16 •• KCBT Kansas City Board of Trade
Feeder Cattle (Apr ’18) CME 4.1 7.8 2 • MGEX Minneapolis Grain Exchange
Lean Hogs (Apr ’18) CME 4.7 11.1 6 • NYMEX New York Mercantile Exchange
New Zealand Dollar (Mar ’18) CME 2 13.8 7 •
Platinum (Apr ’18) NYMEX 3.6 16.4 6 •
S&P GSCI (Mar ’18) CME 3.9 9.7 2 •
Swiss Franc (Mar ’18) CME 2.3 24.9 6 • 1804
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

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TOP 10 VIEWED FOREX BROKERAGES
Foreign ex- which your order gets executed.

LINKS
ch a nge t r a d- A forex brokerage’s ability to Company
ers have more provide market statistics, hedging
choices than ever activity reports, and other such infor- 1. Interactive Brokers
in their ongo- mation may be critical to your trading 2. NinjaTrader Group, LLC
ing search for and investing decisions.
speed, pricing For more complete information, 3. TradeStation
efficiency, and see the Traders’ Resource area at our
good accounting website, Traders.com. 4. Forex Capital Markets LLC (FXCM)
when it comes to forex brokerages.
First, you must find a forex brokerage Traders’ Resource 5. Global Futures Exchange & Trading Company, Inc.
that handles your particular currency at Traders.com
cross or pair. You should also look Traders’ Resource is available at our 6. ALTAVEST Worldwide Trading, Inc.
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and whether the broker offers a mini brokerages listing, but also numerous
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Up, Down, & Sideways
A Range-Bound Strategy
Markets move in trends and markets move in trading ranges. A guide to range-bound trading
Looking at any chart makes it plain to see that a trader can 1. Establish the range
make money during trends, but we shouldn’t rule out the pos- Look for a range of prices that have tested the resistance or
sibility of making successful trades during trading ranges. support areas at least two to three times. The high and low
Here’s how one forex trader does it. points created do not have to stop and reverse at the exact
same level but will be relatively close to each other. You can
A
by Solomon Chuama establish a resistance level when you connect the high points
with a horizontal line. Similarly, when you connect the low
range is when there’s a series of prices marked points with a horizontal line, you create a support line. Since
by a high and low level. Ranges occur as a result all highs and lows are not of the same price, the differences
of buyer and seller indecision. Neither group is between them result in a resistance & support zone, respectively.
able to push the price of a currency pair beyond The range-bound market becomes stronger as price reaches
BULL: ALBERTO CLEMARES EXPOSITO/EURO/SWISS BILLS: SARA
MICHILIN/SHUTTERSTOCK/COLLAGE: CHRISTINE MORRISON
the high and low point or resistance and support high and low points more times. This strong level is likely to
levels, respectively. This is known as a range- eventually lead to a breakout.
bound market. It is possible to trade a market A range trader will choose to enter short positions near the
when prices oscillate between these levels, if there’s enough resistance zone and enter long positions near the support zone.
distance between them. But if a ranging market is choppy, it’s In the daily chart of EURGBP in Figure 1, you see that:
not worth trading. A choppy market consolidates tightly and
• Price reached three highs at different prices
the distance between the levels is not enough to allow for a
good risk–reward ratio. • Price reached five lows at different prices
To trade a range-bound market, what rules or conditions • The distance between the support and resistance levels
need to be met? Here are some guidelines that may help. has a good range.
FOREX TRADING
2. Establish the timing of your entry

After you have found the market’s
RESISTANCE ZONE
range, you have to schedule the timing
of your entries. One way to do that is
to use an oscillator, such as the relative
strength index (RSI), stochastic, or CCI
indicator. The RSI is normalized to the
zero-to-100 range. When price moves
above 70, it is overbought and could
indicate future downward movement.
Similarly, when price moves below
30, it is oversold and could lead to an
upward movement. SUPPORT ZONE
Here are three possible ways you
can initiate your entry depending on FIGURE 1: RANGE-BOUND MARKET. A trading range is bounded by support & resistance zones, which are
market conditions:
defined by the highs and lows. As in this daily chart of EURGBP, the highs and lows won’t be at the same exact
level but are close to the same level.
• Use overbought/oversold levels.

When the market is overbought,
Short trade
do not immediately take a short
position because you do not know Short trade
whether price will continue to
rally. Instead, take a short posi-
tion when the RSI falls below
the 70 level. This will give you a
high-probability trade. Similarly,
if the market is oversold, take a Long trade Long trade
long position as soon as the RSI
rises above the 30 level.
• Wait for a false breakout, then

act. Wait for the market to make a
false breakout of a trading range. FIGURE 2: TIME YOUR ENTRIES. On this chart of EURCAD, short trades are entered at the resistance level
In any trading range there will be (top of the trading range) and long trades at the support level (bottom of the trading range), with entry timing
at least one false breakout. A false suggested by overbought/oversold oscillator readings.
breakout is when price breaks
beyond the established range and then moves back into RSI rises above the 30 level, or when a bullish candlestick
the range. Initiate a short position if price moves and closes at the support level in the lower timeframe.
closes in the resistance zone; initiate a long position if
price closes in the support zone.
The distance between support & resistance levels in EUR-
• Use pin bars. Look for bullish and bearish pin bars at CAD is usually ideal for range trading.
the key levels. They can easily be identified because they
protrude significantly from the surrounding key bars. 3. Establish your risk management
Initiate a short order when a bearish pin bar closes at Risk management is something that must be considered for
the resistance level. Initiate a long order when a bullish
pin bar closes at the support level.
Using the daily chart of EURCAD in Figure 2 as an example,

you could initiate a trade in one of the following ways: Not all markets that trade
• Short: Take a short trade at the resistance level when
sideways are tradable. There
the RSI falls below the 70 level or when a bearish needs to be adequate distance
reversal candlestick closes at the support level in the between support & resistance
lower timeframe. levels.
• Long: Take a long trade at the support level as soon as the

Take profit for
Stop loss for short trade above the 4. Identify range-bound currency
previous high to exit in the event
long trade of breakout pairs
The currency pairs that best char-
acterize a range-bound market are
currency crosses that are not paired
with the USD. Examples of crosses
include EURGBP, EURAUD, EU-
RCHF, and CHFJPY. The euro and
Swiss franc tend to trade within an
obvious range because the Swiss
economy is closely connected to the
Take profit for Stop loss for long trade below the previous low
short trade to exit in the event of breakout European economy.
SidewAyS doeSn’t AlwAyS

meAn A trAding rAnge
FIGURE 3: MANAGE YOUR RISKS. To time your exits and protect profits, you can set a stop-loss or a take-profit
at the top and bottom of the trading range.
Not all currency markets that trade
sideways are necessarily tradable.
any strategy. Traders can exit a range-based strategy either There needs to be adequate distance between support &
through a stop-loss or through profit-taking. When taking a resistance levels to be tradable. Otherwise, the market will
short position at the range’s resistance zone, place a stop-loss be choppy and difficult to trade. You’ll need to have a risk-
above the earlier high. Conversely, when taking a long posi- management strategy in place when trading range markets,
tion, place a stop-loss below the current low. since breakouts can move in the opposite direction and lead
In range trading, you can use limit orders to take profits. For to losses. Breakouts could turn into a trend, and that means
short trades, set a limit order to take profit near the support you’ll have to modify your trade.
zone. For long trades, set a limit order to take profit near the
resistance zone. Solomon Chuama has been working in the financial industry
Using the example of the daily chart of EURCAD in Figure for 16 years. He is a training seminar organizer and instructor
3, you could exit the market in one of the following ways: who tries to pass along to students his passion and knowledge
of forex trading.
Stop-loss:
• Set a stop-loss above the previous high to exit a long Further reAding
position in the event of breakout. Chuama, Solomon [2018]. “Dip One Toe
• Set a stop-loss below the previous low to exit a short Into The Forex Pond,” Technical Analy-
position in the event of breakout. sis of StockS & commoditieS, Volume
36: January.
Take-profit: †See Traders’ Glossary for definition
• For short trades, set a take-profit near the support
zone.
• For long trades, set a take-profit near the resistance
zone.
Sneak preview...
Rocket RSI—A Solid Propellant For Moving Average Hammer Pivots Get More Value Using A Trading
Your Rocket Science Trading by Ken Calhoun Checklist
by John F. Ehlers Combining a Japanese hammer candle with a by Thomas Bulkowski
The RSI is a favorite indicator among technical Western technical moving average line allows What is a trading plan or checklist, and how
analysts. Yet it can be improved by becoming you to capitalize on trading technical signals can it help? We’ll find out.
a tad bit more flexible. Plus, you can use it to generated by both approaches.
address a statistical approach to technical
analysis. We’ll see how. …Coming soon!
62 • April 2018 • Technical Analysis of StockS & commoditieS

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STOCKS � BONDS � MUTUAL FUNDS � ETFS � OPTIONS

FEATURE ARTICLE 28 RaS: An Alternative

4 • April 2018 • Technical Analysis of Stocks & Commodities

To see the full comparison visit:

Interactive Brokers Rated Low Cost

Trading on margin is only for sophisticated investors with

is difficult to determine if a selloff is a correction or the beginning of a

Opinions expressed are subject to revision without noti-

6 • April 2018 • Technical Analysis of Stocks & Commodities

I am a subscriber to to signing a nondisclosure agreement, as

are concise and simple:

• Buy after four consecutive days of falling price

In Figure 1 you see how I built the 4x2 strategy in

added. You can read about these changes in the Wikipedia

Dion Kurczek is an independent trader and backtesting soft-

10 • April 2018 • Technical Analysis of Stocks & Commodities

Visit tdameritrade.com/trade24-5 to learn more.

with its share of problems. I’ll first illustrate the dif-

The renko chart, possibly named after the Japanese

Passive support & resistance

turning points. A support confirmation appears if the price

Trading and emotions

April 2018 • Technical Analysis of Stocks & Commodities • 15

Fake resistance break

Search apps and services to personalize the

Explore now at ninjatraderecosystem.com

• 10 is the number of periods

The multiplier (MLTP)

MLTP = ABS[(Current Close -

Multiplier ABS[(Current Close-Lowest Low) -

High - Lowest Low)

April 2018 • Technical Analysis of Stocks & Commodities • 19

SC = [MLTP × (2/(2+1) - 2/(30+1)) + 2/(30+1)]2

The fastest SC is the smoothing constant for shorter EMA

Adaptive moving average

Current AMA = Prior AMA +SC ×

The table in Figure 1 shows the KAMA/AMA (10,2,30)

See our Traders’ Tips section beginning on page 48 for commen-

Vitali Apirine is a programmer engineer with an interest

MetaStock code for KAMA and AMA

FastSC:=2/(2+1); {Adaptive Moving Average}

Direction:=Abs(CLOSE-Ref(CLOSE,-periods)); Volatility:=Sum SSC:=Mltp*(FastSC-SlowSC)+SlowSC;

KAMA:=If(Cum(1) = Pds,Ref(C,-1)+Constant*(C-Ref(C,- —Vitali Apirine

April 2018 • Technical Analysis of Stocks & Commodities • 21

Volatility: What’s The Best

he expected Standard Oil stock to do. According

measured either by returns or range. In other words, volatility

To make each indicator comparable to the VIX, each of the

What is high volatility?

What we can conclude is that

26 • April 2018 • Technical Analysis of StockS & commoditieS

FEATURE ARTICLE 28 RaS: An Alternative

Current AMA = Prior AMA +SC ×

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