Position Sizing Forex Pairs Support & Resistance Expansions & Contractions Interview A Better Trend Reviews

THE TRADERS’ MAGAZINE SINCE 1982
www.traders.com APRIL 2014
POSITION SIZING
In the spot forex markets 10
Forex Pairs
Strongest to weakest 14
Support &
Resistance
With two new indicators 20
Expansions &
Contractions
Identifying divergences 28
INTERVIEW
Rob Booker 38
A Better Trend
What makes it better? 44
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04-IB14-731CH719
CONTENTS APRIL 2014, Volume 32 Number 5
10 Position Sizing In The 28 Expansions & Contractions,

Spot Forex Markets Part 2
by Karl Montevirgen by Dirk Vandycke
Wouldn’t you like to know exactly Last month in part 1, we found
how much you are risking before out how to measure intrinsic
you enter a trade? Find out how divergences. In this second part,
to do just that before placing your we will identify divergences that
next trade. take place when price may appear
to be strong but has a tendency to
FEATURE ARTICLE close near the lows. REVIEW, QUICK-SCAN
14 Identifying The Strongest 49 • Candle Profit System
32 Trading The Unpredictable Product review: MetaStock add-on
To Weakest Forex Pairs for finding candlestick patterns
by Michael Burke Without Indicators
Which is the strongest and which by James Stanley 51 • StockCharts University
is the weakest? Here’s a straight- Is it possible to trade using no Quick-Scan: Educational seminar
forward concept that can help you indicators at all? Here’s a five- covering features of Stockcharts.com
track forex market dynamics and point plan that you can apply to
cross-currency relationships. look for strong entry opportunities
in the forex markets. DEPARTMENTS
18 Explore Your Options 6 Opening Position
by Tom Gentile 37 Q&A 8 Letters To S&C
Got a question about options? by Don Bright 53 Traders’ Tips
This professional trader answers 57 Advertisers’ Index
20 Evidence-Based a few of your questions.
57 Editorial Resource Index
Support & Resistance TIPS
58 Futures Liquidity
by Melvin E. Dickover INTERVIEW
Here are two new indicators based 38 Trading Rationally 59 Classified Advertising
on evidence from price–volume With Rob Booker 59 Traders’ Resource
behavior to help create depend- 62 Trade News & Products
by Jayanthi Gopalakrishnan
able support and resistance lines
Nicknamed the “Prime Minister of
that accurately identify the prices
Pips,” Rob Booker is a currency
where supply and demand pools
trader, author, and speaker who
are located.
believes that trading profitably is
not easy but can be enjoyable. We
27 Futures For You spoke with him about the emotions
by Carley Garner that can be encountered while
Here’s how the futures market trading in the currency markets.
really works.
44 A Better Trend
by Perry Kaufman
How can a trend be better? Here’s
a unique approach to viewing
trends so you can gain the most
from them.
This article is the basis for Traders’ Tips

TIPS n Cover: Pactrick Kelley
this month.
n Cover concept: Christine Morrison
Copyright © 2014 Technical Analysis, Inc. All rights reserved. Information in this publication must not be stored or reproduced in any form without written permission from the publisher. Technical Analysis
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April 2014
March 2006••Volume
Volume32,
24,Number
Number5 3
O
Opening POSITION
PENING Position
The Traders’
The Traders’ Magazine
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Ah,
EDITORIAL
EDITORIAL
[email protected]
[email protected]
O
Editor in Chief Jack K. Hutson
Editor
EditorinJayanthi
Chief Jack K. Hutson
Editor Jayanthi
Gopalakrishnan
Gopalakrishnan nce again thewe irony
gotofa it. Shortly of
reminder before
just
this forex-themed issue went
Managing Editor Elizabeth M.S. Flynn
Production
ProductionManager
Manager Karen
KarenE.E.Wasserman
Wasserman how sensitive the financial markets
Art
Art Director
Director Christine
ChristineMorrison
Morrison to press,
are. We saw foreign-exchange
a major sellofftrading in the practices
Japanese
Graphic
GraphicDesigner
Designer Wayne
SharonShaw
Yamanaka have
markets, which — as expected of
come under the scrutiny — regulators.
triggered a
This mayeffect
mean more regulation, which may
Editorial
Staff Intern
Writer Emilie
Dennis Rommel
D. Peterson
Technical Writer
Webmaster Han J.David
Kim Penn
domino on markets throughout the
Staff Writers Dennis D. Peterson, Bruce Faber
Contributing Editors John Ehlers,
mean more transparency or lower
world. Add disappointing earnings numbers trading costs,
Webmaster
Anthony Han J.Ph.D.
W. Warren, Kim both
fromof USwhich would beand
corporations welcomed
you haveby retail
a situa-
ContributingWriters
Contributing
Anthony
EditorsDon
W. Warren,
John Ehlers,
Bright, KevinBulkowski,
Thomas Lund,
traders. It’s too early to know what
tion that just got worse. So what started off as changes
Martin Pring, Barbara Ph.D.
Star, Markos Katsanos
Contributing Writers Don Bright, Thomas Bulkowski, to expect.year ended up correcting, and rather
a strong
rapidly.
Even ifI must
forex admittradingthat became lesscorrec-
costly
Martin Pring, Adrienne Toghraie
OFFICE OF THE Publisher
although
Publisher Jack K. Hutson
and more transparent, it still won’t
tions are healthy for any market, when you change thehave a 2% drop, it gets you thinking.
risky
Prior to the Federal Reserve’s FOMC meeting,too
nature of the forex markets. As we know well, the
takemore risky anything
OFFICE OF THE PUBLISHER
Industrial Engineer Jason K. Hutson
Publisher Jack K. Hutson I usually a look at the yield
Project Engineer Sean M. Moore
Credit Manager Linda Eades Gardner
Controller Mary K. Hutson
is,
curve. At present, it’s looking a little flat, and given that the general consensusto
even though there’s a potential for a large loss, there is still that small chance
Industrial Engineer Jason K. Hutson
Project Engineer Sean M. Moore
make
is thata the
hugeFed amount
is going of money.
to tightenAnd at of course,
their January it’s that
31stprofit
meeting, that Iwe’re mostly go-
am concerned
Accounting Advertising Sales
Assistants Jane Leonard ing to think about when trading the forex markets.
that the yield curve may be heading in the direction of being inverted. And This is exactly what drove Rob
if that
Controller Mary4757 California Ave. S.W.
K. Hutson
Seattle, WA 98116-4499 Booker, our interview subject this month, to trade
were to happen, that would not be a good sign for the US economy. I’m not the currency markets. Although
1 206 938-0570 Fax 1 206
ADVERTISING
[email protected]
938-1307
SALES luck was on that
suggesting his side
we arewhengoinghe started, he quickly
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period. Butnogiven
cake walk;
that
he
almost anything can happen, it doesn’t hurt to expect the worst. If nothingforelse,
went through some devastating losses before figuring out what worked him.
4757 California Ave. S.W.
Seattle, WA
National Sales Manager, 98116-4499
Classified & Web Sales
1 206 938-0570 Fax 1 206 938-1307
Edward W. Schramm
[email protected] He has a unique way of
it helps to preserve your capital. approaching the markets, and you can find out more about
Advertising Sales
National Sales Summer
Manager Davis W. Schramm
Edward it in the interview, which starts on page 38.
Classified & Web Sales Chris J. Chrisman Finding a unique way to trade is an important piece of the trading puzzle, re-
So
Circulation gardless of what you trade. We often emulate what others do just so we can be as
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it’s important
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1 206 938-0570 Fax 1 206 938-1307 system that gets you out of the market at
accept that we can never be like someone else. Each one of us is unique and eachthe right time. When access to
Subscription Manager Sean M. Moore
trading instrument is unique. Think about how many permutations and combinationsit
the markets is easy, the number of options available increases. This makes
[email protected]
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Subscription Sales
Manager Carmen
SeanHale
M. Moore
Assistant Subscription Manager Sheila Peterson
important
there are justto befromthorough
combining withthese
the different types of
two variables —orders,
that is,front-end
the person software,
trading andand
Subscription Sales Website
Agnes Dimaano, Tina Row trading systems that
what that person is trading. are out there. Lee Leibfarth, in his article “The Automated
T
http://www.traders.com
Staff members mayWEBSITE
be emailed through the Internet
Daytrader” starting on page 22, addresses the various options that are available and
using first initial plus last name plus @traders.com
http://www.traders.com how you can take advantage of them.
Staff members may be emailed through the Internet
using first initial plus last name plus @traders.com
Butrading
beforecurrency
getting topairs will be
the stage differentthat
of placing from trading
trade, equities
you need or options the
to understand or
marketfutures.
you areJames trading. Stanley, in his article starting on page 32, “Trading
You should be able to do so after reading Paolo The
Pezzutti’s
Unpredictable Without
MarketIndicators,”
Structure.”discusses a technique
follow he followsbehavior
in whichpat- he
Authorization to photocopy items for internal or personal
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terns, and you need to determine if it is volatile, trending, in a trading range, but he
Serv ice, pro v ided that the base fee
the Copyright Clearance Center (CCC) Transactional Report- of $1.00 per copy, plus follows
stronglyainfive-point
one direction,plan toorachieve
movinghis butgoals.
not with Meanwhile,
much momentum.Michael Burke uses a
50¢ per pageprovided is paid directly
that the to CCC,fee 222 Rosewood Drive,
strength score to determine which currency pairs to trade. He identifies thetostron-
ing Service, base of $1.00 per copy, plus
Danvers,
50¢ per page MA 01923.
is paidOnline:
directlyhttp://www.copyright.com.
to CCC, 222 Rosewood Drive, For Only when you know what the structure of the market is will you be able apply
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Danvers, MA 01923. Online: http://www.copyright.com. For
license by CCC, a sep ar
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those organizations that have been granted a photocopy tem
granted
of pay m
a
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photocopy
has been gest and weakest underlying currencies and ranks them based on a strength score.
the correct trading technique. But that’s just the first step. You still have to have
arranged.
license by The
Reporting
CCC,fee code forsystem
a separate users of the Transactional
of payment has been His article, “Identifying The Strongest To Weakest Forex Pairs,” starts on page 14.
discipline, as you will find out after reading this month’s Technical Analysis of
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& COMMODITIES ™
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Jayanthi Gopalakrishnan,
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commodities discussed. Technical Analysis Inc., one or may have a position in
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68 •• April
March2014 • Technical
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SWING TRADING SYSTEM
The editors of S&C invite readers to submit their opinions and information on subjects
Editor,
relating to technical analysis and this magazine. This column is our means of communi-
I read and reread Don-
cation with our readers. Is there something you would like to know more (or less) about?
ald Pendergast’s De-
Tell us about it. Without a source of new ideas and subjects coming from our readers, this
cember 2013 article in
magazine would not exist.
S&C, “Swing Trading
Email your correspondence to [email protected] or address your correspondence
With Three Indicators,”
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All
which I thoroughly en-
letters become the property of Technical Analysis, Inc. Letter-writers must include their full
joyed. I was wondering if the author had
name and address for verification. Letters may be edited for length or clarity. The opinions
any thoughts on using the system with the
expressed in this column do not necessarily represent those of the magazine.—Editor
3x ETFs such as FAS, FAZ, TQQQ, or
SQQQ. Would he change the H/L period?
Would he use a different EMA? Has he
Select Sector Strategy ber 2013 S&C. Based on his article, I done any work in that area? Thanks for
Editor, managed to code a very promising trad- publishing his work and his articles. I am
Thank you for another ing system to use on Indian equities. a long-time subscriber to S&C.
great article in the Janu- Nalin Pasricha Andy Ermenc
ary 2014 issue, the one
on the Select Sector Author Giorgos Siligardos replies: Author Donald Pendergast replies:
strategy using State I’m glad you found my article useful. Thanks for the kind words and very glad
Street Global Advisors to hear you enjoyed the article.
SPDRs (“Outperform The Market With SINGLE BACK ISSUES I have not performed any research on
Sector ETFs” by Todd D. Winkler and Editor, those particular leveraged ETFs, but
Steven A. Winkler). However, when I Is there a way to purchase single copies as I stated in the article, your primary
try to access year-end results from the of the print magazine directly from the consideration in using such a system is
State Street website, it doesn’t allow Stocks & Commodities website at to visually locate stocks and ETFs that
me entry. Traders.com? I noticed that there is no typically make regular swing or trending
Can you provide percentage results order form for single printed issues. moves on a regular basis. If you do locate
for 2013 or advise what is needed to Giorgos Siligardos any double- or triple-leveraged ETFs
obtain the data another way? In the with those characteristics, then you’ll
future, I’ll be sure to accumulate data Contact our circulation department likely want to focus on those vehicles
monthly myself. directly via email at Circ@Traders. for testing/trading purposes.
Also, I wonder how this strategy would com or by phone at 206 938-0570 or As far as adjusting the moving average
work on the “sell in May and go away” 800-TECHNICAL to order single back lengths for the channels, only extensive
strategy? That could be interesting! issues in hardcopy format from the past testing can help you determine the
Thanks so much for your help. year. There isn’t an option at our website optimum settings. TradeStation offers
Bill to place an order for printed single back their Portfolio Maestro product that
Washington, ME issues, although you can order single enables system testing at a portfolio
past articles in electronic format at www. level, and that might be a great way to
Author Todd Winkler replies: traders.com. test the system on a diverse group of
If you’re having trouble using the State Subscribers to S&C should know that stocks/ETFs that manifest consistent
Street Global Advisors (SSgA) website they can access complete issues from the swing or trending moves. But always
(www.ssga.com), simply go to a site such past year as digital files (look for the visually confirm that they are worthy
as Nasdaq.com, where you can easily downloadable Digital Editions at our swing candidates before including them
download data in spreadsheet form. You website, www.traders.com.)—Editor in such a back/forward test; your results
can then quite easily calculate yearly will be much better than if you randomly
returns from that. choose 100 or 500 large caps and run
them with the system.
YIELD CURVE EXPLAINED Hope this helps to provide a bit
Editor, more insight on how to develop your
I just want to thank you own unique way to use the system, and
for Giorgos Siligardos’ thanks for being a faithful subscriber
excellent article “Un- to Technical Analysis of Stocks &
derstanding The Yield Commodities magazine!
Curve, Part 2,” which
appeared in the Decem-

LETTERS
ERRATA: SHORT IRON CONDOR
In “Static Option Income Strategies: Do I work hard at my trading and
They Work?” by Giorgos E. Siligardos want a platform that works as
in the February 2014 S&C, a graphics hard as I do. That’s why
error occurred in Figure 1 unrelated to the
text of the article. The profit/loss graph I chose NinjaTrader.
of the short iron condor was incorrectly It not only lets me execute like
pictured upside-down. The correct graph
a pro - their Ecosystem,
is shown below in Figure 1. We regret
this error. support and training have
me thinking like a pro too.
I may not be a pro,

FIGURE 1: CORRECTED Profit/loss graph of
short iron condor but I trade like one.
ERRATA: CANDLESTICK patterns
In “Small Range, Big Professional traders move through the
Profits” by Robert E. markets with confidence and precision.
Ross
Dragonfly doji in the February Shooting star (bearish)
(bullish)
2014 S&C, part of the Black orNinjaTrader’s
white, after extensive video library, partner
descriptions for two of an uptrend
the candlestick diagrams Ecosystem and live training webinars provide
in Figure 1 was incorrect. The descrip- you with the foundation to become a more
tionsGravestone
should have
dojistated that the hanging Spinning tops (trend change
(bearish)
confident
man candle appears near or at a top (not either bullish or bearish) trader. Our award winning software
bottom) and that hammer candles appear
near or at a bottom (not top). lets you execute trades with professional
precision, and the best part is that getting
Hanging man (bearish) Topping tail (trend change
Black or white, at or from buyers to sellers) with NinjaTrader is FREE.
started
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Hammer (bullish)
So what are you waiting for?
Bottoming tail (trend change
Black or white, at or
near a bottom Start trading like a pro today!
from sellers to buyers)
ninjatrader.com/TASC
ERRATA: FUTURES TRADING ROOMS
In the March 2014 issue,
the Letters to S&C column
incorrectly referenced investtosuccess.com indicatorwarehouse.com optimusfutures.com
a past S&C article. The
article “Identifying Suc-
cessful Futures Trading
Featured Ecosystem Partners
Rooms” by Dean Handley appeared in
the December 2013 issue of S&C. to view more go to ninjatrader.com/partners
April 2014 • Technical Analysis of Stocks & Commodities • 9

L
et’s begin with the concept
of strategy. A strategy is
a set of actions that is or-
ganized and combined to achieve
a predetermined result. Although
various components within a given
strategy differ in proportion, se-
quence, and emphasis, each compo-
nent, no matter what its limited role
or function, has the capacity to have
a momentous effect on the outcome.
It is possible for a minor strategic
component to unexpectedly be-
come the single and most critical
factor leading an entire strategy to
its successful completion; inversely,
the same can be said about each
component’s vulnerability to risk
and failure.
Anyone who has had the ex-
perience of developing or imple-
menting a strategy knows that its
success relies on its capacity to
seize opportunity and to manage
risk. The notion that opportunity
and risk are two sides of the same
coin is a misguided abstraction.
In actuality, the size and potential
of both terms are dynamic and
subject to change in proportion to
one another, its manner of change
being perpetual and asymmetric.
For this reason, a well-designed
strategy will not place emphasis
on one at the expense of the other.
As the smallest of contingencies
COLLAGE: CHRISTINE MORRISON

can yield disproportionate results,
a minor misstep can throw an entire
strategy off course.
The importance
of position sizing
Granted, there are countless
Balancing Opportunity & Risk variations of trading strategies
Position Sizing In The

and methods in existence. Each
variation interprets markets in a
different way, focusing on certain
Spot Forex Markets

market tendencies, and filtering
or combining data to seek out
actionable trading opportunities.
Regardless of how logically sound
a strategy is or how effective it is
Wouldn’t you like to know exactly how much you are risking before you enter a under given market conditions,
trade? Find out how to do just that before placing your next trade. if you overlook any detail in the
management of risk, it can make
by Karl Montevirgen the strategy ineffective.
MONEY MANAGEMENT
When it comes to trading, one of the most He is willing to risk no more than 6% of the
Trade Stop-loss
fundamental yet overlooked steps is that of amount account and has decided to distribute his risk
position sizing. Many traders, especially evenly among the four trades. Here is what he
1 10
retail traders, size their positions with little has decided on:
2 30
or no reference to an objective risk metric.
n Total risk of 6%:
Without a risk metric, you will not know how 3 125
$1,200 for all four trades combined
much of your account equity you are risking. 4 450
You may not be aware that you are risking Figure 1: four trades with n Risk per trade of 1.5%:
a small percentage of your account or the varying stop-loss amounts. $300 risk per trade
Here you see the stop-loss amount
entire account. To make matters worse, if for four hypothetical trading oppor-
you continue in this manner across a series tunities. But what if the four trades had varying stop-loss
of trades, then the correlation between a amounts (buy price minus sell price, in pips) such
strategy’s profit or loss targets and the account equity become as what you see in Figure 1? The solution would be to divide
inconsistent and indeterminable. In this article, I will revisit the dollar amount of risk R by the stop-loss amount S and this
this basic but critical step. will determine the position’s P dollar-per-pip value limit.
R = Risk stated in currency terms (in our case, USD)
Position-sizing basics
n
The purpose of position sizing is to determine an appropriate n S = Stop-loss amount

size for a given transaction (a buy or sell) based on a strat-
n P = Position’s pip value limit (in our case, the
egy’s risk parameters and profit goals. Preferably, the size of
dollar-per-pip value limit)
the position will correspond to a predetermined risk limit.
In this article, I will base the position-sizing discussion on a R/S = P
percent risk metric.
Percent risk varies from trader to trader and is often de- For this example, I have predetermined that the risk per trade
termined by the trader’s account size and/or average trading (R) will be $300.
volume. Suppose a trader with a $20,000 account has a percent
Trade 1:
risk limit of 2% per trade. This amounts to a risk of $400.
For Trade 1 with a stop-loss amount (S) of 10, applying
Another trader with a larger account balance of, say, $1 million
the formula for determining the pip value limit would
may feel that risking 2% per trade ($20,000 potential loss) is
result in $300/10 = $30.00 per pip limit.
too large. That trader may instead want to risk only 0.25%,
Based on this calculation, if the position exceeds
which is a potential loss of $2,500.
the position’s pip value limit (P) of $30 per pip, then
However, the percent risk metric also depends on the overall
the potential loss will exceed the predetermined $300
anticipated average volume that a trading strategy generates. If
loss limit.
you trade a longer-term system that generates an average of one
trade per month, the fractional amount you are willing to risk Trade 2:
may differ when it comes to trading a strategy that produces For trade 2, the largest dollar-per-pip value you can
an average of 10 or more trading signals per day. Ultimately, take is $10.00 per pip ($300/30 = $10).
it is up to you to determine the appropriate risk limit you are
Trade 3:
comfortable with.
For trade 3, your position cannot exceed more than
Once you decide on a percent risk amount, you are then
$2.40 per pip ($300/125 = $2.40).
responsible for determining the size of each position so as to
not risk more than that predetermined amount. In order to do Trade 4:
this, you will need to calculate your position size in reference For trade 4, your position cannot exceed $0.66 per
to your percent risk and stop-loss amount (Please keep in mind pip ($300/450 = $0.66). In this case, unless your forex
that when you place an electronic order, there is no guarantee brokerage offers lot sizes smaller than 1,000 currency
that your order will get executed as intended; there is always units, you will want to limit the position to $0.60 per
a possibility of some error occurring.) pip (or six micro lots), which lowers the potential
In this article, I will show two hypothetical examples. The stop-based loss to $270.
first example is simplified using whole numbers for the initial
parameters, making the calculations easier to follow. The sec-
ond example uses more specific values and is more realistic.
The forex examples assume no additional fees or commissions The success of a strategy relies
other than the spread taken into consideration. on its capacity to seize oppor-
Let’s take a look at the first example. Suppose a trader with tunity and manage risk.
an account size of $20,000 identifies four short- and long-term
trading opportunities across four different currency pairs.
MONEY MANAGEMENT
detailed percentage risk adjust-

Trade Stop-loss Pip value Corresponding Lots
amount limit ments across a series of trades.
Now let’s take a look at the
1 10 $30 per pip 300,000 currency units (3 standard lots)
second example (Figure 3). In this
2 30 $10 per pip 100,000 currency units (1 standard lot)
example, the trader is bullish on
3 125 $2.40 per pip 24,000 currency units (2 minis and 4 micro lots) the EUR/USD and speculating
4 450 $0.66 per pip 6,000 currency units (6 micro lots) = $0.60 per pip that a 50% retracement of the
Figure 2: position size results. Here you see the pip value limits for the four hypothetical trades. swing from 1.1880 to 1.3365 (at
1.2623) will result in a measured
move of 1,485 pips to 1.4108
Although currency values per pip will differ depending on (1.2623 + 0.1485). The trader is expecting to hold this position
the currency pair (something that every trader should check for up to a few months. However, the main issue is the 752
beforehand), I will assume, for the purpose of this example, pip stop-loss amount from the current market price of 1.2632
that the USD per pip value is an even $10 per pip per standard to the swing low of 1.1880. The trader has exactly $20,000
lot. The position size results are displayed in Figure 2. in his account balance and has the option of trading either
Forex Tester Software

FIGURE 3: A REALISTIC LOOK. Looking at this daily chart of the EURUSD, you can determine where you should enter a position and how much you should risk.
If all of the trades end up being losers, the target risk limit the 6E (EUR/USD) futures or the spot market. However, he
would be $1,200 (given that all of the stops are triggered does not feel comfortable risking more than 10% (or $2,000)
according to plan), or 6% of the account. In contrast, if you of his account equity for this one trade.
were to position size using varying lot sizes in an unsystem- The pricing of the 6E futures will be slightly different (as
atic manner, the potential profits or losses would have been its pricing structure takes into account the cost of carry), but
difficult to determine. as the two are highly correlated, the trader will take the 752
pip stop-loss amount as a proxy to make a quick assessment
Spot forex vs. currency futures as to whether the 6E might be a viable instrument to trade. If
One aspect that differentiates spot forex from its currency he chooses to trade the 6E and gets stopped out at 752 ticks,
futures equivalent is the smaller lot sizes that you can trade. his loss would be $9,406 (that is, trading loss [752 ticks x
Most forex brokerages offer a micro lot (1,000 currency units) $12.50 = $9,400] + commission & exchange fees of $6.00),
as the minimum tradable lot size, and some brokerages of- as the 6E moves in increments of $12.50 per tick. Be aware
fer lot sizes that are even smaller. In my opinion, smaller lot that commissions vary and $6.00 is only being used as an
sizes allow for more flexibility in position sizing. Although example. This loss would amount to 47% of his total account.
potential profit decreases when using smaller lot sizes, risk If he decides to use a “dollar stop” limit of $2,000, then his
can also be minimized and better managed. Smaller lot sizes stop-loss would have to be placed 160 ticks from his entry
also allow traders to trade multiple currency pairs (if a trading point somewhere around the 1.2472 range. He decides that
strategy calls for greater market diversification), participate such a stop-loss amount may be too close for this kind of a
in longer-term strategies requiring larger stops, and/or make trade and therefore passes on the 6E.
If he trades in the spot market, he is able to build a position This amounts to a 92% gain, but at the risk of losing 47% of
to match his loss limit to the swing low point of 1.1880, which the account. Although the difference between the two scenarios
he feels may be a more preferable “market-based” technical are clear, you would have to ask how many traders are willing
support point. Because of the flexibility of having smaller to make large profits at the expense of betting the farm, versus
lots sizes to work with, he is able to position his equity risk risking smaller amounts in a controlled manner in the effort
to a preferred stop level rather than selecting a stop level to attain smaller but more consistent profits.
based on his equity (as is the case with the 6E). Dividing his
percent risk amount of $2,000 by the amount of 752 pips, he Size it up
is able to determine that his dollar-per-pip value must match I hope these examples have provided you with a better un-
and not exceed $2.66 per pip. He decides to round this figure derstanding of the calculation, implementation, and potential
down to $2.60, which in lot terms is 26,000 currency units or significance of position sizing. Position sizing plays a crucial
two mini- and six micro lots (the total stop-based risk being role in forex trading. Failure to give position sizing adequate
$1,955.20). He double-checks this position value by making the consideration can disproportionately increase the risk factor
calculation: ((pip/exchange rate) * currency units) * exchange of any trade or trading strategy.
rate = USD per pip value, or ((.0001/1.2632)*26,000)*1.2632
= $2.60. Karl Montevirgen has worked for Global Futures Exchange
The trader enters a market order that is filled at 1.2632. If and Trading Company as a foreign exchange and futures
he is correct in his speculation and the EUR/USD reaches broker since 2011. He can be reached at KMontevirgen@
his profit target of 1.4108, he will gain a trading profit (not globalfutures.com.
counting rollover interest debits/credits) of $3,837.60 (1,476
pips), which is a 19% gain, while risking a little less than ‡Forex Tester Software
10% of his account (9.8%). On the other hand, if he traded ‡See Editorial Resource Index
the 6E with an equivalent profit target, he would have gained
approximately $18,444 (that is, trading profit [1,476 ticks x
$12.50 = $18,450] – commission & exchange fees of $6.00).
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THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS SHOWN IN AN ACTUAL PER-
FORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR
OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO
SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR
LOSSES SIMILAR TO THESE BEING SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

FOREX TRADING
Pairing Up
Identifying The Strongest

To Weakest Forex Pairs
Which is the strongest and which is the weakest? pair, EUR is the base currency while the second
Here’s a straightforward concept that can help you symbol, in this case USD, is the quote currency. The
track forex market dynamics and cross-currency base symbol is the currency you are buying or selling
relationships. and the quote symbol is the currency in which you
realize the profit or loss of a trade.
At some point in the life of every forex trader, the

idea of trying to determine which currency is
Measuring forex strength
There are several ways to calculate the performance
stronger or weaker than all the others will come up. relationships across the eight major currencies. I
The thinking goes like this: If I know which currency elected to take a simple approach; I used a smoothed
is the strongest and which one is the weakest, then the momentum percentage calculation to look at how
resulting combination pair should have the greatest each currency performs against all of the others.
trend potential. Although this is a straightforward The first step in measuring a forex strength score
concept, it turns out that there is much more that we is to calculate the raw performance for each of the
can derive from this analysis in tracking forex market eight major underlying currencies individually. This
dynamics and cross-currency relationships. is done by calculating the performance of the seven
In this article, I’ll discuss the modeling and analysis related forex pairs that contain each underlying cur-
of a forex pair performance strength score, focusing rency and then totaling the results.
only on the eight major (that is, most widely traded)
currencies: the US dollar, Japanese yen, euro, Swiss Momentum percentage = Average ((Close –
franc, British pound, Canadian dollar, Australian dol- Close[13 bars ago]) / Close[13 bars ago], 3 bars)
lar, and New Zealand dollar. These eight underlying
currencies represent 28 unique tradable cash forex Depending on the trader’s time frame and outlook,
pairs; any one underlying currency will have seven these scores can be calculated on any bar interval,
unique cash pairs that match up with the seven other and the lookback bar length for the momentum per-
underlying currencies. centage calculation can also be adjusted.
Since there are two currencies represented in each
Forex pair symbology forex symbol, if the momentum percentage for the
Each cash forex symbol comprises two underlying pair is positive, then the score value for the base
currencies. The base currency in a forex pair symbol is (first) symbol in the pair is also positive, and the
JOSE CRUZ
the first symbol noted. For example, in the EURUSD score value for the second (quote) symbol in the pair
must be negative. For example, if EURUSD has a
positive momentum percentage value of 0.55, then
the EUR would get a positive score value, +0.55, and
the USD gets a negative score value, -0.55. You then
by Michael Burke accumulate the scores for each of the seven unique

FOREX TRADING
forex pairs to come up with the raw performance score for the
underlying currency. In other words, you look at all seven pairs Tracking the strength
that contain the EUR and add up the scores: scores over time to
find changes in score
Euro score = (EURAUD + EURCAD + EURCHF + EURGBP
+ EURJPY + EURNZD + EURUSD)
momentum will help
identify those pairs
The formula is a little different for currencies that are not moving up and down
always the base (first) currency of the symbol. For example, in the rankings.
for the US dollar:
US dollar score = (USDCAD + USDCHF + USDJPY) reflects the overall performance strength
– (AUDUSD + GBPUSD + EURUSD against the seven other currencies. You can
+ NZDUSD) now rank these underlying currencies from
strongest to weakest.
You need to subtract the scores when the score currency is
the quote (second) currency in the symbol, since a negative Pairs scores example
performance score for that pair means the score was positive Once you have the normalized score for each
for the quote currency. Let’s plug in some sample performance of the eight major underlying currencies, the
numbers to illustrate the idea: normalized scores for the two underlying
currencies in each specific pair combine to
US dollar score = (0.5 + 0.6 + (-0.4)) – (0.7 + 0.5 + (-0.3) make up the strength score for that pair. The
FIGURE 3: STRENGTH
+ (-0.4)) = +0.2 (raw total score) table in Figure 3 shows the calculated scores SCORES FOR THE 28
for all 28 pairs. You can sort and rank this MAJOR PAIRS. Seeing
This raw score for each underlying currency can be normal- list in order to find the strongest and weakest the calculated scores for all
ized to a larger number that can be more easily compared and pairs relative to each other. 28 pairs helps to sort and
sorted for analysis. rank them to find the stron-
The strongest and weakest underlying gest and weakest pairs
currencies in Figure 2 are the British pound relative to each other.
Euro score example and the Canadian dollar, with strength scores
The table in Figure 1 shows the smoothed momentum percent- of +18.19 and -16.82, respectively, yield-
age for each of the seven related euro currency pairs. These ing a strength score of +35.01 for the pair GBPCAD. You
momentum values combine into the strength score for the take the strength score of the British pound and subtract the
underlying euro currency. In this case, I also normalized the strength score of the Canadian dollar as follows: (+18.19 –
final underlying score by summing the performance of all seven (-16.82)) = +35.01
related pairs, multiplying the result by 1,000, and dividing that The weakest pair in Figure 3 is CADCHF, with a strength
result by seven. score of -19.38, the result of the Canadian dollar score of
-16.82 and the Swiss franc score of +2.56 (Figure 2): (-16.82
Underlying scores example – (+2.56)) = -19.38.
The table in Figure 2 shows the final strength scores for each Since the Canadian dollar is the weakest underlying currency,
of the major currencies. Each underlying currency score now it will have a reverse score effect when it is the second (quote)
symbol in the pair, thus
placing those pairs such as
GBPCAD and AUDCAD
among the strongest.
Charting
performance
Figure 1: FOREX PAIR PERFORMANCE VALUES. Here you see the smoothed momentum percentage for each of the seven euro-related
currency pairs and the total strength score.
strength score
The historical values of
the strength score for an
individual forex pair can be
plotted on a chart in order to
gauge the trend of the score
itself and to identify any
Figure 2: strength score for each of the eight major currencies. Each of the scores reflects the overall performance visual correlations between
strength against the seven other currencies, making it possible to rank these underlying currencies from strongest to weakest. the score and price action. In
The right pair
At first glance, traders might see this data
as a way to identify long position symbol
candidates in the stronger pairs and short posi-
tion symbol candidates in the weaker pairs.
However, by the time a pair or currency has
reached the strongest or weakest spot in the
list, the symbol has probably already moved
a significant amount. This is where tracking
TradeStation
the strength scores over time to find changes

in score momentum will help identify those
pairs moving up and down in the rankings.
FIGURE 4: FOREX PAIR PERFORMANCE STRENGTH SCORE. On this daily chart of the EURUSD you see an
indicator that plots the historical strength score for a unique forex pair. This allows you to gauge the trend of the
In my mind, the primary application of this
score and identify visual correlations between the score and price action. strength score concept is symbol selection,
which is identifying those symbols with the
Figure 4 you can see an indicator that plots this historical strength greatest potential based on their relative ranking and performance
score for a unique forex pair. within the group of 28 major forex symbols.
Longer-term trend traders can utilize this concept on daily
Strength score for or weekly bar intervals and adjust the length input for the
underlying currency momentum calculation as desired. Remember, however, that
It’s not always enough to know the momen- longer input values tend to exaggerate the indicator lag effect.
tum of a single pair; it is equally important to Intraday traders can use multiple confirming time frames/in-
know the trend of the two strength scores for tervals (minute and daily intervals) to gauge and confirm the
the underlying currencies that make up a pair. mode or direction of a currency, and then use that information
In Figure 5 you can see that the top indicator to develop or support intraday trading decisions.
plots this historical strength score for the two Anytime you take multiple forex (FX) trades, make sure that
underlying currencies that make up EURUSD the pairs you are trading are not overly correlated. For example,
(red = euro, and blue = US dollar). you would probably not want to trade GBPCAD (long) and then
One possible application of this historical pair chart data is CADCHF (short), since both trades are actually short CAD. It
to confirm a new trading signal by waiting for one underlying might be better to find a non-CAD pair for a second trade.
currency to be above zero and trending higher while the other One possibility for further development of this idea would
currency is below zero and trending lower. To help visualize be to track, over time, changes in the relative ranking of each
this concept, the bottom indicator in Figure 5 is now plotting symbol compared to the others. This ranking could be displayed
a tick mark whenever one underlying currency score is above over a historical period to monitor the relative movement of
zero and the other is below zero, in the trade direction of the each symbol within the list. This would allow you to more easily
pair score. see which symbols were moving up and down within the list,
determine how long a symbol had been at a
specific rank level, and better identify trend
reversals and rotations of symbol strength.
Michael Burke is vice president of Client

Education and Training at TradeStation
Securities. He is a long-time trader, market
analyst, and trading strategy developer. He
has taught numerous live and online courses
and seminars to thousands of traders all over
the world.
‡TradeStation
‡See Traders’ Glossary at Traders.com for definition

‡See Editorial Resource Index
FIGURE 5: CHARTING STRENGTH SCORE FOR UNDERLYING CURRENCY. Plotting the historical strength score
of the two underlying currencies that make up the EURUSD (euro in red and USD in blue) will help to confirm
trading signals.

Explore Your Options
Got a question about options? Tom Gentile is the chief option strategist at Optionet-
ics (www.optionetics.com), an education and publishing firm dedicated to teaching
investors how to minimize their risk while maximizing profits using options. To
submit a question for our Explore Your Options column, post it to our website at
http://Message-Boards.Traders.com. Answers will be posted there, and selected
questions will appear in a future issue of S&C.
Tom Gentile of Optionetics
Trading the “Easing” of both up and down — very well. for TLT would be near $100. It’s only
Quantitative Easing The chart in Figure 1 is a daily chart then that I look at a directional option
Ever since former Federal Reserve chair- of TLT, and as you can see, it had quite strategy for this move. Let’s compare
man Ben Bernanke and company made a move last year before finding a bot- two directional strategies that could be
the ultimate decision to begin pulling tom. Since October 2013, it has started used by someone with a bearish outlook
back on bond purchasing last year, Trea- to create a “cone” effect of higher highs on TLT, taking into consideration both
sury bonds have taken a beating. In the and lower lows. My expectations are that risk and reward.
last six months of 2013, bonds dropped we will remain in this wide range this
some 20% while interest rates rose during year, testing both the bottoms of 2013 as Put options: The first and simplest
the same time frame. Many traders are well as the recent tops. If the Fed were way to take advantage of a falling
speculating on a continued drop after the to continue to taper off bond purchases, asset is to buy put options. Puts
brief runup at the beginning of this year. then this would be bearish for TLT and give the buyer the right, but not the
A question I have been getting lately is, good for both the US dollar and interest obligation, to sell the underlying as-
“How can an equity option trader take rates. This would suggest a move back set at a predetermined price (strike)
advantage of this move in the fixed in- toward the recent lows seen in TLT. If, for a predetermined amount of time
come markets?” however, the stock market were to con- (expiration date). A premium is paid
There are plenty of stock option traders tinue making corrections similar to what to a seller for this right, so the buyer
who have no idea that trading the bond we saw earlier this year, that might be wants to make sure that his timing
market is right in their backyard. Yes, enough for traders to start buying bonds is right for both the price move and
when the subject of trading bonds comes as a flight to quality, causing TLT to see the time frame; otherwise, the option
up, most people think of the futures mar- moves back toward the highs of earlier could lose value, even if the trader
kets, but it’s possible to take advantage of this year. I actually expect both of these were correct about the overall move
a bond rally (or drop) using an exchange scenarios to happen. of the asset. In the case study in Fig-
traded fund (ETF) that is made up of If I had a bearish view of the bond ure 2, the option buyer has a purchase
bonds. When I am not following the fu- market, and I were expecting TLT to of May 106 puts, which have 100
tures markets, I turn to TLT, the iShares drop, then I would first want to get a days to expiration. They cost $287
20-year bond ETF. This ETF closely price outlook on this ETF. For instance, per contract. The option trader needs
tracks the US Treasury bond market, if the chart in Figure 1 were to continue the price of TLT to be at or below
meaning it correlates to the moves — on in its current pattern, my price target 103.13 by the May expiration date to
break even or profit on the trade. If
TLT were to fall to our target of $100,
the trader would see a profit potential
of more than $300 on the trade, or a
better than 100% gain.
Bear put spread: This spread in-

Optionetics / Integrated Investor
volves the simultaneous purchase

and sale of two different option
strike prices for a spread price. The
sale helps reduce the cost of the
overall trade, and in some cases can
even increase your reward-to-risk
ratio. This case study involves the
purchase of the put option from the
Figure 1: BOND ETF. A continuation of this price pattern in TLT points to a price target near $100. At that point, first example with the sale of the
a directional option strategy for this move could be considered.
May 100 puts. The total cost of this
Explore Your Options
trade has been reduced to $217,
but the reward is capped at a
total of $383 (Figure 3). This
is because we are obligated at
or below the price of $100 for
TLT. The good news is that
the cost and risk in this case
study are significantly lower
than the put purchase in our
first example. Even better is
the reward-to-risk ratio, which
is nearly twice as much if TLT
were to move to 100 by the May
Optionetics
expiration.
It is important with any trade

Figure 2: PUT OPTION. Here, the option buyer purchases May 106 puts with 100 days to expiration at $287 per contract. setup that traders first evaluate
Thus, the option trader needs the price of TLT to be at or below 103.13 by the May expiration date to break even or profit
on the trade. their own expectations of price
moves, as well as the time frame
in which they expect the moves to
occur. After that, evaluate differ-
ent option strategies for the best
outcomes in both risk and reward.
Finally, since markets can move
before expiration occurs, I can’t
stress enough that option traders
should constantly monitor their
open positions for possible early
exits.
Good trading!
‡Optionetics and Integrated Investor

(Hubb Financial)
Figure 3: BEAR PUT SPREAD. Using a bear put spread instead of a put option reduces the total cost of the
trade and also reduces the risk, although the reward is capped.
Sneak
preview …
Wilder’s RSI: Expansions & Contractions, The Truth About Stock Trading
Extending The Time Horizon Part 3 Rooms And Chat Rooms
by Mike B. Siroky by Dirk Vandycke by Josh DiPietro
The relative strength index (RSI) is a well-loved In this third and final part of a series that looks If you think that joining a trading or chat room
indicator. But have you ever thought about how at expansions and contractions to gauge diver- will show you how to trade like the traders on
many price bars to include in its calculation, gences, we look at how to apply the Chartmill Wall Street, think again. Instead, here’s what
or thought about how high is high and how Bull Indicator to your trading and show you the you should really be doing.
low is low? Here’s a look. backtested trading results. …Coming soon!

Elementary, My Dear Chart!
Evidence-Based Support & Resistance

Here are two new indicators based on evidence from price– els. Because these formulas ignore volume, the support and ROY WIEMANN
volume behavior to help create dependable support and resistance lines they compute are only proxies for the actual
resistance lines that accurately identify the prices where location of the supply and demand pools that create support
supply and demand pools are located. and resistance. This article describes how a new indicator I
named Defended Price Lines (DPLs) can exploit price and
by Melvin E. Dickover volume data to pinpoint the location of supply and demand
pools. DPLs indicate where resistance caused by supply or
IT is well known that price movements are caused by

changes in supply and demand. Pauses, consolidations,
pullbacks, and reversals are caused by encountering
demand has been found and will be found again and again.
Finding DPLs with relative volume

pools of supply or demand that must be absorbed before Using simple statistical methods, we can find significant vol-
price can move past them. It is these supply and demand pools ume differences — those that make a difference to our trad-
that are the underlying cause of support and resistance. ing. The relative volume indicator finds where an unusually
Conventional support and resistance indicators are cal- large volume suddenly comes rushing in to defend the price.
culated from various price formulas based on hypotheses For end-of-day data, a relative volume indicator shows how
about price behavior such as floor pivots and Fibonacci lev- many standard deviations from the average volume today’s
NEW TECHNIQUES
volume is. The code for the relative

volume indicator in OmniTrader’s
OmniLanguage is shown in side-
bar “OmniLanguage Code For
Relative Volume Indicator.”
Finding DPLs with

Freedom of Movement
A new indicator I call Freedom
of Movement (FoM) shows where
movement of price is suddenly
restricted. This identifies where
a pocket of supply or demand
has been hit, preventing the price
from continuing to move. If price
OmniTrader
movement is unrestricted, it takes
only a moderate amount of volume
to move price up or down. In an Figure 1: defended price lines (DPLs). Here you see a chart annotated with DPLs starting in 2008 and ending in
uptrend, for example, traders September 2013. The relative volume and Freedom of Movement (FoM) indicators used to determine the DPLs are plotted
expect price to rise, and buyers at the bottom of the chart.
must pay the ask price — and with

slippage, sometimes more — to
get shares. Few will sell at the
bid. When you encounter a price
where even a large volume of buy-
ing results in price moving little
or not at all, you have encountered
an FoM restriction that exposes
a defended price where hidden
supply or demand awaits.
FoM is a normalized measure
of relative effect (relative price
change) divided by relative effort
(relative volume), plotted as a
histogram in standard deviations.
FoM spikes beyond a threshold
indicate important restrictions
on price movement. The code
for FoM in OmniLanguage for
Figure 2: a detailed view. Here you see the same chart as in Figure 1 but FIGURE 3: OVERLAPPING BARS.
OmniTrader is shown in sidebar focusing on the time period between January and May 2013. The detailed view If the bar with the spike overlaps the
“OmniLanguage Code For Free- annotates the dates the DPLs were first drawn, some starting as far back as 2008 previous bar, then you draw the DPL
dom Of Movement (FoM).” through 2010. They still retain accuracy and predictive power. from the close of the previous bar.
End-of-day example is found in either indicator, it shows a significant reaction to

The chart in Figure 1 shows a chart annotated with DPLs a price, a reaction that indicates a DPL is present. Often, the
starting in 2008 and ending in September 2013. The relative price movement from the previous bar to the spike bar is large
volume and FoM indicators used to determine the DPLs are enough to create a zone of prices wherein the DPL might be
plotted at the bottom of the chart. The chart in Figure 2 details located. The initial placement of the DPL is done heuristically,
the same chart for the time period January to May 2013. The and refined later.
detailed view annotates the dates the DPLs were first drawn,
some starting as far back as 2008 through 2010. They still Overlapping bars
retain accuracy and predictive power. If the bar with the spike overlaps the previous bar, then you
draw the DPL from the close of the previous bar (Figure 3).
Drawing the DPLs
A good threshold setting for significant relative volume spikes Very large bars
is two standard deviations. When a spike that size or larger If there is a large bar up or down, you may assume that the
FIGURE 4: VERY LARGE FIGURE 5: SMALL GAPS. Small gaps are treated
BARS. If there is a large the same as overlapping bars, so you would draw
bar up or down, you may from the close of the previous bar.
assume that the price at
which the bar ended was
a DPL.You draw it from the
close of the very large bar
with the volume spike.
price at which the bar ended was a DPL, so you draw it from
the close of the very large bar with the volume spike. The FIGURE 6: LARGE FIGURE 7: CLUSTER OF SPIKES.
GAPS. Large gaps You would draw the DPL at the
initial placement of the DPL is done heuristically, and refined are treated as very open or close extreme value in the
later (Figure 4). large bars, and the cluster of spikes for the last or next-
DPL is drawn from to-last spike.
Gaps the close of the spike
bar.
A gap means that the open of the current bar was above or
below the high or low of the previous bar. Small gaps are
treated the same as overlapping bars, so you would draw from Cluster of adjacent spikes
the close of the previous bar (Figure 5). Large gaps are treated Sometimes, the chart will show a rapid move of two to four
as very large bars, and the DPL is drawn from the close of relative volume spikes adjacent to one another. This indicates
the spike bar (Figure 6). a volume climax. You would draw the DPL at the open or
close extreme value in the cluster of spikes, for the last or
OmniLanguage Code For next-to-last spike (Figure 7).
Relative Volume Indicator
#Indicator
'RelativeVolume Gathering more evidence
'by Melvin E Dickover as time goes on
'finds spikes of volume above numStDevs standard When a DPL is first found, often the heuristics
'deviations of the average volume of the lookback period only place the DPL near the price where it
#param "period",60 'number of bars for StDev calculation
#param "numStDevs",2 'num of StDevs to be significant is actually located. It is only one piece of
evidence, after all. As more bars accumu-
dim av, sd, relVol as single late, you get more evidence from additional
if bar=0 then relative volume and FoM spikes near the initial DPL price
plot("0",0,black,1) ' force title to black
end if level and you can adjust the DPL price to improve accuracy.
if Bar>period then I adjust the DPL price (within the initial zone of uncertainty)
av = sma(V,period) in a way that fits the DPL to multiple spike instances, or to
sd = std(V,period) the price of a doji candle if I am fortunate enough to find one.
relVol = (V-av)/sd
if relVol>numStDevs then A doji tends to occur exactly at DPL prices.
plothist("RelativeVolume",relVol, 0,black) If you start drawing a DPL from a time that is hundreds of
else bars prior to the current bar, you will find that line will have
plothist("RelativeVolume",relVol, 0,darkgray) several more spikes associated with it as bars accumulate. The
end if
end if more spikes that define the DPL, and the more times price hits
it and holds or consolidates around that price, the stronger the
NEW TECHNIQUES
Interestingly, I find
that DPLs defined
years ago are still
honored today. You
will have to go back
several hundred bars
to identify them.
DPL. If you find later spike bars whose

candles touch or are passed through by
an existing DPL, do not use heuristics
to create another DPL. Assume you are
seeing the existing DPL being honored.
FoM spikes can be used to define
DPLs, but in general, they are not as
strong an indication unless they come in
clusters. Use isolated spikes to confirm
and refine DPLs. If a relative volume
spike and an FoM spike occur on the
same bar, it's a sign of greater strength
of the DPL. It suggests that a defensive
reaction was provoked, and price move-
ment was stopped in its tracks.
By following this process on a dozen
charts, starting back a few hundred bars,
you can become adept at annotating a
chart with DPLs, since you would have
encountered enough examples to know
what makes a good DPL and how it plays
out on a chart over time. On many stock
charts, you will need to go back to 2007 or
2008 to find DPLs that establish bounds
around today’s prices. Interestingly, I
will find that DPLs defined years ago
are still honored today.
Trading with DPLs

By following the process I’ve described
here, you will have a chart that is anno-
tated with dependable, reinforced DPLs.
As you examine the chart, you will see
that price movement will normally pass
a short way through the DPL. It is the
passage through the DPL that provokes
the defensive reaction. Momentum car-
ries the price extreme past the DPL, with
different degrees of momentum generat-
ing different price extremes at different
times near the same DPL.
If you had used price extremes to
NEW TECHNIQUES
define support and resistance, you would have to construct or exit a position quickly before a fast-moving emini reverses
a wide price zone from the extreme price back to another and wipes out all your profits. Dependable evidence ahead of
price (not well defined) in order to be certain that the zone time that shows you where the pauses and consolidations and
contained the actual supply or demand price. DPLs accurately perhaps reversals will happen will inspire you to have many
locate supply and demand near extremes and at consolidations. other trading ideas.
DPLs tend to either be at the outer bound(s) of consolidations,
or pass through the middle of them. Remember, for price to Defended Price Lines
pass through a DPL, the existing supply or demand at that on intraday bars
price needs to be absorbed. DPLs tell us in advance where The significant difference between in-
price will pause, consolidate, pull back, or reverse. traday bars and end-of-day bars for the
DPLs can be used in place of conventional support and relative volume and FoM indicators is
resistance indicators in your trading. You can use the same the periodic high and low volume activity levels at different
trading strategies that are used with floor pivots or Fibonacci times of day. In stocks and futures, there are large, regular
levels — reversals, breakouts, and breakins. DPLs provide volume-activity time zones. For example, activity increases
price targets, places to scale out of a position, and excellent near the session open and close, and activity cuts back dur-
prices for stops. Since you have dependable stops and targets, ing lunchtime. In forex, there are regular times during the
DPLs provide a way to compute a realistic risk/reward ratio. day when transaction volume increases (actual lot volume is
For trading options, they indicate excellent places to put the not available) due to the different opening times of the major
strikes for iron condors and other spreads. Shorter-term traders exchanges. For the relative volume and FoM indicators to be
may consider using DPLs and FoM spikes as a complement meaningful when trading intraday, you must replace volume
to a trailing stop. If you hit a spike, there’s no point in waiting with adjusted volume in the calculations.
while a consolidation proceeds. Similarly, you don’t need to Adjusted volume averages the volume of bars occurring at
wait to be stopped out by a trailing stop if price reverses. the same time of day over a number of days. This adjusts for
FoM spikes are especially interesting because they often volume variations at each particular time bar. For example,
uncover previously unknown prices where a pause or reversal for five-minute emini futures bars, the 14-day adjusted
can happen. You have an opportunity to take partial profits volume for the 9:35 am five-minute bar would be computed
OmniLanguage Code For Freedom Of Movement (FoM)
#Indicator theMove = 1 +((aMove-theMin)*(10-1))/(theMax-theMin)

'FreedomOfMovement end if
'by Melvin E Dickover
'computes how much effort to move the close up or down from previous bar 'compute the relative volume
'Effort is defined as the normalized relative volume av = sma(V,period)
'Effect is the normalized percent of (close - previous close) sd = std(V,period)
'The resulting Freedom of Movement is the relative ratio of effort/effect relVol = (V-av)/sd 'relative volume in stDevs
'The larger the spike in FoM, the more the restriction of freedom of movement 'from the average volume
'Price movement is easy when FoM is small or negative,
'that is, only a small volume required to move price appreciably 'Normalize the relative volume to range of 1 to 10 to get
' 'rid of negatives
#param "period",60 'lookback period for calculations theMinV = LLV(relVol,period)
#param "numStDevs",2 'standard deviations for significance theMaxV = HHV(relVol,period)
if (theMaxV-theMinV)>0 then
dim aMove, theMin, theMax, theMove as single theVol = 1 + ((relVol-theMinV)*(10-1))/(theMaxV-theMinV)
'for normalizing theMove end if
dim av, sd, relVol as single
'for StDev of volume 'compute the Freedom of Movement in stDevs from the average
dim theMinV, theMaxV, theVol as single vByM = theVol/theMove 'effort divided by effect
'for normalizing relative volume avF = sma(vByM,period)
dim vByM, avF, sdF, theFoM as single sdF = std(vByM,period)
'for StDev of Effort/Effect theFoM = (vByM-avF)/sdF 'Freedom of Movement in stDevs

if bar=0 then if theFoM<numStDevs then
plot("0",0,black,1) 'forces title to black plothist("FreedomOfMovement", theFoM, 0,darkgray)
end if else
if bar>period+1 then 'warmup period plothist("FreedomOfMovement", theFoM, 0, black)
aMove = abs((C-C[1])/C[1]) 'percent move end if
'normalize to 1 to 10, so no divides by a zero or forex problems end if
theMin = LLV(aMove,period)
Return theFoM
theMax = HHV(aMove,period)
if (theMax-theMin)>0 then —M.D.

FIGURE 8: FIVE-MINUTE CHART OF THE EMINI (ES). To adequately bracket the September 9, 2013 prices, it was necessary to start the plot back on August 22, 2013.
by adding up the volume for the last 14 9:35 am five-minute drawing DPLs on the chart starting from a few days prior. Try
bars and dividing by 14 to get the average volume of a 9:35 to bracket the most recent session’s closing price with DPLs
am bar. You would then divide the current 9:35 am bar’s vol- that are enough points away to accommodate the expected
ume by that average. Note that a 14-day average calculation opening gap, plus a small buffer. In Figure 8 you see a five-
requires at least a 14-day backfill of real-time data. To use minute chart of the emini (ES) with DPLs plotted for trading
the code in the sidebars for intraday charts, replace volume on September 9, 2013. To adequately bracket the September 9,
with adjusted volume. 2013 prices, it was necessary to start the plot back on August
22, 2013. The chart in Figure 9 shows a more detailed view of
Emini five-minute bar example Figure 8 and illustrates how existing DPLs from three weeks
If you are going to daytrade stocks or eminis on a five-minute ago are still honored. Opening-gap traders will often find that
chart, then prior to the market open, you need to prepare by the opening price will be at a DPL. Opening-range traders may
FIGURE 9: HONORING DPLS FROM THREE WEEKS AGO. Opening gap traders will often find the opening price will be at a DPL. Opening range traders may want to use
previously established or new DPLs (empirical) rather than traditional opening range lines.

NEW TECHNIQUES Your goal should be to
construct charts with
dependable lines, created
want to use previously established or new DPLs (empirical) and reinforced by evidence.
rather than traditional opening range lines (proxies for what
you really want to know).
Limitations of DPLs
Although DPLs indicate where increases but just not as dependably.
in supply or demand await, they do not in- As with any support and resistance method, it is possible
dicate how large the supply or demand will to get carried away and have too many lines on the chart.
be at that price. Knowing where the supply If you draw enough lines (even at random) or wind up with
or demand waits is not the same thing as lots of lines close together, you will find price bouncing
knowing where price will stop or reverse. off many of them, even though there really is no trading
Prices will sometimes blow through a DPL significance to this behavior. If you start creating the lines
as if it were not there. If this happens on low with the more numerous FoM spikes alone, you may end up
volume, it may mean the DPL is becoming with too many lines.
weak or irrelevant. If it happens on strong momentum and
reasonably high volume, it means that the supply or demand Finding the hidden clues
waiting there was swamped by the momentum, and the DPL Your goal should be to construct charts with dependable lines,
is still valid. Since the defensive reaction is provoked by created and reinforced by evidence. Go for a smaller number
passing the DPL price, especially on end-of-day charts, you of repeatedly proven lines.
cannot predict price extremes with them, although they often DPLs provide an evidence-based alternative to hypothetical
coincide with price extremes. calculations of support and resistance, using the price–volume
DPLs require a price history. If price is making historic highs behavior to unearth hidden caches of supply or demand.
and lows, all your DPLs will be initial and their prices set by
the heuristics, with no evidence to tell you how dependable Melvin E. Dickover has been an active trader for about 15
they are or how they should be adjusted. They will still work, years, focusing on technical analysis. He is an active member
of his local Society of Market Technicians. He is a retired
system designer and builder, and holds a bachelor’s of science
in physics from Purdue University, and a master’s of science
in physics from Trinity College. He has programmed several
Noisy indicators indicators in OmniLanguage script, including the Defended
delay your analysis Price Line (DPL) and Freedom of Movement (FoM), both of
which he has trademarked.
He may be reached at [email protected].
‡OmniTrader (Nirvana Systems, Inc.)

‡See Editorial Resource Index
Jurik algorithms The code given in this article is available at the Subscriber Area at
deliver low lag, our website, www.Traders.com, in the Article Code area.
low noise analysis See our Traders’ Tips section beginning on page 53 for commen-
tary on implementation of Melvin Dickover’s technique in various
Tools for: TradeStation, AmiBroker, Investor/RT, MultiCharts, NeuroShell Trader, technical analysis programs. Accompanying program code can be
eSignal, NeoTicker, Tradecision, TradingSolutions, MATLAB, Ninja Trader, found in the Traders’ Tips area at www.Traders.com.
Genesis TradeNavigator, Market Delta, Extreme charts, DLLs for custom software
For Windows XP, Vista, 7, 8, & Server

both 32 and 64 bit !!
Jurik Research
of Stocks and Commodities Reader's Choice Award

2010 -- 2011 -- 2012
www.jurikres.com • 800-810-3646 • 719-686-0074

FUTURES FOR YOU
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is the senior
strategist for DeCarley Trading, a division of Zaner Group, where she also works
as a broker. She authors widely distributed e-newsletters; for your free subscription,
visit www.DeCarleyTrading.com. Her books — Currency Trading In The Forex
And Futures Markets; A Trader’s First Book On Commodities; and Commodity
Options — were published by FT Press. To submit a question, post your question
at http://Message-Boards.Traders.com. Answers will be posted there, and selected
Carley Garner
questions will appear in a future issue of S&C.
WHAT IS THE BEST WAY TO INVEST IN historically provided price appreciation of 2008. Similarly, the corresponding
COMMODITIES? and might even pay dividends or interest cash flow makes it possible for investors
The commodity markets offer opportuni- payments. Investors typically don’t use to profit from stock and bond holdings
ties for traders of all sizes, strategies, and leverage and should be seeking modest, even if the price of the security doesn’t
risk-aversion levels. However, before or at least realistic, returns. necessarily go up. Simply put, traditional
you put money to work in commodities Traders often speculate on leverage investments provide a cushion from
you must be aware of two simple, but and are indifferent to the historical ten- losses through income, but commodities
often overlooked, facts: dency for prices to move in a particular don’t pay dividends or interest; instead,
direction. Case in point, commodities commodity traders are left to fend for
1 Trading is not investing. Under- tend to trade in long-term ranges and themselves via market timing.
standing the difference between cycles. Aside from low levels of infla- Another aspect to be aware of before
these two approaches is important tion, commodities are not necessarily participating in the commodity market
because the allocation of your assets expected to appreciate in the long run is the nature of contract expiration.
should be overweight in investments like equity securities are. Stock traders can theoretically hold a
and underweight in trades. Accordingly, traders face far less room position forever, but a commodity trader
for error. An investor who is early, or is typically using futures contracts that
2 Putting money to work in the com- wrong, can simply hold a position for face expiration dates. Although it is
modity markets, whether as a trader possible to roll over expiring contracts
or as an investor, is far different than into distant contract months, there are
doing so in traditional asset classes Commodities are not still transaction obstacles and slippage.
such as stocks and bonds. necessarily expected to Even those who think they are avoid-
appreciate in the long run ing this via the purchase of exchange
Trading vs. investing traded funds (ETFs) are indirectly suf-
Trading is active speculation on price
like equity securities are. fering from the inefficiencies of rolling
changes; traders might go long or short contracts over to avoid delivery of the
a market in anticipation of relatively several months or years if necessary in underlying commodity. On a side note,
short-term moves. Investors, on the other an attempt to recoup losses, but a trader ETFs are an extremely inept way to gain
hand, are the so-called buy and holders rarely considers this as an option. There commodity exposure.
whose purpose is to accumulate gains is a saying in the trading business that Commodity futures contracts can be
on a long-term basis, namely several goes something like this: “An investment bought or sold in any order. If a speculator
months or even several years. is a speculation gone wrong.” believes the price of corn is going lower,
Although there are no guarantees or he has the ability to sell a contract with
assurances, investors typically face bet- Commodities vs. stocks/bonds the intention of buying it back at a later
ter odds of success in the long run than The primary difference between put- date. Stock traders can do this too, but
active traders might. However, they do ting money to work in the commodity they must first borrow shares from their
so with expectations of relatively lower markets relative to stocks or bonds is broker and pay interest on the transaction.
profit potential. Naturally, savvy and the absence of a cash flow. For instance, In my opinion, speculating on a price
experienced traders might fare better stock holders often receive dividends decrease in any asset is a trade rather
than traditional investors, but they are or benefit from stock buybacks. As a than an investment; it is simply a bet
undoubtedly accepting higher levels of result, the overall equity market has an that prices will go lower.
risk to do so. overwhelming tendency to go up over
In general, investors are putting their time despite periodic setbacks such as the Continued on page 43
money to work in asset classes that have dotcom bubble and the financial collapse
Divergence Of The Fittest
Expansions & Contractions

Part 2
In the first part of this three-part article series, we found out ticle, I will provide a statistical framework that results in an
PATRICK KELLEY
how to measure intrinsic divergences. In this second part, we indicator you can use to measure divergences.
will identify divergences that take place when price may appear
to be strong but has a tendency to close near the lows. What is divergence?
In part 1, I talked about measuring intrinsic divergence, which
by Dirk Vandycke measures divergence within one time series as opposed to the
more popularly used divergence between different time series.
The concept of divergence is nothing new. When one in-

dicator behaves differently than another, it sometimes
On a normal price chart you won’t see intrinsic divergence, but
the divergence between different time series — which I refer to
suggests that a change in trend is about to take place. as extrinsic divergence — is something you can see on a chart. It
Technical analysis is all about measuring probabilities rather may, however, lag, and it’s difficult to detect algorithmically.
than forecasting. Because of this, it is difficult to quantify In my previous installment, I also showed the tendency of
concepts such as divergence. Most attempts get stuck in an high-percentage days to close near one of its extremes (high
algorithmic approach that tries to capture specific graphical or low). High-percentage up days tend to close near the high,
setups. This ends up giving you mediocre results. In this ar- while high-percentage down days tend to close near the low,
CHARTMILL.COM
Figure 1: intrinsic divergence. On this chart of Facebook (FB), you see the relative close of each day displayed in the bottom subchart (blue line). A reading of zero
indicates a close at the low, and a reading of 1 indicates a close at the high. The green indicators represent the divergence days (middle subchart), which are very weak
days with strong closes and their accumulation (top subchart).
and they do so with high statistical correlation. I will use this average to 12.
concept to build an intrinsic divergence indicator, which I Another thing to keep in mind is that large values have a
call the Chartmill bull indicator (CBI). As you will see, the significant impact on averages twice: They will impact the
CBI tries to find situations where an extreme down day is ac- averages when they are added and once again when they are
companied by a relatively strong but abnormal close near the removed from the computation. But percentiles are immune
high. This tendency should be seen over several days and not to this, which means that adding or deleting extremely large
just on an isolated day. Likewise, the Chartmill bear indicator or small values will not change the percentile values much.
identifies strong closes with an inner tendency to close near The CBI looks for days where the close is among the 25%
the low. I’ll focus solely on bullish signals. lowest closes in the past 20 days and simultaneously looks
for a relative close near the high to be among the 25% highest
The roaring bulls intraday closes over the past 20 days. On the chart of Face-
You can measure bullish divergence by looking at how weak book (FB) in Figure 1, the indicator on the second subchart
a close is on a daily time frame while looking at the tendency shows spikes that indicate such days. Each spike indicates a
to close near the high on an intraday level. You can determine day being among the 25% worst days of the past 20 days in
strength by comparing the location of the close or relative terms of absolute close, while at the same time being one of
close to recent closes or relative close locations. the 25% strongest closes near the high over the same window
I’ll take this one step at the time. First, you need to look for of 20 days. These spikes show extreme divergence since they
a close that’s relatively low compared to the last 20 closes, go against the strong correlation between extreme days and
and a relative close that’s high compared to the last 20 relative extreme closes that was shown last month in part 1.
closes. Instead of coming up with averages or differences, I’ll The green spikes in Figure 1 indicate the weak days with
use percentiles. relative strong closes near the high. Because the CBI doesn’t
A percentile refers to the value below which a certain look at the absolute value of any close or relative close posi-
percentage of all observations fall. The 35th percentile, for tion, it is adaptive. In some cases, a close in the upper 60% of
example, would be the value below which you will find 35% a daily range might be enough to distinguish it from several of
of all values measured. The 25th percentile is referred to as the previous 20 days, which would give a divergence signal.
the first quartile, the 50th percentile as the second quartile (or But in other cases, closing in the top 5% of the range might
even more popularly referred to as the median), and the 75th not even be enough, because the previous 19 days all closed
percentile as the third quartile. in the top 3% of their range. Adaptability is the key here.
Using percentiles has several advantages over averages. One
is that an outlier doesn’t have a large impact on percentiles. Identifying divergences
Think about the following example. The values 1, 2, 3, 4, and Typically, the very weak days — that is, days with large drops
5 have a median as well as an average of 3. If you replaced in price — statistically tend to also have weak closes that are
5 with 50, it doesn’t change the median, but it inflates the near the low of the day. So when a weak day closes strong,
The CBI is a statistical,
algorithmic, objective,
and adaptable method to
incorporate divergences.
In Figure 2 you see a chart of FB again but

this time with the CBI on the chart. There
were a few instances when the CBI gave nice
signals, which, when combined with a trailing
stop-loss, resulted in successful trades. The
second signal gave favorable results in that it
identified a nice entry point to a giant ride.
This seems like a nice achievement, but
there’s more to see. The most important take-
away from this example is that the signals
are timely, perhaps too early. It is evident
from the chart that signals may even start
to develop before you can spot any extrinsic
divergence. For an extrinsic divergence to be
in place, you would have to wait for a higher
low (see rectangles on price chart). Early
signals are not a problem, since a breakout
can be anticipated with a buy-stop trailing
down, as depicted by the descending trend-
lines you see in Figure 2. The entry is just
Figure 2: intrinsic divergence shown by chartmill bull indicator (cbi). Here you see a small part of the trade; trade management
two instances where the CBI showed effective trading signals, which are marked by the two rectangles in is what will, to a much larger extent, dictate
the price chart.
whether you are profitable.
In the third and final part of this article
it’s a deviation from the norm. From a nonstatistical point series, I will backtest the CBI and discuss how you can further
of view, traders can develop a feel for this type of day by enhance the use of this indicator. Stay tuned!
identifying patterns such as key reversal days. So in a sense,
the CBI is a statistical, algorithmic, objective, and adaptable Dirk Vandycke has been actively and independently studying
way of incorporating divergences. the markets since 1995 with a focus on technical analysis,
Weak days with strong closes during the past 19 days are market dynamics, and behavioral finance. He regularly writes
isolated events. What is more interesting is if such spikes, all articles and develops software, some of which is available at
of a sudden, start to cluster. This can be easily measured by his co-owned website, www.chartmill.com. Holding master’s
applying a running sum to the spikes. You can see this in the degrees in both electronics engineering and computer science,
green indicator on the top subchart in Figure 1. This is the main he teaches software development and statistics at a Belgian
component of the CBI. You should also be aware that only university. He’s also an avid reader of anything he can get
when a minimum of three spikes (or more) are seen in the past his hands on. He can be reached at [email protected] or via
20 days will the CBI show the number of spikes. Because of his website at www.chartmill.com.
this, one or two divergence days within the 20-day lookback
period are considered to be noise, which you don’t want to see Further reading
anyway. You want a sufficient number of divergence days in Vandycke, Dirk [2014]. “Expansions & Contractions, Part 1,”
the past 20 days before they show up on the indicator. Notice Technical Analysis of Stocks & Commodities, Volume
in Figure 1 that I have placed a rectangle around four spikes in 32: March.
the middle subchart. This is to show how the running sum of [2013]. “The Chartmill Value Indicator, Part 1” Tech-
the spikes creates one signal in the upper subchart. nical Analysis of Stocks & Commodities, Volume 31:
January.
Is the CBI a valuable indicator? [2013]. “The Chartmill Value Indicator, Part 2,”
To answer this question, you could look at some Technical Analysis of Stocks & Commodities Volume
examples, you could conduct a rigorous backtest, 31: February.
or you could look to further enhance or estimate [2013]. “The Chartmill Value Indicator, Part 3,” Technical
the quality of the signals in a broader context. So Analysis of Stocks & Commodities, Volume 31: March.
first, we’ll go through an example. In my next ‡Chartmill.com
article in this series, I’ll address the second and ‡See Editorial Resource Index
third points.
IF A STOCK FALLS IN THE MARKET
AND YOU’RE NOT THERE TO HEAR IT,
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© 2014 TD Ameritrade IP Company, Inc. All rights reserved. Used with permission.
CHARTING
in the past? What follows is

a five-point plan that traders
can implement to look for
strong entry opportunities
in which they may be able to
find effective risk–reward
ratios.
The trend is
your friend
We’ve all heard this say-
ing, and while it may be
oversimplistic, it’s true.
Trends develop for reasons.
It could be a fundamental
change in an economy or
a company or the result of
a global positioning play;
whatever the reason, trends
can be desirable.
Trends don’t continue
forever, and this is what
makes trading them so
challenging. It’s difficult
to determine when a trend
might be over, or whether
it’s just taking a break or
a pause before ascend-
ing higher (or descending
lower in the case of a
No Lines, No Patterns! downtrend).
Trading The Unpredictable

Traders use numerous
technical methods to iden-
tify trends such as moving
Without Indicators averages or oscillators like

the commodity channel
index (CCI). And while
these can be proactive
Is it possible to trade using no indicators at all? Here’s a five-point plan that methods of finding trends,
you can apply to look for strong entry opportunities in the forex markets. they all suffer from a key
characteristic: They all lag
by James Stanley the market.
You do not need indica-
W
tors to find or trade with
hen a new trader finds technical analysis, it often leads to an onslaught of indicators trends. The best mechanism
added to the chart. After all, if a moving average or relative strength index (RSI) can for identifying a trend is
help enter positions more effectively, another indicator or two couldn’t hurt, right? This already on your chart. Up-
trader will often work toward building the perfect strategy that never loses. And the trader may trends will often form in a
even go on a run of good luck in which it looks like the holy grail has been found. process similar to two steps
But indicators are not a panacea; they are merely tools that help to translate what has hap- forward, one step back.
pened in the past on the chart. And regardless of how rigid a technical strategy may be, the This can often be seen in
past is never going to be perfectly predictive of the future. a process of higher highs
This is why traders need strong risk management, regardless of the strategy, so that in those and higher lows (Figure 1).
situations in which the market environment changes, or when market conditions aren’t optimal, Downtrends, on the other
they don’t lose everything they made during the good times (and then some). hand, will often form in a
But, taking this a step further, do traders really need indicators to translate what has happened process of lower lows and
Price action uptrends
Higher highs
Marketscope/Trading Station II
Higher lows
Figure 1: UPTREND PRICE ACTION IN USDCAD. Here you see a series of higher highs and higher lows.
lower highs (Figure 2). trend may seem threatening, the act of support (in the case of
After traders have diagnosed the trend through price ac- uptrends, or resistance in downtrends) means that you should
tion, they can begin plotting entry possibilities. Traders want rather look to buy low and sell higher.
to trade in the direction of the trend in anticipation of that
trend continuing. While the possibility of reversals may seem Validating support & resistance
attractive, you need to remember that the observed trend has There are many ways of identifying support & resistance. But
taken place for a reason. While retracements or pauses in that do any of them matter if the market doesn’t consider them?
Downtrend in AUSUSD
Lower highs
Lower lows
Figure 2: DOWNTREND PRICE ACTION IN AUDUSD. Here you see lower lows and lower highs.

CHARTING
Lower highs
Lower lows
Price finds support at 0.9000

unable to break through
FIGURE 3: VALIDATING SUPPORT & RESISTANCE. The downtrend stalled when price hit the psychological support level of 0.9000.
If the market doesn’t or hasn’t shown support or resistance at entertain in the future.
a level, then that price is esoteric and might as well not have Let’s look at an example in the foreign exchange (forex or
been on your chart in the first place. FX) market. On the chart in Figure 3, note how the Australian
This is another benefit of price action: By noticing the dollar was in a freefall against the US dollar. And it wasn’t
prices at which movements have stopped or stalled at in the until price hit the psychological support level of 0.9000 that
past, traders can see which levels the markets may potentially the downtrend stalled. These even, rounded, whole numbers
can often come up as support or resistance levels in markets
(similar to Apple Inc. showing support at $500 or the Dow
Jones Industrial Average showing resistance at 16,000).
As soon as 0.9000 was hit on the chart, the order flow
changed greatly. Sellers were more hesitant to sell the Aussie
much lower; simultaneously, buyers jumped in to pick up a
perceived value, since the Aussie had just touched below a
key and psychologically important support level.
Does this mean that the trend is over? Maybe, but we won’t
know that for sure until it’s too late. What we do know, however,
is that the trader can still look to trade the downtrend, and can
now sell the Aussie at a higher, more advantageous price.
Using a lower time frame to enter

Now that you know there is a trend to work with, and which
direction you want to trade that trend, you can look to plot
The best mechanism for

identifying a trend is
already on your chart.
“This one is for helping win the TV ratings
war with my expert commentary.”

The bounce after 0.9000 was hit
Lower lows and lower highs confirm entry
Trend continues
FIGURE 4: LOOKING AT A LOWER TIME FRAME. As soon as price begins showing downtrending movement, you can look to initiate a position since it is likely the
downtrend will resume.
your entry into the position. A lower time frame can help you to buy uptrends cheaply, or sell downtrends expensively; and
get a more granular look at the price action taking place inside when or if you are proven wrong, you want to be out of the
of the move to more accurately plot the trade. position as quickly as you can with as small a loss as possible.
Taking the AUDUSD trend we had looked at previously, let But if you are right, and if the trend continues, then you can
us dial in on a lower time frame chart such as the four-hour potentially look for three, four, or five times your initial risk
chart in Figure 4, and wait for price action to begin showing into the trade.
a series of lower lows and lower highs. Let’s look at the previous AUDUSD trade to see how this
This may take a little while since the chart had just shown a might set up with relevant risk–reward ratios if you are an-
countertrend movement after the price of 0.9000 was hit. But ticipating price to return to the previous level of support at
as soon as price begins showing downtrending movement, you
can initiate the position, since it’s likely the original downtrend
will resume. Ideally, you will be able to sell shortly after a StockS & commoditieS Online Store
lower high was previously formed, the goal being to buy low
and sell high, with the anticipation that the original trend will Store.Traders.com
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do you really want to be in that trade?
It’s moving in the opposite direction MAgAzinES ARtiClES BookS
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should be higher prices.
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CHARTING
One-to-two risk-to-reward ratio
Entry after lower high

Stop on position
100 pips away
Profit target
200 pips away
Target is two times stop distance
FIGURE 5: RISK MANAGEMENT. You would enter a position after the lower high with a profit target that is 200 pips away. A stop should be placed at the last high,
which in this case is 100 pips away. This gives you a profit target that is twice the stop distance.
0.9000 (Figure 5). You would enter a position after the lower have to take a loss.
high with a profit target that is 200 pips away. A stop should This can free you up to reemploy that initial risk capital
be placed at the last high, which in this case is 100 pips away. elsewhere, or at the very least, leave the position with a slightly
This gives you a profit target that is twice the stop distance. higher vote of confidence knowing that you probably won’t
While finding favorable risk–reward ratios (in which the lose any precious risk capital on the position.
trader might profit more than he or she is risking) will not What about the exit from the trade? While profit targets can
help you predict the future, it will allow you to mitigate your work (such as removing the entire AUDUSD position when
losses, while putting you in a position to maximize your 0.9000 comes into play), one way to maximize profits is by
winners — which, in the long run, is the best that any trader scaling out of positions. This can be done by closing a part of
can hope to do. the trade as the position moves into the money. If the trade is
going to trend further, the trader can look to close subsequent
Managing positions pieces from the position as the trade works deeper.
and scaling out The one thing you will always know is that you will never
Entering a profitable position is one be able to predict the future. When you get it wrong, you want
thing; properly managing it is another. to lose as little as possible, and when you’re right, you can look
Most new traders lose because they take to take out as much as you possibly can from that move.
profits far too quickly when they win.
This often comes from fear of failure. James Stanley is an active trader and trading instructor at
Most traders can remember the feeling of simply having to close DailyFX (www.dailyfx.com). He began trading equities and
a position because they know it will come back against them. options in 1999 and has worked for some of the largest banks
And if that profit turns into a loss, well, it’s all their fault! and brokerage houses in the US.
Being in a winning position doesn’t help you forecast price
movements any better than not having a position at all; but it Further reading
does afford you the luxury of being able to manage positions Gopalakrishnan, Jayanthi, and Bruce Faber [2012]. “Kathy
more effectively. Lien of BKForex.com,” interview, Technical Analysis of
To remove this psychological burden of fear, you can look Stocks & Commodities, Volume 30: September.
to move your stop on the trade to your initial entry price. ‡Marketscope/Trading Station II
Then, if prices do reverse and come back against you, at the ‡See Editorial Resource Index
very least, you are out of the position at breakeven and do not
Q&A
SINCE YOU ASKED
Confused about some aspect of trading? Professional trader Don Bright of Bright
Trading (www.stocktrading.com), an equity trading corporation, answers a few of
your questions. To submit a question, post your question to our website at http://
Message-Boards.Traders.com. Answers will be posted there, and selected questions
will appear in a future issue of S&C.
Don Bright of Bright Trading
QUESTIONS & ANSWERS! If you generally trade in 500-share lots, Did your account size go up due to the
Don, I have followed your writings in then you should enter a trade with 500 upward movement of the overall market?
Technical Analysis of Stocks & Com- shares. Not scale in. If the trade is going If it did, then keep your share size. If it
modities and in some Internet blogs. It your way, then you can certainly scale didn’t, lower the share size to reflect your
seems that you offer serious advice about out if you wish, keeping a stop price in actual account value.
topics that traders can use. I have been your head. For example, if you buy 500 And now I’ll address the classic ques-
trading for a couple of years now and shares at $47.00 and have a target price tion of adding to winners and/or losers.
have spent money on various trading of $48.50, and the stock looks strong I say “classic” because different traders
courses. I find that most of these courses at $48.50 (and we’re in a market-wide think of this in different ways. One trader
that I have participated in focus on upswing that day), then sell 300, and may say, “I am just averaging down to
general information instead of specific offer the other 200 up a bit. But don’t make my breakeven price lower.” That’s
trading-related factors. I have some let the stock slide below $48.40 or so, fine. but the problem occurs when traders
questions for you. I would appreciate thus defeating the purpose of a price start adding the third layer of a single
if you could be as specific as possible exit goal. stock. Think about this: If they sold the
in your answers. stock, instead of buying more shares, then
Put your entry and exit they could buy more at the third-lower
1. Scaling in and scaling out: I have level. On the other hand (no economist
heard diverse opinions on scaling in plans down in writing. jokes here!), this could be handled with
and scaling out of shares in a stock. Those who stick to a the scaling in question.
What are your thoughts on this? I’m going to try to sum up all of
plan do better. these questions. I tell my traders that
2. Risk vs. reward: There’s so much talk “common sense must prevail” — and
about having a proper risk-to-reward Risk and reward should be thought of I realize common sense is a subjective
ratio. Is there an objective number that in a simple way. If, in your trade planning, term. What makes sense in the heat of
should be followed? you expect to make $500, regardless of the moment may not make sense upon
share price or size, then you shouldn’t review. So this brings it back to creating
3. Share size and price of stocks: Other allow yourself to lose more than $500. a trading plan before actually trading.
than account size limitations, what Makes sense, right? Many traders try While your head is clear, and you’re not
should we look for regarding these to come up with elaborate calculations sweating bullets watching the money
points? with all of this, but common sense must being drained away — or you’re too
prevail. You’re either going to be right or euphoric because you making more than
4. Adding shares to winners and or los- wrong. And, sure, if conditions change you ever expected — put your entry and
ers. Any comments? and the market starts to drop, get out if exit plans down in writing. Review and
you can reenter at a better price. You don’t modify as necessary, but please do your
Thanks for reading the magazine and need to wait for the entire $500 loss. best to stick to a solid plan. You’ll find
for the kind words. I will do my best to Share size and stock price are next. that in the long run (and assuming you
address each issue with my bottom-line This is even more important than ever track your trading daily), those who stick
advice. As I look at your questions, it before. Try thinking about it this way. A to a plan will do better.
appears to me that they all seem to be few years ago, the Dow Jones Industrial And, yes, I realize the last point about
related in one form or another. Average (DJIA) was somewhere below using a trading plan is general, but it’s still
Scaling in is completely different from 7,000. Now it’s around 16,000. How did the most important thing in trading.
scaling out, in my opinion. I noticed that that average go up by more than double?
you brought up “adding shares to winners It’s because the stock prices went up
and/or losers.” Let’s start there. more than double (on average, of course).
INTERVIEW
AhAchieve Emotional Balance
Trading Rationally
With Rob Booker
Rob Booker is a currency trader, author, and speaker who believes that trading
profitably is not easy but can be enjoyable. Nicknamed the “Prime Minister of
Pips,” he has seen much success in currency trading in past years and continues
to trade today. His eBook Forex Strategy 10: Low Risk/High Return Currency
Trading has been downloaded more than 500,000 times. He is also the author
of Adventures Of A Currency Trader.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Rob
Booker on February 6, 2014 via Skype about the emotions that can be encoun-
tered while trading in the currency markets and how to manage them.
It was those quiet moments of
time where my thinking was
Rob, tell us a bit about yourself and started a business in the first place. I
how you got interested in trading. already loved the financial markets.
rational and my reasoning
I started a business in the 1990s that While I was in law school in the San was logical that helped me
was not successful. As a result of that, Francisco Bay area, I would skip class get through trades.
I took on a pretty substantial amount of and go have lunch with hedge fund
debt related to that business and had to managers or anybody that I could
find my way out of that situation and still meet through any kind of network
take care of my family. So I called a friend that I could create. I met everybody that — the financial markets had become
I had while I was in law school. I had I possibly could. When I worked for a quite unstable. The technology bubble
been interested in the financial markets law firm that worked for a hedge fund was still a year and a half away from
during law school. I said to the friend, down the hall, I would stop people in bursting, but everybody, at that time, was
“You work in the financial industry. I’ve the hallway and ask, “What do you do? already feeling a bit of anxiety about it.
got to make some money, and I’m not Can I buy you lunch? Can I talk to you We’d passed through the Russian debt
going to practice law. What else can I for five seconds?” crisis and the Asian currency crisis, and
do?” My friend said, “Well, whatever you I was annoying, but I was persistent. I everyone was a little on edge.
do, don’t start trying to trade anything. wasn’t qualified to have a job in any of The only way I was going to get into
And especially if you’re thinking that those places, but I had caught the bug. the financial markets was by doing it on
you’re going to get rich quick, don’t try I knew I liked it, and I wanted to be a my own. So that’s exactly what I did. I
to do anything in the world of currency part of it, and I didn’t really know how opened up a trading account and decided
trading because it’s a shark tank and to get in. that if no one was going to hire me, I was
you’re going to get killed.” just going to do it on my own.
So, of course, that was the first place How did you get in?
I looked because there was a theoretical Before I started law school, I had a And how did it go when you started?
possibility that I could lose a lot of money temporary job in San Francisco, working It went pretty well at first. I started an
very quickly, which gave me, as it does for at Montgomery Securities in a very low- account with $2,500, which wasn’t even
everybody, the thought that maybe there level job. I was a college graduate, just my own money — a friend had lent it to
was also a chance to make a lot of money about to start law school. I was there on me. After I opened the account, I started
very quickly. I immediately became the day that they took Netscape public trading the euro. There was a website I
drawn to the currency markets. as a co-underwriter. Then I left the job had found on which some guy would
at Montgomery Securities and went to post status updates of what he overheard
So you got attracted to the forex markets law school. currency traders talk about at a bank he
because of the high risk involved. After I got out of law school and then worked in. I don’t even know if he was
Yes, I’m naturally prone to take risks. had that business failure, I called my telling the truth, but he seemed to be
I don’t mind taking risks. That’s why I friend, but there were no jobs for me right all the time.
I would follow whatever this guy parts. It came across the 11 months of huge contributing factor to my success
said and within three weeks I had made the year 2000. The two big revelations, or failure. That would be what would
$250, a 10% gain. Of course, that wasn’t or realizations that I had, were, first, have made the difference in the end.
going to be enough money to support that I had to follow a system that was So, in the first place, I had to follow a
my family and needed to make more. based on historical patterns. Even if pattern or a structure, and second, all I
I figured since he’d been right 10 out people said that “past performance was needed to do was compound consistent
of 10 times and I had made 10% of my not indicative of future results,” I knew and smaller wins over time, and it was
money back, I would go ahead and take that chaotic behavior was indicative of going to work out for me.
a bigger trade. margin calling my account. So I knew
The leverage that was available in I had to follow a pattern. That pattern What made you realize these two
currency trading was extraordinary. I might not work in the future or forever, things?
figured I could make about $2,000, or but I had to have a structure in place. I spent 11 months after that loss not
almost double my account, on the next Otherwise, it was chaos. During those trading any substantial amounts of real
trade, so that’s what I planned to do. Of three weeks where I had made and lost money. I spent the time going back over
course, that was the trade on which he that initial money, I felt very out of sorts. the charts. Before the days of backtest-
was completely wrong, and I lost all but I felt like a gambler. I felt like I was just ing software or knowing anything about
10%. I was left with $250, the amount I living for the high. I knew I had to follow programming, I would go over the charts
had made. The rest of the account was a pattern and structure. and ask myself, “What re-emerging
gone. So within three weeks, I had blown The second revelation I had at the patterns can I identify? Maybe I’m just
up my first trading account. time was that those modest gains I making this up, but what patterns do I
had experienced could have been com- think I can identify? And how much
I remember reading somewhere that pounded over time to mean something do I think I could reasonably expect to
you had continuous losses in the begin- significant, if I had given it more time. make off that pattern every time? What
ning. What turned that around? The amount of time that I was going is a consistent amount?” Then I realized
My big self-revelation came in two to give myself to make it work was a my next task would be to simply imple-
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StockCharts-1404.indd 1 April 2014 • Technical Analysis of Stocks & C2/20/14 11:31:26 •AM
ommodities 39
can’t just be imbalance. interest rate cycle is.
A housing bubble leads to a correc- What most people will do is look at
tion of the housing market. A carry the interest rate differentials and trade in
trade bubble, where interest rates are the direction of the best interest rates. I
very dissimilar across the world, will look at it a little differently. I ask myself,
be followed by a period of time where “In the big picture, where is the greatest
interest rates converge. That period of amount of imbalance right now?” That’s
time when interest rates around the a different way of looking at it. I’m not
world are very low across the board is just comparing interest rates around the
followed by a long period of time where world and saying, “Now I’m going to take
interest rates around the world start to a trade.” I want to see massive amounts
diverge again. of imbalance.
These are patterns that can be repre-
sented by trendlines, Bollinger Bands, There are some interesting dynam-
divergences, and so forth. I spend a lot of ics going on in the forex markets
ment that pattern over and over again. time asking myself, “Where is the market now. Could you share some of your
After the 11 months, it was a matter of imbalanced, and what would restore bal- insights?
being disciplined and consistent in the ance to these markets?” How can I make Since I want to see stark and specific
application of that pattern, and that’s the money from that pattern?” imbalances, here is one example. Japan
only responsibility I would have. has had a zero interest rate policy for
You mentioned interest rates, housing over 12 years. Some of the greatest
When you talk about patterns, are there markets, and so on, which are more opportunities in the currency markets
specific patterns that you look for? Are fundamental indicators. In the forex and the greatest trends over the next
there specific indicators that you use markets, fundamentals play a big role. year are going to come because Japan
when you trade forex? What are some of the major fundamen- is not going to change its mind about
The specific indicators, or meth- tal variables you look at? interest rates.
odology, or the tactics that I use have There are a lot of individuals in the Meanwhile, in the US, we’re already
changed over time. I’ve used trendlines, game of trading that love to focus on experiencing a period of time where the
Bollinger Bands, moving averages, and the day-to-day fundamentals, as if they Federal Reserve is tapering, or reducing
divergences. I’ve used a lot of different were reading a financial report about its stimulus program. That’s an imbal-
tactics because it’s enjoyable. I like to countries. I find that very interesting, ance. These are the imbalances that I’m
experiment with new things. but I tend to stay away from anything looking for. I’m looking for markets that
However, the patterns that I have gone that is very day-to-day. This includes are out of balance.
back to over and over are those that have weekly employment numbers, retail When Japan and the US have been at a
to do with the return to the mean or a sales, inflation, consumer price indexes, similar interest rate, and the US is starting
financial instrument’s tendency to return producer price indexes, or commodity to diverge from that, then I think there’s
to its natural state. In all markets at all prices. I avoid them. an opportunity, for example, to go long
times, there is a fight between balance I would compare day-to-day financial the US dollar and short the Japanese yen,
and imbalance. There are chaotic moves news to the ups and downs of a personal because there has to be a consequence
in one direction, followed by an attempt relationship with someone. There could of that divergence of interest rate poli-
to move back in the opposite direction, be a lot of very short-term highs and lows cies. They are small and insignificant
back to its natural state. That natural in the relationship, but over time, there is at first and you don’t often recognize
state can be represented by several dif- either stability or instability, especially it until after it has already made itself
ferent things. with respect to major events. With regard very obvious.
Thinking in the most basic way, the to the currency markets, I think those Concentrating on the day-to-day
market is a series of moves that are major events are interest rate cycles. fundamentals such as employment and
chaotic in nature which then correct to Those matter more than anything else to consumer prices is not a good way to look
restore some balance. Often there is a me. I want to see what the overarching at things because you can get caught up
move after an economic report, followed in the small picture. But the big picture
by a retracement or correction. Some- is very obvious right now.
times there is a move after an interest rate
decision, or if you look at the big picture, Once you are in a trade, how do you
there is a giant trend that emerges over manage your positions?
a six-month period on, for example, the For many years, I employed strict risk
Canadian dollar. There is always some management on short–time frame charts
kind of pattern that has to correct. There for small gains that I would compound
over time. You can think about trading
successfully in two main ways: You
can compound small wins over time, or
you can compound a smaller number of
trades over time. Either way is manage-
able, since you are taking a little piece
out of the market here in a small trade
and then taking another piece out of the
market on another small trade. You build
those up over time and have a high win
percentage.
Another approach would be to take a
small number of trades every year and
compound those gains. It’s easier for me
to approach trade management when I
think in those terms.
I’ve been a trader for the last 14 years
and what I’m doing this year is something
different from what I’ve done in other
years — I’m taking a smaller number of
trades, but they’re much bigger trades.
I think that 2014 is a continued year of
trending markets, and I think that the
opportunities are substantial.
As I’m taking a smaller number of
trades, one potential trade I’m looking at
is long dollar/yen. The setup hasn’t come
yet, but I’m waiting to be long US dollar/
Japanese yen, and I’m going to be long
British pound/Japanese yen. I will trade
on a much longer time horizon.
Here’s how I manage the trades. It
takes a long time — between two and
three weeks or sometimes a month —
for that setup to emerge. Then I’m in
that trade for anywhere from one to six
weeks. Once I’m in that trade, I don’t
touch it, I don’t manage it, I don’t look
at it, I don’t want anything to do with
that first position. I’m going to leave
that alone, and as time goes on and if
the trade moves in my favor, I’m going
to add to that position, so that over time,
I stand to gain more if it continues to go
in my favor, but I stand to lose more if it
goes against me. I’m not scaling out of
positions at first. At first, I’m scaling into
positions to manage my trades.
Then, when I’m halfway to my profit
target, I’ll start to scale back out of the
position. That process can take between
one and six weeks. I wouldn’t say that
I have a risk-management scheme in
place. I think it’s interesting, but I just
don’t do it. I just take trades, and if they
don’t work, I close them out. I don’t have
case and I’m not going to let go.” Duff, author of The Buy Side and a
®
I see traders so often let go of their former hedge fund trader. He said, “I
case. They’ve made a case for a trade, had to have quiet time in the morning,
they believe in it, they take it, and when it every day, to remember the positions I
starts to go against them, they jump out. had taken and why I liked them, because
But the imbalance or the reason for the in the heat of the moment, a trade that I
trade still exists and there is a temporary loved recently could become one I hate.”
spike on a temporary economic report. I find that’s true for me as well. I have to
NeuroShell Trader What’s the big deal? That shouldn’t force set aside time away from the computer,
Intelligent Power you out of something that has a much go on a long walk or read a book. I have
bigger time horizon. to set aside quiet time to remember why
I had to compare the drawdown to I liked my trade because in the heat of
the possibility of what I would stand to the moment, when the trade is on and the
make when it finally went in my favor. money is big, it’s very easy to mistake
In another instance, I traded the Brit- current profit and loss for being right
ish pound/Australian dollar, and the and wrong.
trade immediately moved against me. Say two weeks ago I was up $45,000 on
I had to stand aside and ask myself if I a euro/Australian dollar position, and my
waited long enough for this to become profit target would have been $50,000,
out of balance. I looked at pivot points, but at $45,000, I was literally jumping
Winner 12 years in a row! divergences, trendlines, and long-term out of my skin. I became emotional and
support & resistance, and determined so I had to plan quiet time every morn-
www.NeuroShell.com that I had jumped the gun — I only had ing. I was just 20 points away from my
three out of the four conditions. profit target and it hadn’t hit it yet. The
301.662.7950 I didn’t have all the pieces in place reasons for the trade hadn’t changed, and
when I took that trade, so I wasn’t go- I couldn’t mistake the amount of money
a big program of risk management or ing to stick with it. This wasn’t the case that I had or didn’t have for managing
calculating how much I stand to lose. I with the US dollar/Canadian dollar trade the trade correctly. The trade was still
take a substantial bet that I’m going to where I had my divergence, my long-term right, and at the level it was at, I was
be right, and if it’s wrong, I try to get out support & resistance, my pivot points, still right, and I needed to stay in that
of the trade quickly. and my divergences. I had all of those trade. I couldn’t just close it because of
things in place and I had a temporary my emotions.
How long does it take for you to figure spike against me. I had everything the Some people say that you shouldn’t
out that you’re wrong? way I liked it, so I was going to ride out let a win turn into a loss. But I find that
That’s what everybody wants to know. that loss. to be a ridiculous statement. Is that $1
I think it’s a fair question. I used to be or $2 of win? For me, it was those quiet
able to say where the stop-loss goes That leads me to my next question, moments of time where my thinking
and where the profit target is, but now, which has to do with how to eliminate was rational and when I would think
every single position is a puzzle. It’s a emotions from your trading. Emotions about the reasons I entered the trade
chain that I’m linking together, and it’s are always going to play a role, regard- that helped me.
a picture that I can see only a part of; I less of whether you have a system. But It’s very difficult for me. I go through
can’t see the entire picture. from listening to you, it seems that you periods where I’m disappointed and I
Sometimes, I’ll ride a losing trade. have come to a point where you under- lack confidence, but I can’t let it take
For example, I took a position on the stand the market so well and you’re so me from my plan. Confidence is not
US dollar/Canadian dollar, rode it for confident that it seems that emotions related to my willingness to implement
a loss, and then I stayed in it. It turned aren’t really a factor. Is that true? my plan. If I made a plan, I am not going
around and I added to the position as it No, I’m an emotional person. I recently to change my mind.
went in my favor and came back. While conducted an interview with Turney
it was going against me, it was probably Besides trading, what else do you do?
down 6 or 7% of my total trading capital. In addition to trading, I travel around
I was experiencing a loss. Ordinarily, that the world every year meeting with
would be catastrophic or at least terrible, traders. Last year, I traveled across the
but I thought to myself, “No, this is a US and slept overnight at 20 different
market out of balance and I believe that traders’ homes and talked to them about
for the reasons I’ve laid out. I’ve built a what they did. I wrote a book about it
case for it, so I’m going to ‘prosecute’ this but haven’t shared the book with any-
body. So sometimes, I’ll write about my
experiences.
This year, 2014, I would say that
trading takes up a very inconsequential
amount of my time. I spend about 30–45
minutes in the morning looking at the
charts, and then two or three hours
thinking about what I saw, and thinking
quietly about it. I have a few websites and
people come to the websites and check
on the big trades that I and a wonderful
group of traders plan together.
Since you get to meet so many traders,

what are some of the common mis-
conceptions you find traders can have
about trading the forex markets?
That’s a good question. I think it ap-
plies to any market in general, but I find
that most traders don’t give themselves
enough time, whether it has to do with
being in a position, planning during their
quiet time, or thinking of becoming a suc-
cessful trader. If you ask a trader how long
they will give themselves to become suc-
cessful, most of them, myself included,
will say they want to be successful soon. them before you place them, and if you Trader’s Handbook: Strategies For
Such traders are likely not going to be give yourself more time to develop your Forex Success, self-published.
successful. But if a trader responds by trading career, then you have a better [2007]. Adventures Of A Currency
saying he wants to be successful seven chance of being successful. It has a lot Trader, Wiley Trading.
years from now, chances are that trader to do with how long you’re willing to [2010]. Forex Strategy 10: Low
will be relentless and will have a good give it. Risk/High Return Currency Trading,
chance of being successful. ebook, self-published.
I think this is a reasonable statement to Thank you for your time, Rob.
make. If you give yourself more time for • www.robbooker.com
trades to work out, if you give yourself Further reading
more time to plan trades and think about Booker, Rob [2006]. The Currency
FUTURES FOR YOU

GARNER / FUTURES FOR YOU easy; simply trade fewer lots or use mini in a $22,000 account, they will be far
Continued from page 27 contracts. As an example, if the margin to more manageable.
go long a corn futures contract at $4.40 In the absence of extreme leverage,
The commodity markets can be a trade representing 5,000 bushels is $2,400, and when trading from the long side of
or an investment vehicle a trader can fully fund his account and the market, it is fair to consider com-
It is common for inexperienced traders eliminate leverage by trading a single modities an investment rather than a
to assume the free leverage granted by lot for every $22,000 deposited into the speculative trade. Whether your money
the futures industry is an advantage that account. Doing so increases the room is allocated to the commodity markets
must be used to the fullest extent. How- for error and, therefore, the odds of suc- as a trading vehicle or as an investment
ever, experienced traders understand that cess. The $22,000 represents contract is solely up to your risk tolerance and
leverage can work against them just as value and is calculated by multiplying portfolio management. In my opinion,
easily as it can work in their favor. Most the price by the contract size ($4.40 x the optimal choice lies somewhere in
traders, and strategies, are optimized by 5,000). To illustrate, the percentage gains between the two extremes.
reducing, or even eliminating, leverage. and losses of a corn futures contract in
For commodity futures traders, this is a $2,400 account will be dramatic, but
C onsider these points:
n Macrotrend systems have

had the best track record of
any method for more than
30 years.
n They are based on a sound

premise — following the
reaction to economic policy.
n They don’t trade often (which
bothers the brokerage houses).
n They work across nearly

every market.
n They work across a large

range of time frames (calcula-
tion periods).
n They capture the fat tail of

price moves; that is, the really
big moves.
n Therefore, they are robust.

Very few trading strategies
are robust.
n And, yes, they can be boring.
What I mean by robustness is:
n The same rules and

parameters are applied to
all markets.
n “Loose pants fit everyone”

but don’t always look good.
Fine-tuning to each market is
a guarantee of failure.
COLLAGE : NIKKI MORR
There are also these advantages:
n Knowing the trend allows

you to filter trading signals
from other strategies.
Zzzzz…No, don’t fall asleep! This is important.
A Better Trend
n Knowing the trend allows
you to weight trades with
better expectations.
n Knowing the trend helps

with option strategies.
How can a trend be better? Here’s a unique approach to
n The concept is transparent;
viewing trends so you can gain the most from them.
that is, you know what it’s
by Perry Kaufman doing.

TRADING SYSTEMS
Overall, knowing the trend of prices can improve any

trading. But what’s the downside?
n They are slow when it comes to getting out of

a trade, often giving up a large part of recent
gains.
n They are insensitive to current events and often

seem stupid.
n They require discipline to follow.
n They can be frustrating.
Those are the pros and cons. However, I most often see
the pros, and I am constantly surprised at how well a
straightforward technique can work. Figure 1: total profit/loss. Here you see the results of a test of moving averages from
10 to 150 days. There is a tendency for more profits as the trend periods get longer.
A sound premise
An overwhelming consideration in using a trading strategy is Would you prefer a combo?
whether it has a sound premise. That distinguishes methods Most traders end up with a single moving average that they
that have been found by testing indicators and rules on a track. But which one is the best? It doesn’t take long to find
computer and settling on the one that was most profitable, or out that the long-term trends are more reliable than short-
most reliable, or most anything. However, discovering a system term ones, that is, calculation ranges from 40 days and higher
through testing is a sure way to lose money. The right way is tend to be profitable for most markets. It’s not even clear that
to first determine the reason why a strategy should work, and short-term trends can be profitable since they are erratic. As
then implementing it. an example, Figure 1 shows the results of a test of moving
A macrotrend system is based on identifying the direc- averages from 10 to 150 days. There is a clear tendency for
tion of prices based on government economic policy (mostly more profits as the trend periods get longer. Experience and
interest rates) or long-term shifts in supply and demand, or a testing show that this is generally true of most stocks and
change in the stability of a country (geopolitical risk). While futures markets.
there are other reasonable approaches, such as arbitrage, this Does that mean you should choose the most successful,
is a sound premise. which in this case is the 140-day trend? That depends on
whether you believe past performance predicts future results.
What trend do you use? I do — for this method — but there is considerable vari-
Do you use a moving average, a linear regres- ability from year to year. I can reduce that risk by choosing
sion, an n-day breakout, or something more more than one calculation period in the same way I diversify
sophisticated? Each method has a unique way a portfolio by choosing more than one stock. Then I’ll get
of identifying the trend. A moving average lags
the market, linear regression tries to forecast
ahead, and a breakout takes a current high or
low as the new direction. Your online resource
While one is better than another for some markets some of
the time, in the long run, over many years of data and over a
For Technical analYsis
wide sample of markets, the results are remarkably similar. It’s
the market that makes the biggest difference. If prices trend,
all trend-following methods work. If prices don’t trend, then
trend-following methods all lose. Welcome to reality.
The subtle difference between the various techniques is
in the risk. The simple moving average approach has many
small losses and fewer large gains. The breakout technique has
fewer trades with large interim losses but a high percentage
of profitable trades when closed out. The linear regression
is somewhere in between the two, not as fast as the moving
average and not as slow as the breakout, given the same time
horizon. You’ll want to explore this yourself to find the trend
that best suits you.
20-, 40-, and 80-day averages with three entries, two days apart
TradeStation
Figure 2: one moving average or a combo? On this daily chart of the EuroSchatz futures, you see the 20-, 40-, and 80-day moving average (MA) applied.
When all three MAs are trending up, you would be fully long.
less-than-perfect results each year, but more stability. As I the other two are up, you would be long one-third of your posi-
choose more combinations, the results will get closer to the tion. You net out the long and short trends. In Figure 3 you see
average performance. a similar trend for Apple (AAPL). Most macrotrends start at the
In Figure 2 you see the EuroSchatz futures with a 20-, 40-, 40-day MA and go to periods of 120 to 200, but in both these
and 80-day moving average (MA). When all three are trending examples, the 20-day MA clearly shows the differences.
up, you would be fully long, and when one is trending down and
Seeking an average performance
Choosing a single trend means that you expect this trend to
outperform the average. Given a choice of all trend periods
Averaging into a trade is a better between 20 and 200, what are your chances of choosing the
strategy for long-term trend- one that will perform best next year? It would be the same
following than entering the entire as choosing a single market to trade out of the large number
available. Could you have figured out that AAPL would have
position on any one day. gone to $700, or that gold would go to $1,800, or crude oil to
$150? You diversify to improve your chances of being right,
AAPL 20-, 40-, and 80-day averages with

three entries, two days apart
FIGURE 3: MACROTRENDS. Most macrotrends start at the 40-day moving average (MA) and go to periods of 120 to 200, but the 20-day MA clearly shows the
difference.

TRADING SYSTEMS
knowing that you give up any chance of an extreme

profit. It’s a good tradeoff.
The same is true for choosing calculation periods.
Long-term trend-following is unique because it is
profitable (to different degrees) over a wide range of
time frames, as seen in the AAPL example in Figure
1. If 70% of all trends are profitable over a wide range
of periods, then why not trade a fair sample of them
and target the average performance? While you can’t
FIGURE 4: NET PROFIT/LOSS. Column 1 shows some instability. The farthest-right column,
get the highest profit, you also can’t get the worst loss. although not the most profitable, is the most stable.
Instead, you get stability.
A note about test

distribution
At the risk of being too mathematical, the tests in
Figure 1 misrepresent the results. Technically, they
are correct, but they make it appear as though the
larger calculation periods are more stable than they
really are. That’s because the difference between a
10-day average and a 20-day average is 100% (the
20-day has twice the number of prices as the 10-day),
while the difference between the 190- and 200-day
averages is only about 5%. So there should only be a
slight difference between the results of the 190- and
200-day calculations. That will make the right end of FIGURE 5: PROFIT FACTOR. The worse results are toward the upper left and the best ones
the chart look more stable. To be more accurate, each are toward the lower right.
test should be incremented by the same percentage.
For example, you would use 20-40-80-160, or 20-30-
45, and so on. Most test platforms don’t allow that,
but it’s good to be aware of the problem.
Averaging into a trade

You can apply the same idea of averaging the trend
positions to the way you enter and exit a trade. You FIGURE 6: ZEROING IN. Here you see that it is better to average into a trade rather than
entering the entire position in one day.
could execute the entire position at once, on the open
of the next day, or you can divide the position size into
equal parts and execute over a span of days. For example, for a measure of reward to risk.
trade of 100 shares, you could execute 50 on the first day and The profits in Figure 4 show a successful band through the
50 on the second, third, or fourth day. Or you could execute in center of the table at 60–70. While all the cells are profit-
four equal parts, each two, three, or four days apart. This gives able, column 1 varies from dark red to green, showing some
you an average price rather than counting on all or nothing. instability. The farthest right column, although not the most
Averaging in works best for long-term trends because they profitable, seems to be the most stable. The picture is much
are not sensitive to a price move on a specific day. If you clearer in Figure 5, which displays the profit factor. Here, the
consider an 80-day average, then today’s price move is 1/80th worse results are clearly toward the upper left and the best
of the total. A new buy signal will be the aggregate of many towards the lower right. I have always judged success by a
days, and today’s change may be up, but tomorrow and the risk–reward ratio rather than only by profits.
following day may be down. An average is always safe. In Figure 6 I’ve copied the calculation periods separated by
Figures 4, 5, and 6 show the results of testing the EuroSchatz the same percentage of days, showing the same results as Figure
from 1990 through 2013 as heat maps. The EuroSchatz is the 5. This is not just a well-chosen example, but generally true. Not
European equivalent of the US five-year note, but it serves as all examples are quite as clear, but nearly all show that averaging
a good example. In Figures 4 and 5 I’ve tested moving average into a trade is a better strategy for long-term trend-following
periods from 20 to 120 days (in the left column), and entries than entering the entire position on any one day.
in three parts separated by one day, two days, and up to five. One particular advantage of averaging-in is when the trend
The column marked “0” enters the entire trade on the first day. changes direction sooner than expected, or generates a false
Figure 4 gives the net profit/loss, and Figure 5 displays the signal. If you are entering and exiting a position in three parts,
profit factor (total profits divided by total losses), a reasonable then there will be six trades in total to reverse the position.
TRADING SYSTEMS
During that interval, if the trend reverses, then the entire n Use the closing price to calculate signals and then execute
position would not be exited or entered, which would result in the aftermarket
in substantial savings. n Use prices 15 minutes before the close, execute on the
close, and then rerun and adjust if needed
Using different position sizes
The size of the trade for stocks is calculated by dividing the n Use the close for the signals, then execute on the next
amount to be traded by the current price. While not at all per- open.
fect, it attempts to risk-adjust the position size. When there are
five different calculation periods and three parts for averaging By far, the most realistic and convenient is to use the closing
into a trade, there are a total of 15 buy orders to reach a full prices to generate the signals, then execute on, or just after, the
long position. Then each order gets 1/15 of the investment, open of the next trading session. This delay has only a minor
consistent with the idea of equal weighting. effect on long-term trends, which are not reacting to specific
However, between the first and last order, the price can moves on the day of entry. A change in the long-term trend
change. You want to keep your position tuned to the current can just as easily be caused by the oldest data dropping off
price level so that you reduce the size as prices move higher, as the change in the new data.
and increase the size as prices move lower. Then when a new
leg is to be entered, you calculate the total new position size To sum it up…
based on today’s price, then add or subtract whatever is neces- A better trend has the following features:
sary to have a total position size consistent with the current n Macrotrend time frames with calculation periods from
price level. For example, if you are investing $10,000 in Bank 40 to 120 days
of America (BAC), each leg gets 1/15 of that, or $666. n Multiple trends that are spaced by a percent change in
the calculation period
n On the first buy signal, the price is $10; therefore, you
n Averaging in and out over n days, spaced equally apart
buy 66 shares.
n Your position is the net of all trends, equally weighted
n At the second buy signal, the price has dropped to $9, so n The position size for stocks is determined by price
you want a total of $1,332 invested at $9 = 148 shares. n When new positions are added or reduced, net the total
Had you only considered the 1/15 allocation, you would at the current price
add 74 shares, but now you add 148 - 66 = 82 shares.
n To reduce the cost of trading, don’t add or reduce your
n On the third signal, the price is $15, so you should be position unless it changes by 15%
holding 3/15, or $2,000 worth of shares. At $15, you n No stops are used because they fight with the trend
get 133, larger than the 148 you are currently holding n Portfolios are long-only, although short sales can be
even though you have three parts of your total position monitored.
rather than two. You sell 15 shares to bring the risk into
line. Perry Kaufman is the author of TradingSystems And Methods
and Alpha Trading. He has been the managing director and gen-
This process allows you to continually adjust the risk of your
eral partner of investment funds and the chief architect of their
position to the current risk of the market. If the adjustment is
strategies. He is president of KaufmanSignals.com, a website
too small, you would just wait for the next order.
that offers subscriptions to trading strategies and portfolios.
He may be contacted via his website, www.KaufmanSignals.
Switching threshold com, or by email at [email protected].
If you are trading too many combinations, consider this point:
The more you trade, the closer you get to the average, but you
Further reading
also need to consider the costs. With more combinations, there
Kaufman, Perry J. [2011]. Alpha Trading: Profitable Strategies
are likely to be small changes in the net position each day,
That Remove Directional Risk, John Wiley & Sons.
which means a trading commission each day. There are two
[2013]. Trading Systems And Methods + Website, 5th
ways to solve this: Either use fewer combinations, or only make
ed., John Wiley & Sons.
changes in the net position size when the change is greater than
[2014]. “Timing The Market With Pairs Logic,”
some threshold (say, 15%). If your position changes from 200
Technical Analysis of Stocks & Commodities, Volume
to 210 shares, then don’t do anything. Wait until the change is
32: March.
at least 30 shares before making an adjustment.
‡TradeStation
Execute trades on the next open ‡See Editorial Resource Index
There is something to be gained by executing trading sig-

nals as soon as possible, but it is not always practical. Your
options are to:
product review
Candle Profit System

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time/metastockpro/?requirements earlier versions. When you open MS13,
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by S&C Staff power console. One of the tabs on this an easy way to code ideas to see if they
C
screen is for the explorer, and when you work. To show how easy it is, let’s take
andle Profit System (CPS), a select it, you’ll see a screen similar to a look at the first statement in the doji
MetaStock add-on and product what you see in Figure 2. top code. To make this a little easier,
of a collaboration between Steve The CPS add-on has the unusual fea- consider what the doji candlestick looks
Bigalow and MetaStock, seeks to find ture of disclosing the code that is used for like. Ideally, it has an open and close that
profitable candlestick patterns. There scans and the code used in a MetaStock are the same. But in reality, that may not
are a large number of candlestick pat- feature called expert advisor. Clicking be the case, so you have to come up with
terns, some of which are highly reliable, on edit on the explorer screen results in some other rule. How about the rule of
but many of them are infrequent. What a screen similar to that in Figure 3. the open and close being less than 20% of
Bigalow asserts is that there are just 12 One of the great strengths of Meta the average of the last 20 differences?
patterns that you need to pay attention Stock is its formula language. It provides With that in mind, here is what the
to for generating profits. There is a free
webinar you can watch on YouTube
found at http://www.youtube.com/
watch?v=1fB3EF7XeXU to see ex-
amples of these 12 patterns.
Overview
The webinar starts by listing the 12 pat-
terns you see listed in Figure 1. The user
manual that comes with the add-on also
describes each one. As Bigalow explains
in the webinar, candlestick patterns are
reflections of the mood of traders. For
example, a doji pattern is one where the
open and close are nearly equal, which
reflects indecision by traders. In other
words, neither the bulls nor the bears
have control. You then want to see a con-
firming signal, such as the appropriate Figure 2: power console interface to explorer. Listed on the left are the scans you can use. Near
bearish or bullish candlestick following the top, highlighted in blue, is the first of four different CPS scans. The scan in this figure is Doji Dynamite and
the doji, depending on the trend. on the right is a description of each of the si patterns for which a search will be done.

There are just 12 candlestick
patterns that you need to pay
attention to for generating
profits.
first line of code would look like:
dj:=Abs(O-C)<=Mov(Abs(O-C),20,S)*.2;
To start with, we are defining a variable we are calling “dj”

by writing “dj:=.” The “:=” is used to say “defined as.”
From the description, it’s easy to see that “Abs(O-C)” is the
absolute difference between open and close, while the state- FIGURE 3: EDIT SCREEN FOR DOJI DYNAMITE EXPLORATION. Each of the tabs,
ment “Mov(Abs(O-C),20,S)” is the simple moving average labeled A through L, is used to hold the code for a search. At the lower left in a small
window is the column name. The code seen here is for the doji top.
(SMA) of those differences for the last 20 days, multiplied
by the factor “*.2.” That’s it. If you
look at the rest of the statements, each
is separated by a “;” and since each is
a true or false statement, you conclude
by using a formula language convention
and simply write “Sig,” which has the
value of either being true or false, by
virtue of the previous statements.
Formula language purposely leaves
out some grammatical elements that
would complicate usage. It’s a terrific
compromise between using complete
grammar and providing something that
is simple and easy to use.
Scan report FIGURE 4: EXPLORER REPORT. Tabs at the top let you look at the results versus the rejects or lets you look at
a description of the scan. Since you want to identify where the scan was successful, you are looking for a true
An explorer report looks like what you condition, which would be represented by a value of one. Zero would mean the condition is false. You would sort
see in Figure 4. There are columns for your columns to identify the true conditions, and when you do you can open up the chart for that particular trading
each of the patterns. Clicking on a pat- instrument.
tern column header sorts the rows in the
column. A value of 1.0000 corresponds
to a true condition. Two equities met
the criteria for the doji top conditions
discussed earlier. Mind you, this is out of
a scan of approximately 3,800 stocks.
Charting results
Highlighting the top row after sorting
and then selecting the open chart button
brings up a chart for Mitel Networks
(Figure 5). However, the chart in Figure
5 has an embellishment. The CPS add-on
comes with a template, which you can
switch to after you open a chart. The
template adds four moving averages
and the stochastic indicator, because as
you will learn when you listen to the
webinar, you are looking for overbought
and oversold conditions along with other
patterns and conditions. FIGURE 5: PRICE CHART WITH CPS TEMPLATE APPLIED. The template adds a stochastic indicator at the
bottom as well as four moving averages.

Key elements
As you go through the webinar, it is clear
that knowing where support & resistance
might occur is a powerful piece of infor-
mation. In fact, Bigalow discusses this
throughout the webinar. He explains that
the 200-, 50, and 20-period SMA levels are
support & resistance levels that are popu-
lar among institutional traders. As a result,
these are included in the template.
Another topic he discusses is trend
analysis, which is another important
factor to consider when using candlestick
patterns. Defining a trend analytically
and encoding it are two different things.
As a result, the code disclosed in CPS
does not include a test for trend, nor does
it contain logic to tell you how close you
might be to one of the moving averages.
Defining close and trendiness are best
left to your eye and experience.
Going through the webinar is especially
helpful because Bigalow emphasizes StockCharts University Lights, camera, action
the importance of gaps and having StockCharts.com The course site was well-equipped for
supporting signals. Bigalow likes the 11241 Willows Rd., Suite 140 the presentation with comfortable seating
stochastic (12, 3, 3) indicator because it Redmond, WA 98052 and tables, free access to Wi-Fi and power
gives him a good measure of overbought Phone: 425 881-2606 strips, large dual screens for ease of view-
or oversold conditions. Internet: www.stockcharts.com ing, and great views of Manhattan. Most
Email: [email protected] attendees brought laptops, enabling them
Other Product: Educational seminar cover- to follow the presentation simultane-
There are no indicators in CPS but you ing features of Stockcharts.com ously on the screen and on their laptop
can easily create them by copying and (a flash drive was provided containing
pasting the code you see through the by Leslie N. Masonson all the slides), as well as experiment in
real time with the website’s features to
On
explorer or expert advisor into the indi-
cator builder. Some of the technicians at Friday, September 20, gain proficiency. Anderson presented
MetaStock can give you some assistance 2013, I attended the one- most of the material throughout the
in reading the code. Building code is day course SCU 101 (at day, with Schnell covering a handful of
another matter. They are a very friendly the Sentry Centers in New York City) the segments. Questions and feedback
and knowledgeable group and will try to presented by Chip Anderson, president were encouraged by the speakers, who
help in any way they can. and founder of StockCharts.com, and responded with detailed answers.
Greg Schnell, author of The Canadian The course was divided into eight
Summary Technician. This introductory course modules covered during the day, as fol-
CPS is an affordable item that could help was specifically designed for users of lows:
your trading. It is easy to analyze the the StockCharts.com website to help
n Reviewing the six key compo-
trading performance of CPS since you them maximize their working knowledge
nents of the website
can create elements of entry conditions of the site. Through a combination of
in the System Tester, another terrific technical tools, market commentary, n Touring the key features of the
feature you can find in MetaStock with and educational material, the site aims homepage
the disclosed code. to help users make high-quality investing n Using PerfCharts for sector rota-
decisions. The course focused entirely tion analysis
Further reading on explaining the key website features,
S&C staff [2014]. “MetaStock Pro XIII,” nuances, and the numerous charting n Utilizing point & figure charts
product review, Technical Analysis of capabilities of the software. The website with bullish percent indexes
Stocks & Commodities, Volume has been around since 1999 and many n Learning how to use the Sharp-
32: March. upgrades over the years have enhanced Charts Workbench
‡Candle Profit System (MetaStock) its usefulness and effectiveness.
n Using MarketCarpets tools can help participants make good for example, $349 in Dallas.
investing and trading vehicle choices. Interested individuals and current users
n Creating technical scans
With a copy of all the slides as backup, of StockCharts.com can sign up for the
n Working with SCTRs (strength participants can review the key elements Chart Watchers bimonthly newsletter,
rankings based on technical of these well-designed and useful which provides market commentary
analysis) to simplify scanning features. from a number of sources including
The presenters illustrated how to place Chip Anderson, John Murphy, Arthur
Speaking with attendees during multiple indexes or stocks on the same Hill, and Carl Swenlin. This newsletter
breaks and lunch, I found that they had chart, how to put moving averages on goes back to 1999, when the website
positive feedback on the course and stocks (as well as on indicators them- was developed. Additional courses are
its value in accelerating their learning selves, such as a five-day moving aver- available for those who want more in-
process. Knowing all the nuances and age on the RSI), how to add Fibonacci depth knowledge: SCU 102: “Account
capabilities of the website provides users retracements, commentary boxes, and Configuration”; and SCU 310: “The
with knowledge to uncover the best many other variables. Stockcharts.com 10 Essential Stages to Stock Market
investing opportunities. In particular, is truly a product with wide-ranging ca- Mastery.” For more information on all
the power to create unique customized pability, limited only by the user’s ability the course offerings in other cities, go
searches, and leveraging the value of and knowledge level. Charts have data to www.stockcharts.com/scu.
relative strength analysis in conjunction back to 1990 and indexes back to 1980, In summary, the course covered all
the critical aspects of StockCharts.com
in great detail with actual examples.
The speakers presented the material in a
Knowing all the nuances and logical, easy-to-understand format, and
capabilities of the website helps welcomed questions during the session
to uncover the best investing as well as during the breaks. All in all,
this course provided current and prospec-
opportunities. tive users with solid knowledge that will
speed up their ability to use the site to
their maximum advantage.
with advanced charting capabilities and for Pro members, some stock data Leslie N. Masonson, MBA, is a day
makes for a powerful approach to smart goes back to the 1960s and 1970s. trader and the author of Buy Don’t Hold
investing. and All About Market Timing. He has
During the presentation, live examples Added value contributed a number of articles and
of website features were demonstrated in In addition to the speakers’ comprehen- reviews to Technical Analysis of Stocks
addition to the slides, which allowed the sive review of the website’s features, & Commodities over the years and can
participants to locate and use the site’s each participant also received a DVD of be reached at [email protected].
many features on their laptops. Since the prior SCU 100 course, “Foundations His website is www.buydonthold.com.
the stock market was open during the of Technical Investing”; a two-gigabyte
course, real-time data was displayed. USB flash drive containing the Power- Further reading
There are a myriad of features to learn Point presentation for SCU 101 with Davis, Summer [2011]. “ChartCon
about, and the speakers focused on the more than 700 slides; a copy of Alexander 2011,” Quick-Scan, Technical Analy-
most important. Elder’s ebook To Trade Or Not To Trade, sis of Stocks & Commodities,
In particular, three of the most StockCharts Edition; and three months of Volume 29: December.
important subject areas covered were the the site’s Extra charting service valued at S&C staff [2010]. “StockCharts.com,”
use of technical scans, using the SCTRs $75. These add-ons allow participants to product review, Technical Analysis
(to find technically strong stocks), and gain additional knowledge and insights of Stocks & Commodities, Volume
designing custom scans with any of the to be better prepared for trading and in- 28: August.
site’s data elements such as moving vesting. The cost of this course in NYC
average breakouts, MACD crossovers, was $399, which included all course ‡StockCharts.com
and minimum volume and price criteria. materials, continental breakfast, buffet ‡See Editorial Resource Index
Each of these areas received sufficient lunch, beverages and snacks throughout
coverage, and understanding these the day. The cost in other cities is less,

To download the EasyLanguage code, please visit our Trade
For this month’s Traders’ Tips, the focus
Station and EasyLanguage support forum. The code for this arti-
is Melvin Dickover’s article in this issue,
“Evidence-Based Support & Resistance.” cle can be found here: http://www.tradestation.com/TASC-2014.
Here we present the April 2014 Traders’ The ELD filename is “_TASC_EVIDENCEBASED_SR.ELD.”
Tips code with possible implementations For more information about EasyLanguage in general,
in various software. please see http://www.tradestation.com/EL-FAQ.
Code for OmniTrader is already provid- A sample chart is shown in Figure 1.
ed in Melvin Dickover’s article. Subscribers This article is for informational purposes. No type of trading or
will find that code at the Subscriber Area of investment recommendation, advice, or strategy is being made, given, or
our website, www.Traders.com. (Click on “Article Code” in any manner provided by TradeStation Securities or its affiliates.
from the S&C menu.) Presented here is an overview of —Doug McCrary
possible implementations for other software. TradeStation Securities, Inc.
Traders’ Tips code is provided to help the reader imple- www.TradeStation.com
ment a selected technique from an article in this issue.
The entries are contributed by various software develop-
ers or programmers for software that is capable of cus-
tomization. F METASTOCK: APRIL 2014 TRADERS’ TIPS CODE
Readers will find the April 2014 Traders’ Tips code and
Melvin Dickover’s article in this issue, “Evidence-Based Sup-
formulas at our website, Traders.com, in the Traders’ Tips
area. Here, you can read some discussion of the tech-
port & Resistance,” discusses two volume-based indicators,
nique’s implementation by the Traders’ Tips contributors the relative volume indicator and the Freedom of Movement
as well as some example charts. (FoM), which is an indicator developed by Dickover and
To locate Traders’ Tips at our website, www.Traders. introduced in his article. The MetaStock formulas for the two
com, click on the link on our main menu at the top of the indicators are as follows:
homepage, or scroll down to the “Current articles” section
and click on the Traders’ Tips tab. Relative volume indicator
x:= Input("Standard Deviation Periods", 5, 120, 60);
y:= Input("Number of Deviations", 0, 4, 2);
av:= Mov(V, x, S);
sd:= Std(V, x);
relVol:= (V-av)/sd;
F TRADESTATION: APRIL 2014 TRADERS’ TIPS CODE If(relVol>y, relvol, 0);
In “Evidence-Based Support & Resistance” in this issue, author If(relvol<=y, If(relvol>0,relvol, 0),0);
Melvin Dickover discusses two indicators to help traders note Freedom of Movement (FoM) indicator
support and resistance areas by identifying supply and demand x:= Input("Standard Deviation Periods", 5, 120, 60);
pools. Here, we present EasyLanguage code for the relative y:= Input("Number of Deviations", 0, 4, 2);
av:= Mov(V, x, S);
volume indicator and for an indicator developed by Dickover sd:= Std(V, x);
named Freedom of Movement (FoM). relVol:= (V-av)/sd;
aMove:= Abs((C-Ref(C,-1))/Ref(C,-1));
theMin:= LLV(aMove,x);
theMax:= HHV(aMove,x);
denom:= If(theMax-theMin = 0, -1, theMax-theMin);
theMove:= 1 +((aMove-theMin)*(10-1))/Abs(denom);
MinV:= LLV(relVol,x);
MaxV:= HHV(relVol,x);
denomv:= If(MaxV-MinV = 0, -1, MaxV-MinV);
theVol:= 1 + ((relVol-MinV)*(10-1))/Abs(denomV);
vByM:= theVol/theMove;
avF:= Mov(vByM, x, S);
sdF:= Std(vByM, x);
theFoM:= (vByM-avF)/sdF;
If(theFoM>y, theFoM, 0);
If(theFoM<=y, If(theFoM>0, theFoM, 0),0);
The last two lines of both formulas allow them to be plotted

on a chart in two colors. After plotting the indicator, you will
see two lines. One at a time, select a line. Then use the color
and style toolbars in the bottom-left corner of your MetaStock
screen to change the line style to histogram. You can also
change the color and weight (thickness) of the line.
—William Golson
Figure 1: TRADESTATION. Here is a daily chart of ADM with the RelativeVolume MetaStock Technical Support
and FoM indicators inserted. www.metastock.com

F WEALTH-LAB: APRIL 2014 TRADERS’ TIPS CODE
In “Evidence-Based Support & Resistance” in this issue, author
Melvin Dickover presents a new framework for discovering
supply and demand pools and creating dependable support
and resistance lines that claim to identify the prices where
those pools are located on the chart. The underlying method
is quite simple to grasp.
Because drawing the Defended Price Lines (DPLs) is to
some extent a heuristic process, the example strategy plots
the DPLs using a rudimentary algorithm: a line is drawn
when either the relative volume or Freedom of Movement
jumps two or more standard deviations away from the mean.
We recommend using that only as a starting point, though.
To avoid getting distracted by too many DPLs, pinpoint the
most influential ones by considering such criteria as clustering
behavior, strong momentum, and high volume.
Figure 2: THINKORSWIM. Here is a sample three-month daily chart of Archer-
Daniels Midland (ADM) with the relative volume and Freedom of Movement indica-
To hide the complexity and make the process easier, the two
tors in the lower panes. new indicators (relative volume and Freedom of Movement)
have been added to the Wealth-Lab TASCIndicators library.
To execute the included sample code, Wealth-Lab users need
to install (or update) the latest version of the TASCIndicators
library from the extensions section of our website if they
haven’t already done so, and restart Wealth-Lab.
F Thinkorswim: APRIL 2014 TRADERS’ TIPS CODE
In “Evidence-Based Support & Resistance,” author Melvin Wealth-Lab 6 strategy code (C#):
Dickover describes how to find support and resistance areas
by using more than just price levels. Dickover provides using System;
using System.Collections.Generic;
evidence for using volume-based price levels for identifying using System.Text;
these classic technical analysis areas. using System.Drawing;
Based on the article, we have created two new studies for using WealthLab;
using WealthLab.Indicators;
thinkorswim users in our proprietary scripting language, using TASCIndicators;
thinkScript. To load them, simply click on each of these links:
namespace WealthLab.Strategies
http://tos.mx/yzefQi and http://tos.mx/sL8TVa. You can adjust {
their parameters within the edit studies window to fine-tune public class MyStrategy : WealthScript
your variables. {
protected override void Execute()
In Figure 2, you see a three-month daily chart of Archer- {
Daniels Midland (ADM). We have drawn support and int period = 60;
resistance levels on the price chart by using the logic described double d = 2;
DataSeries relVol = Close*0; relVol.Description =
in Dickover’s article. In order to draw all necessary lines, "Relative Volume";
click on the links, save each in thinkorswim, and rename DataSeries theFoM = Volume*0; theFoM.Description =
them. The first link, http://tos.mx/yzefQi, should be renamed "Freedom of Movement";

FreedomOfMovment or FoM and the second, http://tos.mx/ for(int bar = 0; bar < Bars.Count; bar++)
sL8TVa, should be renamed RelativeVolumeStDev. {
Next, use the price level drawing tool, found in thinkorswim relVol[bar] = RelVol.Series(Bars,period)[bar] > 0 ? Rel-
Vol.Series(Bars,period)[bar] : 0;
charts under the drawings menu at the top right, to draw your theFoM[bar] = FOM.Series(Bars,period)[bar] > 0 ? FOM.
price levels based on the spikes on your studies. You can expand Series(Bars,period)[bar] : 0;
the chart area to show time to the right by clicking on style then }
settings and the time axis tab. Now your drawings are looking HideVolume();
forward and displaying future support and resistance lines. ChartPane r = CreatePane( 30,false,true );
If you have questions or comments, please email us at PlotSeries( r, relVol, Color.Black, LineStyle.Histogram, 3 );
ChartPane f = CreatePane( 30,false,true );
[email protected] and mention Technical Analysis PlotSeries( f, theFoM, Color.Black, LineStyle.Histogram, 3 );
of Stocks & Commodities magazine.
—thinkorswim for(int bar = 1; bar < Bars.Count; bar++)
A division of TD Ameritrade, Inc. {
if (relVol[bar] <= d)
www.thinkorswim.com

Figure 3: WEALTH-LAB. This sample Wealth-Lab 6 chart illustrates how the
DPLs can be plotted following some of the rules from Melvin Dickover’s article in
this issue. The DPLs are the blue lines on a daily chart of ADM. The relative volume
and Freedom of Movement (FoM) indicators are plotted on the bottom pane for
reference purposes.
Figure 4: NEUROSHELL TRADER. This NeuroShell Trader chart displays the

SetSeriesBarColor( bar, relVol, Color.DarkGray); relative volume and Freedom of Movement indicators based on Melvin Dickover’s
if (theFoM[bar] < d) article in this issue.
SetSeriesBarColor( bar, theFoM, Color.DarkGray);

if (theFoM[bar] > d || relVol[bar] > d) // Draw DPLs A sample chart is shown in Figure 4.
{ —Marge Sherald, Ward Systems Group, Inc.
DrawLine(PricePane,bar,Close[bar],Bars.Count- 301 662-7950, [email protected]
1,Close[bar],Color.Blue,LineStyle.Solid,1); www.neuroshell.com
}
}
}
}
} F AIQ: APRIL 2014 TRADERS’ TIPS CODE
The AIQ code based on Melvin Dickover’s article
A sample chart is shown in Figure 3. in this issue, “Evidence-Based Support & Resis-
—Wealth-Lab team tance,” can be found at http://www.TradersEdgeSystems.
MS123, LLC
www.wealth-lab.com com/traderstips.htm.
The code provided there and also shown here will allow AIQ
users to plot the two indicators presented by Dickover, the
relative volume indicator and his new Freedom of Movement
F NEUROSHELL TRADER: APRIL 2014 (FoM) indicator, both of which are shown in Figure 5.
TRADERS’ TIPS CODE
The relative volume and Freedom of Movement
indicators described by Melvin Dickover in his article in
this issue, “Evidence-Based Support & Resistance.” can be
easily implemented with a few of NeuroShell Trader’s 800+
indicators. Simply select “New indicator” from the Insert
menu and use the indicator wizard to recreate the following
indicators:
Relative Volume: StndNormZScore( Volume, PERIOD )
RelVol Significance: A>B( Relative Volume, STDEVS )
FoM: StndNormZScore( Divide(Add2( 1, Mult2(

SimpleStoch%K( StndNormZScore(Volume,PERIOD),
PERIOD), 0.09 ), Add2( 1, Mult2( SimpleStoch%K( abs(
PercentChange(Close,1)), PERIOD), 0.09)), PERIOD)
FoM Significance: A>=B( FoM, STDEVS )
Users of NeuroShell Trader can go to the Stocks &

Commodities section of the NeuroShell Trader free technical
support website to download a copy of this or any previous Figure 5: AIQ. Here is a sample plot of the relative volume and Freedom of Move-
Traders’ Tips. ment indicators on a chart of Adobe Systems (ADBE). The horizontal lines are set
at two standard deviations.

!EVIDENCE-BASED SUPPORT & RESISTANCE The following code files are provided in the download:
!Author: Melvin E. Dickover, TASC April 2014
• Function MED_NORMALIZE: Returns a normalized value
!Coded by: Richard Denning, 2/5/2014
!www.TradersEdgeSystems.com that can be used to make comparisons
• Function MED_RELATIVE_VOLUME: Returns the values
!INPUTS: for the relative volume indicator
vLen is 60. • Function MED_FREEEDOM_MOVE: Returns the values from
sdSigLvl is 2. the Freedom of Movement (FoM) indicator
V is [volume]. • Indicator MED_RELATIVE_VOLUME_IND: Indicator plot
C is [close]. for the relative volume indicator
C1 is valresult(C,1). • Indicator MED_FREEDOM_MOVE_IND: Indicator plot for
the Freedom of Movement (FoM) indicator
avgV is simpleavg(V,vLen).
sdV is sqrt(variance(V,vLen)).
rv is (V-avgV)/sdV. In Figure 6, I show Dickover’s indicator, Freedom of
rvi is iff(rv>0,rv,0). !PLOT Movement, and the relative volume indicator discussed in his
article on a chart of Alaska Air (ALK). The horizontal lines
aMove is abs((C-C1)/C1).
are set at two standard deviations.
minM is lowresult(aMove,vLen).
—Richard Denning
maxM is highresult(aMove,vLen).
normM is 1+((aMove-minM)*(10-1))/(maxM-minM).
[email protected]
for TradersStudio
minV is lowresult(rv,vLen).
maxV is highresult(rv,vLen).
normV is 1+((rv-minV)*(10-1))/(maxV-minV).
vByM is normV/normM. F NINJATRADER: APRIL 2014 TRADERS’ TIPS CODE

avgF is simpleavg(vByM,vLen). We have implemented the relative volume and Freedom of
sdF is sqrt(variance(vByM,vLen)).
FofM is (vByM-avgF)/sdF. Movement (FoM) indicators that are presented in Melvin
FofMI is iff(FofM>0,FofM,0).!PLOT Dickover’s article in this issue, “Evidence-Based Support &
Resistance.” These indicators are available for download at
—Richard Denning www.ninjatrader.com/SC/April2014SC.zip.
[email protected] Once they have been downloaded, from within the
for AIQ Systems
NinjaTrader Control Center window, select the menu File →
Utilities → Import NinjaScript and select the downloaded file.
This file is for NinjaTrader version 7 or greater.
F TRADERSSTUDIO: APRIL 2014 You can review both indicators’ source code by selecting
TRADERS’ TIPS CODE the menu Tools → Edit NinjaScript → Strategy from within
The TradersStudio code based on Melvin the NinjaTrader Control Center window and selecting the
Dickover’s article in this issue, “Evidence-Based Support & RelativeVolume and FoM files.
Resistance,” is provided at both of the following websites: A sample chart implementing the strategy is shown in
Figure 7.
• www.TradersEdgeSystems.com/traderstips.htm —Raymond Deux & Brandon Sutrina
• www.TradersStudio.com → Traders Resources → Traders Tips NinjaTrader, LLC
www.ninjatrader.com
Figure 7: NINJATRADER. This screenshot shows the RelativeVolume and FoM

indicators applied to a daily chart of Archer-Daniels Midland (ADM) stock.
Figure 6: TRADERSSTUDIO. Here, the Freedom of Movement (yellow) and relative
volume (green) indicators are shown on a chart of Alaska Air (ALK). Continued on page 60

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

Commodity Futures Exchange % Margin Effective Contracts to Relative Contract Liquidity
% Margin Trade for Equal
Dollar Profit
E-Mini S&P 500 GBLX 4.2 10 5 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
10-Year T-Note CBOT 1.2 12.9 17 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
T-Bond CBOT 2.6 15.4 9 ••••••••••••••••••••••••••••••••••••••••••••••
E-Mini Nasdaq 100 GBLX 3 6.7 6 •••••••••••••••••••••••••••••••••••••••••••••
S&P 500 Index CME 4.2 10 1 •••••••••••••••••••••••••••••••••••••••••
5-Year T-Note CBOT 0.6 14.2 37 ••••••••••••••••••••••••••••••••••••••
Corn CBOT 12.7 12.9 9 •••••••••••••••••••••••••••••••••••••
Ultra T-Bond CBOT 3.1 12.3 5 ••••••••••••••••••••••••••••••••••••
Gold COMEX 7.3 13.4 3 ••••••••••••••••••••••••••••••••
Japanese Yen CME 2.3 5.9 4 ••••••••••••••••••••••••••••••
Silver COMEX 10.5 7 1 •••••••••••••••••••••••••••••
Crude Oil WTI NYMEX 5.2 24.7 10 ••••••••••••••••••••••
Sugar #11 ICE-US 9.4 6.8 8 •••••••••••••••••••••
Soybeans CBOT 7.2 17.9 7 ••••••••••••••••••••
Natural Gas NYMEX 5.7 10.1 8 •••••••••••••••••
Euro FX CME 1.5 13.1 10 ••••••••••••••••
Cotton #2 ICE-US 5.6 3.6 3 •••••••••••••
CBOE S&P 500 VIX CFE 8.9 3.9 6 ••••••••••••
DJIA mini-sized CBOT 3.4 9.1 6 ••••••••••••
Wheat CBOT 11.5 16.8 10 ••••••••••
E-Mini S&P Midcap GBLX 3.3 7.1 3 ••••••••••
Coffee ICE-US 11.4 6.9 3 •••••••••
Australian Dollar CME 1.9 7.4 9 ••••••••
High Grade Copper COMEX 6.3 16.3 6 •••••••
Soybean Oil CBOT 7.4 12.6 14 •••••••
Gasoline RBOB NYMEX 5.5 17.1 5 ••••••
2-Year T-Note CBOT 0.1 12.9 81 ••••••
Canadian Dollar CME 1.2 7.2 13 ••••••
CBOT Chicago Board of Trade, Division of CME
British Pound CME 1.3 12.7 18 ••••••
CFE CBOE Futures Exchange
Soybean Meal CBOT 6.5 19.1 14 •••••
Live Cattle CME 2.4 8.5 12 ••••• CME Chicago Mercantile Exchange
Swiss Franc CME 1.6 5.5 5 •••• COMEX Commodity Exchange, Inc. CME Group
Heating Oil NYMEX 4.8 32.1 10 ••• GBLX Chicago Mercantile Exchange - Globex
Nasdaq 100 CME 3 6.7 1 ••• ICE-EU Intercontinental Exchange-Futures - Europe
KCBT Red Wheat KCBT 8 13.5 10 •• ICE-US Intercontinental Exchange-Futures - US
Eurodollar CME 0.1 45.1 257 •• KCBT Kansas City Board of Trade
Platinum NYMEX 5.3 16.6 8 •• MGEX Minneapolis Grain Exchange
Cocoa ICE-US 7 16.3 17 •• NYMEX New York Mercantile Exchange
Lean Hogs CME 3.8 16.1 22 • WCE Winnipeg Commodity Exchange
Mexican Peso CME 5.9 37.2 33 •
Palladium NYMEX 7 24.5 9 •
Spring Wheat MGEX 10.6 12.8 8 •
DJIA CBOT 3.4 9.1 3 •
Canola WCE 6.3 10.4 37 •
U.S. Dollar Index ICE-US 1.6 15.8 23 • 1404
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

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April 2014 • Technical Analysis of STOCKS & COMMODITIES • 59

Continued from page 56
F UPDATA: APRIL 2014 TRADERS’ TIPS CODE

This Traders’ Tip is based on Melvin Dickover’s article in
this issue, “Evidence-Based Support & Resistance.”
The author presents two indicators based on price
and volume behavior to better determine support and
resistance lines. The first is a relative volume indicator,
which identifies large-volume days, illustrated with a
black bar in an otherwise gray histogram.
Updata has slightly extended the article by adding
rules for the additional Defended Price Line (DPL),
plotted at the close price after a cluster of large-volume
black bars.
The second colored histogram (Figure 8) is Dickover’s
new Freedom of Movement (FoM) indicator, which seeks
to identify when price movement has suddenly become
restricted by comparing a price move to volume change
over a period. FIGURE 8: UPDATA. Here, the relative volume [60|2] and Freedom of Movement [60|2]
indicators are applied to daily S&P 500 index data. The DPLs are drawn with relative volume
The Updata code for this article is in the Updata clusters of size 2.
Library and may be downloaded by clicking the custom
menu and indicator library. Those who cannot access
the library due to a firewall may paste the code shown in the adjusts his DPLs up or down to reflect this new confirming
Traders’ Tips area of www.traders.com into the Updata custom information with a single best-fit for the apparent localized
editor and save it. support or resistance level.
—Updata support team What you see in my Figure 9 is the same data that’s shown
[email protected] in Figure 1 of Dickover’s article. I have used the heuristics
www.updata.co.uk
described in his article to have Excel set the DPLs.
As you can see, there are lots of them. Many originate off
F MICROSOFT EXCEL: APRIL 2014 TRADERS’ TIPS CODE the chart to the left. The darker areas show critical price point
In his article in this issue, “Evidence-Based Support & Resis- confirmation by way of the closely located DPLs.
tance,” author Melvin Dickover introduces some new indicators Figure 10 shows the results of one filtering method that can
that point out locations of possible support and resistance. With “thin the herd” a bit by suppressing the plot of DPLs whose
these indicators and a simple set of rules, Dickover determines levels are within a user-specified tolerance proximity of older,
initial support or resistance levels, which he manually plots already displayed DPLs. The method I used is not as precise
as Defended Price Lines (DPLs). as I would like, so some clutter remains.
Since the indicators show repeated support and resistance An Excel limitation on the maximum number of series per
levels that tend to cluster near the same levels, Dickover chart (256) causes some interesting things to happen on the
FIGURE 9: EXCEL, ACTIVE FILTER. Use the active filter to remove some of the cluster clutter.

FIGURE 10: EXCEL, Defended Price Lines (DPLs). Here, we show only those DPLs that originate within the current chart specifications.
FIGURE 11: EXCEL, FREEDOM OF MOVEMENT AND DPLs. Volume and the FoM indicators are displayed with automatically generated DPLs.
chart. In Figure 10, the active filter has eliminated some of the by way of the InputPriceData tab. Any time you retrieve data
clutter shown in the upper-right part of Figure 9. This made for a symbol listed on the follow tab, that row of the follow tab
room within the series limitation for some older-origination will be updated to record a last trade entry with time stamp.
DPLs to appear in Figure 10. Compare the DPLs that run (See the notes on the follow tab.)
through the sharp valley formation near the vertical cursor. The spreadsheet file for this Traders’ Tip can be downloaded
Figure 11 does a better job of approximating Figure 1 from from www.traders.com in the Traders’ Tips area. To
Dickover’s article by restricting the display to DPLs that successfully download it, follow these steps:
originate on the visible area of the chart. This version still gets
congested as we move to the right. But it also makes clear • Right-click on the Excel file link, then
the sort of manual DPL-level selections and adjustments that • Select “save target as” (or, in some browsers, “save as”) to
Dickover had to perform to arrive at his much-less cluttered place a copy of the spreadsheet file on your hard drive.
Figure 1.
Under the heading of user friendly, I have added a follow —Ron McAllister
tab to my Traders’ Tips Excel template. Excel and VBA programmer
Simply enter a list of Yahoo! Finance–acceptable symbols [email protected]
in column A of the follow tab. Then you can double-click on
one of these symbols to automatically initiate data retrieval

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THE TRADERS’ MAGAZINE SINCE 1982

www.traders.com APRIL 2014

“Scanning Techniques for Bigger Profits” “Introduction to Relational Analysistm”

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April 2014 • Technical Analysis of Stocks & Commodities • 15

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April 2014 • Technical Analysis of Stocks & Commodities • 17

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April 2014 • Technical Analysis of Stocks & Commodities • 19

Evidence-Based Support & Resistance

IT is well known that price movements are caused by

Finding DPLs with relative volume

volume is. The code for the relative

Finding DPLs with

must pay the ask price — and with

End-of-day example is found in either indicator, it shows a significant reaction to

DPL. If you find later spike bars whose

Trading with DPLs

OmniLanguage Code For Freedom Of Movement (FoM)

#Indicator theMove = 1 +((aMove-theMin)*(10-1))/(theMax-theMin)

24 • April 2014 • Technical Analysis of Stocks & Commodities

April 2014 • Technical Analysis of Stocks & Commodities • 25

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of Stocks and Commodities Reader's Choice Award

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26 • April 2014 • Technical Analysis of Stocks & Commodities

Expansions & Contractions

The concept of divergence is nothing new. When one in-

In Figure 2 you see a chart of FB again but