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The CAM Indicator

For trends and countertrends 8

Profit-Taking n

And Resets
Part 1: Trend-following 14

Energy Sector
and S&P 500
A look at pairwise
correlation 20

Two For The Price

Of One
Showing momentum and
congestion in the same plot 24

Gatis and Grayson Roze 34

n Market Timer App

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CONTENTS JANUARY 2018, Volume 36 Number 1

7 Daytrading ADX Breakouts 24 Two For The Price Of One

by Ken Calhoun by David Solomon
Would you like to know about a Here’s how you can enhance a
technical indicator that provides momentum indicator to show
a consistent way to spot volatile momentum and congestion.
breakouts in a timely manner? This 40 Futures For You
tool may be sitting right in front by Carley Garner
of you. If you aren’t already using
26 Measuring Risk With The Here’s how the futures market
the ADX, here’s how to use it to Normalized Risk Index really works.
determine whether a breakout is by Mike B. Siroky, MD
strong enough for a daytrade entry. Risk—there are many ways to 42 Explore Your Options
measure it, but how effective are
they? Here’s one measure that is by Jay Kaeppel
FEATURE ARTICLE versatile and suitable for just about Got a question about options?
8 The CAM Indicator For Trends any type of risk profile.
And Countertrends TIPS 60 Socially Responsible
by Barbara Star, PhD 30 Dip One Toe Into The ETF Investing
Prices are always moving—up, Forex Pond by Leslie N. Masonson
sideways, down; they pull back, and by Solomon Chuama Interested in learning more about
change direction. What are some It’s one thing to learn the theory using exchange traded funds (ETFs)
hints that conditions are changing? behind forex trading but another in your trading?
Here’s a look at how you can use to apply it in the markets. Here’s a
patterns that appear in indicators step-by-step approach.
and add an indicator to help identify QUICK-SCAN
the changing conditions of stock
prices. INTERVIEW 44 Market Timer App
End-of-day program for swing and
34 Master The Markets With seasonality trading.
14 Profit-Taking And Resets, Gatis and Grayson Roze
Part 1: Trend-Following by Jayanthi Gopalakrishnan
by Perry J. Kaufman When you live and breathe the DEPARTMENTS
In this first part of a two-part series, markets, it’s not unusual to be a big 6 Opening Position
we look at long-term trends and influence on your family. Because
different ways to take profits and of his deep interest in the financial 39 Trade News & Products
reenter trades. markets, Gatis Roze had an impact 43 †Traders’ Glossary
on spreading that passion to his son 48 Books For Traders
Grayson. The two have a special 50 Traders’ Tips
20 Energy Sector and S&P 500: bond because of this common
A Look At Pairwise interest. From that they’ve formed 57 Advertisers’ Index
Correlation a respectful relationship that has 57 Editorial Resource Index
by Cassandra Wang led them to coauthor a book and 58 Futures Liquidity
Can you develop a trading strategy collaborate in their efforts to
educate investors to take control
59 Classified Advertising
out of a correlation pattern between
two assets? Here we analyze the of their financial assets. We spoke 59 Traders’ Resource
movement of the S&P 500 index with this father & son team to hear
with its various sectors to find out if what they had to say about their
any correlation patterns stand out. experiences in writing together This article is the basis for
and working together toward a TIPS Traders’ Tips this month.
common objective of educating
independent investors. n Cover: Brian Taylor
n Cover concept: Christine Morrison
Copyright © 2017 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
of Stocks & Commodities™ (ISSN 0738-3355) is published monthly with a Bonus Issue in March for $89.99 per year by Technical Analysis, Inc., 4757 California Ave. S.W., Seattle, WA 98116-4499. Periodicals
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4 • January 2018 • Technical Analysis of Stocks & Commodities

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January 2018 • Volume 36, Number 1
Opening Position
The Traders’ MagazineTM

EDITORIAL atterns—traders anxiously try to find
Editor in Chief Jack K. Hutson some meaning in them when analyzing
Editor Jayanthi Gopalakrishnan price charts. Take Fibonacci numbers, for
Production Manager Karen E. Wasserman
example. They’re one sequence traders are
Art Director Christine Morrison
obsessed with. They can be placed on a chart
as lines or arcs drawn from highs and lows
Graphic Designer Wayne Shaw
Webmaster Han J. Kim
Contributing Editors John Ehlers,
just so we can see how prices react at those
Anthony W. Warren, Ph.D. various levels. Not that we’ll ever know what
Contributing Writers Thomas Bulkowski, Martin Pring, prices will do, but it’s the intrigue that keeps
Barbara Star, Markos Katsanos
us coming back. Why did I think price would
move up? Why did I not see that pullback?
Publisher Jack K. Hutson
Why did I not see that correction coming? Each unanswered question keeps us
Industrial Engineer Jason K. Hutson going back to the drawing board to see if we missed one price bar or an intraday
Project Engineer Sean M. Moore movement within a daily price bar that could have contained the clue.
Controller Mary K. Hutson
The desire to find patterns within price movement is what keeps traders going.
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6 • January 2018 • Technical Analysis of Stocks & Commodities


Daytrading ADX Winner

15 years
in a row!
Would you like to know about a techni- best technical indicator available for
cal indicator that provides a consistent detecting an increase in volatility over Build powerful
way to spot volatile breakouts in a timely time. If you have ever struggled with
manner? This tool may be sitting right false breakouts and choppy entries when
trading systems in
in front of you. If you aren’t already daytrading stocks, you may find the MINUTES
using the ADX, here’s how to use it to ADX is especially valuable to help focus
determine whether a breakout is strong on volatile breakouts with exceptional
without coding
enough for a daytrade entry. trade potential.

Daytrading stocks

by Ken Calhoun
with ADX ®

aytrading is all about finding In my own trading, I have found ADX

volatile breakouts in time to to be the only technical indicator that,
make a successful entry. You in addition to a preexisting uptrend, is
can use J. Welles Wilder’s a fairly consistent, reliable leading indi-
average directional index cator for finding volatile breakouts. My
(ADX) to help locate intraday students value it because the red ADX
trading setups as they are breaking out signal line is easy to follow. When it 301.662.7950
to new highs. I examined how to use this breaks out to new highs during the first
useful indicator for swing trades in an 20 minutes of the stock market open, it
earlier article (Stocks & Commodities, often indicates a strong likelihood the signal line breaks out above the prior
March 2016). In this month’s column, stock price will continue upward. day’s ADX high, it reveals an increase in
you will see how to identify daytrades From a price action daytrading volatility in the underlying stock price,
using the ADX. standpoint, my two favorite patterns which you can then capitalize on.
The ADX is especially useful for are gap continuations and two-day-high Because the ADX and the DMI+/-
daytrading breakouts because it is the breakouts. Similarly, when the red ADX lines may oscillate or cross over, it is
best to simply focus on a strong-
trending ADX signal, as illustrated
in the chart of Cree, Inc. (CREE)
in Figure 1.
Do you see how the red ADX
line came from below on October
17 and then broke out to new highs
on the morning of October 18? This
upward move in the red ADX signal
line, especially once it breaks out
over 40 on the market open, gives
your daytrading entry signal.

action plan
Here’s how you can use this
ADX breakout strategy with your

Step 1: Using a two-day five-

minute candlestick chart, visually

Figure 1: Daytrading with ADX (CREE). Here is an example of using the ADX to locate volatile daytrading
entries ahead of time. Continued on page 49
January 2018 • Technical Analysis of Stocks & Commodities • 7
8 • January 2018 • Technical Analysis of Stocks & Commodities

Up, Down, Pullback, Countertrend

The CAM Indicator For Trends

And Countertrends
Prices are always moving—up, sideways, down; they The CAM indicator
pull back, and change direction. What are some Because the two indicators function as a single coordi-
hints that conditions are changing? Here’s a look at nated unit, I abbreviated their names to “CAM,” which
how you can use patterns that appear in indicators stands for coordinated ADX and MACD indicator.
and add an indicator to help identify the changing The ADX shows the strength of price movement and

conditions of stock prices. the MACD shows the direction of price movement.
Both indicators are readily available in most trading
echnical analysis relies heavily on pattern software packages.
recognition based on price structure alone or The ADX is part of the directional movement system
on price in relation to one or more indicators. developed by J. Welles Wilder. It is designed to detect
Patterns identify breakouts, trends, consolidations, the strength, but not direction, of price movement. The
continuations, or reversals. Several years ago I noticed ADX rises as price strengthens into an identifiable
indicators also create patterns that, when paired with trend and falls when price weakens or consolidates.
another indicator, can help traders recognize many of The MACD indicator developed by Gerald Appel is
the changing conditions displayed by stock prices. designed as a momentum indicator that moves above
In my January 2002 Stocks & Commodities article, and below a trigger line and a zero line. However, trad-
I wrote about positioning two well-known indicators— ers often find it also helps identify price direction.
average directional index (ADX) and moving average For me, using the MACD as a directional indicator
convergence/divergence (MACD)—in a way that is easier to interpret and produces less whipsaw than
revealed two trending patterns: one for bullish price the fluctuating +DI and -DI directional components
movement and the other for bearish. The following year of Wilder’s directional movement system.
I wrote an article that appeared in a booklet produced To reproduce the CAM patterns discussed in this
by MetaStock that included a third pattern. article, two changes are necessary. The first is to
The original idea was to display the indicators in be certain the ADX is in a panel directly above the
a manner that would show both price strength and MACD as seen in Figure 1. The second is to use a
direction. And they do. But over time, nuances in 10-period ADX rather than the usual 14-period default.
their appearance became apparent that made for a Decreasing the lookback period to 10 reduces the lag
broader range of trading options. A few additional time of the ADX so it more closely corresponds to
changes now make it possible to observe four patterns the turns made by the MACD.
that help identify uptrends, downtrends, pullbacks, I also plot a 13-period exponential moving average

and countertrend rallies. This article describes those on price to call attention to turns and changes in price
patterns and applies them to trading. direction as well as to help filter some trades.

by Barbara Star, PhD

January 2018 • Technical Analysis of Stocks & Commodities • 9

Next, I’ll provide a descrip-
tion of the four patterns. The
sidebar “Code For CAM
Indicator Patterns” provides
the MetaStock formulas that
identify each pattern.

CAM-UP: The CAM-UP identifies an

upward-moving market. The pattern
occurs when both the ADX and MACD
rise as price rises. There is no need to FIGURE 1: The CAM Indicator Patterns with Verizon (VZ). This daily chart of Verizon from May to
wait until either the ADX or MACD are September 2016 identifies the four CAM patterns and the correct placement of the ADX above the MACD needed
above a certain level or cross a trigger to produce them.
line. All that is necessary is for both to
rise in tandem. The coordinated move-
ment reflects a strong push in upside

CAM-PB: PB stands for pullback and

signifies a decrease in upward price
momentum. In this pattern, both the
ADX and MACD slope downward when
prices stop rising and begin to retrace,
or when price pauses temporarily and
consolidates. When this pattern ends,
price may resume its prior upward-rising
trend or continue to sell off into a larger
decline. Figure 2: CAM Patterns with Colored Price Bars. Here is the same Verizon chart seen in Figure 1 with
the colored price bars that depict each CAM indicator pattern. The CAM-DN is red, the CAM-CT countertrend bars
are blue, the CAM-UP pattern is green, and the CAM-PB pullback is yellow.
Cam-DN: The CAM-DN occurs when
the ADX rises but the MACD declines.
The rising ADX indicates a potential trend, but falling MACD The same Verizon chart shown in Figure 1 is illustrated in
identifies price movement as down. This pattern identifies a Figure 2 with the colored price bars that make it clearer to see
strong push in downward momentum, usually beyond a “nor- where each pattern begins and ends.
mal” retracement.
MetaStock Code for CAM Indicator Pattern Formulas
CAM-CT: The CAM-CT is a countertrend rally that appears
when the ADX is declining and MACD is rising. Usually, this CAM-UP
follows a price decline that is bottoming and leads either to a ADX(10)>=Ref(ADX(10),-1)AND When(MACD()>Ref(MACD(),-1))
temporary rally in a downtrend or to the beginning of a new CAM-PB
upward move. ADX(10)<=Ref(ADX(10),-1)AND When(MACD()<Ref(MACD(),-1))

Add color: Even though the patterns are fairly easy to spot as ADX(10)>=Ref(ADX(10),-1)AND When(MACD()<Ref(MACD(),-1))
they occur, I add color to the price bars to identify each pat-
tern. Any color can be used, but I selected the following colors CAM-CT
ADX(10)<=Ref(ADX(10),-1)AND When(MACD()>Ref(MACD(),-1))
for this article:
• The CAM-UP price bars are colored green and the Note: The MetaStock program follows the examples of Wilder’s
CAM-DN in red original calculations shown in his book, New Concepts In Techni-
• The CAM-PB bars are colored a yellow gold to serve as cal Trading Systems, which rounds the ADX value to the nearest
a warning of a pullback whole number. However, many charting packages do include the
fractional component, which may produce colored bars that differ
• The CAM-CT countertrend are displayed in blue. from those shown in this article.

10 • January 2018 • Technical Analysis of Stocks & Commodities

However, in this case, a green bar ap-
pears between two blue bars at #1 while
it is still below the moving average, and
red bars occur following the yellow bars
at #2 while prices are above the moving
average. I use these green and red bar
inconsistencies as warnings of a potential
change, but would not act on them until
price resistance or support is breached
by the appropriate closes above or below
the moving average.
Price contractions and consolida-
tions produce another type of pattern
Figure 3: Selected CAM Patterns on Analog Devices (ADI). Because each CAM indicator pattern has its discrepancy as seen at #3. During the
own code, it is possible to make visible only those patterns you wish to see when they appear on the price chart. This first month of 2017, both the ADX and
chart of ADI shows the CAM-CT and CAM-UP patterns. MACD began to decline in tandem,
which created the expected PB yellow
price bars. However, as price began to
move sideways, the price bars shifted
almost daily, generating red, yellow,
green, and blue bars with none lasting
long enough to generate a sustainable
CAM pattern. When this happens, it
helps to take note of the actual indica-
tor levels. Usually, you will notice the
MACD flattens out and moves sideways,
especially along its zero line, and/or the
ADX declines below its 20 level, which
indicates a nontrending phase.
Figure 4: Pattern Anomalies on The Travelers CompanIES (TRV). The numbers #1–3 on this chart of The
Travelers Companies illustrate two common CAM pattern abnormalities. One is the bar color in relation to the moving
Trading with CAM
average, and the other occurs during sideways or consolidating price moves. indicator patterns
While it is impossible to avoid all false
pattern fluctuations, it is possible to filter
Because there is a specific code for each CAM pattern, it is out many of them by going beyond the moving average and
possible to activate only a single pattern or combination of pat- adding a 14-period standard default commodity channel index
terns. For example, select CAM-PB to be alerted to pullbacks (CCI) to the price chart.
in an uptrend, or choose both CAM-CT and CAM-UP as seen The CCI oscillates above and below a zero line. The zero line
in the chart of Analog Devices in Figure 3, which call attention represents the mean or average based on the lookback period.
to a countertrend that could lead to a new uptrend. And, like a moving average, when price momentum pushes
the CCI above its zero line, it is considered positive, and when
Some pattern anomalies below the zero line, it is viewed as negative.
Trading would be much easier if all However, as seen in Figure 5, CCI offers a different view of
stocks followed the CAM pattern price action than does a moving average. Because it is either
progression so clearly illustrated in above or below the line, CCI helps stay in tune with the trend
Figure 2. But price movements rarely
are that accommodating. Short-lived
price fluctuations and consolidations
cause indicator movements that produce The CAM indicator
false or confusing patterns.
Two of the most common are illustrated in Figure 4, a chart
identifies four patterns
of The Travelers Companies (TRV). The first is the color in that help identify uptrends,
relation to the moving average. Green bars should occur above downtrends, pullbacks, and
a rising moving average. Red bars, which indicate a strong countertrend rallies.
downward price move, should occur during a price decline and
take place below the moving average.
12 • January 2018 • Technical Analysis of Stocks & Commodities
during color fluctuations, as occurred
in the daily chart of the ETF USO. In
addition to trend, it often shows diver-
gences that might not be apparent when
only using a moving average.
When it comes to trading, a CCI
above zero suggests buying the yellow
CAM-PB pullbacks or following the
blue CAM-CT as it crosses the mov-
ing average. In the intraday chart of
the emini S&P 500 in Figure 6, the
letter “V” identifies two such locations.
If below zero, then avoid entry to the
upside and look for the yellow and red Figure 5: USO with CAM and a CCI. Adding a CCI sometimes offers a different perspective than a moving average
bars for entry or continuation to the alone. In this chart of the ETF USO, the CCI shows price divergences as well as positive and negative trending movement
downside. These are marked with the despite various CAM pattern and color bar changes.
letter “X” on the chart, as both CCI and
the moving average identified downside
continuation moves.

Repeatable and
Despite new advances in the develop-
ment of technical analysis indicators,
it is not necessary to abandon those
from the past that continue to work
effectively. This article shows how
two well-known indicators are able
to help traders identify major price
movements that produce repeatable and
recognizable patterns in all markets and Figure 6: Intraday eMini S&P 500. CAM indicator patterns appear in all timeframes. On this five-minute chart
of the emini S&P 500, both the moving average and the CCI identify potential retracements and continuations in rising
and declining phases.

Barbara Star, PhD, is a retired univer-

sity professor. She is a past vice president of the Market Ana- The code given in this article is available in the Article Code section
lysts of Southern California and led a MetaStock users group of our website,
for many years. A Contributing Writer for this magazine, her
articles and software reviews have been published in Stocks See our Traders’ Tips section beginning on page 50 for commentary
& Commodities since 1991. Currently, she trades part-time and implementation of Barbara Star’s technique in various technical
and provides individual instruction and consultation to those analysis programs. Accompanying program code can be found in the
interested in the technical analysis of the financial markets. Traders’ Tips area at
She lives in Woodland Hills, CA, and can be reached at 818
224-4070 or by email at

Further reading
Star, Barbara [2002]. “Detecting Trend Direction And Strength,”
Technical Analysis of Stocks & Commodities, Volume
20: January.
[2003]. “Catch That Trend! Directional Strength And
How To Find It,” Secrets Of Successful Traders, Equis
Wilder, J. Welles [1978]. New Concepts In Technical Trading
Systems, Trend Research.

‡See Editorial Resource Index

January 2018 • Technical Analysis of Stocks & Commodities • 13

ity. An investor doesn’t want to pay someone
who appears to be doing nothing but sitting
on whatever positions are in the portfolio. A
modestly active portfolio must mean the advi-
sor is doing his or her best.
Before diving into analysis, let’s apply some
common sense and look at the characteristics
of short-term and macrotrend strategies.

Short-term trading
Trades held for one to three days are short-
term. They rely on patterns, bursts of volatility,
mean-reversion, and changes in supply and
demand. Trends are not one of them, unless
you consider a two-day upward move a trend.
I don’t. For me, a trend is a fundamentally
stimulated move, such as we would see in
interest rates when the Fed starts raising rates,
or even in crude oil when there is a constant
build of supply. But two days? No.
Short-term trading depends on noise. If
you’re a mean-reversion trader and price jumps
up, you sell, expecting a reversal. During a
trend, you would expect the odds to favor the
price continuing higher; if you treat it as noise,
you expect it to reverse.
Experience shows profit-taking is an impor-
tant part of short-term trading, and in part 2,
I’ll show how that could improve results. But
most traders follow trends, and profit-taking
is a different problem for them.

Trend-following strategies
I consider the range of macrotrends as 40 to
120 days. It could be longer, but I wouldn’t go
out further than 150 days, which is 25% ad-
ditional days, or else you risk having a buy &
hold program in place (and a portfolio manager
Conserve Capital risks appearing to have one). If you wanted to

use one calculation period to represent what the
advisor “industry” uses, it would be 80 days.

And Resets
The characteristics of trend trading can
be seen in the long-term results of 30-year
bond futures and the euro currency. Bonds
are impacted (almost) directly by Fed action,
currencies have a slightly muted reaction,
Part 1: Trend-Following and equity index markets tend to lag. We can
In this first part of a two-part series, we look at long-term trends and different expect clearer trends in the interest rates and
ways to take profits and reenter trades. good trends in the euro currency, both reflected
in the results of the 80-day trend in the tables

by Perry J. Kaufman in Figures 1 & 2. All tests used back-adjusted
futures data beginning 1990, processed on
traders, we all like taking profits. It puts money in our pocket TradeStation.
and increases the number of profitable trades. It keeps us out Bonds and the euro have outstanding re-
of the market so there is less risk, and if we can avoid a price sults, although bond profits are all on long
shock, even better. For money managers, it also shows activ- trades due to the overwhelming decline of
14 • January 2018 • Technical Analysis of Stocks & Commodities

yields since 1980. US Bond Futures All Trades Long Trades Short Trades
The US dollar, on the other hand, has ranged from near Total Net Profit $2,807,219 $3,499,375 ($692,156)
90 cents to 150, back to near 100 and is now at about 113, Profit Factor 1.65 2.82 0.71
producing net profits for both long and short trades. Total Number of Trades 269 135 134
Macrotrend strategies are in the class of “conservation of Percent Profitable 35.7% 43.0% 28.4%
capital.” They cut losses quickly and stay with trades that Max. Consecutive Winning Trades 6 5 3
are profitable, hence the adage “the trend is your friend.” Max. Consecutive Losing Trades 10 9 10
The two tables show that only 35% to 36% of the trades are Winning Trades 96 58 38
profitable—and this for markets that trend. Other markets will Losing Trades 168 73 95
have no more than 30% good trades. The two rows that begin Avg. Bars in Winning Trades 53.33 61.74 40.5
with “Avg Bars” in both tables are important: The length of
Avg. Bars in Losing Trades 10.5 10.3 10.65
winning trades is four to six times longer than the losses. This
Time in the market (days) 16851 9437 6803
leads us to the concept of a “fat tail.”
Return per day $167 $371 ($102)

What’s a fat tail?

Figure 1: US Bond futures trading statistics (back-adjusted
data from 1990). Bonds are impacted (almost) directly by Fed action, so we
The fat tail represents unusually long, very can expect clearer trends in the interest rates. Bond profits are all on long trades
profitable trades that are the underpinning due to the overwhelming decline of yields since 1980.
of trend-following success. Figures 3 & 4
show all the futures trades for bonds and euros from 1990, Euro Futures All Trades Long Trades Short Trades
using an 80-day moving average, sorted from largest losses Total Net Profit $2,721,213 $1,123,788 $1,597,425
to largest gains. Profit Factor 1.49 1.41 1.57
As you can see in each chart, the gains on the right are three Total Number of Trades 284 142 142
to four times as large as the losses on the left. Those are the Percent Profitable 36.27% 38.03% 34.51%
trades that cause the average bars in the winning trades for Max. Consecutive Winning Trades 4 4 4
bonds to be six times as long as the average in losing trades. Max. Consecutive Losing Trades 8 7 11
It’s what makes macrotrend trading profitable. Avg. Bars in Winning Trades 49 46 53
Avg. Bars in Losing Trades 10 11 9
Profit-taking Figure 2: euro futures trading statistics. Currencies have a slightly
Now consider the effects of profit-taking. Because most trend muted reaction to Fed action so we can expect to see good trends in the euro.
trades do not end as a profit, capturing a profit will boost the
percentage of good trades. And that’s nice. But if you take For a long position in futures, we have:
profits and the trade goes on to be one of those in the fat
tail, it’s not nice. You get a completely different profile. Is it Profit target = Entry price + profit factor × 20-day ATR
better or worse? Is it necessary to reenter the trade in order
to capture another part of a long, profitable run? That’s what where ATR is the average true range.
we’ll look at now. For shorts, we subtract the last term. We don’t use a profit
factor above 4 because the number of profit-taking trades is
Profit-taking rules very small. If we make the factor large, say 10, we could catch
Profit-taking methods are not a secret. Normally, you use some one or two big moves before they reverse, but it would be
profit factor (a ratio that always ends up between 2.5 and 4.0 overfitting. To prove a feature works, we need enough trades
for trends) times the volatility and pinned to the entry price. that take profits (at least 20%, hopefully more).

30-Year Bond Futures Trades Euro Futures Trades

50.00% 20.00%

40.00% 15.00%

microsoft excel


-20.00% -10.00%





















gains on the right are three to four times as large as the losses on the left. Those Here also, the gains on the right are significantly larger than the losses.
are the trades that cause the average bars in the winning trades for bonds to be
six times as long as the average in losing trades.

January 2018 • Technical Analysis of Stocks & Commodities • 15

US Bond Futures All Trades Long Trades Short Trades Then there’s the S&P
Total Net Profit $1,042,125 $1,161,250 ($119,125) Everyone wants to look at S&P futures, and it paints a different
Profit Factor 1.27 1.67 0.94 picture. Unlike bonds and the euro, the S&P is not a trending
Percent Profitable 40.2% 46.7% 33.6% market, even with the bull market of the past seven years. It
Winning Trades 108 63 45 may move higher, but it does so with a lot of noise.
Losing Trades 156 68 88 The table in Figure 6 shows good returns when the moving
Avg. Bars in Winning Trades 11.36 11.92 10.58
average period is increased to 120 days, but smaller returns
Avg. Bars in Losing Trades 6.74 6.74 6.74
per day—$125 compared to $167 for bonds. (Noisy markets
Time in the market (days) 4778 2444 2304
require longer trend periods to offset that noise, so an 80-day
Return per day $218 $475 ($52)
trend is not good enough.) If we apply the same profit-taking
rule, a 40-day ATR and factor of 3.0, the time in the market
FIGURE 5: BOND RESULTS USING PROFIT-TAKING. Note that profits are smaller
but so is the risk. drops to 25% but net profits and returns per day drop further
(Figure 7). The S&P also shows upward bias, with profits only
S&P Futures All Trades Long Trades Short Trades on the long side. When profit-taking is added, the percentage
Total Net Profit $2,133,013 $2,889,325 ($756,313) of profitable long trades only increases marginally, indicat-
Profit Factor 1.48 2.66 0.72 ing prices often change direction before the profit target of
Percent Profitable 35.25% 42.62% 27.87% 3 ATRs is reached.
Winning Trades 86 52 34
Losing Trades 155 69 86 Caveat: If you optimize the moving average period as well
Avg. Bars in Winning Trades 62.27 78.02 38.18 as the ATR period and profit factor, the best results are likely
Avg. Bars in Losing Trades 8.43 8.46 8.4 to be better. That’s called “torturing the data.” It’s unlikely
Time in the market (days) 17039 10464 5590 those optimal choices will result in an optimal future result.
Return per day $125 $276 ($135) By applying the same, or similar, parameters to the different
markets, I believe we have a better chance of understanding
(FROM 1990). When the moving average period is increased to 120 days, returns the overall impact of profit-taking.
are good, although smaller per day.
Reentry rules
S&P Futures All Trades Long Trades Short Trades Once we take profits, reentering a trade in
Total Net Profit $109,879 $643,689 ($533,810) the same direction can add additional gains
Profit Factor 1.03 1.37 0.78 and avoid missing a big trade that becomes
Percent Profitable 37.55% 43.90% 31.15% part of the fat tail. I have three reentry
Winning Trades 92 54 38 rules I look at, two based on pullbacks or
Losing Trades 150 68 82 reversals, and two that could reenter at a
Avg. Bars in Winning Trades 10.71 12.37 8.34 better or worse price. I’m sure you can think
Avg. Bars in Losing Trades 7.09 7.94 6.38 of others, but I believe these three cover
Time in the market (days) 4308 2478 1766 the most obvious combinations.
Return per day $26 $260 ($302)
1. Retracement back toward the trendline. After taking
PROFIT FACTOR OF 3.0. The time in the market drops to 25% but the net profits profits, find the percentage retracement from the profit-
and returns per day drop further. The S&P also shows the upward bias, with profits taking point (for a previous long position) to the current
only on the long side. position of the trendline. If your criterion is 50%, then
reenter when the current price falls below the midpoint
Let’s look at a standard scenario, which we find by using of that distance:
the 80-day trend, a 40-day ATR, and a profit factor of 3.0, and
apply it to bonds (Figure 5). The most obvious difference is Long reentry threshold = Trend value +
on the top line, where the net profit drops by 62%. That may retracement reentry factor × (profit level –
be enough to discourage anyone, but there are some offset- trend value)
ting factors.
The profitable trades increase from 35% to 40%, and the 2. Volatility declines to normal. In most cases, volatility
average bars in the losing trades decrease significantly because is above normal when profit-taking occurs, the result of
some losers turn into winners. Most important, the returns a sustained price move. Record the ATR at the time of
per day (when we have a trade) increases from $167 to $218. profit-taking and compare it to the ATR of 60 days ago
We are in the market only 28% of the time, so we are using (to avoid including the current price move). When the
our money better and avoiding unnecessary risk 72% better. volatility drops to a value closer to the “normal” lagged
Some traders may like that. volatility, reset the trade:

16 • January 2018 • Technical Analysis of Stocks & Commodities

Long volatility threshold = Normal vol + CU Trend vs. PT Retrace
volatility reentry factor × (vol at exit – 5000000
0 20 40 60 80 100 120 140

normal vol)
4000000 Trend 30, PT 3.0 x 1.0
3. Enter on a new high (or low) after retracement.
Record the highest high after profit-taking, and

wait for a percentage retracement from that 2000000

high back to the trendline. Then reenter a long 1000000

on a new high: 0

Retracement threshold = Highest high – -1000000

retrace threshold × (highest high – trend



































Profit for trend-only

An alternative (not tested) would be a pullback FIGURE 8: RESULTS OF TESTING ENTRIES ON RETRACEMENTS, EURO FUTURES FROM
based on volatility, then a new high. 1990. Here, the trend returns (the red line) are compared with all combinations of profit factors
and retracements for the euro.
Reentry test results
Expectations are important because results far from what you The best case for reentry using retracement was a trend of 30
expect may prove to be wrong. In this case, I like the idea of days, a profit factor of 3.0, and a retracement of 1.0 (actually,
using volatility to reenter a trade because a return to “normal” any retracement). This chart shows there are essentially no
volatility means the event that preceded profit-taking is over cases where a retracement was better than the trend with no
and we can go back to normal trend trading. Prices could be retracement. We would expect this for a trending market.
higher or lower than the time of exit, so this method won’t
miss a reentry. A nontrending market example
A retracement entry will most often be at a better price (reentry rules 1 & 2)
than the profit-taking exit, but if prices don’t retrace, there is Consider the example of the S&P futures, which I don’t consider
no way to reenter. That is really a problem. It’s the same as a trending market. Figure 9 shows the reentry using retracement
waiting for a pullback after an entry signal. The trades that (reentry rule 1) and Figure 10 shows the reentry using volatility
don’t pull back are the ones you really want to take. (reentry rule 2). In both cases, the shorter calculation periods,
I like reentering longs on a new high after a pullback as a 60 days and below, show reentry returns generally better than
way of confirming the trend, but then again, if the pullback the simple trend returns. You may choose to use both reentry
doesn’t occur, you miss a clear winning trade. Even waiting rules at the same time, but if I could only have one, it would
for a small pullback may not help. be volatility because it will not miss a reentry.
Note that when you use the reentry, you also use a faster
A trending market example trend, in this case 20 days. If you use a longer trend, above 100
(reentry rule 1) days, then the simple trend is still the best performer.
Figure 8 lets you compare trend returns (red line) with all
combinations of profit factors and retracements (per reentry Retracement and breakout
rule 1 above) for the euro. The vertical dots show the results (reentry rule 3)
of each combination of those parameters relative to the mov- Instead of entering near the trendline on a retracement (as in
ing average calculation period, shown across the top axis. rule 1), this approach will enter on a new high or low once

ES Trend vs. PT and Retrace ES Trend vs. PT and Reset Volatility

0 20 40 60 80 100 120 140 0 20 40 60 80 100 120 140
5000000 4000000
4000000 3000000
3000000 2000000
-3000000 -3000000
-4000000 -4000000
-5000000 -5000000

























































Profit for trend-only Profit for trend-only

The shorter calculation periods, 60 days and below, show reentry returns generally Reentry using volatility doesn’t miss a reentry.
better than the simple trend returns.

January 2018 • Technical Analysis of Stocks & Commodities • 17

Euro HL Breakout S&P HL Breakout
3000000 1000000

2500000 Any pullback


All Pullbacks
All Pullbacks





-1000000 -1500000
1.5 2 2.5 3 3.5 4 4.5 1.5 2 2.5 3 3.5 4 4.5
Profit Factor Profit Factor

along the bottom and range of results varying the retracement ratio is on the left. The S&P takes profits sooner.
euro is a more trending market than the S&P 500 and favors a larger profit factor.

the retracement occurs. If prices move through the retrace- In both charts, the best results for each choice of profit factor
ment level and continue on that path until the trend changes, is 1.0, which means any retracement followed by a new high
we do not reenter. It still suffers from the same problem as or low is enough to allow a reentry in the trend’s direction.
reentry rule 1 does, that is, if prices continue in the trend’s The only difference is that the euro, a more trending market,
direction with no retracement at all, the trade isn’t reentered. favors a larger profit factor (the maximum value tested of 4.5),
But that’s not likely. The retracement level keeps adjusting to while the S&P was best taking profits sooner.
a percentage of the new high (for a long trade) less the current The table in Figure 13 shows the results of euro futures using
trend value. How are the results? the maximum 4.5 profit factor and smallest 1.0 retracement.
Figures 11 & 12 show the test results using an 80-day These choices indicate a trending market and a reluctance to
average for the euro and a 120-day average for the S&P, but take profits. Nevertheless, results for long trades improved as
varying the profit factor and retracement ratio. Remember, a did the percentage of profitable trades. However, this method
ratio of zero means prices must touch the trendline, while a would have reentered quickly, so the time in the market would
ratio of 1.0 means any small retracement is sufficient to allow be close to 95%.
the next high to be the trigger to reenter a long position. For the S&P, the table in Figure 14 shows a dramatic drop in
returns and profit factor, even while the percentage of profitable
trades increased. Given the intrinsic noise in S&P prices, we
A strong market can continue to would have expected a retracement to do better.
go up until you are completely
frustrated waiting for a pullback. Summing it up
Remember, here in part 1, we’re dealing with long-term
trending systems. Part 2 will evaluate the same methods
applied to short-term trading.
Euro Futures HL Breakout All Trades Long Trades Short Trades It is also possible for you to develop a better way of reenter-
Total Net Profit $2,685,588 $1,687,276 $998,312 ing trades than the choices shown here; nevertheless, I believe
Profit Factor 1.33 1.43 1.24 the results paint a consistent picture, as follows:
Total Number of Trades 362 180 182
Percent Profitable 43.4% 45.0% 41.8% 1. Using a reentry method reduces your time in the market
FIGURE 13: Euro futures trading results based on a 4.5 profit
and overall exposure to risk.
factor and a minimum (1.0) retracement). This is a trending market and
2. Profit-taking can significantly increase the percentage
a reluctance to take profits. Nevertheless, results for long trades improved as did
the percentage of profitable trades. However, this method would have reentered of profitable trades.
3. None of the reentry methods came close to achieving
quickly so the time in the market would be close to 95%.

S&P Futures HL Breakout All Trades Long Trades Short Trades the net profits from using a simple trend system without
Total Net Profit $760,839 $1,668,911 ($908,072) profit-taking or reentries.
Profit Factor 1.08 1.31 0.8
Total Number of Trades 498 290 208 The common problem with most reentry methods is the gap
Percent Profitable 50.2% 55.9% 42.3% between exiting and reentering. If you exit a long position and
figure 14: S&P futures trading results based on a profit-factor
prices continue higher, it will be difficult to recover the lost
of 2.0 and a minimum (1.0) retracement. There’s a dramatic drop in returns
and profit factor, even while the percentage of profitable trades increased. Continued on page 49
18 • January 2018 • Technical Analysis of Stocks & Commodities
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risk capital should be used for trading and only those with sufficient risk capital should consider trading.
Energy Patterns

Energy Sector and S&P 500:

A Look At Pairwise Correlation
Can you develop a trading strategy out of a correlation be developed out of pairwise correlation?
pattern between two assets? Here we analyze the movement To answer this question, I plotted the close price of the SPDR
of the S&P 500 index with its various sectors to find out if S&P 500 (SPY) against correlation within its sectors. The S&P
any correlation patterns stand out. 500 consists of 10 sectors: consumer discretionary (XLY),
consumer staples (XLP), energy (XLE), financials (XLF),
by Cassandra Wang health care (XLV), industrials (XLI), materials (XLB), real

estate (XLRE), technology (XLK), and utilities (XLU). The
my last article in the February 2017 issue symbol enclosed in parentheses is the ticker symbol of the cor-
of Stocks & Commodities, I looked at responding sector’s exchange traded fund (ETF). This article,
inter-asset correlation and how it can be used which explores specifically the correlation between the energy
to predict the movement of the S&P 500. sector and S&P 500, serves as one of a series that will focus
After receiving an overwhelming amount of on pairwise correlation between the S&P 500 and its sectors.
comments from readers about the study, in Adjusted weekly close price data of XLE (energy sector) and
particular its complex calculations, I began SPY from Yahoo Finance were used in the study.
to think about pairwise correlations between
the S&P 500 and each of its sectors. Pairwise Patterns of XLE/SPY
correlation is a much simpler concept than inter-asset correla- pairwise correlation

tion; it can be easily calculated with a spreadsheet program such In Figure 1, a 13-week period correlation between the S&P
as Microsoft Excel. The key is whether a pairwise correlation 500 and the energy sector is plotted in orange. The close price
pattern can predict price changes of the S&P 500 as effectively of the S&P 500 is plotted in blue. As can be seen, the strength
as inter-asset correlation is able to. Can an investment strategy of the correlation fluctuates constantly but is positive overall;
20 • January 2018 • Technical Analysis of Stocks & Commodities

the average correlation is 0.63 with a

standard deviation of 0.34. At first glance,
the two graphs appear unrelated. There
doesn’t appear to be a direct relationship
between the value of the correlation and
price of the S&P 500.
However, the red boxed areas in Fig-
ure 1, where the correlation graph has
two clustered negative local minima,

Microsoft Excel
correspond with significant drops in the
S&P 500’s close price. For instance, on
6/9/2000, the correlation was at a local
minimum of -0.34. Six weeks later, on Figure 1: The close price of S&P 500 (blue) against correlation between the energy
sector and S&P 500 (orange). The small red boxes highlight the areas of two local correlation minima
7/21/2000, the correlation was again at its with negative values separated by fewer than 25 weeks.
local minimum with a value of -0.39. Six
weeks after 7/21/2000, the S&P 500 reached its peak value To test this, a table collecting all cases where there were two
of 152.50, and then began its 47% free fall, dropping to 80.8 negative local minima of correlation was generated. In Figure
on 10/4/2002 more than two years later. 2, I only included separations between two minima that were
This phenomenon occurs again in 2006 to correctly predict fewer than 52 weeks apart from each other. From there, the
the recession in 2008. On 10/20/2006, the correlation was at a maximum drop percentage of the S&P 500 over a period of
local minimum of -0.62. Eighteen weeks later, a second local 52 weeks was calculated for three scenarios: at correlation’s
minimum was formed on 2/23/2007 with a correlation value
of -0.20. Around the time of the second negative correlation
spike, the S&P 500’s prior upward momentum began to slow
down until the slope reversed direction; its close price began Take note of patterns in
to drop on 10/12/2007 (33 weeks after the second negative correlation within the energy
spike) from a peak value of 156.33. That day marked the
beginning of the Great Recession.
sector of the S&P 500 to get
For most of 2014, the S&P 500 kept its overall upward a glimpse into the future
momentum. However, two negative local minima in the XLE/ movement of the S&P 500.
SPY correlation were formed on 9/19/2014 and 12/26/2014. The
value of the correlation on 9/19/14 was -0.08, and it was -0.16
14 weeks later. Twenty-one weeks after, the S&P 500 reached
its peak value of 212.99. It went through a down cycle with second local minimum, when correlation crossed above
a maximum loss of 11% near the week of 1/15/2016. Again, zero, and when correlation crossed above 0.5. The results are
two local minima of correlation (with values less than zero) tabulated in Figure 2.
occurring fewer than 25 weeks apart appear to correctly predict The first portion of Figure 2 describes the dates and values
a downside move of the S&P 500 in the near future. of the two successive negative local minima of correlation, as
Are these instances representative of a general pattern? well as the number of weeks elapsed between the two minima.

Weeks Weeks w/ Weeks w/ Weeks w/

Date @ Corr @ Date @ Corr_ Corr @ %MaxDrop Weeks %MaxDrop Weeks %MaxDrop
Rows Between MaxDrop MaxDrop MaxDrop
Corr_min1 min1 min2 min2 since_min2 cross_0 since_0 cross_0.5 since_0.5
Minima since_min2 since_0 since_0.5

1 06/09/2000 -0.34 07/21/2000 -0.39 6 23.3% 37 4 24.3% 33 7 27.4% 52

2 01/19/2001 -0.03 03/09/2001 -0.44 7 21.1% 28 2 15.0% 26 6 21.9% 22
3 08/20/2004 -0.28 01/28/2005 -0.11 23 2.8% 11 1 5.1% 10 4 6.0% 7
4 10/20/2006 -0.62 02/23/2007 -0.14 18 9.1% 47 1 4.8% 46 3 6.4% 52
5 09/19/2014 -0.06 12/26/2014 -0.16 14 7.6% 36 4 8.4% 51 6 8.6% 49
6 01/10/2003 -0.07 08/22/2003 -0.12 32 -0.2% 5 2 1.5% 4 5 2.4% 1
7 03/31/2006 -0.29 10/20/2006 -0.62 29 0.2% 2 3 -0.2% 18 5 1.3% 16
Avg all 9.1% 8.4% 10.6%
12.8% 11.5% 14.1%
0.0% 0.6% 1.9%
FIGURE 2: S&P 500 price move after occurrences of two local minima in XLE/SPY 13-week correlation. All instances of two negative local
minima of correlation fewer than 52 weeks apart during the period between January 2000 and June 2017 have been recorded here.

January 2018 • Technical Analysis of Stocks & Commodities • 21

500’s top when correlation crosses above 0.5 after its second
minimum. For the two local correlation minima 25 weeks or
In the past 18 years, we less apart from each other: at the second minimum, the average
MaxDrop was 12.8%; when correlation crossed above 0.0, the
have never seen correlation average MaxDrop was 11.5%; and when correlation crossed
behave like this. above 0.5, the average MaxDrop was 14.1%. The time strategy
in which the correlation crosses above 0.5 after the second
minimum appears to work out slightly better than the other
two methods in predicting the S&P 500’s tops.

“% MaxDrop since_min2” calculates the maximum percent- What does this mean
age drop of the S&P 500’s close price over a period of 52 weeks for the future?
after the second correlation minimum. “Weeks w/maxDrop As Figure 1 shows, XLE/SPY pair-
since_min2” counts the weeks between the correlation’s sec- wise correlation from the second
ond negative minimum and the S&P 500’s MaxDrop. “Weeks quarter of this year (2017) onward
cross_0” refers to the number of weeks between the second local has been strongly negative. On
minimum of correlation and when correlation crossed above 3/17/2017, intersector correlation
zero. Similarly, “% MaxDrop since_0” calculates MaxDrop reached -0.934, the lowest negative
over a period of 52 weeks after correlation crossed above value this sector has witnessed in over 18 years. This negative
zero, and “Weeks w/maxDrop since_0” counts the number of spike has yet to return to a positive value and make a second
weeks between the MaxDrop and when correlation crossed negative spike. As of right now, it is difficult to predict if
above zero after its second local minimum. there will be another spike. Through 3/17/2017 and continuing
The same holds true for the final section of the table. “Weeks through 6/30/2017, the close price of the S&P 500 has contin-
cross_0.5” calculates the number of weeks between correla- ued to rise. Since the minimum of 3/17/2017, correlation has
tion’s second local minimum and when correlation crossed risen but stopped at a local maximum of -0.13 on 5/19/2017.
above 0.5. “% MaxDrop since_0.5” calculates the S&P 500’s After 5/19/2017, correlation resumed dropping until it reached
MaxDrop in the 52 weeks after correlation crossed above 0.5. a second local minimum of -0.87 on 6/23/2017. In the past 18
“Weeks w/ maxDrop since_0.5” calculates the number of weeks years, we have never seen correlation behave like this. Never
between the MaxDrop of the S&P 500 and when correlation has correlation in the energy sector created two negative
crossed above 0.5 after its second local minimum. local minima without returning to a positive number before
embarking on its second local minimum. If correlation were
Separation length between to return to a positive value and then quickly create another
two local minima negative local minimum before 25 weeks are over, it is likely
Over the past 18 years, five out of the total seven incidences the close price of the S&P 500 will plummet soon after cor-
of clustered local minima in correlation correctly predicted relation returns to 0.5 following its second minimum. Now
a market top. As illustrated in rows 1 to 5 of Figure 2, the is the time to closely monitor the S&P 500’s price movement
average MaxDrops of the S&P 500 varied from 11% to 14%. given the frequency of the negative correlation minima.
This is the result of varying start dates, as shown in Figure Will market prices drop dramatically in the near future? Or
2. All five cases had a separation fewer than 25 weeks apart will everything remain the same, as if nothing happened? Only
between the two correlation minima. On the other hand, the time will tell. Until then, take note of patterns in correlation
remaining two incidences (row 6 and 7 in Figure 2), which had within the energy sector of the S&P 500. Perhaps it will give
a separation greater than 25 weeks, both gave false positive you a glimpse into the future movement of the closing price
signals of the S&P 500’s peaks. Therefore, the time period of the S&P 500.
between two correlation minima is an important indicator to
predict tops of the S&P 500. Cassandra Wang studies patterns in the stock market and is
a contributor to She may be reached via
Correlation crossing above 0.5: email at
a good starting point
For a good investment strategy, timing is always a factor Further reading
that needs to be considered carefully. I studied three tim- Wang, Cassandra [2017]. “Using Correlation To Trade The
ing strategies to determine when to start counting S&P 500 S&P 500,” Technical Analysis of Stocks & Commodities,
price movement over the next 52 weeks (Figure 2). The first Volume 35: February.
strategy is to predict the S&P 500’s top at the second local SPDR sector ETF:
minimum of correlation. The second strategy is to forecast spiders.asp
the S&P 500’s top when correlation crosses above zero after
its second minimum. The third method is to predict the S&P
22 • January 2018 • Technical Analysis of Stocks & Commodities
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Momentum & Congestion

Two For The Price Of One

Here’s how you can enhance a momentum indicator to show
momentum and congestion.

by David Solomon

omentum indicators are probably the most favored

in technical analysis. In this article, I’ll show a
simple way to emphasize trends and identify con-
gestion in the same plot on a chart.
I begin with any standard momentum indicator—
a line drawn on the chart showing an average of some kind
(such as simple moving average, exponential moving average,
double, Hull, etc.). The moving average convergence/divergence
(MACD) is probably one of the more widely used indicators. FIGURE 1: AN ORDINARY MOMENTUM LINE (21-BAR). A quick glance will tell
In Figure 1 is a 21-bar exponential moving average (EMA) you if price is moving up or down compared to its most recent behavior.

24 • January 2018 • Technical Analysis of Stocks & Commodities


on a 15-minute EUR/USD indicator intersects with the

chart. The line works by current bar (that is, neither
telling you some history: in buy or sell mode) then we
Embedded in the current are in neutral/congestion.
value of the indicator is If prices are in congestion
how price has fared overall mode as defined, then there
in previous bars. At a mo- is no momentum and no
ment’s glance, the indicator plot is made on this bar.
tells you whether price is In the chart in Figure 5,
rising or falling compared momentum stays stuck in
to its most recent behavior. neutral for 13 bars before
Notice there is only one changing to buy. In this
case, no signal is a good
The green line indicates that momentum is signal. The advantage of
Up, down, pushing prices up. showing no signal is that
or neutral the chart reader doesn’t
I will add some new infor- get misled.
mation: If momentum is Sometimes the absence
pushing prices up, I’ll color of momentum can be a use-
it green (Figure 2). If it is ful pause (retrace) before
pushing prices down I’ll a trend resumes. In Figure
color it red (Figure 3). 6 on the left-hand side,
But so far, there is no momentum indicates sell
whipsaw—that is, when mode, then it’s in neutral or
prices go back and forth congestion for two bars, and
rapidly (and the money you FIGURE 5: HOW ABOUT NO SIGNALS then the sell indication re-
DURING WHIPSAWS? Coming up with a
made on those great swings system where no signals are generated will sumes. This makes intuitive
goes down the drain). avoid misleading the trader. sense: Momentum stalled
When prices move back FIGURE 3: MOMENTUM IS GOING DOWN. for just two bars. This isn’t
and forth, a momentum When the momentum is in a downward direc- a reason to exit the trade but
indicator can be mislead- it’s something you need to
tion, the indicator is colored red.

ing because there is a lack be aware of.

of momentum. The value of this ap-
In the next example (Fig- proach is that it meaning-
ure 4), the indicator goes fully connects momentum
from red to green to red and to congestion: It uses the
then back to green. It’s a momentum indicator to
roller-coaster in six bars. In double up as a congestion
this case, the “momentum” indicator. This drastically
indicator misinforms the reduces the whipsaw prob-
trader. This is a common lem because the approach
problem among momen- identifies a neutral, transi-
tum indicators. tion state. Whipsaws in
In order to bring clarity, I FIGURE 4: WHIPSAW. Sometimes there’s FIGURE 6: A two-bar momentum
price movement are not
redefine momentum as fol- no clear direction with prices moving up and pause. This short stall period is not a going to go away but the
lows: When the momentum down. So when you have indicators that go reason to exit a trade. chart cautions you by mov-
indicator is completely from sell to buy to sell and then back to buy ing through neutral state
outside and above the cur- it can confuse the trader.
rent bar then consider it to red) rather than a whiplash
be in buy mode. When the The value of this approach state (red-green-red).
momentum indicator is Visually, three different
totally outside and below
is that it meaningfully states have been com-
the current bar, then it is connects momentum to pressed into one line and
in sell mode. congestion. two colors (three if you
I define congestion as
follows: If the momentum Continued on page 46
January 2018 • Technical Analysis of Stocks & Commodities • 25
Unskew It!

Measuring Risk With The

Normalized Risk Index
Risk—there are many ways to measure it, but how effective that rather than expected return, safety of capital was the first
are they? Here’s one measure that is versatile and suitable priority for any rational investor.
for just about any type of risk profile.
Measuring risk
by Mike B. Siroky, MD Despite this, risk is still commonly defined by a financial as-

set’s volatility. In fact, the terms risk and volatility are often
hat is risk and how is it best measured? The term used interchangeably, although they are different concepts. A
risk is generally applied to adverse outcomes only. stock that loses 4% per year, then 3%, then 2% has a standard
No one talks about the risk of winning the state deviation of 0.82%. Another stock that loses 8%, then 7%,
lottery, but it is common to hear about the risk then 6% has the same standard deviation of 0.82%. While the
of getting hit by lightning. In the financial arena, stocks have the same volatility, the first stock has lost 9% over
risk may mean the likelihood of bankruptcy, a three years while the second has lost about 20%.
dividend cut, or a decline in earnings. In modern Asset volatility is most commonly measured using the
portfolio theory, it may mean a high beta, or the standard deviation (variance) of asset returns (usually annual-

likelihood of underperforming a market index or ized). Why is this? The standard deviation is easy to calculate,
some target return. However, to most individual easy to understand, and easy to use as a measure of volatility,
investors, the term risk means the likelihood of which does have some correlation with risk. After all, peri-
losing capital. British economist A.D. Roy stated ods of stock market decline are usually short and violent in
26 • January 2018 • Technical Analysis of Stocks & Commodities

comparison to periods of gain. Nevertheless, as a measure of for the standard deviation (variance) in well-known portfolio
pure downside risk, standard deviation (variance) has many return/risk measures such as the Sharpe ratio. Substituting the
well-known drawbacks: ulcer index in the Sharpe ratio produces what is called the
ulcer performance index or Martin ratio.
1. Standard deviation (variance) measures the variation Other measures of downside risk also exist. About a decade
about the average in both directions while, as noted before the ulcer index was introduced, V.S Bawa and B.C.
earlier, market participants define risk only as loss of Fishburn introduced the interesting concept of the lower
capital. This becomes important if the frequency distri- partial moment (LPM) as a measure of pure downside risk
bution is significantly skewed positively or negatively. (for a historical review, see David Nawrocki’s article listed in
A skewed distribution is what happens when a stock the further reading at end). The LPM measures return below
declines in a major way and negative returns are larger a target return:
than positive returns.
2. More important, the standard deviation (variance) for n periods, LPM = [∑ max[0,(T-R)a/n] 1/a [1]
provides reasonable probability estimates only if the
frequency distribution of asset returns is approximately where n is the number of periods, T is a target rate of return,
Gaussian. Yet stock returns rarely approximate a Gauss- R is the actual rate of return, and a is an exponent >=0.
ian distribution. For example, let’s look at the distribu- If the target rate is less than the actual rate, the equation
tion of daily returns over the last 2,499 trading days (10 generates a negative number and the maximizing function
years) for SPY, a proxy for the S&P 500 stock index. The selects zero. If the return is less than the target rate, the differ-
distribution has skewness 4.7 standard errors different ence is a positive number and is selected since it is more than
from zero and excess kurtosis about 15 standard errors zero. In this way, only negative outcomes, defined as missing a
different from zero—the expected values for a Gaussian target return, are included. Positive outcomes generate a zero
distribution. As pointed out by mathematician Benoit B.  and thus are ignored.
Mandelbrot, the real problem lies in the much larger- The second notable feature of the LPM is the variable
than-expected number of extreme values, especially exponent a. If a=1, we have the simple mean of all negative
on the negative side. The standard deviation conveys a outcomes or the expected loss. If a=2 we have the root mean
false sense of security when in reality, the level of risk square of negative outcomes. In the special case where T equals
is much higher than we acknowledge. We severely un- the mean and a=2, we obtain the semi-standard deviation.
derestimate the level of risk in a non-Gaussian market Note semi-standard deviation can be seen as a special case of
with the potential for “black swan” events. a lower partial moment, where a=2 and T=the mean.
If a=2, the squaring process will overweight the negative
3. Standard deviation (variance) measures dispersion events whereas if a=1 they are equally weighted. An exponent
around an average price or average return over a period of 2 might be appropriate for a risk-averse investor while an
of time while market participants are more concerned exponent of 1 may fit a risk-neutral investor. Values of less
with drawdown from their initial entry price or some than 1 may be selected by a risk-seeking investor. Further-
target price. more, the LPM can use fractional exponents as well as whole
4. Standard deviation (variance) is calculated using the sum numbers.
of squares and overweights the more extreme values.
This may be appropriate for some risk-averse investors Normalized measure of downside risk
but not for others. The LPM concept can be used to build a normalized measure
of downside risk for individual stocks and ETFs. We begin by
5. The relationship between risk and volatility is nonsta-
defining our target return, T, as the natural logarithm of the
tionary from asset to asset as well as from time period
ratio of the maximum close over n periods (Maxclose) and
to time period.
today’s close (Closet):
Addressing some of these concerns, Peter G. Martin and
Byron B. McCann introduced what is known as the ulcer index For n periods, T = 100*ln(Maxclose/Closet) [2]
(UI) in their 1989 book The Investor’s Guide To Fidelity Funds.
The ulcer index was one of the early measures of downside
risk available in technical analysis. In contrast to the standard
deviation, the ulcer index calculates retracement from a previ- A portfolio using the
ous closing high and thus only measures downside risk. It is normalized risk index beats
calculated in a manner analogous to the standard deviation, buy & hold by reducing
using the root mean square of the percent retracement from
the highest closing price. Thus, the ulcer index is a type of
exposure during high-risk
semivariance, only it’s based on deviation from a closing high periods.
rather than from an average price. It has been used to substitute
January 2018 • Technical Analysis of Stocks & Commodities • 27
value of (T-R) to the expected maximum
price excursion, a concept derived from
random walk theory. If there is an equal
probability of a gain or loss, such as in
the case of a fair coin toss, random walk
theory predicts the expected maximum
excursion (EME) of price to be:

EME = s * √n [4]
microsoft excel

where s = step size and n is the number

of steps. Thus, EME is a function of the
square root of time and represents an
FIGURE 1: Frequency distribution for retracement minus actual return, 10 years of estimate of predicted range of price move-
daily data for SPY (n=2436) ending 9/29/2017. Markers indicate the 50th percentile or median at
1.60%, mean at 4.25%, and 75th percentile at 5.15%. Note the mean is much closer to the 75th percentile
ment. We could use various estimates
than to the 50th percentile. for step size such as mean true range or
standard deviation of returns. However,
for our purposes, the most robust measure
is the median absolute return (median
AR). The absolute return is distributed
as in Figure 2.
Like the retracement frequency curve,
absolute return has a minimum of zero and
consists of only positive numbers. Again,
we have a skewed distribution with the
mean closer to the 75th percentile than to
the 50th percentile or median. Unlike true
range, median AbsR is based on closing
prices and unlike standard deviation,
median AbsR does not overweight the
FIGURE 2: Frequency distribution for absolute return % based on 10 years of daily deviations by squaring. Finally, median
data for SPY (n=2499) ending 9/29/2017. Markers indicate the 50th percentile or median at 0.50%,
AbsR is based on a difference between
mean at 0.80%, and 75th percentile at 1.06%. Note the mean is closer to the 75th percentile than to the 50th
percentile. actually realized transaction prices rather
than the difference from a mean.
To obtain median AbsR, take the ab-
We define the actual rate of return R as: solute value of each day’s return. Find the 64-day median to
obtain the median absolute return. Substituting the median
R = 100*ln(Closet/Closet-1) [3] absolute deviation (median AbsR) for the step size s and the
number of periods for n, we obtain as a general form:
Let’s say today’s close is 4% below the 64-day maximum
close and today’s return is -2.0%. Then (T-R) for today equals Normalized risk index = Median (T-R) /
(4 + 2) = 6%. Since this is larger than zero, the (T-R) value for (median AbsR * √n) [5]
today is 6%. In another case, assume today’s close is 2% below
the 64-day maximum close and today’s return is 3% above the Note the normalized risk index (NRI) takes one input, the
previous day’s close. Then (T-R) for today equals (2–3)=-1, and number of periods n, and generates a dimensionless ratio
since this is less than zero, the value for today is zero. that compares a measure of retracement to a measure of
In this way, the quantity (T-R) is calculated for n days, total range.
weeks, months, and so on. Let’s examine how daily (T-R) is In Figure 3, we see how the normalized risk index changes
distributed. in response to price change. Values of more than 0.5 indicate
Looking at Figure 1, we see that (T-R) has a minimum value retracement is more than one half of the expected range. Val-
of zero and consists only of positive numbers that represent ues of more than 1.0 indicate retracement is more than the
the difference between the target rate and actual rate of re- expected range and implies excessive risk. NRI values can
turn. It is clearly asymmetric and heavily skewed. The most reach several times the expected range.
robust measure of central tendency in such a distribution is The normalized risk index (NRI) differs from the ulcer
the median that divides the distribution in half. index in three significant ways:
We can normalize the indicator by comparing the median
28 • January 2018 • Technical Analysis of Stocks & Commodities
• If the retracement % is less than
a positive daily gain, the quantity
(T-R) becomes negative and the
retracement is ignored. Only re-
tracement values larger than daily
returns are included rather than all
retracement values.
• The retracement is not squared and
thus is not overweighted by extreme
• The index is normalized for the
expected range, which gives some
indication of when risk is exces-

Backtesting the FIGURE 3: 10-year price chart for SPY ending SeptEMBER 29, 2017. The normalized risk index
normalized risk index is calculated with n=64 days. The normalized risk index changes in response to price change. Values of more
In a simple backtest, on each day we are than 0.5 indicate retracement is more than one half of the expected range. Values of more than 1.0 indicate
either 100% owning SPY or 100% in cash retracement is more than the expected range and implies excessive risk.
depending on whether the normalized
risk index is greater than a specified cutoff value or
not. The final portfolio value is given in Figure 4 as
a ratio to the starting value of 1.0.
With cutoff values of about 1.00 or greater, a portfo-
lio using the normalized risk index beats buy & hold
by reducing exposure during high risk periods. With
low cutoff values of < 1.0, exposure time to equities is
also low and final portfolio value does not match buy
& hold. With high cutoff values > 2.0, exposure time
approaches 100% and final portfolio value equals buy
& hold. This is shown in the chart in Figure 5.
Note with normalized risk index cutoff values ap-
proximately 0.5 or less, there is less than 50% exposure
to equities. With normalized risk values of about 2.00
FIGURE 4: BACKTESTING NORMALIZED RISK INDEX. On the vertical axis is the final value
or more, there is nearly 100% exposure to equities. of a portfolio consisting only of SPY or cash after 10 years ending September 29, 2017. The
Obviously, with different stocks, these numbers will horizontal axis shows various normalized risk index cutoff values from 0.00 to 4.00. Buy &
vary. We are looking only at raw final portfolio num- hold has a final value of 1.82 over 10 years, that is, a gain of 82%.
bers. If we adjusted for exposure time, the difference
from buy & hold would be even larger.

When the first-order lower partial moment is nor-
malized by an estimated total range, we obtain the
normalized risk index (NRI) given by equation 5. The
normalized risk index is a versatile measure of down-
side risk, as it indicates when risk might be excessive.
However, different investors almost certainly have
unique risk profiles and the NRI can accommodate
any given level of risk tolerance by adjusting the cutoff
value. Raising the cutoff value increases exposure to
equity risk and lowering it decreases exposure to eq-
uity risk. A risk-neutral investor is well-modeled with
FIGURE 5: Percent of time invested in equities as a function of normalized
a cutoff value of 1.0. A risk-averse investor might use risk index cutoff values from 0.00 to 4.00. With normalized risk index cutoff values
about 0.5 or less, there is less than 50% exposure to equities. With normalized risk values of
Continued on page 46 about 2.00 or more, there is nearly 100% exposure to equities.

January 2018 • Technical Analysis of Stocks & Commodities • 29

Before You Can Make A Splash

Dip One Toe Into The Forex Pond

It’s one thing to learn the theory behind forex trading but Step 1: Trading education
another to apply it in the markets. Here’s a step-by-step
• Does the syllabus of your training meet your trading

by Solomon Chuama • What is the duration of the training course?

efore you assume any of the steps mentioned in The foreign exchange market is vast and elaborate and your
this article, you will have to ask yourself what type training is a continuous exercise even when you become a
of trader you are. Are you a scalper, daytrader, professional trader. Your training should incorporate theo-
swing trader, or position trader? Which style of retical and practical forex trading. After acquiring this basic
trading matches your personality? Once you’ve knowledge, you have to know how to analyze the market
established the type of trader you are, then you either fundamentally, technically, or sentimentally. You have
can begin your trading education. Each trader has to develop the skill of price action trading and chart reading
a unique personality and psychological makeup. in real time. Price action trading on a higher timeframe is
That’s why there are different names for different more useful than chart indicators. All economic data and
types of trading. world news are reflected in price action and your ability to
I will outline the steps to follow as applied specifically to read price action will give you an edge in the market.
the forex markets but they can be adapted to trade any market. But you also need professional training, just as with most
Here are the steps I recommend you follow. other professions. A professional trader is someone who uses
price movement in the currency market to make a profit and
30 • January 2018 • Technical Analysis of Stocks & Commodities

is a chart technician who uses price Come visit one of the most popular trading
charts to analyze and trade the market. chat rooms for Breakout Trading.
A professional trader would have made
the same mistakes newbie traders usually
make and can teach you how to avoid
them. This will save you from risking
your hard-earned money in the market
Breakout Trading Bull Flags
and avoid mental frustration.
Something that is helpful is to master
one trading strategy. Think about it: It Momentum Stocks Pivot Points
could be your only trading edge over
others. To profit in the market you have to
have some bias toward price movement.
The market can either go up or down; Swing Trading Key Reversals
once you establish the general trend of
the market, read the price action, and plot
key price levels on your charts.
Home of Dan Zanger, world record holder for
Step 2: Open a demo account
This step enables you to get to know parlaying
$10,775 into $18 million in 18 months!
your platform and put into practice all
theoretical and practical knowledge you Home of The Zanger reporT.
have acquired. This is an ideal stage to
test your strategy so you don’t lose money
unnecessarily. Be aware that demo trad-
ing isn’t the same as live trading since it
doesn’t involve emotions. Once you start
live trading, your emotions will come into play. You should • Abilities of a good trader. A trading journal is your
demo trade until you are able to understand your platform best friend. Write all your deep, dark secrets in there.
and the strategy or strategies you wish to use. Nobody sees those except you so if you have a losing
It is possible to open an account with as little as $1,000. In trade, write a story about it. What were the reasons for
the forex world it’s called a micro account. A mini account that bad trade? What emotions crept up when you entered
can be opened with $10,000 and a standard account with that trade? What about the exit? It’s important to be
$100,000. Remember, proper capitalization will mitigate the honest with yourself here. Reflect on the situation and
effects of leverage and use of low leverages enables you to see why it was a bad trade. Maybe you risked too much,
have losses that are small. or overleveraged your account, or perhaps you entered
It’s best to start with a micro demo account. It allows you to the trade based on your intuition instead of what your
test-run your strategies using micro-size lot sizes. You should trading system was telling you. The best way to learn
do this for at least three months to get the hang of it. is from your mistakes.
Because it’s a demo account and you are not risking any
capital, you’re not going to experience any emotional attach- • Ability to be patient. There will be times when there are
ment to your trades. Even if you skip a day or two, nothing no trading opportunities. Even though you may be itching
is going to happen to your cash flow. Try it out and see how to place a trade, it pays to be patient and wait for those
disciplined you are when real money isn’t involved. It’s a high-probability trading opportunities. Keep repeating
great way to find out if forex trading is something you can this mantra: No setup, no trade. If you are patient and
sustain. When we play video games, we feel the emotion of precise in your trading, you will avoid low-probability
greed creep up since we want to move on to the next level.
Do you recognize emotions of fear and greed surfacing when
you trade your demo account?

Step 3: Do you have these skills and abilities? Your trading strategy
It is difficult to figure out what it takes to be a good trader could be your only trading
because each of us is different. No two traders see things the
same way, which is why the financial markets exist. Nonethe- edge over others.
less, there are a few things you need to be aware of.

January 2018 • Technical Analysis of Stocks & Commodities • 31

trades and keep your losing trades to a
minimum. Too much trading and chas-
ing after low-probability trades will run
down your trading capital, which goes
against your goals. When you identify
choppy or sideways markets that don’t
The red ledger line indicates the extreme
price level of the currency pair. Daily chart
respect key levels on your charts, it’s enables me to know the direction of the
best to avoid them. market which is now overbought. I will
proceed to 1 hour chart for entry.

• Ability to control your emotions. Are

you afraid of losing capital through trad-
ing? Do you have that burning desire to
get rich quick? You don’t want these types
of emotions to dominate your trading.
We all have them and need to conquer FIGURE 1: WHEN PRICE HITS EXTREME LEVELS. When price hits an extreme level and looks a little
them before we start trading. One way toppy on a chart, there’s a chance price could reverse.
is to get in the habit of objectively decid-
ing how much you want to risk. There
will be times you will come across the
temptation to make big profits even if you
have a small account. Then there will be
times when you are faced with a series
of losing trades and you want to increase
your positions to quickly make up those On the 1 hour chart, the market has
losses. Recognize these situations and been overbought on 2/6/2017 as
indicated by the rectangular block.
when they come up, get up from your
trading desk, and engage your mind in
some other activity. You don’t want to
trade when such emotions arise.
Another scenario that often comes up
is revenge trading. You suffer a huge
loss based on your setup but you want to FIGURE 2: USING A CONFIRMATION TOOL. Here, the relative strength index (RSI) is used as a confir-
prove yourself. So you jump back into the mation tool. The RSI reached an overbought level on June 2, 2017, which suggests a reversal is likely.
market just to recoup your losses. Not a
smart idea, since your emotions are now
out of whack and you could suffer further losses, which the context of financial markets involves sizing up your
would be devastating. risk/reward ratio. You want more reward with less risk,
The opposite could also happen—you could have a ideally. But you should focus more on the risk. You’ll
string of winning trades, which makes you feel over- need to figure out where to place stop-losses and the
confident in your abilities. Because of this, you may size of your positions.
find yourself jumping into trades without giving them Say you want to determine a trade’s position size. First
much thought, just because you feel you’ve figured out you need to figure out the stop-loss distance. If your
this trading thing and you can’t be wrong. predetermined risk for $5,000 is $100, it means you
But the market can be dangerous and will likely get could trade two mini lots at a stop-loss distance of 50
you because, after all, it’s a game of probabilities. If you pips. One mini lot is $1 per pip; two mini lots is $2 per
have a series of winning trades, chances are the next one pip x 50 pips. A stop-loss of $100 is your risk. Similarly,
will be a loser. The past has no bearing on how you will your predetermined reward should then be $300. With
trade. Stick to your trading plan and don’t get distracted this setup, say you place 10 trades in a week and have
by price action, your emotions, or what others are doing. five winning and five losing trades. The five wins equal
Losses are part of trading; embrace them. And when $300 x 5 or $1,500. The five losing trades are equal to
they happen, remember to hold yourself accountable. $100 x 5, which is $500. So after your trading week
It’s not the market’s fault. with 10 trades, you would be left with a gross profit of
$1,000; then you must deduct commissions, which could
• Ability to manage your trades. When we make a de- be $150. That will leave you with a profit of $850 to add
cision to trade, we’re exposing ourselves to risk. How to your capital. No trade is a guaranteed profit. Always
well do you manage your trades? Risk management in protect your capital.
32 • January 2018 • Technical Analysis of Stocks & Commodities
Similarly, on the daily chart of the USDCHF
in Figure 3, a ledger line is drawn to show the
extreme level of the market. The USDCHF
is oversold as per the daily chart. In the one-
hour chart of USDCHF in Figure 4, the RSI
has moved below the 30 level (red rectangle)
This is the second negatively correllated pair to EURUSD. The red ledger shows
on June 2, 2017, which indicates a buy signal.
the extreme price level of the currency that is EURUSD & USDCHF. Daily chart In such a scenario you could buy USDCHF
shows the USDCHF is oversold. I will proceed to 1 hour chart for entry. and sell EURUSD. The USDCHF is oversold,
whereas the EURUSD is overbought.

Step 5: Open a live account

Following the first four steps will prepare you
mentally and physically to trade the markets.
FIGURE 3: EXTREME LOW. On the daily chart of the USDCHF, the currency pair appears to be Some of your trades will be winners whereas
oversold. others will be losers. Taking revenge on those
losing trades isn’t going to help you. Think
On the 1 hour chart, the market has been oversold
of them as expenses.
on 2/6/2017 as indicated by the rectangular block. Second, as you place your trades, determine
an amount you are comfortable losing at the
cost of getting triple your initial investment.
Third, wait patiently for your trade setups.
You must wait for the right combinations of
events to come together before you place your
trades, that is, events that will catapult your
trade entries and events that will bring about
your trade exit. This will enable you to avoid

Learning to swim
In trading, before you profit in the markets,
FIGURE 4: POSSIBLE BUY? Moving to the one-hour chart of USDCHF, you see that RSI reached anit helps to understand why people lose their
oversold level on June 2, 2017, indicating a possible buy signal. funds. You’re not going to hear stories from
traders about their losing trades, so you’ll have
to learn from your own mistakes. There are
Step 4: Master your trading strategy no hard-and-fast rules in trading, but have enough knowledge
So far, it should be clear that to profit in the forex market or to differentiate between good and bad trades. Good trades
in any market, you should have an effective trading strategy don’t necessarily mean winning trades and bad trades don’t
and have full control over your trades and emotions. Know necessarily mean losing trades. A winning trade can be bad
your trading strategy inside out before you start live trading. if it was based on luck. A losing trade can be good if you
You have unlimited choices when it comes to developing a controlled your risks and lost a small amount.
trading strategy—price-action strategy, gap-trading strategy,
news straddle strategy, range-trading strategy, breakout trading Solomon Chuama has been working in the financial industry
strategy, and correlated pairs strategy. Here’s an example of a for 16 years. He is a training seminar organizer and instructor
correlated currency pair strategy. The EURUSD is negatively who tries to pass on to students his passion and knowledge
correlated to USDCHF, that is, one pair is bullish and the of forex trading.
other bearish.
On the daily chart of the EURUSE in Figure 1, you see a Further reading
ledger line to mark when price reaches extreme levels. When the Chuama, Solomon [2017]. “10 Reasons
market reaches an extreme level, a reversal is possible. Second, Traders Lose And What To Do
the daily chart gives me an idea of the market’s direction. The About It,” Technical Analysis of
EURUSD is overbought, as per the daily chart. Stocks & Commodities, Volume 35:
In Figure 2, on the one-hour chart of EURUSD, I added November.
the relative strength index (RSI) to confirm a reversal. The
RSI moved above the 70 on June 2, 2017, as shown by the
rectangular block on the RSI. This indicated a sell.
January 2018 • Technical Analysis of Stocks & Commodities • 33

Find Your Edge

Master The Markets With

Gatis And Grayson Roze
When you live and breathe the markets, it’s not unusual to be
a big influence on your family. Because of his deep interest in
the financial markets, Gatis Roze had an impact on spreading
that passion to his son Grayson. The two have a special bond
because of this common interest. From that they’ve formed a
respectful relationship that has led them to coauthor a book and
collaborate in their efforts to educate investors to take control
of their financial assets.
Stocks & Commodities Editor Jayanthi Gopalakrishnan
spoke with this father and son team to hear what they had to
say about their experiences in writing together and working
together toward a common objective of educating independent
investors. “A lot of parents want to leave a legacy
Can you briefly tell us a traordinary educator.
for their son, but I was determined to
little bit about your back- So I said, “Harvey, leave a legacy in my son” —Gatis Roze
ground and how you got with your industry
interested in the financial investing experience, “Individual investors need an edge. For
markets? We’ll start with why don’t you teach me, technical analysis is what provides
you, Gatis. investing and I’ll do
Gatis: I started investing when I was the business side? I’ll that edge. It gives us, as investors, a
16, and my dad was my first financial organize it all and fighting chance.” —Grayson Roze
mentor. He hired me to work for his you just have to show
manufacturing company when I was up.” Since then, I’ve
about 13 and encouraged me to invest lectured and taught investing to upwards The bottom line is that I experienced
my money. My first investment was a of 5,000 investors. But it’s a far cry from firsthand how a solid investment educa-
mutual fund, I made some profits, and what Harvey did. tion transformed my life, and it really did.
that was it—I got hooked. During my That led me to cross paths with I was blessed with wonderful mentors.
Silicon Valley career, I had a professional Henry Pruden (most of us called him This started my personal education ini-
money manager, so I was more hands- “Hank”) and Bruce Fraser at Golden tiative, which is what I’m on now. It’s my
off. But in the early ’90s, my wife and Gate University in San Francisco. They way of repaying what I’ve learned. Hank
I opened a family office in Burlingame, were team-teaching and individually and Bruce taught me that teaching others
California, and that’s when my own teaching technical analysis and Wyckoff makes you a better investor because you
financial education, so to speak, went investing courses. Both of them were have to walk the talk.
into overdrive. past presidents of the Technical Securi- The last point was in 1993 when I
About the same time, Harvey Bara- ties Analysts Association, or TSAA. became a father myself with visions of
ban sold his company. He had a firm And this was also the beginning of the having an in-home student investor of my
called Baraban Securities. They trained CMT, the Chartered Market Technician own. For me, it was a matter of wrestling
stockbrokers. Harvey would train people certification that was starting at this with how to best pass the baton on to
such as firefighters to work part-time as time as well. my son, and I think that’s remained the
stockbrokers in his offices who could So we had our Wyckoff group, which overriding motivation for my educational
then go through their Rolodexes to sell were the classes that Hank and Bruce initiative and teaching as a whole.
stocks to their friends. taught. We were pretty tight. It wasn’t a Grayson: I am the product of two
When he retired to San Francisco, we big group, but I believe out of our small Stanford MBAs, and on top of that, I
became good friends. By this time, he group, 10 of us became CMTs, and seven had a dad who was a full-time investor.
had educated over 30,000 stockbrokers of us eventually became presidents of the He had retired from his previous career
through his company. He was an ex- TSAA. It was a special and unique time. before I was born. So for my entire
34 • January 2018 • Technical Analysis of Stocks & Commodities
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Information provided by is not investment advice. You are responsible for your own investment decisions.
sideways, or down?” time. I sat straight upright with an idea. I
If you’re trying to profit off a So I’d draw trendlines grabbed the phone off my bedside table
position, what matters is price. on charts in front of his and called my dad. I woke him up—it was
class of anywhere from 70 around midnight in Seattle—and I was
What matters is volume. to 100 students. To them, so excited that I yelled, “I’ve got an idea,
seeing a kid make intel- I know what I’m going to do! I’m going
ligent observations about to write a book with you!” He sat there
life, my dad had an office in downtown the direction of different stocks was a quietly for a minute, and I continued to
Seattle and worked as a full-time stock powerful demonstration. I was making frantically explain my thoughts. After
market investor. reasonably informed decisions about a long pause, he finally said, “This is
I grew up with that experience and was what to invest in and what to stay away something special.”
tutored by him from a young age. Initially, from based off the charts. It made the We talked about it for a few minutes
it started as a way to teach me about the students realize their biggest enemy and he said, “I’m in bed. We’ve got to get
stores I was shopping in and places we was their own mental roadblocks and to sleep.” But I hung up the phone and
would go, all the different businesses I tendencies to overthink things. still couldn’t sleep. I was so excited that I
interacted with as a kid. My dad used it That interest eventually continued to stayed up that night and wrote till about
as an opportunity to teach me something grow, and by the time I was 18, I was 5:00 am. I actually wrote the opening few
new about those companies. investing my own accounts. I studied pages of the book, and those pages didn’t
There was a company called Zumiez, economics and psychology in college. change from the time I wrote them to the
which was the skateboarding and cloth- My interest in investing deepened, and I time Wiley published the book.
ing store I loved. I was probably 10 years ended up working for That spring, my dad and I started
old, and the company had just gone as an intern for two summers during laying out a plan. About a week after
public. My dad used that as a teaching college. By this time, I was managing my surgery, I started writing the book.
opportunity to have me buy stock in the my own money. I grew my account, I had an icebag on my knee and just sat
company instead of just shopping there invested actively, and was constantly on the couch and began writing.
to buy sweatshirts and shoes. talking to my dad. It gave us something I take credit for the book’s concept
That struck a real chord with me. I important to share. and the initiative to get it written. But
thought that was interesting. As an el- Gatis: I would note that I’ve always the material was my dad’s. It was what
ementary school kid, it was fun to say, taught continuing education classes. The he had been teaching for over 15 years at
“Hey, I don’t just buy the shoes. I actually average age of my students is 50–60 years. that point. He gets credit for developing
own the company.” They’re motivated investors and are not all the material from 25 years of invest-
So my dad started teaching me about looking to get an A in the class. They ing and teaching.
the stock market and charting. He showed want to learn. And I’m not trying to sell Gatis: I’m going to throw in some-
me charts, we opened a brokerage ac- them anything. All I’m doing is teaching thing that John Murphy once told me.
count, and I bought maybe 10 shares them how to invest in the markets. He said, “Publishers love authors who
of Zumiez. are educators because their materials are
Our conversations at the dinner table You both coauthored the book Tensile well organized visually and carefully
revolved around things like the busi- Trading. I know that story was inter- thought through.” That’s another way
nesses we owned stocks in or those we esting. Grayson, can you shed some the teaching benefited me.
were watching. I would constantly say light on that? Grayson: We knew the content was
things like, “Dad, I looked at the chart Grayson: Yes, it is an interesting story. going to be good, and we had a lot of
of this company. What do you think I was a junior in college at Swarthmore enthusiasm for the project. We were in
about this?” where I played lacrosse. I tore my ACL this nice space because if the book didn’t
As a 10-year-old kid, I had an interest during the spring of my junior year and pan out, I still had a fantastic summer
in the stock market and specifically in was out for the season. It was a devas- doing something interesting and learning
charting since it made it approachable. tating injury. I had planned to do an so much from my dad. We felt like there
At that time, my dad had been teaching internship in the financial industry that was no risk. We got to sink our teeth into
part-time in the Seattle area, at Bellevue summer. But I needed surgery, so those it over the course of a couple months. We
College, for a couple of years, ever since plans had to be abandoned. I had to head finished the first draft of the book that
2000. He would bring me to his investing home to have the surgery and then rehab summer because I had nothing else to
classes. His demonstrations were memo- my knee for the summer. I was upset focus on except to rehab my knee. We
rable because he would have a series of about the injury and also concerned about were able to work a lot that summer.
charts on an overhead projector, he’d give how that summer with no internship was I then went back to college in the fall
me this big pink highlighter pen and say, going to affect my future. and that’s when we started sending it
“Grayson, draw some trendlines on the So one night, I was tossing and turn- out to different publishers. Through our
charts and annotate them. Is it going up, ing in bed—it was probably 3:00 am my association with, we
36 • January 2018 • Technical Analysis of Stocks & Commodities
were able to work with successful authors 10 Stages Of Stock Market Mastery as how you can be a successful, full-time
like John Murphy. StockCharts was a opposed to Tensile Trading. I’m not a day- individual investor. It’s not impossible.
fantastic resource. We really wanted trader. I’m a position trader. I subscribe to And I’m now becoming an example of
Wiley to be our publisher, and lucky John Bogle’s approach of having a core that as well in that I’m managing my
for us, they liked the book. During my portfolio, an explore portfolio, and what own money profitably.
senior year, after my knee had recovered, I call a “super explore” portfolio. The book was meant to be a demonstra-
we edited and polished the book, and in Grayson: The book is so much more tion of what it takes to be successful. It
2016 it was published. than trading strategies. It’s trading strate- was meant to be an inspiring look into
Gatis: What is interesting is that many gies and investing strategies. It spans dif- a full-time investor who found his edge
people who attend our seminars want to ferent timeframes. I think any investor, and succeeded in the markets.
know how they can pass the investment no matter what their most comfortable Gatis: I don’t necessarily encourage
baton on to their kids or grandkids. My timeframe is, can find something in this. my students or seminar attendees to
overriding objective with this book was Everything was always organized into invest 100% of their money themselves.
to ensure that Grayson was dotting the these 10 essential stages. We picked that They can start by personally managing
investment I’s and crossing the portfolio up and ran with it. just a portion of their assets. They can
T’s. It was to make sure that Grayson Gatis: Having the words “10 stages” in leave maybe the other 50% or 60% with
truly understood 100% of what my life the title helps people compartmentalize their money manager if they want. But
was like and what it takes to be a suc- their learning. They can quickly figure what I’ve learned over the years is that
cessful investor. out which stage is being discussed, and so many of my students slowly evolve to
Grayson: And your methodology and they can gain more out of it. managing 100% of their assets.
strategies. I knew a lot—especially for my Grayson: One of our objectives was
age. You could say I was a sophisticated When I started reading the book, the to create a book that would allow invest-
investor. But the experience of writing first thought that went through my ing across any trading timeframe—both
the book together was an incredibly deep mind was that it was a book that was traders and investors will find something
dive into my dad’s methodology and all “written for investors, by investors,” of value. Whether you’re more of a
of his processes. It was an enlightening because it addresses the individual short-term trader, or whether you’re a
experience for me. I definitely grew a lot investor. And there’s no complex math longer-term investor, there’s something
through writing about his approach. formulas in it. There’re also the key for you in this book.
Gatis: And in some ways, Grayson is takeaways after each chapter and there We wanted to write a book that was
better in certain areas than I am because are color pictures. It’s very “investor valuable for someone who might want to
of his youthful perspective. A lot of par- friendly.” do this as a hobbyist to get a bit more or-
ents want to leave a legacy for their son, Gatis: At one point, Grayson and I had ganized with their finances. At the same
but I was determined to leave a legacy hoped Wiley would put our asset alloca- time, we also wanted this to be valuable
in my son. And I think both of us would tion DVD in the book. for someone more serious who wants to
agree that’s been achieved. I’m proud of sells it, but it’s a five-hour seminar with do what my dad does—that is, invest full
what Grayson’s doing, and I’m comfort- more numbers in it. But including the time using a cohesive methodology.
able passing assets to him that he knows DVD in the book would have been too Our objective was to provide real
how to protect and grow. Hopefully, his costly, so we ended up pedestrianizing insights to all readers who pick up the
kids and his grandchildren will, too. it somewhat. But I think that if you give book, not just one specific group of
readers too much math, they glaze over it. short-term, full-time traders. We wanted
How did you come up with the title? As Grayson will tell you, I’m a numbers to build something that was more ap-
Gatis: The title I used in my classes guy. He has been the recipient of perhaps proachable for everyone and would add
was “The 10 Stages Of Stock Market more math than he’d like. value to anyone’s investing experiences,
Mastery.” “Stock market mastery” Grayson: I think there were a couple regardless of timeframe or seriousness
was always in there. But somehow, in different objectives in writing the book. or intensity or background. I think we’ve
the publishing process, the book’s title On one hand, it was to show people what achieved that objective.
included “10 Stages.” Those 10 stages it takes to be a full-time investor and to Gatis: I’ve had a unique relationship
evolved over many years, and it’s ap- find success in the markets. At the same with since 2000. One
propriate even to my money manager time, it was also meant to inspire people. of my good friends is one of their lead
friends. The publisher wanted a hook in It was a living, breathing example of programmers, and now Grayson works
the title, so we came up with “tensile,” there as well. You can easily implement
which means strength. And it contains tensile trading methodologies on the site
the word “ten.” It was a play on words, by finding the strongest sectors, then
a double entendre, if you will. with another click, finding the strongest
In hindsight, a better title probably industry groups in the strongest sectors,
would have been Tensile Investing: The and then with another click, finding
January 2018 • Technical Analysis of Stocks & Commodities • 37
an example of the types of things another room, and keep them there for
Teaching others makes you a Hank would facilitate. five hours. You teach one group only tech-
better investor because you I can’t overstate the impact nical analysis, and you teach the other
and influence Hank Pruden has group only fundamental analysis. Then
have to walk the talk. had on my life as an investor, and you somehow put them in this bubble.
now, I think, as an educator. He Tell them to use what they learned, ei-
was an extraordinary person. ther technical analysis or fundamental
the strongest stocks in the strongest My comfortable lifestyle today is a di- analysis, and to invest for six months.
industries, and the strongest sectors rect result of his insights, kindness, and The idea is they’re in this perfect vacuum
in an uptrending market. And lo and mentorship. Many people feel this special where they can’t learn anything else or
behold, you’ve got all these market gratitude to Hank for his contributions use any other tools.
probabilities working for you and your to something that we all love—technical Our hypothesis is the group that
equity of choice. analysis and investment. learned technical analysis would beat
fundamentalists by a large margin.
You mentioned you had a relationship Yes, Hank sure did a lot for the techni- Technical analysis is approachable. It
with Hank Pruden at Golden Gate cal analysis community. Grayson, you makes sense, it’s logical, and people
University. Hank, who passed away were asked by Wiley to rewrite Trading can understand it quicker than they can
in August, was a terrific human being For Dummies, or the technical analysis fundamental data. It’s also more easily
who did a lot for technical analysis. orientation. Do you think that techni- teachable. Whether you’re an active man-
Do you have any stories to share about cal analysis is becoming more popular ager or more of a passive index investor,
Hank? among investors? it gives you that edge. It allows you to
Gatis: I didn’t work with Hank but Grayson: I firmly believe that it is. see precisely what’s happening in the
worked closely under him. As an edu- I see the growth at, market because everything is reflected
cator, as a mentor, as a person, the guy and the passion that people bring to our in the charts.
was five-star. The first time I heard the charting platform. And I can’t help but There’s no data advantage. One of
term “behavioral finance” was from believe that technical analysis is becom- the knocks against fundamental data is
Hank. This was in the early ’90s. My ing more popular. that there’s always another statistic. And
own take was that using this term was With changes in technology, with high those stats aren’t available to everyone.
Hank’s brilliant strategy for giving data speeds delivered through the Inter- With technical analysis, there’s no way
technical analysis credibility in the net, and the fast pace of today’s financial to hide price and volume. Ultimately, all
academic community, which was far too markets, it’s a definite edge. Individual that matters to me is price and volume.
enamored with fundamental analysis, in investors need an edge. And for me, If you’re trying to profit off a position
my opinion. technical analysis is what provides that of an equity, what matters is price. What
Hank was a visionary who was at edge. It gives us, as investors, a fighting matters is volume. There’s no way to
the epicenter of technical analysis, be- chance. It gives us a leg up. I think the cover up that data, and that’s what makes
havioral finance, Wyckoff analysis, and way to succeed in the market is to focus technical analysis a better tool.
the initial round of CMT certifications. on “what.” So many people in life are Gatis: Let me chime in and say that
I don’t have firsthand knowledge of how trained to ask “why.” it reflects the reality of how buyers and
involved Hank was with the CMT pro- We talked about this with a doctor who sellers are voting with real money. We
gram, but I have to believe that he was. came to one of our seminars. They’re live in Internet times. Information now
Hank was our charismatic evangelist for trained in their careers to always ask happens at a speed that was unimaginable
visual investing, which you could say is “why.” But in investing “why” doesn’t years ago and rips across the globe. If
a synonym for technical analysis. matter. What matters is the “what.” What you don’t invest based on what you see,
Another story I remember was that you need to do is figure out what is hap- you’re going to miss opportunities. In
Hank had the idea for 10 of us to pool pening in the market, figure out what is the past, before we had access to so
what, back then, was a fair piece of happening with your equity, and then take much information, people would have
change. We hired a famous stock market action based off the “what.” Technical someone manage their money based
psychologist from Chicago to spend analysis makes that possible. It allows on fundamental analysis. But what is
a weekend in San Francisco with us. you to see exactly what is happening in interesting is that on the “sell side,”
For me, it was a personal life passage the market. It gives you that edge. these fundamentalists have always used
weekend as we delved into all sorts of One of the chapters in the book had technical analysis because they know
deep personal questions and issues. I an example of what we call the 50/50 you’ll get your head handed to you if you
remember that Hank asked a simple experiment. Take 100 people who have don’t look at the charts and sell based
question: “What does money really mean never invested or know nothing about on the charts. So it’s nice to see those
to you?” It was interesting how it meant the stock market and split them into two folks now coming out of the woodwork
something different to everybody. This is groups. Put 50 people in one room, 50 in and acknowledging charting.
38 • January 2018 • Technical Analysis of Stocks & Commodities
Gatis, you hired Paul Ferwerda to be overlapping middle. There are strengths emotions and behavior. When you’ve
your mentor? How did that work out? and benefits from both camps. We like to got your own hard-earned money on the
Gatis: I was introduced to Paul Ferw- be in the center to pick and choose what line, there are a lot of complex emotions
erda by a mutual friend of mine through works well for us. We always lean more involved in your decision-making.
the TSAA. Amongst his many talents, towards technical analysis, but combined Another benefit of technical analysis
Paul was the founder and first president with an earnings-centric focus. is that by staying more focused on what
of the TSAA in 1970. The guy was an Gatis: You don’t need a big staff to is happening, you’re less likely to fall
amazing visionary. This was even before manage a lot of money based on tech- victim to your own psychological inef-
the MTA started in New York. nical analysis. A chapter of our book is ficiencies or your own emotional biases.
So when Paul retired from a successful called “The Investor Self.” And peppered Technical analysis helps you control your
investment career at Bank of America, I throughout the book is all the emotional emotions by keeping you focused on
hired him as an analyst, an assistant, a aspects of investing and being aware of what is happening and what your charts
mentor, a friend, an “all-in-one” invest- your emotions. It’s been my experience are telling you.
ing guru. When my wife and I first set that it takes about three classes before
up our family office, he was the person people realize that the “Investor Self” Thank you both so much for sharing
most responsible for showing me the is the most important chapter in the your stories with us.
power of blending fundamental and book. I remember when Richard Dennis
technical analysis into something he did his Turtles experiment. The trad- Further reading
called “rational analysis.” That’s the ers who washed out did so because of Roze, Gatis, and Grayson Roze [2016].
basis of our book, and it changed my bad behavior, and not because of a bad How To Master Your Asset Alloca-
life forever. The concept of blending is methodology. That’s what I reinforce in tion Profile, DVD available at Stock-
exactly what I taught Grayson. I think my classes as well.
it’s very powerful, and it’s what Paul A behavioral economist won the No- [2016]. Tensile Trading: The 10
taught me. bel Prize for Economics this year. The Essential Stages Of Stock Market
academic arena has made huge strides Mastery, Wiley.
Tell me a bit more about rational in being able to explain and replicate Roze, Grayson, and Lita Epstein [2017].
analysis. successful investor behavior. The big Trading For Dummies, 4th ed.,
Grayson: In some of our seminars, institutions know how to train money Wiley.
we draw this Venn diagram that has managers. They know what good be- Roze, Gatis. The Traders Journal, blog,
one bubble for fundamental analysis havior is and what isn’t. There’s nothing online at
and one bubble for technical analysis. more important.
And we say that we like to live in the Grayson: It’s all about managing your

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clude Ralph Acampora, Jim Oberweis,
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January 2018 • Technical Analysis of Stocks & Commodities • 39
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 To submit a question, email her at info@ or via Selected questions Carley Garner
will appear in a future issue of S&C.

CHOOSING A BROKER my opinion, that is a big mistake. Keep options with a deep-discount futures
What do I need to look for when choosing in mind, most commodity markets have brokerage can be described this way. This
a commodity option broker? a value of $10 to $12 per tick, so if a is because deep-discount commodity
Before answering this question, there brokerage can save you a tick or two in brokerages have thin profit margins; as
are a few things that must be disclosed. the market every now and then, you will a result, they have exceptionally low risk
For starters, I am a commodity broker gain more in trading performance than tolerance when it comes to short option
who specifically specializes in housing you gave up by paying a slightly higher risk in client accounts and, therefore,
options traders. Thus, my opinion is commission rate. The commission paid react differently to market volatility.
likely slanted. Further, it is important is typically a low bar to overcome, but
to note that we are discussing choosing ironically, traders tend to assume the Forced liquidation
the proper broker to trade commodity bar is set at astronomical heights and Risk managers at discount brokerage
options, not necessarily to trade futures. therefore, overweight its importance firms are generally ill-equipped to house
Depending on a trader’s needs and de- to their bottom line. Also, the truth is, option traders; thus, they are quick to
sires, it might be ideal to use a force-liquidate client posi-
different brokerage for options tions (often without notifying
trading than the one used for Being too commission-conscious the client) at the first sign of
daytrading futures because might save a few pennies in trouble. Anybody who has
most brokerages cater to dif- traded short options for any
ferent types of clientele. Ac-
transaction costs, but it could mean length of time, either naked or
cordingly, some brokerages are giving up hundreds or thousands of within spreads, will tell you the
more efficient at certain types dollars in market losses at the hands hardest thing to recover from
of service than others. of subpar brokerage service. is poorly timed liquidation on
For instance, my brokerage a volatility spike.
aims to offer superior service
and tools for those looking to position- the best way to lower the commission Margin upcharges
trade futures and options but might not be bill in a particular trading account is Another glaring hidden cost of trading
the best choice for a high-volume emini to trade less, not pay less. The trading commodity options with a discount bro-
S&P 500 scalper. It is also important to performance will likely be enhanced by kerage is higher margin requirements.
note that many commodity brokerages this policy as well. It is a relatively common practice for
forbid options selling or spread trading When it comes to options brokers, brokerages to charge its clients a margin
with naked legs altogether. So don’t as- you will always get what you pay for. requirement for short options, or options
sume you can open an account at any Consequently, seeking out the lowest spreads with naked legs, in excess of the
futures brokerage and begin trading commissions will generally mean giv- minimum exchange margin requirement.
commodity options. ing up services or tools, and that has This is known as an upcharge and gener-
With that out of the way, let’s focus the potential to do significant damage ally ranges from a rate of 130% to 300%
on what is really important for options to a trading account. In short, being too of exchange requirement margin.
traders. commission-conscious might save a few Even those traders who sell options
pennies in transaction costs but it could conservatively, leaving plenty of excess
Commission is baggage, but subpar mean giving up hundreds or thousands of margin in their accounts to cushion
service is an anchor dollars in market losses at the hands of drawdowns and avoid margin calls, will
Traders generally put commissions at the subpar brokerage service. You’ve likely be far more likely to receive a margin
top of their list when seeking out a broker heard the quip, “picking up pennies in call if their brokerage is charging an
to trade options on futures. However, in front of the steamroller”; trading futures upcharge margin for options trades.
40 • January 2018 • Technical Analysis of Stocks & Commodities
Naturally, margin calls often lead to of the position intact. Options sellers will selling environment, so viable candidates
premature liquidation of trades (possibly tell you this is significant. In addition, aren’t necessarily plentiful.
even forced liquidation by the broker). most discount brokerages charge a hefty Many of the fancy options trading plat-
Liquidating short option trades and desk fee to call orders in during times of forms that attract traders are fun to look
poor prices to alleviate a margin call are platform outages. This fee quickly eats at, but their risk graphs and probability
expensive lessons that can be difficult to up any “saved commission” on trades calculators aren’t as useful as they appear
recuperate from. placed online. to be. The aforementioned platform fea-
tures are based on today’s parameters of
Lack of support Fancy platforms are fun, but they don’t volatility, option demand, and time value,
Even the most experienced traders will produce profits but these things will change over time
occasionally face difficulties with tech- Another mistake traders often make is (sometimes dramatically), causing them
nology, margin, or strategies. Having the vetting a trading platform and then sim- to be somewhat misleading to unsuspect-
ability to talk to a live person with real ply accepting the brokerage service that ing traders. Further, with a little practice,
knowledge and experience can be a valu- happens to be attached to their preferred the breakeven calculations provided by a
able resource. For instance, most margin trading platform. For those interested in risk graph can be quickly calculated in a
calls can be met without the burden of selling options on futures or trading open- trader’s head and a simple glance at the
wiring additional funds or liquidating ended options spreads, this is the opposite option delta will give traders a good idea
positions. Instead, the margin require- of what they should be doing. Traders of the probability of that option expiring
ment can generally be manipulated lower should find a brokerage service willing to worthless. In short, the bells and whistles
by buying and selling options or futures give them the freedom to implement their in some options platforms are really just
contracts to hedge a position. These options strategy in the manner they wish, smoke and mirrors. Further, there is no
adjustments could mean the difference then choose a trading platform offered by benefit to having the best options trading
between taking unnecessary losses at that particular broker. Don’t forget, not platform in the world if it is being backed
the hands of poorly timed liquidation or all brokers offer all platforms and most by a subpar options broker.
surviving the wave of volatility with most brokerages don’t offer a friendly option-

January 2018 • Technical Analysis of Stocks & Commodities • 41

Explore Your Options
there is no intrinsic value—as the option
Got a question about options? Jay Kaeppel has over three decades of experi- would have no value if it expired right
ence in the options markets. He was a head trader for a CTA firm, an options now—only extrinsic value. Consider a
trading software developer, and is a portfolio manager for an investment call option on ticker ABC with a strike
management firm. He also spent several years writing a weekly column titled price of 30 trading at $1 per contract.
“Kaeppel’s Corner” and now publishes a blog, “Jay On The Markets” (http:// At the same time, ticker ABC is trading He is the author of several books, including The Four at $29 a share. Because the price of the
Biggest Mistakes In Option Trading; The Option Trader’s Guide To Probability, stock is less than the strike price of the
Volatility, And Timing; and Seasonal Stock Market Trends. Send your ques- call option, this option is considered out-
tions or topic suggestions to Jay Kaeppel at Selected of-the-money. For an out-of-the-money
questions will appear in a future issue of S&C. option, the intrinsic value is zero. As a
result, the entire price for the ABC 30
strike price call option is comprised
solely of extrinsic value equal to $1.
INTRODUCING A NEW HOST FOR What is the difference between intrinsic
EXPLORE YOUR OPTIONS and extrinsic value? When I bring up an options chain on
Allow me to introduce myself. My name The simple answer is that the “intrin- my trading platform, there are so many
is Jay Kaeppel, and I am delighted to sic” value for an option is equal to what choices. How do I know which strikes
have the opportunity to succeed Tom the option would be worth if it expired to trade?
Gentile, who is one of my options trading right now. There is no set answer to this question.
mentors, as the new host of the Explore “Extrinsic” value—more commonly The primary consideration is, “What
Your Options column. referred to as “time premium”—is do you hope to accomplish” with your
I traded my first option in 1984, and I arrived at by subtracting an option’s position? Call options with a strike price
codeveloped an options trading program intrinsic value from its current price. As below the underlying security price are
in the 1990s that was called Option Pro. always, an example can help to clarify. considered “in-the-money” while call
(In fact, that software was voted an award Consider a call option on ticker XYZ options with a strike price above the
in the “options trading systems” category with a strike price of 20 trading at $6 underlying security price are considered
by the readers of S&C for six years in a per contract. At the same time, ticker out-of-the-money. For put options this is
row in S&C’s annual Readers’ Choice XYZ is trading at $25 a share. Because reversed. So when selecting specific op-
Awards feature!) the price of XYZ shares ($25) is above tions to trade, one key thing to note is that
I spent nine years as an instructor and the option strike price ($20), this option the further in-the-money an option is at
course developer for Optionetics, Inc. is considered “in-the-money.” For an in- the moment, the higher the likelihood of
I’ve also written two books on options it expiring in-the-money versus options
trading: The Four Biggest Mistakes In that are trading at-the-money or out-of-
Option Trading, and The Option Trader’s Strike prices closer to the-money. In addition, note that options
Guide To Probability, Volatility, And the money tend to see cost more the further in-the-money they
Timing. more trading volume, are and less the further out-of-the-money
I was interviewed for this magazine they are. This dynamic creates a series
first in 1997 and then again in 2009, and
as they typically offer of tradeoffs that you need to consider
I’ve contributed some 29 articles to S&C a more reasonable before entering a trade. Once again, let’s
in the past on trading and seasonality tradeoff between consider some examples.
(a select few are listed at the end; more reward and risk. If you want to buy a call option in hopes
can be found at the S&C website at of profiting from an anticipated advance in price, you have several choices. You
I’ll start off my initial column here the-money option, the intrinsic value is can buy a deep-in-the-money call op-
with two questions that are commonly equal to the price of the stock minus the tion, which will likely have the least
asked about options. In future columns, strike price for the option. Therefore, if amount of time premium built into its
I’ll continue to delve into the ins and outs the option expired right now, it would be price. This may allow you to achieve
of options trading, both mechanics and worth its intrinsic value of $5 per con- almost point-for-point movement with
strategies, and I hope readers will send tract ($25 stock price minus $20 strike the underlying shares at a lower cost
me all their pressing questions about op- price). Since the option is trading at $6 than you would pay to buy the underlying
tions trading that we can explore here. I per contract and the intrinsic value is shares. However, this involves buying the
can be reached by email at jaykaeppel@ $5, we can state that the extrinsic value most high-priced options—which may equals $1 ($6 option price minus $5 be more thinly traded and have larger
So, to begin: intrinsic value). bid–ask spreads.
For an “out-of-the-money” option, At the other end of the spectrum, you
42 • January 2018 • Technical Analysis of Stocks & Commodities
Explore Your Options
can typically buy a far out-of-the-money forward to the chance to tackle some of
option for a very low cost. The tradeoff is your questions about options trading, so The “intrinsic” value
that the likelihood of that option expiring I hope you’ll take the time to explore for an option is equal to
in-the-money may be very low. So while your options!
the cost for buying a far out-of-the-money what the option would
is low, the probability of success is also Further reading be worth if it expired
low. For these reasons, the strike prices Gopalakrishnan, Jayanthi, and Bruce right now.
closer to the money tend to see more R. Faber [2009]. “Jay Kaeppel On
trading volume, as they typically offer Trading Futures, Options, Gold, Sec-
a more reasonable tradeoff between tors,” interview, Technical Analysis Volume 26: January.
reward and risk. of Stocks & Commodities, Volume [2008]. “Buying Straddles,”
If you are writing options, the key 27: November. Technical Analysis of Stocks &
tradeoff to consider is how much time Hartle, Thom [1997]. “Searching For Commodities, Volume 26: March.
premium you receive for writing a par- Clues With Jay Kaeppel,” interview, [2010]. “Short-Term Gap Trad-
ticular option versus the likelihood that Technical Analysis of Stocks & ing,” Technical Analysis of Stocks &
option will expire in-the-money and/or Commodities, Volume 15: May. Commodities, Volume 28: August.
be exercised, thus requiring you to deliver Kaeppel, Jay [2008]. “A Structured Ap-
shares of the underlying security. proach To Option Trading,” Technical
Thank you for reading, and I look Analysis of Stocks & Commodities,

Average true range (ATR)—A moving aver- Normalized—Adjusting a data series so that equal to zero, it’s symmetric. Negatively
age of the true range. the series lies in a prescribed normal, skewed distributions have a long left
Backtesting—A strategy is tested or opti- standard range, such as zero to 100. tail, which can mean a greater chance
mized on historical data and then the Optimization—A methodology by which a of extremely negative outcomes. Posi-
strategy is applied to new data to see if system is developed with rules tailored to tive skew means frequent small negative
the results are consistent. fit the data in question precisely. outcomes, with extremely bad scenarios
Breakout—The point when the market price Overfitting—The parameters of a trading not as likely.
moves out of the trend channel. system are selected to return the highest Standard deviation—A widely used statisti-
Fat tail—On a graph, a normal distribution profit over the historical data. cal concept that describes how a given
is seen as a bell curve, but when a lot Random walk—A theory that says there is distribution varies around its mean ob-
of events, values, or data points stray no sequential correlation between prices servation. In the case of the P/L statistic,
widely from the average and give more from one day to the next, that prices will a high standard deviation would indicate a
frequent high and low values, the opening act unpredictably as they seek a level in widely varying P/L, while a low one would
of the bell becomes stretched out, mak- response to supply & demand. suggest a more stable performance. Also:
ing the opening “fatter.” Assets prone Relative strength index (RSI)—An indicator The square root of the expected value of
to price jumps tend to exhibit fat-tailed developed by J. Welles Wilder and used the square of the difference between a
distributions. to ascertain overbought/oversold and random variable and its mean. A measure
Heuristic method—Problem-solving ap- divergent situations. of the fluctuation in a stock’s monthly
proached by trying out several different R-squared—The percentage of variation in return over the preceding year.
methods and comparing which provides the dependent variable that is explained Standard error—The standard deviation of
the best solution. In behavioral finance, it by the regression equation. A relative the mean within a data set. A measure of
refers to trial-and-error learning leading to measure of fit. variation for random variables.
the use of rules of thumb for decisions. Sharpe ratio method—The Sharpe ratio True range—The largest of the following:
Kurtosis—Descriptive measure of how flat method is a classic return/risk measure Today’s high minus today’s low, today’s
or pointed a distribution is. that rates an investment’s excess return high minus yesterday’s close, today’s low
Mandelbrot set—Complex but structured (return above a safe cash rate) against risk. minus yesterday’s close.
pattern produced by an equation in which (Both the Sharpe and the Sterling ratio Ulcer index—Seeks to measure downside
the result is fed back into the equation methods compare returns with variability risk (with the name referring to the stress
repeatedly; self-similarity. of returns, as opposed to risk of loss of that downside movement causes an inves-
Martin ratio—Also called the ulcer perfor- original investment.) Also, a measure of tor) based on the retracement occurring
mance index (UPI). The total return less risk-adjusted profitability calculated as over a period. Proposed in a 1989 book
the risk-free return divided by the ulcer average P/L (minus some risk-free rate), by Peter G. Martin and Byron B. McCann
index. The goal is to find securities or divided by P/L standard deviation. for mutual fund analysis. The intention
funds with the highest UPI, that is, the Skew or skewness—The averaged cubed is that the greater the value of the ulcer
highest risk-adjusted return. See also deviation from the mean divided by the index (UI), the longer it takes for a stock
ulcer index. standard deviation cubed. If the result of to get back to the former high.
Mean-reverting—A state when price is oscil- the computation is greater than zero, the
lating randomly about some (unknown) distribution is positively skewed. If it’s Additional glossary terms can be found at
mean value. That is, it is not trending. less than zero, it’s negatively skewed. If the S&C website at

January 2018 • Technical Analysis of Stocks & Commodities • 43

Market Timer App
Best Choice Software
1404 Hatcher Drive Circle
Brandon, FL 33511
Phone: 941 747-5858
Product: End-of-day program for
swing and seasonality trading
System requirements: Any com-
puter or tablet that can access the
Price: Monthly subscription $149,
which includes end-of-day data;
access to the various trading rooms
Figure 1: The Extremes Chart with Apple. The default daily extremes chart with Apple from April–
October 2017 is useful for swing trading and for timing entries and exits. The yellow extreme lines provide
by Barbara Star, PhD general direction and oversold & overbought information related to the price range displayed. The chart also
shows the frequency and length of price swings.
It isn’t often a customer likes a product
so much he decides to buy the company. of the range and to spot whether price cording to the seasonal feature in Market
But that is exactly what Jerry McFarland is overbought or oversold. Timer App, during the past nine out of
did when the original owners of Best The space between the yellow lines 11 years the retail sector has experienced
Choice software retired. Rather than can also help traders answer the question, an average increase of 4.2% going into
see a company so well-known to those “Is the stock a good candidate for swing the winter holiday season. But not as
interested in seasonal and short-term trading?” Stocks with small price ranges well-known is the existence of another
trading disappear, McFarland, a longtime and narrow spacing between the lines time of the year when prices of the retail
and profitable Best Choice software usually provide less profit opportunity sector rose an average of 6.5% in 11 out
user, proceeded to revamp the program than those with larger price ranges and of 11 years. Knowing the dates of those
and send it to the cloud, where its new wider spacing between the extreme lines. seasonal occurrences could provide
interface can be accessed globally. And by seeing how often during a six- consistent trading opportunities.
The new version, called Market Timer month period prices bounce from lower The Market Timer App provides sea-
App, also does away with the need to pur- line to upper line, traders can determine sonal charts for any individual stock or
chase an expensive license. The current if the price swings are worth trading. ETF in its US and Canadian database.
program is available for a monthly The seasonal average is shown as
subscription. It includes end-of-day a yellow line. Lighter-colored lines
data, and connects with any computer While nothing in trading is in the background show the price
or tablet with Internet access. certain, when seasonal and movement from the prior years. By
Market Timer retains the major other factors come together comparing the current price move-
components of the Best Choice ment with the average line, traders can
program, which was reviewed in the
at about the same time, it tell if current price activity is in line
June 2008 issue of Stocks & Com- makes for a high-probability with prior seasonal tendencies.
modities magazine. However, the swing trading opportunity. Sliding a cursor over the entire
primary focus of the current version chart will identify the best seasonal
is swing trading and seasonal timing trade during the year. Sliding the
of stocks and ETFs. Market Timer App offers both Western cursor over any portion of the seasonal
and Japanese candlestick charting styles chart will display another colored line,
Swing trading plus a variety of popular trend-following such as the one in Figure 2, which re-
The default display opens to a screen and momentum technical indicators to veals the existence of a seasonal trend
called the extremes chart (Figure 1). aid in price analysis. if one exists during that timeframe. The
Used mainly for swing trading and information column provides details
timing, this chart contains three yel- Seasonal trading about the seasonal trade and its average
low lines overlaid on price. The lines Many stocks or sectors exhibit seasonal profitability as well as its performance
represent the 10%, 50%, and 90% price tendencies that lead to tradable price for several years in the past.
range within the timeframe chosen. They fluctuations. For example, retail store Using a function known as a search
quickly enable traders to identify price revenues tend to increase during the wizard, Market Timer App can scan stock
direction in relation to the high and low holiday season, as might be expected. Ac- lists created by the subscriber or scan its
44 • January 2018 • Technical Analysis of Stocks & Commodities
entire database to find stocks that meet
several user-defined criteria. Users may
select from among approximately 80
criteria that contain, but go well beyond,
the usual price and volume selections.
They include earnings and price growth
rate, earnings, and growth consistency,
volatility, gaps, overbought/or oversold
extremes, average daily or weekly price
movement, and options availability.
The results of that search can then be
sorted by a trade wizard to find both long
and short trades. Users may specify the
number of days in the seasonal trade,
minimum winning percent, average
percent return per trade, minimum Figure 2: The Seasonal Chart of Apple. Users may scan the entire US or Canadian database with
the Market Timer App search wizard to uncover seasonal trades. Or they may type in the symbol of individual
number of winning trades, and mini- stocks of their choosing and simply slide the cursor across any portion of the chart to locate a potential seasonal
mum number of years in the lookback pattern. This one in Apple revealed a seasonal trade in the July timeframe that worked 12 out of 13 years with
period. The output is stored by month, an average profit of 6.6 percent.
which serves as a watchlist that makes
it easy to identify and track upcoming and the extremes price chart in Figure 1 ease of Internet access, Market Timer
potential trades. shows price had declined during June and App has given renewed life and portabil-
was bottoming below the lower extreme ity to a program that helps traders zero
Earnings: One other feature visible on line at about the time the seasonal trade in on viable stock candidates. Market
the seasonal charts and also available was due to begin. As an added bonus, Timer App offers traders an edge that
for viewing on the extremes charts are the earnings green dot on the seasonal is well worth exploring.
green dots that show the dates when chart also appeared at the end of June.
quarterly earnings occur. That makes it Historically, the charts showed price Barbara Star, PhD, is a frequent con-
easy to see how price tends to act going generally rose after the June earnings tributor of articles and reviews to this
into earnings and how it reacts after announcement. While nothing in trad- magazine. Currently, she trades part-
earnings are announced. These provide ing is certain, the three factors coming time and provides individual instruction
additional trading possibilities either by together at about the same time made and consultation to those interested in
direct stock purchase or through the use for a high-probability swing trading the technical analysis of the financial
of options. Traders interested in options opportunity. markets. She lives in Woodland Hills,
can view option chain and projection CA, and can be reached at 818 224-4070
charts via an options module contained Support or by email at
within the Market Timer app. Best Choice includes several videos
that demonstrate the major features of Further reading
Combine seasonal and Market Timer App and help new users Star, Barbara, PhD [2008]. “Best Choice
swing trading navigate the program. Plus, the company Software,” product review, Technical
Sometimes it’s possible to increase the offers free monthly online meetings that Analysis of Stocks & Commodities,
odds of a winning trade by finding a answer user questions and supply a more Volume 26: June.
seasonal trade scheduled to rally that is in-depth look at various aspects of the ‡Best Choice Software
also trading at an oversold level on the program. ‡See Editorial Resource Index
extremes chart. For example, the chart
of Apple in Figure 2 identified a bullish A new look
seasonal trade that begins in late June, With its new pricing, new design, and

Your Online Resource

For Technical Analysis
Join us on Facebook at
Follow us on Twitter @STOCKSandCOMM

January 2018 • Technical Analysis of Stocks & Commodities • 45

Figure 7: TraDing WiTH inDiCaTor anD TWo LineS. You can combine momentum with a diagonal and horizontal price line to trigger the trade. The first
neutral zone gives an optional exit or profit-taking area. The second neutral zone moves into buy and a skillful trader would have exited their sell by this time.

SoLoMon/TWo For THe PriCe oF one The second neutral zone moves into buy and a skillful trader
Continued from page 25 will (at the least) have exited their sell by this time.
Regardless of what momentum indicator you use, come
include “transparent”). What do you do when there is no up with a system for identifying when prices are trending up
momentum? That’s always tricky but you now have a better or down and when they are moving sideways. It’ll keep you
warning system. You have more time to figure out if a trend from getting whipsawed.
is resuming or changing direction. This change of direction
is the difficult aspect of momentum trading. David Solomon is a computer programmer who tinkers with
trading indicators in his spare time. He lives in the San
trade With it Francisco Bay Area and hails from London, England. He
In Figure 7 you see a trade that combines momentum with can be reached via email at
a diagonal and horizontal price line to trigger the trade. The
first neutral zone gives an optional exit or profit-taking area.

Siroky/Measuring Risk
The normalized risk index

Jumps to Siroky. No more

Continued from page 29
can accommodate any given
a cutoff of 0.5, and a risk-seeking investor might use a cutoff level of risk tolerance by

space — very tight.

of 1.5. A large number of combinations are available to suit adjusting the cutoff value.
individual risk profiles.

Mike B Siroky, MD is a retired surgeon living in Phoenix,

AZ. He has more than 25 years investment experience and is Mandelbrot Benoit, and Richard L. Hudson [2004]. The (Mis)
particularly interested in quantitative technical analysis and behavior Of Markets: A Fractal View Of Risk, Ruin, And
indicators. He can be reached at Reward, Basic Books.
Martin, Peter G., and Byron B. McCann [1989]. The Investor’s
Further reading Guide To Fidelity Funds, John Wiley & Sons.
Bawa, V.S. [1975]. “Optimal Rules For Ordering Uncertain Nawrocki, David [1999]. “A Brief History Of Downside Risk
Prospects,” Journal Of Financial Economics. Measures,” The Journal Of Investing, Vol. 8, No. 3, Fall.
• JanuaryGary
2018 •H., PhDAnalysis
Technical [1999]. “The
of S Ulcer
tockS Index,” Technical
& commoditieS †See Traders’ Glossary for definition
Analysis of Stocks & Commodities, Volume 17: April.
Fishburn, P.C. [1977]. “Mean Risk Analysis With Below Target
Returns,” The American Economic Review.
46 • January 2018 • Technical Analysis of Stocks & Commodities







trading technique, how to analyze charts and
The following selection of book descriptions represents a
how to make a decision based on that analysis.
sampling of recent book releases in the investing field. Books
described here may be from some of the major book publish- It then moves on to the more practical aspects
ers as well as some independent book publishers. These about the low-risk high-probability trade from
are not critical reviews or editorial evaluations, but rather a its inception to its termination. It follows with
brief look at the book marketplace to help keep readers up guidance on money management and risk
to date on new or recent book offerings. management techniques—when to get in,
when to get out, and where to locate the initial
or trailing stops.
The Art And Science Of Trading: Volume 2 describes how other methods
Course Workbook (488 pages, $54.99, of analysis can be integrated with pitchfork
October 2017, ISBN 9781948101004) by analysis. Contents include: understanding
Adam H. Grimes, published by Hunter the time/price circumstances related to
Hudson Group/MarketLife. This book is contextual and local market movements; the
about trading edges—how to find them, trader’s preparation in the pre-open; overnight
how to test them, how to trade them, and & intraday news trading; intermarket analysis;
how to monitor your performance and Elliott wave analysis to help discern price
behavior while you’re doing so. Distilling direction; kinetics; Fibonacci and momentum
over two decades of trading and teaching bar counts related to pitchfork’s pivots; and mapping momentum
experience, Grimes shares exercises, strength/weakness through bar counts and pivots.
tools, and his techniques in this book, which in some ways is a Volume 3 presents intermediate and advanced methods guided
followup to the author’s previous book, The Art And Science Of by epistemology principles, using analysis of real-time cases with
Technical Analysis. This book is broader (covering technicals to greater emphasis on risk and money management concepts.
fundamentals to macro), looking at more types of trading (relative Contents include: combining Bollinger Bands, Keltner bands, and
value and options trades as well as directional), and with an even pitchforks; multiple timeframe floor pivots and Mark Fisher pivots;
more how-to, practical focus. It’s not just a system development rectangles; Fibonacci time ratios & Lucas time series; breakaway
book but it’s also designed for discretionary traders who want to and runaway gaps; Gann tools; reward/risk ratios, trailing stops,
learn to trade “smarter,” since the book focuses on probabilities and scaling in and out, exits, and single/multiple trading units.
risk, and how to craft a trading plan from the big picture down to the
details of your daily routine. Part 1 of the book includes about 300
pages of exercises, covering chart reading, to belief inventories, to Smart Portfolios (544 pages, £40.50 hard-
creating your own trading plan. Stock market history is examined cover, £27 ebook, September 2017, ISBN
in the context of the patterns and tools taught in the course. Part 2 9780857195319 / 9780857195722) by Robert
takes a scientifically minded approach to understanding the market’s Carver, published by Harriman-House. This
movements. The final chapter focuses on quantitative evidence that book for professional investors as well as ex-
supports the author’s style of trading and all the patterns described perienced private investors seeks to address
in the course. The book aims to not just give you knowledge and three key questions: 1) What to invest in, 2)
facts about the markets but also to help you become a better trader. How much to invest, and 3) When to make
Companion videos are available at changes to a portfolio. Carver addresses these by providing a single integrated approach to
portfolio management, showing how to follow a step-by-step process
Integrated Pitchfork Analysis: Basic To Intermediate Level (456 to build a multi-asset investment portfolio, and how to rebalance the
pages, $105 hardcover, $68.99 ebook, 2009, 978-0-470-69434-3) portfolio efficiently. He covers investment in collective funds like
by Mircea Dologa, published by Wiley. Volumes 2 & 3 are followups ETFs as well as direct investment in individual equities. The book
subsequently self-published that explore the content further at an addresses: how to account for uncertainty when making investment
advanced level. Dologa is a Commodity Trading Advisor, has a B.S. decisions; how to calculate the true costs of an investment, includ-
in theoretical physics, a doctorate in medicine, ing costs you may not even be aware of; how to compare the costs
and an MBA. Integrated Pitchfork Analysis: and features of different ETFs; and how to select individual shares.
Basic To Intermediate Level is an introductory The book teaches how to calculate the number of shares needed
text to the branch of technical analysis that uses for adequate diversification, and how to use systematic forecasting
the Andrews pitchfork trading technique. The algorithms to adjust portfolio allocations. The author explains how
book demonstrates how to analyze and trade to blend assets with different levels of risk, and how to construct
the markets using pitchfork analysis, with the portfolios that suit the level of risk that the investor can cope with.
goal of assisting the novice trader in achieving a
more consistent performance. The book begins
by introducing the basic theory of the pitchfork
48 • January 2018 • Technical Analysis of Stocks & Commodities

CaLHoun / daYtrading adX to trend back downward, as it did at

1:30 pm in Figure 1.
When daytrading stocks,
BreaKouts you may find the adX is
Continued from page 7
inSightS: WhY thiS especially valuable to help
teChniQue WOrKS focus on volatile breakouts
scan for stocks in the $20 to $70/share Daytrading successfully depends on
price range with the ADX indicator at your ability to make winning trades
with exceptional trade
the bottom (using the standard 14-step when volatility is high and the trend is potential.
parameter). Look for charts in which in your favor, then exiting at the first sign
the ADX has stayed under 40 and is of trouble at a trend reversal. Wilder’s $0.50 or more during a single opening
trending upward into the day’s close. ADX does a remarkably good job of range breakout, such as the example I
You can see this pattern illustrated in identifying increasing volatility for both have described in this article.
Figure 1 on October 17. intraday and swing trades. My use of 40 The price that proves a two-day-high
as a signal took many years of testing breakout daytrade wrong is a reversal
Step 2: During the first 20 minutes and experimentation; it works well as a back down into the previous day’s trading
of the trading session, check to see if decision support tool to tell you whether range. As long as the ADX continues to
1) the red ADX line breaks over 40, or not the ADX is strong enough to gen- trend upward, you can consider adding
and 2) the stock price is breaking out erate a technical entry signal. to a winning trade by scaling in every
above the prior day’s high. If it does, $0.40 or so. Using the ADX breakout
set a buy stop order at $0.20 above the trade ManageMent tiPS daytrading technique can provide you
current price as your entry signal. The biggest technical advantage ADX with a strong, high-volatility entry signal
provides is it serves as a leading indi- that I encourage you to test out.
Step 3: A secondary technical con- cator for increasing volatility, which
firmation signal you can use is to see can help you stay away from choppy Ken Calhoun is a producer of trading
if the green DMI+ line crosses to the charts. Daytrading stops for stocks in courses, live trading room, and video-
upside above the red ADX signal line, the $20 to $70 range should be no more based training systems for active traders.
as it does in Figure 1. This bullish than $0.20 to $0.40 (often tighter). Note He is the founder of,
DMI+ crossover (combined with a this technique should not be used with an educational resource site for active
red ADX signal line at a two-day high speculative, low-float, under-$10 stocks, traders and is a UCLA alumnus.
over 40) is the best possible technical because those are foolhardy for daytrad-
breakout setup signal you will find ing due to their choppy “pop and drop” Further reading
with this indicator. dangerously inconsistent price action, Calhoun, Ken [2016]. “ADX Breakouts,”
low volume, and inherently higher risk. Technical Analysis of StockS &
Step 4: You can exit your trade as Instead, professional daytraders prefer commoditieS, Volume 34: March.
soon as the red ADX signal line starts charts that will run at least $0.30 to

Kaufman/Profit-taKing and resets of technical analysis), and A Guide To Creating A Successful

Continued from page 18 Algorithmic Trading System (2016). For questions or com-
ments, please go to
profit. A strong market can continue to go up until you are
completely frustrated waiting for a pullback. Further reading
The same is true of simple entry techniques. When you get Kaufman, Perry J. [2017] “Optimization—Getting It Right,”
a trend change signal, do you enter right away or wait for a Technical Analysis of StockS & commoditieS, Volume
pullback to get a better price? It’s always a tradeoff. My ex- 35: September.
perience is that three of four times, you can get a better price, [2013]. Trading Systems And Methods, 5th ed., Wi-
but the fourth time price runs away and you lose more than ley.
the total of the three improvements. That’s why the percent- [2015 ]. A Guide To Creating A Successful Algorithmic
age of profitable trades improves but the net profits fall. As Trading System, Wiley.
for myself, I follow the trend. I like taking profits, but I limit [2003]. A Short Course In Technical Trading, Wiley.
profit-taking to short-term systems. [1995]. Smarter Trading, Wiley.

Perry Kaufman is a trader and financial engineer. He is

the author of many books on trading and market analysis,
including Trading Systems And Methods, 5th ed. (with the
first edition published in 1978 as a seminal book in the field
January 2018 • Technical Analysis of StockS & commoditieS • 49
For this month’s Traders’ Tips, the
focus is Barbara Star’s article from
this issue, “The CAM Indicator For
Trends And Countertrends.” Here,
we present the January 2018 Trad-
ers’ Tips code with possible imple-
mentations in various software.
The code for the following Traders’ Tips selections is
posted here:
•  Home–S&C Magazine 
Traders’ Tips
The Traders’ Tips section is provided to help readers im-
plement a selected technique from an article in this issue
or another recent issue. The entries here are contributed Figure 1: TRADESTATION. Here is an example of a daily chart of VZ with the
by software developers or programmers for software that CAM indicator applied.
is capable of customization.
intrabarpersist InAChart( false ),
PatternLabel( "" ) ;

InAChart = GetAppInfo( aiApplicationType ) = cChart ;
In the article “The CAM Indicator For Trends And Coun-
MACDValue = MACD( Close, MACDFastLength,
tertrends” in this issue, author Barbara Star introduces using MACDSlowLength ) ;
chart patterns based on a coordinated ADX and MACD or, as ADXValue = ADX( ADXLength ) ;
she abbreviates it, CAM. In the article, she describes using the
MACDRising = MACDValue > MACDValue[1] ;
CAM indicator to identify upward and downward trends as well ADXRising = ADXValue > ADXValue[1] ;
as pullbacks in existing trends and countertrend rallies.
Here, we are providing the TradeStation EasyLanguage if ADXRising and MACDRising then
code for the CAM indicator based on the author’s work. In PlotColor = CAMUPColor ;
a chart, the indicator will highlight the current pattern by PatternLabel = "CAM UP" ;
painting the bar a user-defined color. In TradeStation Radar- else if not ADXRising and not MACDRising then
Screen, the current pattern will be shown in text. begin
The author also suggests using other indicators such as PlotColor = CAMPBColor ;
PatternLabel = "CAM PB" ;
an exponential moving average (EMA) and the commodity end
channel index (CCI) to help confirm signals generated by else if ADXRising and not MACDRising then
CAM. These indicators are part of the standard library of begin
PlotColor = CAMDNColor ;
analysis techniques included with the TradeStation platform PatternLabel = "CAM DN" ;
and can be applied as desired. end
else if not ADXRising and MACDRising then
Indicator: CAM begin
PlotColor = CAMCTColor ;
// TASC JAN 2018 PatternLabel = "CAM CT" ;
// The CAM Indicator End ;
// Barbara Star, PhD.
// Format plot style as follows:
inputs: // Plot1 Bar High
ADXLength( 10 ), // Plot2 Bar Low
MACDFastLength( 12 ), // Plot3 Left Tic
MACDSlowLength( 26 ), // Plot4 Right Tic
CAMUPColor( Green ), Plot1( High, "CAMH", PlotColor ) ;
CAMDNColor( Red ), Plot2( Low, "CAML", PlotColor ) ;
CAMPBColor( Yellow ), Plot3( Open, "CAMO", PlotColor ) ;
CAMCTColor( Blue ) ; Plot4( Close, "CAMC", PlotColor ) ;

variables: // Show current state in RadarScreen
MACDValue( 0 ), If not InAChart then
ADXValue( 0 ), Plot5( PatternLabel, "CAM", PlotColor )
PlotColor( 0 ),
MACDRising( false ), To download the EasyLanguage code, please visit our
ADXRising( false ), TradeStation and EasyLanguage support forum. The files
50 • January 2018 • Technical Analysis of Stocks & Commodities
Figure 3: WEALTH-LAB. Recent entries and exits are shown on a chart of BTC/
USD (bitcoin).

Figure 2: eSIGNAL. Here is an example of the CAM indicator study plotted on a

daily chart of VZ.
for this article can be found at https://community.tradesta- The CAM indicator depicted by Barbara Star in her article The in this issue, “The CAM Indicator For Trends And Counter-
filename is “TASC_JAN2018.ZIP.” trends,” combines two classic indicators, MACD and ADX,
For more information about EasyLanguage in general, into a pair that intends to highlight the price patterns of trends
please see and reversion.
A sample chart is shown in Figure 1. As suggested in the article, trading this system should be
This article is for informational purposes. No type of trading approached after filtering out false pattern fluctuations by
or investment recommendation, advice, or strategy is being made, first checking the moving average and CCI indicator. The
given, or in any manner provided by TradeStation Securities or resulting countertrend system’s rules are:
its affiliates.
—Doug McCrary Enter long: Buy tomorrow at open if today is a bar colored
TradeStation Securities, Inc.
gold (which represents the CAM-PB, meaning the 10-period
ADX and MACD are declining) but the 14-period CCI is above
zero, or if today is a bar colored blue (that is, the 10-period
ADX is declining but MACD rises) and today’s close crosses
above the 13-period EMA.

Exit long: Sell tomorrow at open if today is a red-colored bar

F eSIGNAL: JANUARY 2018 TRADERS’ TIPS CODE (which represents the CAM-CT; that is, the 10-period ADX is
For this month’s Traders’ Tip, we’ve provided the study rising but the MACD is declining) and today’s close is below
CAM_Indicator.efs based on the CAM indicator described in the 13-period EMA.
Barbara Star’s article in this issue, “The CAM Indicator For
Trends And Countertrends.” Nonetheless, filtering may not itself be enough; to maxi-
The study contains formula parameters that may be con- mize your odds, we recommend applying the system to a
figured through the edit chart window (right-click on the preselected watchlist of securities that demonstrate trendi-
chart and select edit chart). A sample chart is shown in Fig- ness. Figure 3, which is of bitcoin, shows a characteristic ex-
ure 2. ample of an asset where a trend-following system that enters
To discuss this study or download a complete copy of the on corrections shines.
formula code, please visit the EFS library discussion board To make your own conclusions regarding the efficiency
forum under the forums link from the support menu at www. of the indicator combo, you can run the C# strategy code or visit our EFS KnowledgeBase at http://www. shown here (which you can download from Wealth-Lab’s The eSignal formula script open strategy dialog).
(EFS) is also available for copying & pasting from the
Stocks & Commodities website,, in the Wealth-Lab strategy code (C#):
Traders’ Tips section. using System;
—Eric Lippert using System.Collections.Generic;
eSignal, an Interactive Data company using System.Text;
800 779-6555, using System.Drawing;

January 2018 • Technical Analysis of Stocks & Commodities • 51

using WealthLab;
using WealthLab.Indicators;

namespace WealthLab.Strategies
public class MyStrategy : WealthScript
protected override void Execute()
var adx = ADX.Series(Bars,10);
var macd = MACD.Series(Close);
var cci = CCI.Series(Bars,14);
var ema = EMAModern.Series(Close,13);
var days = 10;

SetBarColors( Color.Silver,Color.Silver);

var ls = LineStyle.Solid;
var cp = CreatePane( 30,true,true);
var mp = CreatePane( 30,true,true);
var ap = CreatePane( 30,true,true);
PlotSeries( mp, macd, Color.DarkGreen, ls, 2 );
PlotSeries( ap, adx, Color.Red, ls, 2 ); Figure 4: NEUROSHELL TRADER. This example NeuroShell Trader chart shows
PlotSeries( cp, cci, Color.Black, LineStyle.Histogram, 2 ); the CAM indicator patterns on VZ.
PlotSeries( PricePane, ema, Color.Gray, ls, 2 );

for(int bar = GetTradingLoopStartBar( 14 * 3); bar < Star in her article in this issue, “The CAM Indicator For Trends
Bars.Count; bar++)
{ And Countertrends,” can be easily implemented with a few
bool CAM_UP = (adx[bar] >= adx[bar-1]) & (macd[bar] of NeuroShell Trader’s 800+ indicators. Simply select new
> macd[bar-1]);
bool CAM_PB = (adx[bar] <= adx[bar-1]) & (macd[bar] indicator from the insert menu and use the indicator wizard
< macd[bar-1]); to set up the following indicators:
bool CAM_DN = (adx[bar] >= adx[bar-1]) & (macd[bar]
< macd[bar-1]);
bool CAM_CT = (adx[bar] <= adx[bar-1]) & (macd[bar] CAM-UP And2( A>=B(ADX(High,Low,Close,10,5), Lag(
> macd[bar-1]); ADX(High,Low,Close,10,5),1)), A>B(MACD(Close,12,26),
bool buyPullback = (CAM_PB && (cci[bar] > 0)) ||
(CAM_CT && CrossOver( bar,Close,ema)); CAM-PB And2( A<=B( ADX(High,Low,Close,10,5), Lag(
ADX(High,Low,Close,10,5),1)), A<B(MACD(Close,12,26),
SetBarColor( bar, CAM_UP ? Color.Green : CAM_PB
? Color.Gold: CAM_DN ? Color.Red : CAM_CT ? Color.DarkBlue Lag(MACD(Close,12,26),1)))
: Color.Black );
SetSeriesBarColor( bar, cci, cci[bar] < 0 ? Color.Red : CAM-DN And2( A>=B( ADX(High,Low,Close,10,5), Lag(
Color.Green ); ADX(High,Low,Close,10,5),1)), A<B(MACD(Close,12,26),
if (IsLastPositionActive)
{ CAM-CT And2( A<=B( ADX(High,Low,Close,10,5), Lag(
Position p = LastPosition; ADX(High,Low,Close,10,5),1)), A>B(MACD(Close,12,26),
if( CAM_DN && (Close[bar] < ema[bar]) ) Lag(MACD(Close,12,26),1)))
SellAtMarket( bar+1, p, "CAM-DN" );
else Users of NeuroShell Trader can go to the Stocks & Com-
if(buyPullback) modities section of the NeuroShell Trader free technical
{ support website to download a copy of this or any previous
BuyAtMarket( bar+1); Traders’ Tips.
} A sample chart is shown in Figure 4.
} —Marge Sherald, Ward Systems Group, Inc.
} 301 662-7950,

—Eugene (Gene Geren), Wealth-Lab team

The AIQ code based on Barbara Star’s article in this
issue, “The CAM Indicator For Trends And Coun-
tertrends,” is provided at
F NEUROSHELL TRADER: JANUARY 2018 traderstips.htm and is also shown below.
TRADERS’ TIPS CODE I created an indicator for the CAM that returns a “2” for
The CAM indicator patterns described by Barbara the CAM_UP, a “1” for the CAM_PB, a “-1” for the CAM_

52 • January 2018 • Technical Analysis of Stocks & Commodities

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Figure 6: TRADERSSTUDIO, CAM_IND. The CAM_IND indicator is shown on a
chart of an S&P 500 futures contract (SP) for the last half of 2013.

Figure 5: AIQ. Here is an example of the ADX, MACD, and CAM_IND on a chart
of NFLX.

CT, and a “-2” for the CAM_DN. I also created three buy
rules and ran backtests.
Figure 5 shows the daily ADX and the daily MACD in-
dicator together with the CAM_IND indicator on a chart of
Netflix Inc. (NFLX) during 2017. The vertical line is an en-
try from the entry rule “BuyDNCT.” Of the three buy rules I
tried, “BuyDNCT” showed the best backtest results with an
average per trade of 0.62% over the past 48 months trading
the NASDAQ 100 list of stocks and exiting after a nine-bar Figure 7: TRADERSSTUDIO, EQUITY CURVE. Here is a sample equity curve
trading one SP contract from 1991 to 2014.

!THE CAM INDICATOR FOR TRENDS AND COUNTERTRENDS com/traderstips.htm as well as at the Stocks & Commodities
!Author: Barbara Star, TASC Jan 2018 website at in the Traders’ Tips section.
!Coded by: Richard Denning 11/4/17
The following files are included in the download:

!SET PARAMETER FOR ADX IN CHARTS TO 10 • Function: CAM—Returns a number that is explained
CAM_UP if [adx]>=val([adx],1) and [macd]>val([macd],1). below
CAM_PB if [adx]<=val([adx],1) and [macd]<val([macd],1). • Indicator plot: CAM_IND—Plots the CAM indicator
CAM_DN if [adx]>=val([adx],1) and [macd]<val([macd],1). on a chart
CAM_CT if [adx]<=val([adx],1) and [macd]>val([macd],1).
• System: C
 AM_DNCT—A trading system with a fixed-
CAM_IND is IFF(CAM_UP,2,IFF(CAM_DN,-2,IFF(CAM_ bar hold that uses the CAM indicator or entry.

BuyUp if CAM_UP and hasdatafor(120)>=100. I created an indicator for the CAM that returns “2” for the
BuyPB if CAM_PB and hasdatafor(120)>=100. CAM_UP, a “1” for the CAM_PB, a “-1” for the CAM_CT,
BuyDNCT if valrule(CAM_DN,1) and CAM_CT and hasdata- and a “-2” for the CAM_DN. I also created a trading system
that uses the CAM indicator and ran backtests.
The AIQ code and EDS file can be downloaded from Figure 6 shows the CAM_IND indicator on a chart of the, or copied S&P 500 futures contract (SP) for the last half of 2013. Sev-
from the Stocks & Commodities website at www.traders. eral trades from the system are shown on this chart. Using
com in the Traders’ Tips section. optimization of cam1, cam2 and exitBars, I found the high-
—Richard Denning est net profit from the system to be when cam1=-2, cam2=1, and exitBars =12. The equity curve from trading one SP con-
for AIQ Systems tract is shown in Figure 7.
The TradersStudio code is shown here:


F T RADERSSTUDIO: JANUARY 2018 TRAD- 'Author: Barbara Star, TASC Jan 2018
ERS’ TIPS CODE 'Coded by: Richard Denning 11/4/17
'www tradersEdgeSystems com
The TradersStudio code based on Barbara Star’s
article in this issue, “The CAM Indicator For Trends And Function CAM(adxLen,macdLen1,macdLen2)
Countertrends,” is provided at www.TradersEdgeSystems. 'adxLen=10,macdLen1=12,macdLen2=25

54 • January 2018 • Technical Analysis of Stocks & Commodities

Dim theADX As BarArray
Dim theMACD As BarArray
theADX = ADX(adxLen,0)
theMACD = MACD(C,macdLen1,macdLen2,0)
CAM_UP = theADX>=theADX[1] And theMACD>theMACD[1]
CAM_PB = theADX<=theADX[1] And theMACD<theMACD[1]
CAM_DN = theADX>=theADX[1] And theMACD<theMACD[1]
CAM_CT = theADX<=theADX[1] And theMACD>theMACD[1]


End Function
'Indicator plot:
sub CAM_IND(adxLen,macdLen1,macdLen2) Figure 8: NINJATRADER. The CAM indicator is displayed on the Verizon daily
plot1(CAM(adxLen,macdLen1,macdLen2)) chart between May 2016 and September 2016 highlighting the signals with changes
End Sub to the bar colors.
'CAM trading systme (long only)
Sub CAM_DNCT(adxLen,macdLen1,macdLen2,cam1,cam2,exit NinjaScript uses compiled DLLs that run native, not in-
Bars) terpreted, which provides you with the highest performance
2,cam2=1,exitBars=12 possible.
Dim theCAM As BarArray A sample chart is shown in Figure 8.
theCAM = CAM(adxLen,macdLen1,macdLen2)
—Raymond Deux & Jim Dooms
If theCAM[1]=cam1 And theCAM=cam2 Then
Buy("BuyDNCT",1,0,Market,Day) NinjaTrader, LLC
If BarsSinceEntry>=exitBars Then ExitLong("LXtime","",1,0,Mark
End Sub

for TradersStudio We’re making available a file for
download within the Trade Navigator library to make it easy
for users to implement the strategy discussed in “The CAM
Indicator For Trends And Countertrends” by Barbara Star in
this issue.
The file name is “SC201801.” To download it, click on
F NINJATRADER: JANUARY 2018 TRADERS’ TIPS CODE Trade Navigator’s blue telephone button, select download
The CAM indicator, as discussed in the article “The CAM special file, and replace the word “upgrade” with “SC201801”
Indicator For Trends And Countertrends” by Barbara Star in (without the quotes). Then click the start button. When
this issue, is available for download at the following links for prompted to upgrade, click the yes button. If prompted to
NinjaTrader 8 and NinjaTrader 7: close all software, click on the continue button. Your library
will now download.
NinjaTrader 8: This library contains a study named “CAM study,” the
NinjaTrader 7: template “S&C CAM Indicator,” and four highlight bars:
Once you have downloaded the file, you can import the in- The TradeSense language for the highlight bars is shown
dicator into NinjaTader 8 from within the Control Center by in Figure 9.
selecting Tools → Import → NinjaScript Add-On and then
selecting the downloaded file for NinjaTrader 8. To import Manually creating highlight bars
into NinjaTrader 7, from within the Control Center window, If you would like to create these highlight bars manually,
select the menu File → Utilities → Import NinjaScript and click on the edit dropdown menu, open the trader’s toolbox
select the downloaded file. (or use CTRL + T) and click on the functions tab. Next, click
You can review the indicator’s source code in NinjaTrader on the new button, and a new function dialog window will
8 by selecting the menu New → NinjaScript Editor → Indi- open. In its text box, input the code for the indicator. Ensure
cators from within the Control Center window and selecting that there are no extra spaces at the end of each line. When
the CAM file. You can review the indicator’s source code completed, click on the verify button. You may be presented
in NinjaTrader 7 by selecting the menu Tools → Edit Nin- with an add inputs pop-up message if there are variables
jaScript → Indicator from within the Control Center window in the code. If so, click the yes button, then enter a value in
and selecting the CAM file. the default value column. If all is well, when you click on
January 2018 • Technical Analysis of Stocks & Commodities • 55
The “S&C CAM indicator” template can be inserted onto
your chart by opening the charting dropdown menu, select-
ing the templates command, then selecting the “S&C CAM
Indicator” template. You can apply the CAM study to your
chart by opening the charting menu, selecting the add to
chart command, and clicking on the studies tab. Here you
will find the study in question. Select it by clicking on it, then
click the add button.
Users may contact our technical support staff by phone or
by live chat if any assistance is needed in creating or using
the indicator or highlight bars.
A sample chart demonstrating the S&C CAM indicator
template is shown in Figure 10.
—Genesis Financial Technologies
Tech support 719 884-0245


Barbara Star’s article in this issue, “The CAM Indicator For
Trends And Countertrends,” looks for patterns to be found in
the relative behaviors of two well-known indicators—ADX
and MACD.
In the article, Star shows a way of comparing them to pick
FIGURE 9: TRADE NAVIGATOR, TRADESENSE CODE. TradeSense code is shown out two main stages of market trend (up/down) and two mar-
for the CAM-UP, CAM-DN, CAM-CT, and CAM-PB components of the CAM indica- ket pause situations (pullback/countertrend) that might be
tor, where each code component colors the bars a different color for easier iden-
tification. interpreted as market indecision.
Star suggests that the addition of the CCI indicator and a
14-day moving average can assist when attempting to filter
out false patterns.
The spreadsheet file for this Traders’ Tip can be down-
loaded from in the Traders’ Tips section.
To successfully download it, follow these steps:

• Right-click on the Excel file link (“TheCAMIndicator.

xlsm”), then
• Select “save as” or “save target as” to place a copy of the
spreadsheet file on your hard drive.
FIGURE 10: TRADE NAVIGATOR. The S&C CAM indicator template is implement- —Ron McAllister
ed on a sample chart. Excel and VBA programmer
the function tab, the code you entered will
convert to italic font. Click on the save
button and type a name for the highlight

Adding to your chart

Once they’re completed, you can insert the
highlight bars onto your chart by opening
the charting dropdown menu, selecting the
add to chart command, then, on the high-
light bars tab, find your named highlight
bar. Select it, then click on the add button.
Repeat this procedure for more highlight FIGURE 11: EXCEL. This chart approximates Figure 5 from Barbara Star’s article in this issue, “The CAM
bars if you wish. Indicator For Trends And Countertrends.”

56 • January 2018 • Technical Analysis of Stocks & Commodities

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January 2018 • Technical Analysis of Stocks & Commodities • 57


rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.

Trading Liquidity: Futures

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
S&P 500 E-Mini (Dec ’17) GBLX 3.8 12.7 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>>>>>>>>
10-Year T-Note (Dec ’17) CBOT 0.9 12.1 7 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Dec ’17) CBOT 0.6 11.5 11 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Dec ’17) GBLX 2 5.3 1 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Ultra T-Bond (Dec ’17) CBOT 2.4 15.4 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Jan ’18) NYMEX 4.3 8.1 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
T-Bond (Dec ’17) CBOT 1.9 12.6 3 ••••••••••••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Dec ’17) GBLX 3.9 10.1 1 ••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Dec ’17) CBOT 0.2 8 12 ••••••••••••••••••••••••••••••
Euro FX (Dec ’17) CME 1.6 13.4 4 ••••••••••••••••••••••
Gold (Dec ’17) COMEX 4.2 23.4 3 •••••••••••••••••••
Eurodollar (Dec ’17) CME 0.1 6.4 19 •••••••••••••••
Dow Indu 30 E-Mini (Dec ’17) CBOTM 3.2 9.1 2 ••••••••••••••
Ultra 10-Year T-Note (Dec ’17) CBOT 1.1 10.2 5 ••••••••••••••
Gasoline RBOB (Jan ’18) NYMEX 4.5 9.4 2 ••••••••••••
Natural Gas (Jan ’18) NYMEX 7.6 15.6 4 •••••••••••
ULSD NY Harbor (Jan ’18) NYMEX 4.1 7.2 1 •••••••••••
Japanese Yen (Dec ’17) CME 2.5 17.7 4 ••••••••••
Soybeans (Jan ’18) CBOT 4.2 19.1 6 ••••••••
Sugar #11 (Mar ’18) ICEUS 6.2 10.5 6 ••••••••
S&P Midcap E-Mini (Dec ’17) GBLX 3.6 10.3 1 •••••••
British Pound (Dec ’17) CME 2.7 13.1 4 ••••••
Corn (Dec ’17) CBOT 4.8 16.8 13 ••••••
Wheat (Mar ’18) CBOT 5.5 10.1 5 ••••••
Coffee (Mar ’18) ICEUS 6.3 11.2 2 •••••
High Grade Copper (Dec ’17) COMEX 4.5 12 2 •••••
Live Cattle (Feb ’18) CME 3.4 8.5 3 •••••
Silver (Dec ’17) COMEX 7.7 30.9 3 •••••
Australian Dollar (Dec ’17) CME 2.1 14 6 •••
Canadian Dollar (Dec ’17) CME 1.6 11 6 •••
Cocoa (Mar ’18) ICEUS 7.6 12 5 ••• CBOT Chicago Board of Trade, Division of CME
Hard Red Wheat (Mar ’18) KCBT 5.3 8.5 5 ••• CFE CBOE Futures Exchange
Mexican Peso (Dec ’17) CME 4.6 11.5 6 ••• CME Chicago Mercantile Exchange
Swiss Franc (Dec ’17) CME 2.4 10.8 2 •••
COMEX Commodity Exchange, Inc. CME Group
30-Day Fed Funds (Jan ’18) CBOT 0.1 4.2 12 ••
GBLX Chicago Mercantile Exchange - Globex
Cotton #2 (Mar ’18) ICEUS 6.2 26.9 8 ••
ICE-EU Intercontinental Exchange-Futures - Europe
Platinum (Jan ’18) NYMEX 4.2 10.6 4 ••
Soybean Meal (Jan ’18) CBOT 4.8 13.9 6 •• ICE-US Intercontinental Exchange-Futures - US
Crude Oil Brent (F) (Jan ’18) NYMEX 4.1 7.2 2 • KCBT Kansas City Board of Trade
Feeder Cattle (Jan ’18) CME 4.1 7 1 • MGEX Minneapolis Grain Exchange
Lean Hogs (Feb ’18) CME 4.8 11.9 6 • NYMEX New York Mercantile Exchange
New Zealand Dollar (Dec ’17) CME 2.4 14.9 6 •
Palladium (Dec ’17) NYMEX 10.6 19.5 1 •
S&P GSCI (Dec ’17) CME 4.2 11.5 2 •
Soybean Oil (Jan ’18) CBOT 3.9 15.3 12 • 1801
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

58 • January 2018 • Technical Analysis of Stocks & Commodities

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January 2018 • Technical Analysis of Stocks & Commodities • 59

Socially Responsible ETF Investing
Are you interested in learning more about using exchange arms, or alcohol products. In addition, some funds included
traded funds (ETFs) in your trading? Leslie N. Masonson, moral and religious considerations.
an active ETF trader, is president of Cash Management Other category names associated with this style of invest-
Resources, a financial consulting firm that focuses on ETF ing include green, sustainable, or ethical. In recent years, the
strategies. He is the author of Buy, Don’t Hold: Investing With definition and composition of socially responsible investing
ETFs Using Relative Strength To Increase Returns With Less has expanded and is now more broadly known as ESG (envi-
Risk; and All About Market Timing, as well as Day Trading ronmental, social, and governance) investing. Climate control,
On The Edge. His website is, where carbon emissions impact, and GMOs are now on the minds of
he writes a weekly blog. To submit topics for future columns, citizens across the globe. Thus, as more and more institutions,
reach him at pension funds, and retail investors become more educated about
the importance of investing in sustainable causes, the number

by Leslie N. Masonson of mutual fund and ETF offerings has exploded. Recently,
Calvert Research And Management registered its latest ESG
ocially responsible investing was born in the for approval. Calvert was one of the first issuers of socially
1960s when mutual funds offered a portfolio of responsible mutual funds and is active in shareholder advocacy
companies’ shares meeting their socially respon- and corporate governance through proxy voting.

sible criteria, while also managing for competitive Since this column focuses on ETFs, I will not spend time
returns. The most often-used selection criteria reviewing the large number of ESG mutual fund offerings.
would be companies that don’t sell tobacco, fire- For those interested in that, I recommend the October 9, 2017
60 • January 2018 • Technical Analysis of Stocks & Commodities

issue of Barron’s, which has a special section on sustainable 1.6% on average was on the higher end.
mutual funds that includes the websites of those funds and PowerShares, on the other hand, had two water-related ETFs
Internet articles on the subject from reliable sources. I am also that disgorged $9.2 million (PHO) and $15.9 million (PIO) in
including a few links at the end of this article in the further dollar flows, respectively, so far this year. However, their third
reading section. EFT on the list (PZD) performed well with a $24.8 million
Using’s extensive database of 51 socially responsible money flow and a superb 30.6% performance to date compared
funds, I examined their key metrics (as of October 16, 2017). to the S&P 500’s 14.04%. However, the three had higher-than-
Interestingly, the number of these ETFs has doubled from two average expense ratios between 0.61% and 0.75%.
years earlier. According to the website, their aggregate market Finally, there were three SPDR ETFs in the top 10. All
cap was $5.24 billion. In total, the dollar amount in all ESG- of them had a low expense ratio of 0.20%, typically higher
related mutual funds is estimated at $2 trillion, so the current yields than the others, and about $40 million in new flows in
numbers of ETFs are only a drop in the bucket so far. two funds, but had no new flows into its LOWC ETF. Their
performance was a bit lower than the other funds, between provides extensive data 14% to 19% year to date (YTD).
According to, which updates its information nightly, Smaller size ESG ETFs metrics
the aggregate recent one-month flows into all 51 ETFs were vary widely
$137.8 million compared to their average of $2.6 million. This I selected 10 of the 51 ETFs with $20 to $36 million in assets
indicates there was a substantial increase in money going into under management (AUM) as being representative of more
this fund category recently. Let’s first focus on the largest 10 recent ones available in the ESG arena. My objective was to
ESG ETFs, which are
sponsored by three
Ticker Net Exp. Market Cap Perform. Fund Flows Annual Avg. 90-
well-known ETF pro- Name
Symbol Ratio (millions) YTD YTD (millions) Yield Day Vol.
viders (Figure 1). Five
iShares MSCI KLD 400 Social DSI 0.50% $926.90 15.96% $62.39 1.34% 49,920
of these funds (DSI,
PHO, SUSA, PIO, and PowerShares Water Resources PHO 0.61% $862.49 18.43% ($9.23) 0.53% 37,240
PZD) have five-year iShares MSCI USA ESG Select SUSA 0.50% $634.02 17.07% $86.08 1.45% 17,560
track records. The daily iShares MSCI ACWI Low Carbon Target

Source: Data as of October 16, 2017

CRBN 0.20% $474.47 19.51% $95.46 1.84% 6,180
trading volume of these SPDR SSGA Gender Diversity Index SHE 0.20% $349.07 13.74% $39.84 1.95% 2,830
ETFs is well below
PowerShares Global Water PIO 0.75% $199.08 22.00% ($15.85) 1.12% 11,240
50,000, except for DSI.
Therefore, they would SPDR S&P 500 Fossil Fuel Reserves Free SPYX 0.20% $176.65 17.31% $43.51 1.74% 10,370
not be good vehicles SPDR MSCI ACWI Low Carbon Target LOWC 0.20% $149.18 18.97% $0.00 1.95% 1,380
for active traders as the PowerShares Cleantech Portfolio PZD 0.67% $129.05 30.60% $24.82 1.18% 8,710
volume may be too low iShares MSCI EAFE ESG Optimized ESGD 0.20% $127.95 22.86% ($0.47) 1.65% 8,460
and the bid–ask spread FIGURE 1: COMPARISON OF LARGEST ETFs BY MARKET CAP. These 10 ETFs account for 77% of the assets in the ESG space.
too high. Note the daily trading volume is less than 50,000 shares a day.
Clea rly, iSha res
holds four of the top Name
Ticker Net Exp. AUM Perform. Fund Flows Annual Avg. 90-
10 positions and is the Symbol Ratio (millions) YTD YTD (millions) Yield Day Vol.
leader of the pack with Barclay’s Women in Leadership WIL 0.45% $35.82 10.07% $0.76 0.00% 246
a total market cap of First Trust NASDAQ Clean Edge Smart
GRID 0.70% $27.79 26.03% $4.53 1.14% 3,780
$2.16 billion. Their Grid Infra.
year-to-date perfor- FlexShares STOXX Global ESG Impact
ESGG 0.42% $27.35 18.26% $17.90 1.95% 5,350
mance ranges between Index Fund
15.96% and 22.86%. iShares MSCI Global Impact MPCT 0.49% $26.69 26.03% $5.10 1.98% 4,110
Their expense ratios Inspire Small/Mid Cap Impact ETF ISMD 0.65% $26.30 6.09% $24.66 1.04% 3,660
were either 0.20% or
NuShares ESG Small-Cap ETF NUSC 0.40% $24.98 12.62% $12.05 0.00% 4,610
0.50%. Their top three
ETFs pulled in between Oppenheimer ESG Revenue ETF ESGL 0.40% $23.42 9.19% $0.02 1.96% 363
$63 to $95 million in Etho Climate Leadership U.S. ETF ETHO 0.49% $21.17 18.50% $10.51 1.18% 3,520
new money so far this Inspire Corporate Bond ETF IBD 0.61% $20.16 0.68% $20.06 1.66% 5,950
year, while ESGD had a NuShares ESG Emerging Markets Equity
slightly negative money ETF NUEM 0.45% $19.82 12.60% $18.09 0.00% 3,590
inflow. Finally, their FIGURE 2: COMPARISON OF ETFs WITH $20–$36 MILLION IN ASSETS UNDER MANAGEMENT. There is a wide variance in
annual yield of about the metrics shown. And the daily trading volume is below 6,000 shares a day.
January 2018 • Technical Analysis of Stocks & Commodities • 61
FIGURE 3: PERFORMANCE COMPARISON OF FOUR ESG ETFs. As of December 1, 2015, the performance of DSI, SPYX, and TOK is quite similar (24-27%) to the
performance of the S&P 500 (SPY). TOK (green line) had the weakest performance during the entire period while SPYX (blue) had the strongest.

see how they fared compared to the behemoths (Figure 2). This of these ETFs to each other. Therefore, investors will need
grouping of funds had a total market cap of $431.5 million, to spend time reviewing the investment objectives of each
which is not that impressive, but considering their newness, fund, their ESG parameters, their top-10 portfolio holdings,
it is a reasonable start. their net expense ratios, and their performance against their
One clearly apparent observation about this data was the individual benchmarks.
variability of all the metrics. The annual expense ratios ranged A comparison of four ETFs with a similar but not the exact
from 0.40% to 0.70%, and the annual yield ran from 0% to same focus is provided in Figure 3. The performance is close,
1.98%, but the average daily trading volume was more consis- given the common starting date of December 1, 2015, with
tent at less than 6,000 shares. I used the performance for YTD SUSA and SPYX leading the group, as well as the SPY (S&P
since it includes all these ETFs. Five ETFs had no one-year or 500) benchmark.
longer performance. Note only GRID had a five-year lifespan
with a return of 86.9%. WIL had a three-year record with a Understand the components
return of 31.0% compared to GRID’s 60.85%. In conclusion, the ESG space is bifurcated with the Blackrock
Another remarkable data point was the wide difference in iShares, Invesco PowerShares, and SSGA’s SPDR holding $4.02
fund flows in these ETFs year-to-date with WIL and ESGL billion in AUM out of the $5.24 billion, representing 77% of
receiving virtually no new money. However, Inspire’s two assets. The remaining 41 ETFs represent a wide array of ESG
ETFs ISMD and IBD gathered over $20 million each so choices, but their individual low AUMs, low trading volumes,
far, most likely because they are successfully marketed new and limited ability to bring in new money can potentially
funds. Performance was also widely dispersed with GRID hamper their growth or even future existence.
and MPCT outshining the rest with a 26% return, besting the As is usually the case, the early entrants into specific ETF
S&P 500 return of 14.04%. categories have captured the market share and impetus to
Interestingly, when I checked to see the benchmarks of each grow their assets at a rapid pace. An example is the sector
of these ETFs in Figures 1 & 2, I found they were all differ- fund space, where the 1998 entry of the Select SPDRs proved
ent. For example, in Figure 2, the benchmarks are based on prescient, as they continue to lead their competitors by huge
Global ESG Impact, Small/Mid Cap Impact Equal Weight, margins in AUM and daily trading volume.
ESG USA Small-Cap index, Climate Leadership, and the Investors in the ESG arena need to spend time understanding
Clean Edge Smart Grid Infrastructure Index. This is not the components and focus of any ETF they are considering
unexpected, as the composition of the portfolios is diverse. for investment. Because of the wide choice and difficulty in
Each ETF has a different view of the context of ESG investing, comparing one ETF to another, the extra analysis effort is
and therefore, the investments will reflect their specific focus. needed so a poor choice is not made. In the further reading
That diversity makes it difficult to compare the performance section below, three detailed websites are listed first. You
can find extensive data on the socially responsible funds by
searching for that description on each website.

The composition of the portfolios Further reading
of socially responsible ETFs is
diverse, which makes it difficult
to compare the performance of
these ETFs to each other.

62 • January 2018 • Technical Analysis of Stocks & Commodities

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