Stocks & Commodities V. 27:3 (98, 97): At The Close: Understanding The Trading Enviornment by Joseph J.

Mertes

AT THE CLOSE
Understanding The
Trading Environment
Spending time to assess the market
environment you are trading is a
good habit to develop.

I have a lot of trading expe-

rience from trading —

WAYNE SHAW
some good, some bad, but great
lessons all. One of the lessons
I’ve learned has been about the
use of the chart. Understanding the chart is important. Under- driven up or down until they again agree on the value.
standing what drives the chart is invaluable. Thus, if the trading psychology determines value, and the
I use the Market Development and Market Structure meth- environment in which the trader trades determines psychol-
odology. What drives the method is Auction Market Theory, ogy, then it must be important to understand that environ-
where a willing buyer and a willing seller agree on price. ment. More important, we must anticipate changes to the
When you have many buyers and sellers coming together and environment that will have an impact on the psychology
agreeing on price, they determine where value is for whatever because that will have an impact on price.
commodity they are trading. It is the determination of value By understanding this, we can go back to the example. We
and depicting value on the profile chart that gives us the are currently experiencing wide swings in market ranges.
information that is the basis of a trade or investing strategy. With Auction Market Theory, these are markets in search of
value because the trading psychology has changed due to the
MAKING AN AGREEMENT shift in the marketplace’s environmental conditions. This
Behind the buyer and seller agreeing on price (value) is a causes large vertical swings in different directions every
greater force that makes the determination of value possible, other day as the psychology changes in the interpretation of
and that is the psychology of the players in that market or new environmental information or the perception of informa-
instrument. When the trading psychology involved in a tion coming into the market.
market or equity changes its outlook on that market or equity,
it will move price (value) to a different level. Understanding ENVIRONMENTAL FACTORS
the mindset of the players in a market can give an advantage Currently, we are experiencing a great example of environ-
in trading and investing. mental factors affecting trading psychology and therefore
For example, the stock indexes have been trading in wide value. The US economy is facing two distinct environmental
ranges recently. They are markets in search of value. The issues: financial distress and an economic slowdown. Trad-
trading psychology is such that the traders are not sure where ers have focused on the financial distress in their determina-
value is. Therefore, they keep driving prices up and down in tion of value. As the credit and housing crisis gets worse,
search of that value. So if psychology drives perception of price is driven down. As news of possible solutions is
value for traders, what drives psychology? One of the largest revealed, price is driven up by euphoria over averting an
influences on the psychology of a trader or on a market as a increasing crisis. The market psychology changes every
whole is the environment of that market. other day as information switches from fear to euphoria.
Here’s another example. A market is made up of people. If If you understand the trading environment, you can gain an
you put all those people in a room and asked them to trade a edge in the business by comprehending the competitive
product, they would bid and ask until they came to an agreed- environment you are in and what you must do to be success-
upon value. Most likely, each would feel he or she had made ful. It is important to understand the environment of the
a good deal, so the trade would be facilitated. If you were to market you trade.
introduce into that room new information that changed one or As we begin the trading day, we must ask what the market
the other’s perception of value, then the psychology of the environment is going to be that day. What information could
room — the market — would change. This would then come into the market that may change the trading psychology
change the determination of a fair price, and price will be and therefore price? Once these questions have been an-
swered, we can develop a good trade strategy using whatever

by Joseph J. Mertes
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Stocks & Commodities V. 27:3 (98, 97): At The Close: Understanding The Trading Enviornment by Joseph J. Mertes

AT THE CLOSE
methodology we have developed. Developing a good trade liquidated the position and, a few days later, I was pleased
strategy is critical to success. Many traders think they can that I had.
develop a few tactics without fully understanding the market It is a similar situation in trading futures. You can take a
environment. Once you understand the environment, you can position in a market based on a strategic analysis and tactical
develop a strategy to approach it. When you have the strategy execution. However, if you are unaware of changing environ-
in place, you know what information the market will have to mental information, you may have set yourself up to be run
give you, or what it will do before you look for a tactical setup. over.
Coming back to our current environment, if the financial As a trader or an investor, you are a money manager. As a
crisis finds a solution, the trading psychology will be such money manager, your job is twofold: capital preservation and
that traders will feel more at ease about buying, and a relief to gain a fair return on capital. Taking into consideration, the
rally will ensue. However, from an environmental aspect it is environment is a tool and a necessity in your trading that will
important to remember there is another influence that must be help preserve your capital and assist you in gaining a fair
dealt with, and that is an economy in a recession, where credit return on that capital.
is tight.
ASSESSING THE ENVIRONMENT
CHANGES The trading psychology and the environment that may affect
It is not my purpose here to discuss the fundamental or that psychology are important, no matter what methodology
economic reasons behind environmental changes, but to you use. Before each trading day, always make an environ-
provide a good understanding of recognizing the environ- mental assessment of the markets you are trading, as it will
ment you are trading in and how it may influence the psychol- help you to be long, short, or stand aside.
ogy of traders in that market.
As an example, about a year ago, I had a longer-term Joseph J. Mertes is the author of The Markets in Develop-
position in a gold stock. The company had as one of its ment newsletter and advises individuals and institutions in
greatest assets a gold mine in Bolivia. After holding the the use of Auction Market Theory, the application, and
position for several weeks, I heard that the president of principles involved with developing, implementing and con-
Bolivia was considering nationalizing the natural resources trolling a professional business approach to trading and
of his country not unlike what Venezuela had done. That was investing. His focus is on building technical skills to recog-
an environmental factor that would affect the psychology of nize full trading potential with an emphasis on reward to risk
traders in that stock. It certainly affected my psychology. I strategies, money management techniques, and the use of
diverse instruments to enhance profitability. He may be
reached via www.josephjames.com.
S&C

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Stocks & Commodities V. 27:3 (92): Books For Traders by Technical Analysis, Inc.

Day Trading & Frontiers In Short Term

Swing Trading The Quantitative Fi- Trading Strat-
Currency Market: nance: Volatility egies That
2nd Edition (290 And Credit Risk Work (125
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the forex market, its trends, data, and strate- tions cover the most important issues in quan- 1995 and traded by Connors and his team
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evolved and changed over the last few years, risk and volatility modeling. The book is di- strategies and methods that you’ve likely never
looks at some of the milestones, then moves vided into two parts. The first five chapters seen before, all of which are statistically
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ity within today’s foreign exchange market. tility concerning equity and index derivatives. research. This is the must-have book for
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you need to succeed in today’s forex market. ing how to trade will find it helpful.
S&C

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Stocks & Commodities V. 27:3 (52-55): Dow Theory Direction by Tim W. Wood, CPA

Where Are We Headed?

Dow Theory Direction ED PISKOR

Why do opinions on Dow theory so often vary, and why do Hamilton, and Rhea is Richard Russell. As a result, Russell
Dow theory “signals” so often fail? is the only other orthodox Dow theorist I know of, and he has
fought misquotes, misunderstandings, and erroneously writ-
by Tim W. Wood, CPA ten articles about Dow theory his entire career.

ypically, there is one common denominator that NONCONFIRMATION AND THE ONGOING BEAR

T becomes immediately apparent in most articles

about Dow theory: too many of the authors of
those articles have not studied the original writ-
ings of Charles H. Dow, William Peter Hamilton,
or Robert Rhea. These original writings and particularly
I first warned about the Dow theory nonconfirmation, and the
impending bear market, in October 2007. There was approxi-
mately a four-week period following the October 9, 2007,
closing high on the Dow Jones industrials that was a classic
“sell spot” in accordance with orthodox Dow theory. It was
those of Robert Rhea are essential if we are to understand during this time that I began warning my subscribers and
what has come to be known as Dow theory. The only other guided them through the developments as we watched the
person I know who has studied the original writings by Dow, primary bearish trend take root.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (52-55): Dow Theory Direction by Tim W. Wood, CPA
CYCLES

According to orthodox Dow theory, the primary bearish and low points.
trend change finally occurred on November 21, 2007. It was But the February highs were not secondary high points
then that the stock market barometer first forecasted “stormy themselves. Rather, they were a high within the overall
economic conditions,” according to Hamilton. movement up into the April–May highs, which did constitute
Many market observers misunderstand Dow theory, view- secondary points. It was from these highs that the averages
ing the violation of the previous lows or the bettering of moved down into their July secondary low points. Learning
previous highs to be a buy or sell signal in accordance with to identify what constitutes secondary high and low points
the theory. This is not true. In the writings of the founding is where the art comes into play, and this takes experience
fathers of Dow theory, the violation of joint secondary highs that can in part be learned from the writings of our Dow
or lows is clearly considered to be confirmation of a primary theory founders.
trend change in which they would have already established This is only one reason that their writings are so important.
positions at what they refer to as “buy and sell spots.” So the I have also identified other methods and developed specific
first myth I want to bust here is that Dow theory buy and sell indicators to help identify these secondary high and low
signals do not come once a joint secondary high or low is points. As you can see in Figure 1, the averages last made a
exceeded. In reality, the violation of these levels serves as joint price low on November 20, 2008, which served to again
confirmation of the primary trend. reconfirm the bearish primary trend that was established on
As the averages rallied out of the January–March second- November 21, 2007. This is not to say that there won’t be
ary low points, and into the May–June 2008 and even the bounces, but I believe that the November 20, 2008, low
August 2008 highs, I continuously explained that nothing had marked the most recent secondary low points.
occurred to invalidate the establishment of the November 21, The key is understanding when a secondary low point has
2007, primary bearish trend confirmation. Yet some who do been made, what the advance into the secondary high point is
not truly understand Dow theory misinterpret the movement telling us, and then identifying the turndown out of that
above the February highs as bullish. The most important secondary high point. This is an ongoing process that must be
aspect of Dow theory is the joint movement of the industrials examined as it develops.
and the transports above and below previous secondary high

DJIA

SL
SL SL
SL

SL
DJTA

SL SL SL

SL

SL
METASTOCK

| N | D | 2007 | M | A | M | J | J | A | S | O | N | D | 2008 | M | A | M | J | J | A | S | O | N | D | 2009

FIGURE 1: DOW THEORY. The most important aspect of Dow theory is the joint movement of the industrials and the transports above and below secondary high and low points.
Learning to identify what constitutes a secondary high and low point takes experience, which can be learned from the writings of the Dow theory founding fathers.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (52-55): Dow Theory Direction by Tim W. Wood, CPA

CYCLES

HOW LONG, MR. BEAR? which was 33.3% of the duration of the preceding bull market.
How long will this bear market last? Dow theory doesn’t From my perspective, the last great bull market of all time
directly offer an answer to this question, but there are some began with the 1974 four-year cycle low. Some say that it
historical relationships that can be drawn upon. began at the 1982 low and I understand that argument.
First, it is important to understand that the definition of bull However, it is my opinion that 1982 was simply when the bull
and bear market differs from person to person. My definition market broke out and became apparent.
is based on the works of the great Dow theorists — Dow, At the 2000 top, the associated Dow theory nonconfirmation
Hamilton, and Rhea. As a result of my study of Dow theory and confirmed primary trend change indicated that the great
combined with my study of cycles, which are not a part of bull market era had ended. Upon the primary trend confirma-
Dow theory, I have drawn some conclusions about the nature tion in March 2000, all indications, according to Dow theory,
of bull and bear markets. was that phase 1 of a great bear market had begun. In addition,
As I read about the bull and bear markets of the late 1800s based upon the historical relationships between bull and bear
and very early 1900s, it became apparent that the bull markets markets, that bear market was slated to run into the 2008–10
that Dow, Hamilton, and Rhea wrote about were the upward time frame, which was 33% to 37% of the preceding bull
movements of the four-year cycle and the bear markets were market. When the rally out of the 2002 low began, it appeared
the downward movements of the four-year cycle. As our that this was simply the rally separating phase 1 from phase
country grew, more and more people began investing and, as 2 of the bear market. (Refer to my April 2008 STOCKS &
a result, the bull and bear periods became longer. COMMODITIES article because according to orthodox Dow
Bull and bear markets evolved into a series of multiple theory, the primary trend again turned bullish in June 2003
four-year cycle periods. For example, the first bull market to and proved that price movement above and below secondary
consist of multiple four-year cycles ran from 1921 to 1929 high points is far more important than the perceived phasing.)
and consisted of two four-year cycles. The low in November During this period, the powers that be threw everything
1929 was a four-year cycle low. The rally or “secondary they had at the market and in doing so allowed the bear to claw
reaction” that followed was the upside of a four-year cycle its way out of existence. And when both averages managed to
that topped in only five months. better their 2000 highs, everything changed in accordance
Once this secondary reaction was over, the DJIA moved with Dow theory phasing. At that time, I said, “This confir-
down below the previous four-year cycle low and into the mation does not signal a new bull market, but rather recon-
1932 four-year cycle low, which proved to be the bear market firms the existing bull market.” What I meant was that the bull
bottom. The 1921–29 bull market advanced a total of 568% market that began in 1974 was reconfirmed as still being
from the 1921 four-year cycle low at 67 on the DJIA to the intact when both averages jointly bettered their 2000 highs,
1929 four-year cycle top at a high of 381 on the DJIA. and that we had never entered into a true bear market. That
The next great bull market began with the four-year cycle was written on February 29, 2007.
low in 1942 and ran to the four-year cycle top in 1966. This The advance that followed this reconfirmation carried the
time, the primary bull market was made up of a series of six averages up into their last joint high in July 2007 and can be
four-year cycles and advanced a total of 1,076% from the seen in the Dow theory chart in Figure 1.
1942 four-year cycle low at 93 on the DJIA to the 1966 four- From the July 2007 joint high, the averages moved down
year cycle top at a high of 1,001 on the DJIA. This bull market into their August 2007 secondary low points. It was from that
advance was roughly double the preceding great bull market. secondary low point that things again began to deteriorate. As
The bear market that followed was also a series of four- you can see in Figure 1, the industrials moved on to new highs
year cycles. From the 1966 four-year cycle top, the bear in October while the transports failed to confirm. This
market moved down into the 1974 bear market low. This was nonconfirmation is noted in blue.
a series of two four-year cycles. This nonconfirmation led to the November 2007 decline.
With the break below the August 2007 secondary low points
MARKET ANALYSIS (noted in red) on November 21, 2007, the primary trend was
Now, I want to focus on the bear market declines. Prior to the once again confirmed as being bearish. That break put the
first great bull market that ran between 1921 and 1929, the market at risk of finally marking the top of the entire bull
bear markets averaged some one-third the duration of the market advance that began in 1974 at 570 of the industrials.
previous bull market. As of the October 2007 high, the bull market advance that
This relationship has also held true with the extended bull began in 1974 has now run 33 years and consisted of eight
market periods as well. For example, the 1921 to 1929 bull four-year cycles with a total advance of 2,385%. This bull
market was eight years in duration and the 1929 to 1932 bear market advance has been roughly double the previous bull
market was three years, making the bear market duration market advance in terms of the percentage move out of the
37.5% of the preceding bull market. The period between 1932 low in which the bull market began.
and 1942 was a base-building recovery period that followed Did the October 2007 top mark the top of this entire bull
the Great Depression. The 1942 to 1966 bull market was 24 market advance up from the 1974 low? If so, we are now
years in all and the 1966 to 1974 bear market was eight years, operating within the context of a much longer-term secular
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (52-55): Dow Theory Direction by Tim W. Wood, CPA

CYCLES

bear market that should serve to correct the entire 1974–2007 market top, then we still have some nine-plus years to go
bull market. In addition, based upon the historical bull and based on these typical bull/bear market relationships, and
bear market relationships of the past, the 33-year bull market fighting it will at best only extend the inevitable and make
period should be corrected by a 10- to 12-year bear market, matters worse in the end.
which, based on the 2007 top, would take the bear market
down into the 2017–19 time frame. Tim Wood does a free Friday market commentary at
Back in 2000, the bull market from 1974 was only 26 years in www.cyclesman.info/Articles.htm. He also reports on vari-
duration, and one-third of that would have been some eight to ous markets, all of which can be found at www.cyclesman.info.
nine years, which means that if they would have let the bear
market that tried to begin back then unfold, we would now be SUGGESTED READING
coming out of a natural bear market bottom in which a real Rhea, Robert [1962]. The Dow Theory, Rhea, Greiner & Co.
advance could have occurred. Instead, they fought it tooth and _____ [1934]. The Story Of The Averages, Rhea, Greiner &
nail and were ultimately able to extend the bull market into 2007. Co.
Wood, Tim W. [2008]. “Did Dow Theory Fail?” Technical
HOW MUCH LONGER? Analysis of STOCKS & COMMODITIES, Volume 26: April.
This only served to make matters worse. We now have a 33- _____ [2002]. “When Will This Cruel War Be Over?” Techni-
year bull market to correct, and we are only one year into the cal Analysis of STOCKS & COMMODITIES, Volume 20:
correction, and again, the powers that be are trying to “fix” it. October.
I do not think it can be fixed, as they have only made matters _____ [2001]. “What Can Market Cycles Tell Us?” Technical
worse; we now face the fallout of the credit bubble, the Analysis of STOCKS & COMMODITIES, Volume 19: Novem-
housing bubble, the commodity bubble, and an even larger ber.
stock market bubble, all of which were a result of the “fix”
following the 2002 low.
It all comes down to this. If we have truly seen the bull S&C

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Stocks & Commodities V. 27:3 (62): Explore Your Options by Tom Gentile

Explore Your Options

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

TO CLOSE OR NOT TO CLOSE selling the call (1,000), for a loss of Tom Gentile of Optionetics
I have a put credit spread on a stock $1,500. The more the stock falls, the
where the sold leg is out-of-the-money greater the risk from holding short puts. option? Wouldn’t that ruin your trade if
and the bought leg is deep in-the-money. To mitigate some of that risk, I might you wanted to hold the spread longer?
I have already bought back the sold leg sell the July 75 put for $10 and also buy There are two types of vertical
and the bought leg is left to be exer- the July 60 put for $5. My credit is now spreads: the debit spread and the credit
cised. Should I let the buy leg be exer- only $5.00 ($10 for selling the 75 put spread. In the previous question & an-
cised and reap the profit or should I minus $5 for buying the 60 put), but my swer, we looked at the put credit spread.
close it out before expiration? risk is substantially less. If the stock If, for example, the put seller exercises
If you have a put credit spread, the tanks, I have the right to sell it at $60 per the option and the short put is assigned
trade was entered by selling a put and share, no matter what happens. So the to me at expiration, I will be taken out of
also buying a put with a lower strike put credit spread is a lower risk-reward the spread because the short side of the
price. Basically, selling the put credit strategy compared to simply selling puts. spread becomes a position in shares. I
spread is the same as selling a put, but To answer the specifics of your ques- am then left with a position in shares,
another put with a lower strike is pur- tion, if you opened a credit spread, it plus a put. My position is not necessar-
chased as a hedge. Simply selling puts would not be possible for the sold or ily “ruined”; it has simply been modi-
would expose the investor to more risk short leg to be out-of-the-money while fied from one strategy to another. It’s
than trading the credit spread. the bought leg is deep-in-the-money. If still a hedged trade, but I need to decide
The “credit” from the put credit spread the stock price falls, the opposite would whether to keep it, close it, or make
comes from the fact that the option with happen. If my stock were to fall to $70, some other adjustment.
the higher strike price has more pre- the short side (July 75 put) of my credit Keep in mind: the odds of assignment
mium than the put with a lower strike spread is in-the-money and the option increase as the option expiration ap-
price. Puts with higher strike prices are that I bought as a hedge (July 60 put) is proaches. If the short side of the spread
worth more than puts with lower strike still $10 out-of-the-money. is in-the-money with little time value
prices. In this situation, the best course of remaining, the strategist should be pre-
For example, one stock I like to trade action will depend on what you wanted pared for assignment. In the credit
was recently at $83.40 per share. If it to accomplish in entering the spread. If spread, the trade is probably not work-
falls to $75, I will consider it a scream- your goal was simply to collect pre- ing out as planned if my short option is
ing Buy! Since I’m willing to buy the mium and not take ownership of the at risk of assignment. As expiration
stock at $75, I might write or sell a put stock, it might make sense to admit that approaches and the chances of assign-
with a $75 strike price. Looking at the the trade went against you and close it ment increase, it might make sense to
quotes, the July 75 put is recently going out. However, if you wanted to buy the close out the spread rather than face the
for $10 per contract, so I can pocket stock at the strike price of the put, you chance of assignment.
$1,000 for selling one put ($10 x 100). can wait to get assigned and take own- In a debit spread, the strategist is long
If the stock sinks below $75 by the July ership of the stock. Or it might make a put (or call) and short a put with a
option expiration, I am going to face sense to first salvage any value remain- lower (or higher) strike price. If I create
assignment, and if so, I will pay $7,500 ing in the spread by closing it and then a vertical spread by purchasing the July
to take ownership of 100 shares (have buy the stock in the market instead. 75 call and selling the July 90 call, my
100 shares “put” to me). Each short put The best course of action will depend short call will not be assigned unless my
obligates me to buy 100 shares at the on how much time premium is left in the long call is also deep in-the-money.
strike price. spread and brokerage commissions. If Therefore, I make a good profit if as-
If the stock falls to $50, for example, you aren’t sure in a specific situation, signed because if the stock is called at
I could suffer a significant loss because discuss it with your brokerage firm. $90 per share, I can exercise my $75
while I am assigned at $75, I can only strike call to buy it at $75. Therefore, I
sell for the current market price of $50. WHAT HAPPENS IF… buy at $75 and sell at $90, which is my
If I am assigned 100 shares at $75 and What happens if you do a vertical spread maximum profit potential for this spread.
sell at $50, the net result is a loss of and the person to whom you sold the
$2,500 minus the premium received for call or put decides to exercise their †See Traders’ Glossary for definition S&C

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Stocks & Commodities V. 27:3 (50-51): Full Service by Moses Sanchez
TRADING ONLINE

There’s A Reason To Use Them

Full Service
T he way many traders do
when they are starting
out, I went to a “free”
workshop on options and trading
when I first got interested in the
markets. Once there, they offered
to teach me to trade for a fee I
could not afford. Undaunted, I fig-
ured I could learn the lessons they
offered just by visiting my local
library. So I did: I started reading
what was available there to feed
my own interest about the won-
derful world of stocks, options,
and commodities.
After much study, I decided I
was ready to start trading options
by using a combination of meth-
ods that would (theoretically)
make me the money I wanted. So
I asked my broker at the time, T
Rowe Price, for permission to trade
options in my brokerage account.
I knew what I wanted to do but
actually doing it right was more
difficult than I expected. Was I
supposed to “buy to open” or “buy
to close,” and what was “fill or
kill”? Abbreviations such as FOK,
IOC, and GTC made absolutely no
sense to me, since the books I had
read didn’t explain the actual pro-
cess of trading options very thor-
oughly. All my research on the
companies I wanted to try new
strategies with was the least of my
worries, because I couldn’t even
put the trade on!

PLAN B
Frustrated and stymied, I went
JESSICA MAZURKIEWIEZ

back to the books and started to

look up the words I didn’t under-
stand. Unfortunately, the expla-
nations I found were not in
laymen’s terms, so that just added
to the time and effort I had put in
It’s nice to have a hand to hold when you are confused about the market. to educate myself. Again, when
the time came to make my move,
I still didn’t know how.
by Moses Sanchez
Plan B kicked in. I called my
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (50-51): Full Service by Moses Sanchez

brokerage firm and after verifying who I was and waiting a I learned a great deal about myself as a trader and realized
few minutes, I had a broker come on line ready to help me, and that there are many different styles and personalities that can
help me he did. I told him upfront that I was a beginner and succeed in the markets. Just by asking that question, my
wanted to try new strategies, but I didn’t understand some of the broker helped me realize what my style and personality was
terms in the actual process. I wanted him to explain it to me as and gave me a helping hand when I was confused about the
if I were a student in the third grade, which he did. market.
For every question I asked and he answered I had a follow- Now that I am a more experienced trader, I use serious
up question, which was finally answered in terms I could tools — charts, watchlists, volume, momentum, backtesting,
understand. By the end of the conversation I saved my and streaming news from many sources. I did not use many
broker’s number on my cell phone, knowing that this was a of the tutorials that these platforms offer. I’ve used these
number I would be calling again. tutorials in the past and they work, but they are no replace-
I ended up buying both calls and puts on a company that was ment for a person on the other end walking you through the
up for a drug approval by the FDA within a matter of months process.
from the time I bought them. I was excited because not only Today, I have accounts with different brokers. I have my
had I completed the trade that I wanted, but I knew what I had electronic platform, a discount broker, and a full-service
done and could do it again. So I moved to safer bets and bought broker, even though I rarely use the full-service broker
a few hundred shares of Pfizer (PFE) back when it was trading anymore. For more heavy-duty trades I prefer to use discount
in the $30 range and raked in the dividends. brokers (such as E*TRADE, Scottrade, and TD Ameritrade),
I sold some covered calls with the help of my broker, but even though they offer limited advisory services.
then something happened I hadn’t expected. I bought PFE at If you are a beginning trader, I recommend using a full-
$30 a share and sold the $32.50 calls, not thinking that it service broker until you are confident enough to make the
would move 10% within the next week when it was to moves you want to make on your own with a discount broker.
expire. But it did and closed at $33 two days before expira- In my opinion, there is nothing like a real person to walk you
tion. Now what was I supposed to do? I had never sold a through the process and talking you through different trades,
covered call and my initial goal was to play off the dividend. expectations, and explanations.
Now I was going to be forced to sell at least 200 shares of
my PFE for $32.50 a share, when I truly wanted to keep Moses Sanchez is a freelance writer whose background is
them! split between politics and business. He currently manages a
stock option portfolio. He may be reached via email at
SOS mosesasanchez@yahoo.com.
I called the only person I knew who could help, my broker.
He asked me one question: “How attached are you to PFE?” RELATED READING
That snapped me back to reality, and I knew I had to let the Sanchez, Moses [2009]. “Unwarranted Optimism,” At the
stock go. I’ve had plenty of conversations with representa- Close, Technical Analysis of STOCKS & COMMODITIES,
tives of my brokerage firm since then, and although the Volume 27: February.
conversations have always been with a different person each
time, he or she has always been helpful in advice and
counseling, and the rep has made learning about stocks and
options very enlightening. S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (67): Futures For You by Carley Garner

FUTURES FOR YOU

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

Carley Garner
ON SPREADS June 2009 eurodollar at 98.75 and goes
What is a futures spread? short the September 2009 contract at 98.50,
The terminology involved in futures he is said to be buying the spread because • If you sell a spread (go short the higher-
spread trading often seems like a foreign the contract purchased is trading at a pre- priced contract), you are anticipating
language. This can cause those who aren’t mium to the contract sold. Assuming fills that the price difference between the
familiar with the practice to misinterpret at the prices noted, the spread could have two contracts will narrow. Should this
the vocabulary. Despite the complexity of been bought for 0.25, figured by taking occur, the spread would be profitable.
the topic on the surface, once you under- the difference between the prices of the
stand a few key concepts, you will gain an two contracts (98.75 – 98.50). On the These rules will always be true regard-
immediate understanding. contrary, if the same trader were to sell the less of the overall market direction, or
A futures spread is a trade in which spread, he would have sold the June 2009 which contract is trading at a premium
opposite positions are taken in similar contract and gone long the September (back or front month). If you can remem-
futures contracts. Simply put, it is the 2009. Keep in mind that identical to trad- ber these concepts, you shouldn’t have
purchase of one commodity and the sale ing outright futures, it is necessary to any problems speaking with your broker
of another related commodity with the execute an equal and opposite position to about futures spread trading.
intention of profiting from changes in the the original when exiting a trade. In order to support the premise of the
spread, or differences in the relation of the A spread trader is inherently hedged rules, let’s look at our eurodollar example
two prices. simply because they are both long and again. The trader who purchased a June
The most commonly used spread strat- short contracts in the same commodity. 2009 eurodollar futures contract at 98.75
egy is the intracommodity spread (or cal- Under normal circumstances, as the mar- and sold a September 2009 contract at
endar spread). Specifically, this entails a ket rallies, the trade will be making money 98.50 would have done so with the expec-
long position in one contract month of a on one side of the spread and losing money tation of a wider spread. At the time of
specific commodity and a short position on the other. execution, the spread was 0.25 so if the
in another contract month of the same In theory, spread trading provides ex- price difference between the June and
commodity. For example, a trader may posure to price movement with relatively September contracts widens to 0.30, the
buy a June 2009 eurodollar futures con- less risk than an outright futures strategy. trader would be profitable by 0.05 points.
tract and sell a September 2009 eurodollar. However, this isn’t always the case. In Each point in the eurodollar is worth $25
(For those unfamiliar with eurodollars, I certain market conditions, spreads can to a trader, so the unrealized profit would
am referring to an interest rate product make dramatic moves. In extreme cases it be $125.
and not the euro currency. A eurodollar is possible for a spread trader to lose on Once again, the spread may widen in a
can be thought of as a certificate of de- both sides of the trade! rising or declining market. Had the June
posit purchased with US currency from a You may be wondering how a spread contract rallied 10 points to 98.85 but the
foreign financial institution.) trader can make or lose money if they are September contract only rallied five points
both long and short a market. Which way to 98.55, the new spread would be 0.30
BUYING AND SELLING SPREADS would a spread trader want the market to (98.85 – 98.55). Similarly, had the June
What does it mean to buy or sell a futures go? The truth is, spread traders often do contract fallen five points to 98.70 while
spread and how does the position gener- not have a directional bias; instead, they the September contract fell 10 to 98.40,
ate a profit or loss? are interested in the relationship between the spread would have also widened to
To accurately talk about spread posi- the two contracts involved. Their concern 0.30 (98.70 – 98.40). In either scenario, a
tions with your broker, or even converse lies in whether the difference between the trader long the spread would be slightly
about them at a cocktail party, you must price of the two contracts expands (wid- ahead on the position.
understand the difference between buy- ens) or contracts (narrows). Don’t let the complexity of spread trad-
ing and selling a spread. This can be Spreads can be confusing, so here are a ing distract you from participating in the
confusing; after all, a spread trader is both few simple and helpful rules: strategy. Futures spreads can be a great
long and short a contract. However, the way for risk-averse traders to expose them-
distinction is relatively simple; whether a • If you buy a spread (go long the higher- selves to the commodity markets with the
trader is long or short, a spread is depen- priced contract), you are anticipating that hopes of reduced levels of volatility.
dent on the position taken in the most the price difference between the two
contracts will widen. Should this occur, S&C
valuable contract.
For instance, if a trader goes long the the spread would be profitable.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (8-9): Letters To S&C by Technical Analysis, Inc.

The editors of S&C invite readers to submit their opinions and information on subjects
relating to technical analysis and this magazine. This column is our means of communication
with our readers. Is there something you would like to know more (or less) about? Tell us
about it. Without a source of new ideas and subjects coming from our readers, this magazine DOUBLE 7S
would not exist. Editor, TRADING SYSTEMS

Rolling The Double 7s

Three Rules, One Easy Way

Address your correspondence to: Editor, STOCKS & COMMODITIES, 4757 California Ave. I thank your magazine
To Trade ETFs
last but not least, we lim-
ited the strategy to three
simple rules.

and authors Larry

THE DOUBLE 7S

SW, Seattle, WA 98116-4499, or email to Editor@Traders.com. All letters become the

Before we tell you those
rules, first understand a
bit about this trading strat-
egy, which we call Double
7s. We tested this strategy
on both the Standard &
Poor’s 500 (SPX) and the
NASDAQ 100 (NDX) from
January 1995 through
April 2008. The results
over that time period for

Connors and David Penn

the S&P 500 were +1,133

property of Technical Analysis, Inc. Letter-writers must include their full name and address
points, with nearly 80%
of the trades closing prof-
itably. In the NASDAQ
100, the results were simi-
larly impressive. From
January 1995 through
April 2008, the Double
7s strategy in the
N ASDAQ 100 yielded
2,822 points, with

for an excellent strategy

79.84% of the trades clos-

for verification. Letters may be edited for length or clarity. The opinions expressed in this
ing in the green.

BORIS LYUBNER
We also tested the
Double 7s strategy on in-
ternational ETFs such as
the FXI, representing the
Chinese F TSE/Xinhua
Index, and the EWZ, rep-
Here’s a short-term trading strategy to trade exchange traded funds. resenting the Brazilian
stock market. Again, the
by Larry Connors and David Penn simulated trading results

described in the article

spoke for themselves. In
famous trader once remarked that he could publish the secrets to his winning trading

column do not necessarily represent those of the magazine.—Editor

the FXI, we saw 73% cor-

A strategy in the newspapers and no one would follow them. The key, this famous
trader explained, was consistency and discipline.
In our opinion, when it comes to trading and trading strategies, one of the things
that makes consistency easier and discipline a bit less daunting is simplicity. With
rect trades since the ETFs’
inception. In the EWZ, the
percent of correct trades
was more than 80%.
few exceptions, all the trading strategies we have developed over the years have had These were long-only
simplicity as their hallmarks. trades over a period that
What we’ve developed in this latest trading strategy is short-term trading at its simplest. Instead included a boom, a bust,
of stocks, we focus on the smaller universe of market index exchange-traded funds (E TFs). We a low-volatility recov-
also created the system as long-only — no need to worry about borrowing shares of E TFs. And ery, and then another

“Three Rules, One Easy

66 • January 2009 • Technical Analysis of STOCKS & C OMMODITIES

Way To Trade ETFs” in the January

2009 STOCKS & COMMODITIES.
One small point to avoid confusion:
GOOD ISSUE least one of STOCKS & COMMODITIES’ In Figure 2, point C is only a seven-day
Editor,
THE TRADERS’ MAGAZINE SINCE 1982 http://www.traders.com/

competitors does this very well. high if they are defining the seven-day
THE MEGAN RATIO
I enjoyed the January Many thanks. high as including the day of the trading.
Which system generates

2009 issue of STOCKS & LJ

more return? 16

TIMING WITH
THE SPECIAL K
Identifying major reversals

JOIN THE BAND

28 The original Donchian channels were
C OMMODITIES . Larry
Apply this method to

based on the prior seven days, not in-

moving average crossovers 36

WALK-FORWARD
Compare trading systems 48

INTERVIEW
Cynthia Kase 54

Connors and David Thank you for this valuable feedback.

$SPX (S&P 500 Large Cap Index) INDX ©StockCharts.com

cluding the present day.

REVIEW, WEBSITE 13-May-2008 Open 1404.40 High 1406.30 Low 1396.26 Close 1403.04 Volume 3.3B Chg -0.54 (-0.04%) ▼
$SPX (Daily) 1550
1525
1500
• NexTrend 1475
1450
• eMiniZ.com 1425
1400
MULTIPLE MA CROSSOVER.
1375
The pair EMA12/BB200 (green/
red) signaled the medium-term
TRADERS’ RESOURCE
1350
1325 trend: Up (U) or down (D). The
1300 EMA12/BB50 duo established
1275
Trading Systems 84 1250
the buy (green arrows) and sell
(red arrows) signals. The price
1225
1200 line was cleared from the upper

Penn’s article, “Three We will certainly consider implement-

1175 chart. It was plotted on the lower
U D U D U D

Now to the meat of my letter. I coded

1150 chart for legibility purposes.
J J A S O N D 06 F M A M J J A S O N D 07 F M A M J J A S O N D 08 F M A M
$SPX (Daily)
1500
1400
1300
1200
J J A S O N D 06 F M A M J J A S O N D 07 F M A M J J A S O N D 08 F M A M

Rules, One Easy Way To Trade ETFs,” ing this in the future.—Editor Larry Connors’ Double 7s strategy de-
was informative. Cynthia Kase [inter- scribed in the article in Matlab. I
viewed for that issue] said it best: “Just ROLLING THE DOUBLE 7S backtested $NDX from January 1995 to
learn a market and trade it up and down, Editor, April 30, 2008, and I checked several
up and down on the pure technicals. First, let me take this opportunity to other ETFs, as Connors and Penn did.
That’s the thing to do!” thank you for a great publication. They didn’t report their average annual
Your magazine is a must-read for all I have a question regarding an article return. For NDX, my result was a gain of
traders. in the January 2009 issue of your maga- 2001.5 points (not 2,822), 11.1% an-
CJ CASEBEER zine. I just finished reading “Rolling nual average return (using 252 trading
Nampa, ID The Double 7s: Three Rules, One Easy days per year), and 77.7% of the trades
Way To Trade ETFs.” I’m impressed (112 trades total) were profitable. I also
Thank you for your feedback. We are with the backtesting results and with the had good results on GLD, FXI, and EWZ,
glad you are enjoying the magazine. simplicity of the system, but the authors where the percentage of trades profit-
did not cover how they exit or manage able was 65–75%. I commend them for
SYSTEM BACKTESTING RESULTS losing trades. Can they expand on their an excellent system.
Editor, system for limiting losses? Thanks I started wondering whether perfor-
I would suggest that you strongly en- again. mance could be improved by catching
courage that any and every contributed LUIS ORDAZ the big moves up, when the price keeps
article about trading systems include a rising after hitting the seven-day high.
backtest with clearly stated entry, exit, Larry Connors replies: Therefore, I modified the Double 7s
stop-losses, profit-taking rules, and per- Thank you. We’re glad you enjoyed the (per Alex Elder’s buying methods in his
formance figures (equity/drawdown Double 7s strategy. triple screen strategy) as follows:
curves, % winners, TIM, k ratio, and so Most reversion-to-the-mean strate-
on). Ideally, the systems would be tested gies will show lower test results (and 1. Set a buy-stop 0.1 above the close of
on a standard diversified portfolio es- often lower real trading results) when the seven-day low, and keep moving
tablished/suggested by STOCKS & COM- using stops. I published this finding in the buy-stop down above each day’s
MODITIES, which could include stock my newest book, Short Term Trading close until you are bought in. This
indexes, currencies, as well as agricul- Strategies That Work. For a number of often gets you in at lower prices when
tural and financial commodities. At the traders, stops are important but they the price keeps going down after hit-
very least, systems should be tested on are an expensive form of insurance. We ting the seven-day low.
major indexes in main asset classes (for feel there are better ways to protect a
example, DIA, SPY, QQQQ, CRB, DXY, position and a portfolio, such as posi- 2. Set a sell-stop 0.1 below the close of
and so on). I think that this type of infor- tion size, hedging, and so on. the seven-day high, and keep moving
mation would attract a lot of interest it below the close each day until you
from current and potential readers. At are sold out.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (8-9): Letters To S&C by Technical Analysis, Inc.

3. One important exception on point 2 DOUBLE 7S STRATEGY

above: After the seven-day high (day Year NDX NDX DAX FUTURES SCALPER
1), if the next three days’ highs finish (original) (modified) Editor,
above day 1’s close, loosen the sell- I am a scalper/trader using the Ensign
1995 24.1% 54.4%
stop to just under the seven-day low Software platform. Do you know of any
1996 21.4% 54.3%
channel. The optimum sell-stop was 1997 18.4% 36.2% indicators or trading systems for trading
5% of the seven-day channel width 1998 15.7% 32.5% DAX futures? It would help me to know
below the seven-day low, but as long 1999 56.2% 49.7% about any websites, books, or forums
as you keep it under the channel low, 2000 -0.2% 78.9% for scalpers or intraday traders.
it will work. This allows you to catch 2001 0.0% 0.0% NAME WITHHELD
the long runups. 2002 0.0% 0.0% Italy
2003 23.6% 34.1%
My results for the modified Double 2004 -3.1% 16.5% There are a number of trading systems
7s on NDX system is as follows: total 2005 2.0% 18.9% available for trading DAX futures. A
5,357.2 points, 28.8% average annual 2006 -2.0% 5.2%
Google search will provide an exten-
2007 17.6% 29.7%
return, 70.5% of trades were profitable. sive list. I would recommend that you
2008 -9.6% 0.0%
Of the 112 total trades, 55 were runups, visit sites such as collective2.com to
where the sell occurred more than three Avg annual %: help find systems that trade the DAX
days after the seven-day high was hit. 11.16% 28.79% futures.—Editor
For example, this method caught the
Total trades: 112 113
48% runup from 10/19/99 to 1/5/2000,
where the price ran along the seven-day % of trades profitable:
high for months. It seems that this modi- 77.7% 70.50%
fication is well worth doing and is not FIGURE 1: Sample system results for Double 7s
much more complicated. and modified Double 7s strategy
Here is my summary table for each
year’s performance (see Figure 1). The
performance for 2008 goes up through
4/30/2008.
Thanks for your excellent articles.
KIRK DOLAN S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (16-21): On The Precipice Of The Nearest Dollar Increment by A. Trongone, Phd, CFP, CTA

TRADING STRATEGIES

How Brackets Make All The Difference

On The Precipice Of
The Nearest Dollar Increment
In a bear market, any piece of information that OPENING PRICE BRACKET $ DECIMAL RANGE
will give traders a slight edge in performance is
10¢ BELOW $0.90–0.99
always welcome. Here’s how a stock performs
AT .00 $0.00
when it is trading in the vicinity of the nearest
dollar increment. 10¢ ABOVE $0.01–$0.10
INSIDE $0.11–0.89
FIGURE 1: THE FOUR OPENING PRICE BRACKETS

S uccess often results from analyzing

the smallest pieces of information. On
a daily basis, some price patterns may
appear unimportant; over a series of
trading days, however, they can contribute signifi-
PER SHARE REGULAR TRADING SESSION PERFORMANCE
POWERSHARES 100: (QQQQ) DATES: 01/02/2003–10/24/2008
DECIMAL
BRACKETS
AT 0.00
TRADING
DAYS
27
AVERAGE
RETURN
-$0.0952
PER SHARE
PROFIT/LOSS
-$2.57
STANDARD
DEVIATION
0.333
cantly to your profitability. With the continuing ABOVE 142 $0.0346 $4.91 0.351
downtrend in worldwide markets, existing trading BELOW 131 $0.0279 $3.63 0.476
systems are performing poorly, causing market INSIDE 1166 -$0.0211 -$24.66 0.481
participants to abandon previous trading strategies. TOTAL 1465 -$0.0128 -$18.69 0.468
In this current environment, traders are grateful for FIGURE 2: REGULAR TRADING SESSION PERFORMANCE. The decimal price of an
instrument can often be the most compelling reason for entering into a position at the
any new information, especially if it will give them sound of the opening bell. These results demonstrate the performance differences of the
regular trading session. In the 1,465 trading days, there was a loss of $18.69 in the regular
the slightest performance edge. Say a stock begins trading session; however, there are performance differences among these four decimal
trading at $40.03 (three cents above the next dollar brackets.
mark) or $39.97 (three cents below). Does this
slightly above/below situation provide us with a sent the intraday movements of 100 companies, but
trading advantage? they trade as a single security, allowing investors to
This article analyzes the opening decimal price participate in the collective performance of a port-
against differences in the performance of the over- folio of companies. As a result, I am confining this
night trading session. It acknowledges the melt- investigation to this most active instrument when it
down in equity prices by assessing the performance is trading during the regular session. In 1,465 trad-
of this system in the current bearish trading envi- ing days (January 02, 2003–October 24, 2008),
ronment. Instead of examining each decimal com- they have fallen $18.69 during the regular trading
bination, we collapse the opening price into the four session (Figure 2). You can easily download these
brackets seen in Figure 1. historical numbers from finance.yahoo.com into an
With an average trading volume of 182 million Excel worksheet.
shares in 2007, the PowerShares QQQ are a good Despite this history of falling prices, when the
representation of investor psychology. The Qs repre- opening price was within 10 cents of either side
of the nearest dollar amount, the results were
positive. All the downside risk came from taking
a long position when the opening decimal price
by Anthony Trongone, PhD, CFP, CTA was not within this 20-cent range. A cumulative
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (16-21): On The Precipice Of The Nearest Dollar Increment by A. Trongone, Phd, CFP, CTA

WILLIAM L BROWN

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (16-21): On The Precipice Of The Nearest Dollar Increment by A. Trongone, Phd, CFP, CTA

$10 TRADING STRATEGIES

5
0
■ Below 0.90–0.99: When 10 cents be-
5 low the dollar mark, most traders are
10 cautious of a further breakdown. This
Running performance of regular trading session creates some hesitation to take a long
15 Ticker QQQQ position until prices spike above the
20 1465 Trading days next level. Still, if they are able to
25
penetrate into the next dollar incre-
ment, it further strengthens buyer con-
Ja

Ja 3

Ja

Ja 6
Ja 5

Ja 7
Se 4
Se

Se 6

Se 8
Se

Se
Ma

Ma

Ma

Ma
Ma

Ma
n0

n0

n0

n0
fidence, making it more likely they

n0

n0
p0
p0

p0

p0
p0

p0
y0

y0

y0

y0
y0

y0
3

7
6

8
4

8
3

7
will buy into the rally.
FIGURE 3: CUMULATIVE DAILY RESULTS OF THE REGULAR TRADING SESSION. Despite an $18.69 loss
in the Qs over 1,465 trading days, when the opening decimal price was slightly above (0.01–0.10) or slightly below OVERNIGHT TRADING SESSION
(0.90–0.99), both brackets produced a trading profit. The results display a stark contrast among
these four decimal brackets. Naturally, the most important
performance of the regular trading session is displayed in Figure 3. question is whether they will hold going forward. Before
taking up this discussion, it is important to bring another
■ At $0.00: Although the probability indicates that this variable into our analysis. The overnight session contributes
should occur 14 times, it actually produced 27 trading significantly to our predictive ability. It is surprising to find out
opportunities, with 19 days in negative territory. This that once we separate this session by performance, the findings
0.00 appears to be a psychological tipping point because are not the same across all decimal brackets (Figure 4).
when stocks slide below this mark, it becomes more When you bring another variable into the mix, it can often
difficult for them to recover. Despite the negativity, they shake up your findings. One visible change is the difference in
do not go into a freefall; the largest decline was $0.63. trading opportunities. Despite an overall
loss in the Qs, an advancing overnight ses-
QQQQ DECLINING OVERNIGHT SESSION ADVANCING OVERNIGHT SESSION sion had the majority of the plays.
DECIMAL TRADING AVERAGE TRADING AVERAGE There is an even tradeoff between a ris-
BRACKETS DAYS RETURN SUM DAYS RETURN SUM ing or falling overnight session. The 0.00
bracket does poorly after a declining over-
0.00 7 -$0.2043 -$1.43 20 -$0.0570 -$1.14 night session. It does not appear to attract
ABOVE 69 $0.0241 $1.66 73 $0.0446 $3.25 buyers, but in fairness, there are too few
BELOW 57 $0.0474 $2.70 73 $0.0127 $0.93 plays to lend convincing support to this
statement. Similarly, the bracket above,
INSIDE 525 -$0.0055 -$2.90 641 -$0.0340 -$21.76
although positive, was about two cents less
TOTAL 658 $0.0001 $0.03 807 -$0.0232 -$18.72
effective per trading day.
FIGURE 4: PERFORMANCE IN THE REGULAR TRADING SESSION AFTER AN ADVANCING/DECLINING If prices decline but open in the 0.01–
OVERNIGHT SESSION. Despite an overall loss in the Qs, an advancing overnight session had the majority of
the plays.
0.10 bracket, it attracts an excess of long
positions. This appears to support the Qs, allowing them to stay
■ Above 0.01–0.10: At this price, many stop-sell orders on the plus side until the close of trading.
are put into play. Being above the dollar mark elicits a When examining the other two brackets, you can see the
feeling of “fragile security” because individuals per- benefits from falling after-hours prices. Not unlike the three-
ceive this 10-cent range as a psychological barrier. Once point home team advantage in football, they seem to offer us
prices penetrate below the dollar mark, this security a three-cent advantage. Although this may appear to be a small
blanket can quickly cool because it is seen as breaking difference, in 1,166 plays, it certainly put points on the
support. Such a reaction is likely to deflate investor scoreboard, amounting to a difference of $18.86 between the
confidence, causing them to abandon their opening long two sessions.
position, dragging prices lower.
OPENING 90 MINUTES OF TRADING
■ Inside 0.11–0.89: Taking a long position when prices Instead of extending our findings to the closing bell, what if we
are within the inside bracket seems to operate as if you were to shorten our time frame to the opening 90 minutes of the
set your global positioning system (GPS) to take you regular session (09:30–11:00 Eastern time)? The most intrigu-
directly to financial ruin. In 1,166 days, when the ing decision confronting daytrading regulars takes place within
opening price was in this range, the regular trading this 10-cent range on either side of the dollar mark. If you
session (RTS) fell $24.66. With these hefty declines, we separate this 20-cent range into two neighboring price brack-
would expect more volatility, but just 3% of the RTS ets, which one gives us the better 90-minute performance:
declines were over a dollar. When the opening price is slightly above the next dollar mark

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 27:3 (16-21): On The Precipice Of The Nearest Dollar Increment by A. Trongone, Phd, CFP, CTA
OPENING 90 MINUTES OF TRADING: 10/31/2007–10/24/2008 TRADING STRATEGIES
DECIMAL TRADING AVERAGE PER SHARE STANDARD
BRACKETS DAYS RETURN SUM DEVIATION

ABOVE 19 -$0.0837 -$1.59 0.474 analysis covers 1,465 days, we can make assumptions about
BELOW 23 $0.1430 $3.29 0.385 our results. Even with a negative regular trading session, the
INSIDE 208 -$0.5353 -$7.33 0.433 neighboring brackets — that is, within 20 cents of the 0.00
price — gave us positive results
FIGURE 5: PERFORMANCE OF THE OPENING 90 MINUTES OF TRADING (09:30–
11:00 ET) AMONG THE THREE BRACKETS. Despite extensive market declines, the
The focus of the article is on this constrictive battleground.
0.90–0.99 bracket still holds its positive status. This occurs when two opposing sides appear to draw a prover-
bial line in the sand. Once prices cross the next dollar mark,
or when it is slightly below? bullish traders are holding on to their territory by preventing
Since the market has taken a precipitous fall, it is important the opposition from pulling the price below this important
to run this analysis during this unfavorable setting. For that threshold.
reason, we will confine our results to the previous year when During an extreme downturn, the above-decimal bracket
the Qs were at their highest closing price ($55.03) on Hallow- was less effective. Once the price of the Qs falls below the
een 2007. After one year (October 31, 2007–October 30, nearest dollar mark, market participants perceive it as breaking
2008), they fell $22.19. In spite of this spooky experience, one below support; such sentiment deflates investor confidence.
bracket remains profitable (Figure 5). Most technicians be- Further, in a bearish setting, investors are
lieve that the bracket above will retain its positive status, but sensitive to declining prices; this encourages
them to place stop orders. Given that most
Dollar price change for inside bracket people place protective orders closely below
Bear market
9:30–11:00 the dollar mark ($39.97), execution of these
stop orders generally elicit an avalanche of
DATA SUPPLIED BY eSIGNAL

sell orders. When this occurs, investors have a

tendency to overcompensate, driving prices
below fair value.
Despite the trading environment, the re-
-1.50 -1.00 -0.50 0 0.50 1.00 1.50 sults of the inside bracket after an advancing
FIGURE 6: DOLLAR PRICE CHANGE. The dots show the dollar price change over the opening 90 minutes overnight session were unprofitable. In all
of trading for the inside bracket. Note the extreme losses on the left side of the histogram. fairness, however, a portion of these declines
came during the bear market. In such a hostile setting, the
the bracket below was the easy winner. tendency of daytraders is to place these protective orders
The recent nosedive in equity prices provides us with the further from existing prices. This partially accounts for the 56-
opportunity to measure the effectiveness of our trading systems in cent average regular session decline.
a bearish setting. The above (0.01–0.10) bracket was unable to The flipside of this story is when prices start the day slightly
withstand the pressure of a down market — slipping 8.37 cents a below the next dollar amount (0.90–0.99). Instead of taking
day. In the 208 trading days, the average daily decline in the inside immediate action, daytraders are more likely to stay on the
bracket was roughly 54 cents. However, on days when the sidelines, waiting for prices to move either way.
opening price began trading in the $0.90–0.99 range, it gave Investors can overcome this psychological barrier if the
us a profit of $3.29 in 23 trading days. price penetrates above this resistance level. When this occurs,
It is an encouraging sign when a system requires you to take they become more bullishly optimistic, creating more upside
a long position and can produce positive results during an potential because active participants do not want to be left
economic crisis. The dollar price change over the opening 90 behind; therefore, they are more likely to buy into the rally.
minutes of trading for the inside bracket can be seen in Figure 6. Given the perilous downturn, it offers us the opportunity to
investigate the effectiveness of our systems. When the eco-
CAUTION GOING FORWARD nomic landscape is uncertain, the roadmap for success be-
Although there is a small numerical difference between the comes difficult to navigate. The safest way to avoid falling into
two bordering brackets, it does provide us with insight into a pothole is to lighten your trading load by trading fewer
how daytraders react when a stock or commodity is trading stocks. This will allow you to better concentrate on the smaller
around this psychological barrier. An analysis of market- aspects of each stock. And with this knowledge, it can pave the
driven behavior is not the same for all instruments; in this case, way for a smoother ride.
we are looking at a very active security, which closely follows
the price movements of the NASDAQ 100 index. Anthony Trongone is the director of Executive MBA programs in
China for Centenary College and is one of the Master Educators
CONCLUSIONS on eSignal. He may be contacted at trongonea@centenarycollege.edu.
The price of a stock can be the most compelling reason for
entering into a long position. By confining our analysis to the SUGGESTED READING
opening price, we can investigate its performance when it • finance.yahoo.com
trades in the vicinity of the nearest dollar increment. Since our S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (8): Opening Position by Jayanthi Gopalakrishnan
March 2009 • Volume 27, Number 3
OPENING POSITION
The Traders’ Magazine TM

EDITORIAL
editor@traders.com

T
Editor in Chief Jack K. Hutson
Editor Jayanthi Gopalakrishnan he year 2009 is being billed as one of
Managing Editor Elizabeth M.S. Flynn
hard work that will pave the way for
Production Manager Karen E. Wasserman
Art Director Christine Morrison
better times. With the new Presidential ad-
Graphic Designer Wayne Shaw ministration in the US, there is indeed a tre-
Staff Writers Dennis D. Peterson, Bruce Faber mendous amount of optimism throughout the
Webmaster Han J. Kim
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Contributing Editors John Ehlers,
Anthony W. Warren, Ph.D. take a lot of work to fix not just the state of the
Contributing Writers Don Bright, Thomas Bulkowski, economy but the state of the world. The bad
Martin Pring, Adrienne Toghraie
news still keeps coming in, with some pundits
even forecasting a second wave in the finan-
OFFICE OF THE PUBLISHER cial crisis.
Publisher Jack K. Hutson I’m not sure when or if that second wave will be, or even whether that means we’ll
Credit Manager Linda Eades Gardner
Industrial Engineer Jason K. Hutson
see lows even lower than we saw in November 2008. But the one thing I do know
Project Engineer Sean M. Moore is that the economy is in a deep recession. The government has already spent
Accounting Assistants Agnes Dimaano hundreds of billions of dollars in bailouts, and it is far from being fixed. Clearly,
Controller Mary K. Hutson
there is more work that must be done to overhaul the entire financial system. We
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Stocks & Commodities V. 27:3 (43): Q&A by Don Bright

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

BEFORE THE OPEN expected value in market opening is ex-
Don, I was wondering if you could answer actly zero. Say I do a 2% envelope, so I
this. I have heard that there is a data send a sell OPG order at 102. Here’s what LEVEL II
source that tells you the estimated open- the list of orders looks like: I am a fairly new trader, and everyday I
ing of NYSE stocks before the open. Have learn something new. The greatest thing
102 1,000 shares
you heard this? Thanks. — Sky123987 I’ve learned is that there are things you
101.50 2,000
I’ve not heard of any particular site, but 101.47 2,000 get from eight hours a day screen time
I can tell you what we use. We see 101.40 1,000 that you can’t find in a book. My
premarket imbalances (excess shares) of subconscious“knows” things and has been
opening-only orders, and NYSE special- So the specialist, whom I assume knows getting me out of trades before they be-
ists sometimes publish an estimated open- where the stock is heading, doesn’t antici- come a problem. I often get these signals
ing price range as well. We also look at the pate any institutional activity after the from watching the Level II screen. I can’t
electronic communications network’s market opens and believes this stock is pinpoint it, but I must be picking up on
(ECN) trading levels, premarket. This helps going to sell off. There is a buy imbalance, something when I get these “bad feel-
considerably with our opening-only order so he fills up to 101.50, then notices he ings” about a trade.
strategy by allowing us to adjust bid and needs to fill 10,000 more shares, so he Where can I get more information on
offer prices. We also calculate estimated parks an order at 101.99 for 10,000. Level II action? I see strange things all the
opening stock prices based on fair value– We open at 101.99, I don’t get filled, time, such as a 100-share print at a price
adjusted futures trading ranges as well. and the stock comes crashing down. In my far from the best bid/ask that forms a
We take the closing price of the Standard simulation, which matches it decently but candle spike but affects nothing else; and
& Poor’s 500 spot price (SPX), add or not perfectly, notes the expected opening lots of prints going off at the ask when the
subtract the fair value number (basically to be down 0.001%. So it places a simula- bidding is sparse.
the cost of carry to expiration date, minus tion order at 101.99 and counts me as I have to make a living off a $60,000
dividends), and then compare where this being filled. account and as of this month am finally
number related to the emini futures (CME/ Is this a legitimate concern? Is this managing it, so I would appreciate any
Globex) premarket. Hope this helps! trouble enough that in order to avoid or help you can provide! —Donna
minimize this, I am better off doing it on A couple of things come to mind. First
OPENING-ONLY STRATEGY liquid stocks? —Sky is to determine whether you’re seeing full
I was wondering if you could comment on What you bring up are three separate “consolidated” quotes and prints. You
this. I’m a numbers guy, so I like to create factors. One is, as mentioned, the size of may be seeing off-market trades that take
simulations and analyze the data. I have a the order. At Bright Trading, we tend to place off the system. These might be “dark
monster database; not only does it in- limit to only 2,000 shares per order for pools of liquidity” (see www.redi.com/
clude prices, but news for the stock, what most stocks. So sizing is important. forms/algo720.pdf) or a corrective trade
the market is doing, fair values, volatility Second, you’re assuming the specialist price. Yes, these trades can throw off your
index, similar sectors, and official NYSE “knows” where the stock is going — that’s charting system. You may want to use a
opening prices. It’s got it all. not always the case, trust me. As with the system that allows you to tie in trade size
So I created a simulation and found market on close imbalances, brokers and (volume of trade) vs. a 100-share trade.
that on paper this strategy does quite well. traders have orders that can and will be Second, yes, there are many “games”
I have been trading the strategy, and I can placed upon seeing the opening price. being played. Algorithmic trading sys-
say that my results are definitely not as These orders are unknown to the special- tems are set to place random bids and
good as the simulation produced. ist (and his algorithms). offers to act as deceptive orders. They can
One of the downfalls of creating a simu- And third, simulations don’t and can’t be hit by an offsetting party, thus causing
lation is when you use conditional orders, take into consideration all the variables the trade.
sometimes you will be filled, and this is involved. To prove this, you could put in I am a firm believer in “all-encompass-
not possible to recreate in a simulation. 100-share orders, with tighter envelopes ing tape reading,” which includes actual
So I’m trying to find out why my real-time to assure fills and retracements (just a feelings. If something doesn’t look right,
results are not close to the simulation. suggestion). a good trader can sense it. And you’re
I have been trading a lot of stocks, some The opening strategy is a numbers absolutely right about screen time being
liquid, some not. For example, XYZ closes game, and the successful numbers come beneficial.
at 100, and when I send my order in, the from decades of trading it. S&C

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
OPTIONS

Option For An Optionable

Second Chance Options

Optionable stocks allow traders to use
short-term strategies that combine tech-
nical analysis with the right option
strike price and realistic targets to
provide an edge.

by Barbara Star, PhD

hat could be better than

picking up a quality

W stock for pennies on the

dollar? And not only
during times of eco-
nomic distress, but also
during times of economic growth.
Optionable stocks make it possible to
pick up a quality stock for pennies on
the dollar by allowing traders to “lease”
good companies as a substitute for ac-
tually owning the stock outright and
for far less money than it would cost to
purchase the underlying stock. Buying
puts and calls on stocks offers greater
leverage with limited risk than buying
the stock outright. Of course, like any
lease agreement, it is time limited. And
if the price of the stock you leased
doesn’t move quickly enough in the
desired direction during the specified
time limit, you can lose your initial
investment.
However, just as problematic as se-
lecting the right stock is knowing when
to purchase an option on that stock.
The usual mantra for option traders
begins with: If you think price is going
up, buy a call; if you think price is
going down, buy a put. There is no
better illustration of the difficulty in
CHRISTINE MORRISON

predicting price turns than the 2008

crude oil market. Analysts began call-
ing for a top when a barrel of crude
neared $100 and continued calling for
a top as it soared beyond $120, $130,
and $140. Then they claimed crude oil
would climb to $200 a barrel. Wrong again! Crude oil peaked turned a corner and began a trend reversal. Unfortunately, by
in July at $147, which led to a steep decline in oil-related that time, the cost of the option premium has usually increased
stocks as crude oil prices subsequently plummeted below the and a trader would need to pay extra for the same option strike
$70 a barrel mark. price. So without having to consider more complex option
As a technical analyst, I would rather wait until price strategies, what’s a trader who prefers dealing with simple
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star

DIA March – July 2008

134.00
132.00

puts and calls to do? 130.00

This article explores a short-term 128.00

strategy that uses technical analysis 126.00

tools and concepts to give traders a 124.00

second chance to make money buying 122.00

put or call options after a top or bottom 120.00
may be in place. 118.00
116.00
THE BASIC STRATEGY 114.148834
113.152549
The approach is based on a standard 112.242656

trend-following strategy of buying or 110.00

selling retracements — that is, buy dips 108.00

in an uptrend and sell rallies in a 106.00

downtrend similar to those seen in the 104.00

eSIGNAL
3 10 17 24 31 7 14 21 28 5 5/12/08 19 27 2 9 16 23 30 7 14
chart of the Dow Jones Industrial Aver- Mar Apr May Jun Jul

age exchange traded fund (ETF) (DIA)

FIGURE 1: DIA MARCH TO JULY 2008. The chart of the diamonds (DIA) ETF with eight- and 20-period exponential
in Figure 1. moving averages shows a rising trend as the shorter-term moving average remained above the longer-term moving
This strategy relies on price retrace- average until price double-topped in May and then entered a declining period in which the shorter moving average
ments toward a moving average that stayed below the longer moving average. Arrows mark the clearly defined price retracements toward the moving
occur after price trend reversals and averages during the uptrend in March–May and the downtrend from May to July, which could have provided good
entries for short-term trades.
shortly after a break of price resistance
in an uptrend or support in a downtrend.
The goal is a five- to 10-dollar move of the underlying stock Moving averages: Moving averages typically identify price
price that completes within two to three trading weeks. direction and price reversals. In this article, the crossover of
an eight-period exponential moving average (EMA) and a 20-
STOCK SELECTION period EMA serves both purposes. The point where the two
The first step is to identify the likely prospects. Not every averages cross represents the reversal. An upward trend is in
stock can produce the type of short-term price movement place when the eight-period moving average remains above
needed for this strategy. Low-priced stocks, stocks stuck the 20-period moving average (even if price slices below the
in a small sideways range, or even those in a slow, steady two averages) and a downtrend is in progress when the eight-
trend would not work with this strategy. To find a list of period moving average stays below the 20-period (again,
potential candidates, I sorted the weekly (not daily) high to regardless of price action). Actually, any two moving aver-
low price range of optionable stocks trading above $40 per ages could be used. The eight-period and the 20-period were
sharewithin the three major US exchanges. chosen because they provide more trading opportunities than
I then focused on those that moved an average of at least longer-term moving averages such as the more customary 20
three to five points in a week and preferably much more. At and 50 periods or 50 and 200 periods.
this stage, price direction is not important, only the price The stocks that meet the weekly price range requirement
range, since it is the volatility those stocks exhibit that most become part of a potential watchlist that is monitored on a
likely will propel price toward the profit objective for the daily basis for the dual moving average crossover. The
strategy. Check the price charts to eliminate the “one-week challenge is to identify a trend fairly early in its development,
wonders” — those stocks that may have experienced a brief so we are not just grabbing the tail end of the price move.
surge in volatility but typically average less than a three- to
five-point weekly price move. Moving average oscillator: Moving averages are notorious
for their whipsaw action during range-bound periods. While
ANTICIPATION AND TECHNICAL UNDERPINNINGS it may not be possible to eliminate false trend reversals, it is
Realistically, you can never know in advance what price will possible to minimize them with an indicator I call a moving
do from bar to bar. Probability is usually the best we can average crossover (MAC) oscillator. The eSignal formula
achieve, which means we look for those clues that lead us to script (EFS) for the MAC oscillator is provided in the “Moving
take a calculated risk. To provide those clues that identify average crossover (MAC) oscillator” sidebar (on page 26).
potential price reversals and price targets, this short-term The MAC oscillator, which can be seen in a panel beneath
method incorporates three technical analysis tools: moving the price charts of Figures 2 and 3, displays vertical lines
averages, momentum, and support/resistance levels. Figures above and below a zero line. The zero line represents the point
2 and 3 illustrate these technical tools in an uptrending stock at which the eight- and 20-period EMAs cross. The EFS for the
(Schlumberger) and in a downtrending stock (US Steel). moving averages can be seen in the “Moving average with
arrows” sidebar (on page 27). Vertical green lines appear

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
Schlumberger OPTIONS
110.00

6 105.00
Target zone 100.559421
4 97.3789839 +0.05 level and the -0.05 level, the
95.00
1 Resistance
vertical lines suggest that trending ac-
90.00
tion, either bullish or bearish, may have
5 85.00
3 begun or resumed.
80.00 Another moving average helps iden-
2
75.00
73.640173 tify retracements. When a trend is de-
70.00 tected, a five-period time series mov-
MAC 1 ing average reveals the price reversals
0 that create the retracements. On the
price charts, these retracements are
-1
Momentum 9.94 highlighted as green bars in an uptrend
0
and red bars in a downtrend. Traders
-25 who do not have access to a time series
10 17 24 31 7 14 21 28 5 11 19 25 3 10 3/19/08 31 7 14 21 28
2008 Feb Mar Apr
moving average can substitute a four-
or five-period EMA or merely eyeball a
FIGURE 2: SCHLUMBERGER (SLB) IN AN UPTREND. The eight- and 20-period exponential moving averages price pullback toward the eight- and
on the price chart identify price direction and price reversals. Their crossover is marked by arrows. Retracements
in an uptrend appear as green bars and in a downtrend appear as red bars. The MAC oscillator in the middle panel
20-period moving averages.
and the momentum indicator in the lower panel help verify price direction. Support and resistance levels identify Retracements are countertrend
breakouts and target prices. moves that can vary in the number of
bars they take to complete prior to
resuming the trend. There is no mini-
US Steel mum or maximum number required for
200.00 this strategy. The eSignal code for a
1
190.00 pullback can be seen in the “Pullback”
180.00 sidebar (on page 30).
3
170.00
Support 160.00 Momentum: While not essential to this
150.00 strategy, a 13-period momentum indi-
2
Target zone 4 138.559514 cator (seen in the panel beneath the
133.657284
129.85 MAC indicator) is added to provide
120.00 another alert to a trend reversal. Like
110.00
1
the MAC indicator, momentum moves
above and below a zero line. Typically,
0
MAC it crosses its zero line prior to the mov-
-1
ing average crossover. It also serves to
Momentum (13,C) 19.24
0
confirm price direction and warn of
-13.66
weakening trend strength.
7 14 21 28 5 12 19 27 2 9 16 23 30 7 14 21 28 4 8/15/08 25
May Jun Jul Support and resistance: Technical in-
Aug

FIGURE 3: US STEEL (X) IN A DOWNTREND. The decline in US Steel, which began in July 2008, was marked dicators by themselves convey infor-
by both the break of support and the simultaneous cross of the eight- and 20-period EMA in the $170–165 area mation about movement and change.
at point 1. The red bars mark the retracement to point 3. Both the MAC and the momentum indicators remained Support and resistance price levels con-
negative during the price retracement. Price continued its decline to the target goals in the $145–140 level.
vey fundamental information about
supply and demand. A break of support
above the zero line when the eight-period is above the 20- or resistance suggests a shift away from one and a move
period and red vertical lines appear below the zero line when toward the other.
the eight is below the 20. For this strategy, look for price to break above resistance
The vertical lines above and below the zero line mirror the in an up move or to break below support in a down move
moving averages on price with one important difference: they before considering a trade. A moving average crossover may
vanish when the moving averages are within less than 1% of occur before or after the support/resistance breakout, but it is
each other and are replaced by small dots along the zero line important that the retracement begin after or at the same time
and blank space above and below the zero line. This alerts as the support/resistance breakout.
traders to the converging of the averages as they come close to Support and resistance areas also help to guide our atten-
touching. It signifies a neutral zone during which no trend is tion toward potential target points that fulfill the goals of this
clearly defined. strategy. The target becomes the next area of resistance
Once the moving averages begin to advance beyond the (supply) in an up move or support (demand) in a downtrend.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
MOVING AVERAGE CROSSOVER (MAC) OSCILLATOR setLowerLimit(1);
setDefault(8);
Provided By: eSignal (© 2008 eSignal), a division of Interactive Data }
Corporation. 2008. All rights reserved. This sample eSignal Formula
Script (EFS) is for educational purposes only and may be modified and fpArray[x] = new FunctionParameter(“LSlow_MA”, FunctionParameter.NUMBER);
saved under a new file name. eSignal is not responsible for the with(fpArray[x++]){
functionality once modified. eSignal reserves the right to modify and setName(“Slow MA Length”);
overwrite this EFS file with each new release. setLowerLimit(1);
setDefault(20);
Description: This is a moving average crossover (MAC) indicator }
written at the request of Barbara Star.
fpArray[x] = new FunctionParameter(“Levels”, FunctionParameter.NUMBER);
with(fpArray[x++]){
Version: 1.0 09/25/2008
setName(“Percent Levels”);
setLowerLimit(0.01);
Notes: Price oscillator with 8 and 20 exponential moving averages is
setDefault(0.5);
either above (green) or below (red) its 0.5 percent levels. }

If(OscP(8,20,e,% )>0.5,1,0) vertical lines are green above the zero line fpArray[x] = new FunctionParameter(“AboveColor”, FunctionParameter.COLOR);
If(OscP(8,20,e,% )<-0.5,-1,0) vertical lines are red below the zero line with(fpArray[x++]){
setName(“Above Zero Line color”);
Dots are plotted in black along the zero line when the indicator value setDefault(Color.green);
}
is between the +0.5 and -0.5 levels.
The values described above are defaults and can be changed. fpArray[x] = new FunctionParameter(“BelowColor”, FunctionParameter.COLOR);
with(fpArray[x++]){
Formula Parameters: setName(“Below Zero Line color”);
Default: setDefault(Color.red);
}
Use exponential moving average true
Moving average source close fpArray[x] = new FunctionParameter(“ZeroColor”, FunctionParameter.COLOR);
Fast MA length 8 with(fpArray[x++]){
Slow MA length 20 setName(“Zero Line color”);
Percent levels - absolute value 0.5 setDefault(Color.black);
Above zero line color green }
Below zero line color red
fpArray[x] = new FunctionParameter(“Thickness”, FunctionParameter.NUMBER);
Zero line color black with(fpArray[x++]){
setName(“Histogram thickness”);
***************************************/ setLowerLimit(1);
setDefault(2);
var fpArray = new Array(); }
var bInit = false; }
function preMain() { var xOsc = null;
setPriceStudy(false); function main(UseExp, MASource, LFast_MA, LSlow_MA, Levels,
setShowCursorLabel(true); AboveColor, BelowColor, ZeroColor, Thickness) {
setShowTitleParameters( false );
if (UseExp == null) UseExp = true;
setPlotType(PLOTTYPE_HISTOGRAM); if (MASource == null) MASource = “close”;
setDefaultBarThickness(1); if (LFast_MA == null) LFast_MA = 8;
if (LSlow_MA == null) LSlow_MA = 20;
setStudyTitle(“MAC”); if (Levels == null) Levels = 0.5;
setCursorLabelName(“MAC”, 0); if (AboveColor == null) AboveColor = Color.green;
if (BelowColor == null) BelowColor = Color.red;
askForInput(); if (ZeroColor == null) ZeroColor = Color.black;
if (Thickness == null) Thickness = 2;
var x=0;
fpArray[x] = new FunctionParameter(“UseExp”, FunctionParameter.BOOLEAN); if ( bInit == false ) {
with(fpArray[x++]){ xOsc = osc(LFast_MA, LSlow_MA, UseExp, eval(MASource)());
setName(“Use exponential moving average”); bInit = true;
setDefault(“true”); }
}
var nYvalue = 0;
fpArray[x] = new FunctionParameter(“MASource”, FunctionParameter.STRING); var drawColor = ZeroColor;
with(fpArray[x++]){ var nOsc = xOsc.getValue(0);
addOption(“open”);
addOption(“high”); if (nOsc > Levels) {
addOption(“low”); nYvalue = 1;
addOption(“close”); drawColor = AboveColor;
addOption(“hl2”); } else if (nOsc < -Levels) {
addOption(“hlc3”); nYvalue = -1;
drawColor = BelowColor;
addOption(“ohlc4”);
setDefault(“close”); }
} setBarFgColor(drawColor);
setBarThickness(Thickness);
fpArray[x] = new FunctionParameter(“LFast_MA”, FunctionParameter.NUMBER);
return nYvalue;
with(fpArray[x++]){
}
setName(“Fast MA Length”);
—Jason Keck

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
MOVING AVERAGES WITH ARROWS
fpArray[x] = new FunctionParameter(“UpColor”, FunctionParameter.COLOR);
Provided By: eSignal (©2008 eSignal), a division of Interactive Data with(fpArray[x++]){
Corp. All rights reserved. setName(“Up arrow color”);
setDefault(Color.green);
Description: This is an arrows indicator written for Barbara Star. }
Version: 1.0 09/25/2008 fpArray[x] = new FunctionParameter(“DownColor”, FunctionParameter.COLOR);
with(fpArray[x++]){
Notes:
setName(“Down arrow color”);
Up arrow when 8 EMA crosses above the 20 EMA
setDefault(Color.red);
Down arrow when 8 EMA crosses below the 20 EMA }
}
Formula Parameters: Default:
var x8ma = null;
Up arrow color green
var x20ma = null;
Down arrow color red
function main(SlowEMA, FastEMA, SlowColor, FastColor, UpColor, DownColor) {
**********************************/ if (SlowEMA == null) SlowEMA = 20;
var fpArray = new Array(); if (FastEMA == null) FastEMA = 8;
var bInit = false; if (SlowColor == null) SlowColor = Color.red;
if (FastColor == null) FastColor = Color.green;
function preMain() { if (UpColor == null) UpColor = Color.green;
setPriceStudy(true); if (DownColor == null) DownColor = Color.red;
setStudyTitle(“MA arrows”);
if (bInit == false) {
setCursorLabelName(“8MA”, 0); x8ma = ema(FastEMA);
setCursorLabelName(“20MA”, 1); x20ma = ema(SlowEMA);
bInit = true;
var x = 0; }
fpArray[x] = new FunctionParameter(“SlowEMA”, FunctionParameter.NUMBER);
with(fpArray[x++]){ var nBarCount = getCurrentBarCount();
setName(“Slow EMA Length”);
setLowerLimit(1); if (x8ma.getValue(-1) < x20ma.getValue(-1) && x8ma.getValue(0) >
setDefault(20); x20ma.getValue(0)) {
} drawShapeRelative(0, BelowBar2, Shape.UPARROW, null, UpColor,
Shape.PRESET, “UpArrow”+nBarCount);
fpArray[x] = new FunctionParameter(“FastEMA”, FunctionParameter.NUMBER); } else {
with(fpArray[x++]){ removeShape(“UpArrow”+nBarCount);
setName(“Fast EMA Length”); }
setLowerLimit(1);
setDefault(8); if (x8ma.getValue(-1) > x20ma.getValue(-1) && x8ma.getValue(0) <
} x20ma.getValue(0)) {
drawShapeRelative(0, AboveBar2, Shape.DOWNARROW, null,
fpArray[x] = new FunctionParameter(“SlowColor”, FunctionParameter.COLOR); DownColor, Shape.PRESET, “DnArrow”+nBarCount);
with(fpArray[x++]){ } else {
setName(“Slow EMA line color”); removeShape(“DnArrow”+nBarCount);
setDefault(Color.red); }
}
setBarFgColor(SlowColor, 0);
fpArray[x] = new FunctionParameter(“FastColor”, FunctionParameter.COLOR); setBarFgColor(FastColor, 1);
with(fpArray[x++]){
setName(“Fast EMA line color”); return new Array(x8ma.getValue(0), x20ma.getValue(0));
setDefault(Color.green); }
} —Jason Keck

one strike price out-of-the-money. Many experienced option

OPTION CONTRACT traders might suggest either a longer time frame or an in-the-
AND STRIKE PRICE money option to offset the premium erosion that occurs with
Historical stock option pricing is difficult to find because of the the shorter time frame. An in-the-money option could be
mountain of data it generates. Many charting packages include chosen if that better fits the comfort level of the trader.
some type of program component that calculates prior theo- However, trader comfort level needs to be balanced with
retical option price values to approximate the premium of the money management because an in-the-money option will
option at a specific strike price. Few sources, however, provide cost more. This strategy also ignores the greeks and, instead,
the actual bid and ask prices on historical data. focuses on the price action of the underlying security.
Two sources I have found that would help backtest this
strategy are Think or Swim for the end-of-day bid-ask prices THE STRATEGY APPLIED
and OptionVue 5 for both intraday pricing at 30-minute So far, this article has presented the broad stokes of the short-
intervals as well as end-of-day pricing. Think or Swim.com term option method, with no details about entries or exits.
in their ThinkBack module is the source used here because Now, we walk through the procedure with two stocks on the
this article will apply the strategy only to end-of-day pricing watchlist that meet the selection criteria.
both for consistency and to avoid undue confusion.
For a short-term strategy, select a contract month that Retracement in an uptrend: In the Schlumberger chart (SLB)
allows a 30- to 60-day time frame until expiration and select (Figure 2), the January–February lows provided a spring-
boardAnalysis
Copyright (c) Technical for a move
Inc.up to the $90 area where it hit resistance
Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
OPTIONS

(point 1) and prices declined into March. The March lows closing option bid of $4.10. Traders who remained in the
(point 2) formed a higher price low than the one made in trade just one more day would have been rewarded with an
February, a signal that a new upleg might be under way. As SLB closing price of $101.85, which met the price target goal
prices rose, the eight-period and 20-period moving averages and closed with a bid price on the May 95 strike of $8.10.
crossed to the upside toward the end of March (point 3), Those who paid the $270 initial premium doubled their
another good sign of upward price strength. Then the resis- money with a profit of $540 per contract.
tance area at $90 was broken as price continued to move up As seen in Figure 4, price closed even higher the day after
to $95 (point 4) before it began a retracement that pulled price the target goal was reached, which sent the May 95 strike
back to the $90 level (point 5) and the eight-period moving price much higher. However, because there would have been
average with closes of 89.62 on April 8 and 90.18 on April 9. no way to know that in advance, it was more prudent to close
This is a good place to consider a short-term option. Why? the position when the target goal was reached if only one
First, because price has been trending higher and the MAC contract had been purchased.
and momentum indicators are above their zero lines; second,
because price broke above resistance; and third, because it Retracement in a downtrend: Opportunities also present
pulled back toward the breakout level while the MAC and themselves in declining markets. For example, after enjoying
momentum indicators remained above their zero lines and a huge runup in price during the first half of 2008, US Steel
price also found support at one of the moving averages for (X) in Figure 3 fell sharply in early July.
two days with the April 9th day making a lower low price but The large one-day decline triggered two of the precondi-
closing slightly up on the day. tions for the short-term option strategy — a crash through
So the $90 level certainly marks a possible entry point. The support at the $165 price level and the crossover of the eight-
only question is whether there is enough clear sailing to the period and 20-period exponential moving averages (point 1).
upside on the underlying stock price to meet our short-term A few days later, price bounced off a lower support zone at the
goal and make it worthwhile to purchase a call option. $145 level (point 2) and retraced up to the 20 moving average
The time to check the next resistance levels in order to (point 3) on July 14 where it made a higher high but closed at
prepare for a possible continuation of the uptrend is when $161, which was lower than it opened and also lower than the
price begins its retracement. The first resistance level is prior day’s close. Both the MAC oscillator and the momentum
always the point at which price stops going up and begins its indicators remained in negative territory during the
pullback. In this case, it would be $95 (point 4). And if price retracement.
clears $95, the next resistance level is at the January highs in If price resumed the decline from the $160 level, the first
the $100 to $102 (point 6) area. Both price levels at points 4 level of support would be $145 (point 2) and below that, $140
and 6 fall within the strategy’s $5 to $10 point goal. There are (point 4), which more than met the $5–10 price move target
no guarantees that it will be reached, but there is a reasonable goal. There were four days left until option expiry in the July
risk as long as price does not close much below the $90 contract, so the focus shifted to the August contract. The
support level. underlying stock price of $161 was so close to the $160 at-
Finally, the last step — deciding which option strike price the-money strike price that the next strike price below that at
and contract month to buy. Strike prices occurred at five-point $155 was selected. On July 14, the premium on the 155 put
intervals. A $90 strike price is at-the-money because that is option was $11.10 or $1,100.
about the same as the underlying stock price. The one to buy is As Figure 5 shows, the closing price of the stock declined
the next strike price above that at $95, which is one strike price steadily for the next three days. By July 17, the stock price
out-of-the-money on that day. However, with only nine days closed at the first target of $145. By then the bid price on the
remaining to expiry on the April contract, it is necessary to August 155 put options had risen to $17.40. Those who took
look to the next contract month, May 2008, which has 37 days profit on that day made $630 per contract, a gain of 55% from
remaining until expiration. The May contract meets the 30- to the initial entry. As it turned out, US Steel moved lower for
60-day time frame requirement for this strategy. an additional day, hitting the second price support at $140 at
Figure 4 follows the progression of the 95 May option the low of the day and closing at $142.49. On that day, the
prices from April 9 to 18, when the closing price of SLB August 155 put option was worth $1,950 for a 75% profit of
reached $101.85. Although option prices fluctuate during the $840 on the trade.
day, for purposes of illustration, purchases will be calculated
at the closing ask price of the call option and exits at the SOME WORDS OF CAUTION
closing bid price. Two things to keep in mind: First, it is easy to make decisions
If purchased on April 9, 2008, the option premium for the when you already know the outcome. These examples were
May 95 strike price would be $2.70 or $270 per contract. For specifically selected after the fact to illustrate one way to
the next three trading days, SLB remained in a small sideways incorporate technical analysis concepts into a short-term
range and traders watched the option premium erode. It option strategy. And second, this is a strategy, not a system.
looked as if this trade might be a loser. Finally, on April 17, As such, it does not contain the specific entry/exit or money
SLB closed at $95.30. Nervous traders might have opted out management rules required to create a viable system and
of the trade at that point with a $140 or 50% profit at the should not be traded on a standalone basis.

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
PULLBACK
var fpArray = new Array(); addOption(“open”);
var bInit = false; addOption(“high”);
addOption(“low”);
function preMain() { addOption(“close”);
addOption(“hl2”);
setPriceStudy(true); addOption(“hlc3”);
setShowCursorLabel(false); addOption(“ohlc4”);
setShowTitleParameters( false ); setDefault(“close”);
}
setColorPriceBars(true);
setStudyTitle(“Pullback Indicators”); fpArray[x] = new FunctionParameter(“PriceLine8”, FunctionParameter.STRING);
setDefaultPriceBarColor(Color.black); with(fpArray[x++]){
setName(“Price For EMA1”);
askForInput(); addOption(“open”);
var x=0; addOption(“high”);
fpArray[x] = new FunctionParameter(“LineColor1”, FunctionParameter.COLOR); addOption(“low”);
with(fpArray[x++]){ addOption(“close”);
setName(“Down Color”); addOption(“hl2”);
setDefault(Color.green); addOption(“hlc3”);
} addOption(“ohlc4”);
setDefault(“close”);
fpArray[x] = new FunctionParameter(“LineColor2”, FunctionParameter.COLOR); }
with(fpArray[x++]){
setName(“Up Color”); fpArray[x] = new FunctionParameter(“PriceLine20”, FunctionParameter.STRING);
setDefault(Color.red); with(fpArray[x++]){
} setName(“Price For EMA2”);
addOption(“open”);
fpArray[x] = new FunctionParameter(“Length5”, FunctionParameter.NUMBER); addOption(“high”);
with(fpArray[x++]){ addOption(“low”);
setName(“Length Time Series MA”); addOption(“close”);
setLowerLimit(1); addOption(“hl2”);
setDefault(5); addOption(“hlc3”);
} addOption(“ohlc4”);
setDefault(“close”);
fpArray[x] = new FunctionParameter(“Length8”, FunctionParameter.NUMBER); }
with(fpArray[x++]){
setName(“Length EMA1”); }
setLowerLimit(1);
setDefault(8); var xMOV5 = null;
} var xMOV8 = null;
var xMOV20 = null;
fpArray[x] = new FunctionParameter(“Length20”, FunctionParameter.NUMBER);
with(fpArray[x++]){ function main(PriceLine5, PriceLine8, PriceLine20, Line8, Line20,
setName(“Length EMA2”); Length5, Length8, Length20, LineColor1, LineColor2) {
setLowerLimit(1); var vSymbol;
setDefault(20); var nMOV5 = 0;
} var nMOV8 = 0;
var nMOV20 = 0;
fpArray[x] = new FunctionParameter(“Line8”, FunctionParameter.STRING); var nMOV5_Ref = 0;
with(fpArray[x++]){
setName(“Type MA for MA1”); if ( bInit == false ) {
addOption(“sma”); if(vSymbol == null) vSymbol = getSymbol();
addOption(“ema”); xMOV5 = efsInternal(“LinearReg”, eval(PriceLine5)(sym(vSymbol)),
addOption(“wma”); Length5, 1); //Mov(C,5,T)
addOption(“vwma”); xMOV8 = eval(Line8)(Length8, eval(PriceLine8)(sym(vSymbol))); //
setDefault(“ema”); Mov(C,8,E)
} xMOV20 = eval(Line20)(Length20, eval(PriceLine20)(sym(vSymbol)));
//Mov(C,20,E)
fpArray[x] = new FunctionParameter(“Line20”, FunctionParameter.STRING); bInit = true;
with(fpArray[x++]){ }
setName(“Type MA for MA2”);
addOption(“sma”); //Mov(C,8,E)>Ref(Mov(C,20,E),-1)AND
addOption(“ema”); When(Mov(C,5,T)<=(Ref(Mov(C,5,T),-1)))
addOption(“wma”);
addOption(“vwma”); nMOV5 = xMOV5.getValue(0);
setDefault(“ema”); nMOV5_Ref = xMOV5.getValue(-1);
} nMOV8 = xMOV8.getValue(0);
nMOV20 = xMOV20.getValue(-1);
fpArray[x] = new FunctionParameter(“PriceLine5”,
FunctionParameter.STRING); if (nMOV5_Ref == null || nMOV20 == null) return;
with(fpArray[x++]){
setName(“Price For Time Series MA”); if (nMOV8 > nMOV20 && nMOV5 <= nMOV5_Ref) {

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 27:3 (22-32): Second Chance Options by Barbara Star
PULLBACK (continued)

setPriceBarColor(LineColor1); nSumXSqr = Length * (Length - 1) * (2 * Length - 1) * nOneSixth ;

} nDivisor = Math.pow(nSumX, 2) - Length * nSumXSqr ;
nSumXY = 0;
//Mov(C,8,E)<Ref(Mov(C,20,E),-1)AND for (var nValue1 = 0; nValue1 < Length; nValue1++) {
When(Mov(C,5,T)>=(Ref(Mov(C,5,T),-1))) nSumXY += nValue1 * xSeries.getValue(-nValue1);
if (nMOV8 < nMOV20 && nMOV5 >= nMOV5_Ref) { }
setPriceBarColor(LineColor2); nSumY = Summation(xSeries, Length);
}
nLRSlope = (Length * nSumXY - nSumX * nSumY) / nDivisor ;
return; nLRAngle = Math.atan(nLRSlope) * 180 / pi;
} nLRIntercept = (nSumY - nLRSlope * nSumX) / Length ;
nLRValue = nLRIntercept + nLRSlope * (Length - 1 + ExecOffset -
function LinearReg(xSeries, Length, TgtBar){ TgtBar) ;
var nRes = 0; nRes = nLRValue;
var nSumXY = 0; }
var nSumY = 0;
var nSumX = 0; if (nRes == null) nRes = 1;
var nSumXSqr = 0; return nRes;
var nOneSixth = 1 / 6; }
var nDivisor = 0;
var nLRSlope = 0; function Summation(xSeries, nLength){
var nLRAngle = 0; var nRes = 0;
var nLRIntercept = 0; for (var i = 0; i < nLength; i++) {
var nLRValue = 0; nRes += xSeries.getValue(-i);
var pi = 3.1415926; }
if (nRes == null) nRes = 1;
var ExecOffset = 0; return nRes;
}
if (Length > 1) { —Jason Keck
nSumX = Length * (Length - 1) * 0.5;

this option strategy, just as they would for any other trading
Schlumberger May 2008 95 Call option method.
Date Stock closing Days to Strike Option Option
price expiry price bid ask SUMMARY
It isn’t necessary to call the top or bottom of a price move to
4/09/08 90.18 37 95 2.6 2.7
4/10/08 92.60 36 95 3.4 3.6 make profitable option trades. Short-term strategies that
4/11/08 90.61 35 95 2.7 2.8 combine technical analysis with the appropriate option strike
4/14/05 91.19 32 95 2.55 2.7 price and realistic target goals can provide the edge for those
4/15/08 91.13 31 95 2.6 2.7 who do not wish to tie up equity for long periods of time or
4/16/08 94.80 30 95 3.8 4 who only wish to implement less complex option strategies.
4/17/08 95.30 29 95 4.1 4.4
4/18/08 101.85 28 95 8.1 8.4 Barbara Star is a retired university professor and a past vice
FIGURE 4: BID/ASK OPTION PRICES FOR SCHLUMBERGER. This table shows president of the Market Analysts of Southern California. For
the progression of the closing bid/ask prices on the May 95 2008 option contract from many years she led a MetaStock users group. Her articles and
April 9 to 18. The purchase price of the option is highlighted in the ask column and software reviews have been published in Technical Analysis
the exit price is highlighted in the bid column. Profits ranged from 50% to 100%,
depending where the trader exited. of STOCKS & COMMODITIES since 1991. Currently, she
trades part-time and provides individual instruction and
consultation to those interested in the technical analysis of
There will be several opportunities to implement this the financial markets.
approach; many will be extremely profitable, but not all will
go smoothly. Some prices may trigger but then move side- US Steel August 2008 155 Put option
ways, which causes premium erosion, as happened for a few Date Closing Days to Strike Bid Ask
days in the Schlumberger example. Or, after purchasing an price expiry price
option on a retracement to the eight-period moving average,
7/14/08 161 32 155 10.9 11.1
price moves briefly in the desired direction, only to switch
7/15/08 155.05 31 155 13.5 13.8
directions and retrace further to the 20-period moving aver-
7/16/08 154.01 30 155 12.8 13.2
age, which leaves the trader wondering whether to exit or
7/17/05 149.19 29 155 17.4 17.9
purchase another contract at the 20-period moving average.
7/18/08 142.49 28 155 19.5 19.7
In some cases, prices move toward but do not reach the
target goal, and in other cases, price may move abruptly in the FIGURE 5: BID/ASK OPTION PRICES FOR US STEEL. As the progres-
opposite direction. Because so many variables can influence sion of the bid/ask prices for the August 155 strike price shows, the option
strategy would have yielded a 55% to 75% profit in about five days using
the underlying price movement, traders need to create contin- the short-term option strategy.
gency money management and risk management plans for S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (58-60): Surviving The Test of Time With J. Welles Wilder by Brian Twomey
INTERVIEW

Surviving The Test Of Time

J. Welles Wilder
J. Welles Wilder is an author, market technician, and inventor of indicators and
trading systems that have become classics over time. Without Wilder’s contribu-
tions to technical analysis, it would be hard to imagine what we would have in the
field, considering so many of the basics are derived from his work — relative
strength index, average directional movement index, directional movement index,
average true range, parabolic stop & reverse … and there’s more that will
influence traders for many years to come. Wilder also founded Delta Society
International, expounding the theory of the delta phenomenon in the 1980s, about
what he refers to the perfect order of the markets.
Wilder is the author of four books: The Delta Phenomenon; Wisdom Of The
Ages In Acquiring Wealth; Adam Theory Of Markets; and his most famous work,
New Concepts In Technical Trading Systems.
STOCKS & COMMODITIES contributor Brian Twomey conducted this interview in
July 2008.

arlier interviews alluded to term delta order. Those are the Treasury There is so much

E your degree in mechanical

engineering from North
Carolina State University
and your prior work as a real estate
bonds and the stock market.
Each perfect order relates to two
things. First is the number of turning
points in the series for that particular
technical analysis
out there that it is
not easy to come up
developer before your career in trad- market, and second is where the inver-
with something
ing. Were you born and bred in North sion comes. The inversion always comes different anymore!
Carolina? at point 1. For example, let’s say that a
I was born in Norris, TN, in the middle market has 10 turning points. From point
of the Great Depression. My father, 1 to point 10, there is a high/low order or moves often come on either side of
who had a master’s degree, worked on a a low/high order that this particular point 1. There are intermediate-term
Tennessee Valley Authority coffer dam market follows. points, the medium-term points, and the
with a pick and shovel. In my first three This order of the markets is the num- long-term points. The distance between
years, we moved from state to state ber of points and at which point the these three sets of points increases with
before we ended up in Greensboro, NC. inversion can occur. This order is per- each set. When you get two or three
And that has been my home for the last fect, and once it is discovered, it will different turning points coming at the
70 years. Since 1986, I have also had a never change. Although the delta points same time, high or low, most of the time
home in Christchurch, New Zealand. have a perfect order according to these this will be a significant high or low
parameters, the exact placement of the point.
Using work from your book The Delta points is not perfect.
Phenomenon, could you expand on The way we handle this is to take 10 Could you expand on why you founded
the perfect order of markets in relation series of turning points for a certain the Delta Society?
to movement and time? What does this market. The placement of the turning The delta turning point gives market
say about today’s market watchers and point is the average of the placement of timing. Those who are members of the
technicians? the 10 points. In a strong market move, Delta Society use the delta turning points
All markets have a perfect order in we would expect the next turning point to show them which way the markets
five different time frames. The shortest to come late because of the momentum. are going and how long it will take for
time frame is intraday or a four-day If a market is moving sideways, we can the markets to get there. Delta does not
series. The longest time frame is 19 expect the turning point to be very close tell us how high or how low the markets
years. There are only two markets with to its average position. will go, however.
enough data to solve for the super long- Regarding movement, the biggest
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (58-60): Surviving The Test of Time With J. Welles Wilder by Brian Twomey
WILDER’S WONDERS
J. Welles Wilder developed many of the cate good exit and entry points.
indicators and indexes that have formed Relative Strength Index (RSI) — This
the foundation of technical analysis to- indicator is used to anticipate trend
Your New Concepts In Technical day. A handful of them are: reversal points by comparing the top
Trading Systems gave us indicators highs and bottom lows, overbought/
we still use today. What did you see in Average Directional Movement Index oversold and divergent situations.
1978 that helped you develop these (ADX) — Indicator developed to The index measures the directional
indicators? What was your main focus measure market trend intensity. price movement’s rate of change or
Average True Range — A moving aver- velocity.
on prices, market volatility, trends,
age of the true range. Stop and Reverse (SAR) — A stop that,
market behavior? when hit, is a signal to reverse the
Directional Movement Index (DMI) —
I simply studied those ideas and be- Measures market trend. current trading position — that is,
gan converting them to trading systems. Parabolic Indicator — Based on stop- from long to short. Also known as
The systems and concepts I have played and-reverse strategies that help lo- reversal stop.
with since the early 1970s included more
than what I finally ended up with in the
book. if the market is moving up, the price bar If you were starting out today as a new
representing the last day on the com- trader, what indicators would you rec-
These indicators are still so popular puter chart is green. If the market is ommend and what methodology would
today. Are the markets any different moving generally down, the last daily you recommend? How would you ad-
today than they were in 1978? (See bar turns yellow. vise a novice trader to approach today’s
sidebar, “Wilder’s Wonders.”) Using this as a starting point, I devel- markets?
Frankly, I don’t think the markets are oped two other trading systems. One is I would recommend reading The
that different than they were back then, called the trend change index (TCI) and Delta Phenomenon. It is easy to read
just as long as too many traders are not the other is the para delta plus (PDP). and understand.
doing the same things at the same time! They each trade the same 17 commodi-
ties. The profits from both systems are Do you have any advice for the trader
Do you have a favorite indicator? Is strong. I developed these two systems today who is not trading with a system?
there one you like more than others? more than 10 years ago, and they are Frankly, I have never known of any-
My favorites are the parabolic time/ available only to members of the Delta body who, over time, has made money
price system, the directional movement Society. I lost interest in developing trading the futures markets without some
system, and the swing index system. another system then; the ones I’d devel- kind of consistent outside or inside in-
Very few people have been able to un- oped were sufficient. formation. So if you think you can beat
derstand and program the swing index the futures markets on your own with-
system, but those who have programmed Would you expand on the parabolic out using a system, only trade with as
and traded it tell me the swing index stop & reverse indicator? What is the much money as you can afford to lose!
system is the best, as far as they’re basis for its reliability?
concerned. The parabolic stop & reverse indica- Can you expand on the concept of the
tor is one of my best systems. It is the three classes of traders?
Do you still believe these indicators only one incorporated in one of my two I think you’re referring to the systems
should be used as standalone indica- current systems. It is used in the PDP trader, the fundamental trader, and the
tors or in conjunction with other system. It only comes into effect when information trader.
things? And if so, which ones? a big profit has been built up. Suddenly
I would say as several indicators, in on the screen a progression of dots ap- Yes, that’s right.
conjunction primarily with the relative pears. It is also known as a stop & The systems trader is one who fol-
strength index (RSI). reverse. lows a mathematical trading system
developed by himself or someone else.
Again from your book New Concepts, Before writing New Concepts In Tech- The fundamental trader utilizes his
I noticed how you used your volatility nical Trading Systems, how long had own information about the commodi-
system and volatility index with the you been trading and how successful ties such as rainfall, temperature, plant-
parabolic time/price system. I know were you? ing, and so on.
this is your methodology for trading. I began trading commodities in the The information trader depends on
Has your system for trading changed early to mid-1970s. I was not very suc- newspapers, magazines, and commod-
over the years? How do you trade today cessful, but nor did I lose very much. ity letters where someone else does the
with your systems? But I read almost everything that was analysis.
I would say my system for trading available and began to develop my own
has not changed much. However, over original trading systems. The ones that Your book New Concepts gave us ac-
the years I have developed three sys- worked best ended up in the New Con- curate and time-tested indicators. Did
tems that are by far better than anything cepts book. New Concepts also introduce trading
else I have done. With the first system, systems for the first time? How have

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (58-60): Surviving The Test of Time With J. Welles Wilder by Brian Twomey
INTERVIEW

trading systems changed over the indicators. Any comment regarding this _____ [1989]. The Wisdom Of The Ages
years? phenomenon? In Acquiring Wealth, Cavida, Inc.
When I wrote New Concepts, I knew There is so much technical analysis _____ [1987]. The Adam Theory Of
of only two other different mechanical out there that it is not easy for one to Markets, Trend Research.
trading systems. One was the moving come up with something that is good _____ [1978]. New Concepts In Techni-
average, which had been around so long and different anymore! cal Trading Systems, Trend Research.
that nobody knew who first invented it. _____ [1990]. “Predicting The Market
The other system was the weekly rule, That’s true! Thank you for speaking Order With The Delta Phenomenon,”
which was invented by Richard with me. Technical Analysis of STOCKS &
Donchian. With Donchian’s weekly COMMODITIES, Volume 8: April.
rule, if you are long, you have to move Brian Twomey is a currency trader and _____ [1986]. “The Relative Strength
your stop up so much at the end of the adjunct professor of political science at Index,” Technical Analysis of STOCKS
week until you are stopped out. If you Gardner-Webb University. He may be & COMMODITIES, Volume 4: Decem-
are short, then you do just the opposite. reached at dbcc_twomey@yahoo.com. ber.
Trading systems have become much
more complicated over the years since SUGGESTED READING
then. Bowman, Melanie [1986]. “Wilder’s
Back,” interview, Technical Analysis
In recent years, traders have been us- of STOCKS & COMMODITIES, Volume
ing classic indicators like yours and 4: February.
playing with parameters and settings Wilder, J. Welles, Jr. [1991]. The Delta
to adjust to their particular market Phenomenon, Trend Research.
instead of developing new and fresh S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (44-49): The Trading Plan by Cory Mitchell

Never Trade Without One

The Trading Plan

When creating a trading plan, you have to take into account trades too early or not at all because of anxiety, staying in
LISA HANEY

all the possible contingencies. Here are the steps you should trades after profits should have been taken due to an emo-
go through when designing your game plan. tional attachment to a tradable, or exiting too early and for a
minuscule profit when it should have been left open longer.
by Cory Mitchell
THE BENEFITS
trading plan is your carefully thought-out and Having a trading plan will allow you to navigate different

A tested way of approaching and beating the market

over the long term. It is the course of action for
entering, exiting, and managing your trades so
that all contingencies are considered before a
circumstances methodically and logically. This process can
be repeated, tested, and then altered if results are not up to
your standards. If you trade based on emotion, you will not be
able to go through this process because your emotions will
trade ever takes place. With such a plan, emotions always get in the way and you will react accordingly. Prob-
are left out of the trading equation, and only tangible criteria lems can be avoided by not having to trade on reactions to the
are used to make trades. Emotions can cause many problems moment. The market is in constant flux, which in turn means
in trading, including entering trades out of boredom, entering emotions can be in constant flux. Well-laid-out trading plans
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (44-49): The Trading Plan by Cory Mitchell

Scalper

Frequency Of Trades
will allow traders to avoid this trading style that allows you to
Trading Style Day
barrage of emotion as they will make more trades, such as
know in advance how to handle daytrading or swing trading. If
each situation as it arises. you are impatient, you probably
Swing
Designing a trading plan gives want your trades to be quick and
you ground rules by which to more frequent. If you worry about
trade and a consistent basis for Position positions or money, you may
which your results can be com- want to take on several positions
pared using different trading cri- Less Aggressive More Aggressive for the longer term, but with small
teria. If you lose money and you amounts of capital on each.
are still sticking to the plan, you will know it is your plan that Looking at your personality and the way you react to
needs to be worked on. If you don’t have a plan, you have no stressful situations will give you a good idea of the trading
real idea what is causing your losses, since they are not based style that will be the best fit for you. Then fine-tune the style
on anything other than your thoughts and emotions at the time you choose. The trading style you choose should fit your
of the trade. Having a plan will save you time and money as goals and objectives as well as your personality.
you pursue consistent profitablility.
On occasion, the markets do reward bad trades (or, at WHAT TO TRADE
least, trades that have not been thought through). This is Deciding what market to trade will ultimately be determined
known as random reinforcement — believing you have a by your capital position and personality. Certain markets
winning trading system when you do not. Due to the sheer require more funds than others due to leverage restrictions
number of transactions possible, some trades will randomly and legal requirements across different countries. Some
work out when no forethought was given to the trade at all. markets are historically more volatile than others as well. The
The true trader strives for consistency over the long term. It stock market, the stock index futures market, and the better-
is essential to have a trading plan so that over the course of known commodity markets are the ones that most traders
many trades you will be able to see if your success (or should stick to. Trading those markets with sufficient volume
failure) is related to sheer, dumb luck. to enter and exit your positions easily is recommended.
In order to develop a trading plan, there are several steps Once you know how and what you are going to trade, you
that we should go through. The plan should not leave room for can start to develop your trading plan. Your plan will be a set
traders to question what to do during a trade. All possible of rules, written down for easy reference, which you will use
questions must be looked at before trades are made, so that to execute every trade you make. If you deviate from the plan,
when money is on the line, traders will know that they can rely then there is no point in having one. That is why it is worth
on their plan because it was well thought out and all pertinent taking the time to develop a plan that you believe will be
questions were asked and scrutinized during the making of profitable, so that you will not sway when the market goes
the plan. against you. You know your plan will be successful over the
long term, but if it is not, you know it is your plan that needs
THE INITIAL QUESTIONS adjustment.
Before you place a trade, you need to know why you want to
trade, what your objectives are, and what type of person HOW OFTEN TO TRADE
you are. Is it extra income, a main source of income, or Deciding how often to trade will be based on your personality
capital growth that you want to generate through trading? and your trading objectives. A trading plan can be created for
Are you going to do it full or part time? How much money any style of trading and followed by any personality type, but
do you have to work with, and what type of return do you sticking to the system will be easier if the plan is designed
expect from your money? around a trading style that reflects the trader’s personality.
Once you have answered these questions, you will have a Trade a style that would not reflect your personality only if
rough idea of what you want to do with your trading and you you have no choice. This might include believing you would
will be able to build a trading plan. You will want to stipulate be well suited to daytrading even though you have a full-time
all your objectives in regards to trading, not just answer the job and thus cannot daytrade. In this case, developing a
questions. trading plan for a different method of trading would be
suitable as long as you realize it may go against some of your
PERSONALITY basic tendencies, and you decide to commit to the system
There are many forms of trading and even more types of anyway.
trader personalities. It is crucial to build a trading plan based The style of trading chosen will have a direct impact on
on a trading style that complements your personality; select- how often trades are made. Daytraders make many trades in
ing a style at odds with your personality is a sure way to lose one day, swing traders make a trade or several trades every
money and ultimately burn yourself out. few days or weeks, and investors make trades (or invest-
If you don’t like to sit idle, then you may want to look at a ments) over many months or years. Since the style of trading
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (44-49): The Trading Plan by Cory Mitchell
TRADING TECHNIQUES

determines the number of transactions made, it will also

reflect commissions and the amount of fees paid to a broker. Taking time to make a trading plan will
This should also be considered in any trading plan. give you a greater chance of beating
A trading plan must be profitable when accounting for the market over the long term.
commissions and other costs, and the extent of profitability
over fees should be estimated using backtesting of old market $30, he will have used $30,000. The maximum loss on this
data to determine if the trading plan is even worth implement- trade is $300 for the entire position, based on risking 1% of
ing. While testing a plan on old data does not guarantee used capital. The trade will be exited based on an exit
profitability today, you can be fairly sure that something that strategy, which will be discussed shortly, or when $300 has
has never worked in the past is not likely to start working all been lost on the position. The exit price would be $29.70
of a sudden tomorrow. (1,000 x ($0.30) = -$300) or at a reasonable technical level
Trading objectives will also determine how often trades above this price.
are made. Having your objectives in sync with your plan is By maintaining a 1% risk level on each trade taken, it will
important for you to be able to stick with it for the long term. not matter if only a portion or all of the trading capital is being
Having unreasonable objectives for your plan will only lead utilized, for at no point will all outstanding trades with their
to problems and possible abandonment of your plan. Realis- potential losses exceed 1% of total capital. It is better to stick
tic objectives must be based on your current circumstance, with the 1% stop of capital used for shorter-term trading such
how much time you dedicate to market study, current level of as daytrading (don’t lose more than 1% of capital per day).
market understanding, capital available, and any other fac- Since trades are exited in a timely fashion, the smaller stop
tors related to your situation. based on 1% of capital used for the trade (as opposed to all capital
There are three main parts to a trading plan — money available) should not cause too many whipsaws, which can
management, entry rules, and exit rules. After creating a plan, deteriorate performance. With volatile stocks that present a good
it will be important to test it on old market data for profitabil- opportunity, it may be prudent to take fewer shares than your
ity, and then in real time. Constant monitoring of the trading capital would allow but use a maximum stop that is 1% of total
plan is advisable. capital. This is also useful for the longer-term trader to avoid
being whipsawed out the market too often.
MONEY MANAGEMENT Finding the ideal position is easy once you know the
Money management should be your first concern. This is the maximum loss on the trade you are willing to accept, the price
most overlooked area, and ignoring it is why many traders go of the stock, and a proper technical stop level. Using our same
broke. Not every trade will be a winner, so controlling losses example, if $50,000 is available and a stock is trading at $30,
using position sizing and stops is crucial to maintaining you know that you do not want to risk more than $500 on the
profitability over the long term. one trade.
The basic rule of money management is that no more than Let’s assume that the stock has shown strong price support
1% of capital should be risked on any one trade. This does not at $29.50. Based on technical levels, you would place your
mean that a trader should only utilize part of his or her capital. stop at $29.40, just below the support level. This means that
Rather, the trader can be fully invested in a single instrument you are willing to risk $0.60 a share. If your maximum loss
(or several), but a stop in place will keep the potential loss to is $500, you can determine how many shares (or contracts) to
approximately 1% of trading capital or less. Stops should not take based on this information. In this case, the trader could
be placed at random levels such as placing a stop at the 1% take $500/$0.60 = 833, or 800 shares. By taking 800 shares,
loss of capital level. Instead, you will use your money you can use a proper technical support level/stop for your
management combined with your entry signals so that you trade and also not risk more than 1% of your capital.
can enter trades and implement stops at reasonable technical The main thing to remember is that losses need to be
levels. controlled. Write down your money management rules, and
To give an example, if a trader has a $50,000 trading when in a trade or preparing for a trade, use the rules and do
account, he or she will not risk more than $50,000 x 0.01 = not deviate from them under any circumstances.
$500 on a single trade. Therefore, if a stock is purchased at
$30, the most the trader should lose is $500 if all capital is ENTRY RULES
employed. The trader has the option of using all his or her How to enter a trade is probably the most discussed topic
capital and buying 1,600 shares (rounded down from 1,666), among traders. Every trader is looking for a new piece of
or buying a smaller amount. If the trader purchases 1,600 information that will allow them to get into a bull market right
shares at $30, their maximum stop would be at $29.69. At this before it happens. While a good entry is important, most traders
price, the trader would have lost just under $500, or 1% of focus on it way too much. Trying to find the perfect entry is
trading capital on the trade. Each trader should use his or her hardly worth the time. Most commonly known entry signals
own variation of this rule and decide if he wants to risk 1% of will do fine as long as proper money management and exit
capital on each trade, or just 1% of capital in use. rules are implemented.
In the example, if a trader buys 1,000 shares of the stock at Getting into trades will not be the focus of this article.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (44-49): The Trading Plan by Cory Mitchell
Elements Of A Plan

There are plenty of entry

1Money
2Entry
3 Exit because you can lose that
systems out there includ- Management Rules Rules amount does not mean that
ing buying/shorting on old • Amount of capital • Based on trading • Stops you should. Often, stops can
highs/lows, moving aver- • % Per-trade risk personality • Trailing/protective be placed much closer to the
age convergence/diver- • What % of capital • Trade length — • Profit target entry price than the maxi-
gence (MACD), and sto- is acceptable loss long term? Swing? • Combination of mum stop-loss allows.
chastic crosses and mov- • Control losses Day? Scalp? indicators
ing average crosses. You Stop-loss: The exit is known
can find one or several you like, then customize and filter before the trade is placed. Whether mental or automated
them. Pick or create an entry system that goes along with how stops are used, the stop is known and the trader must enter a
you would like to trade. stop order to monitor the position so that he does not lose
If you want to trade long-term trends, entry signals should more than he determined he would. When a stop is deter-
be based on long-term indicators so you are not whipsawed in mined before a trade, it is never altered once the trade is
and out of trades. If you want to daytrade, the entry indicators executed.
or criteria should be based on short-term movements so Dealing with losing trades is easy; a stop is set and the
potential profits are not outweighed by large losses that may trade is left alone. When a trade becomes profitable, that is
result if stops were based on long-term criteria, such as when the trader has several options on how to exit the trade.
weekly support and resistance areas, for example.
The bottom line is finding an entry criteria that works for Trailing or protective stop: Trailing or protective stops are
your personality and provides for adequate reward based on common and an excellent way to lock in a profit. A trailing stop
your stops and money management rules. A potential entry is where the stop is increased as the price increases, assuming
signal for a long-term trader might be: the trader is holding a long position. If a trader is using a stop
■ A Standard & Poor’s 500 stock rises above its 200- of $0.50 on a trade, if the stock moves up by $1.00, the trader
day moving average would keep his $0.50 stop below the current level, thus locking
in a $0.50 profit if the stock were to retrace some or all of its
■ Overall market is trending with an average direc- gains. If the stock continues to rise, the trader would continue
tional movement index (ADX) above 40 to move up the trailing stop to $0.50 below the price.
■ Volume is rising A trailing stop can be based on a daily close, intraday
■ The stock must have a positive increasing money fluctuations, or be moved only when the price rises by the
flow indicator amount of the stop. A trailing stop is never backed up; for
long positions, it is never moved back down if the price
■ The stock is over $10 falls, and for shorts it is never moved back up if the price
■ The stock trades more than two million shares a day. begins to rise.

This is just an example and is not meant to be used for trading Profit target: Profit targets are another way a trader can exit
purposes. It can be, but all criteria should be validated by a trade. Profit targets allow the trader to see the potential risk
backtesting the criteria for profitability on past market data on and reward of a trade before it is placed. Profit targets are
the same time frame. If the trade is expected to last for several especially useful if chart patterns are used for entry signals.
months or a year, the entry criteria should be tested on daily, Information on common profit targets can be found in most
weekly, or monthly charts. technical analysis trading information. Profit targets do not
Write down your entry rules and only enter trades when a have to be based on chart patterns; instead, they can be based
given instrument matches those criteria. You can have differ- on company ratios such as a price/earnings ratio. If a stock is
ent criteria for different trading styles, but only trade by rules purchased because its P/E ratio is lower than the average for
you have written down and tested. its sector and believed to be undervalued, profits could be
taken when the company’s P/E reaches the sector average.
EXIT RULES Using chart patterns is more objective, but if a trader
Knowing when to exit a good or bad trade is a crucial part of prefers using fundamental data, it can be used. When using
trading. It will not matter how good your entry is if profits are a profit target, simply set an offsetting order at the target price
not taken off the table in a timely manner. Exits can be simple to which you expect the instrument to go.
or quite complex. There are basically four ways to exit a While profit targets are excellent for managing risk and
trading instrument — a stop, trailing/protective stop, profit reward ratios and capturing a good piece of a stock’s move,
target, or a combination of indicators (including price, vol- traders sometimes feel as if they are leaving money on the
ume, indicators, and time). This part of the trading plan is table if the price continues to move in their direction after
designed to keep losses from getting too large or giving back they have exited at their target. The solution to this is to trade
too much profit on profitable trades. The maximum loss on a multiple units and exit half or a part of the position at the
trade will be determined by your money management, but just target price and then implement a trailing stop on the rest of
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (44-49): The Trading Plan by Cory Mitchell
TRADING TECHNIQUES

the position. This will lock in a profit but also allow the trader It is also important that everyone realizes that trading
to capture additional gains that may occur while still limiting losses do occur, and a string of losses does not necessarily
risk of loss. mean that a trading plan is not valid. After several trades have
been made, the trader can analyze the trades and see how they
Combination exit: A trader may also employ a series of could have been improved. But it is important not to keep
indicators to exit a position. The same criteria used for the tinkering with a trading plan once time has been taken to test
entry can also be used as an exit once the original criteria no it and write it down. Give the plan time to work.
longer exists. Other indicators can be used to show when the Market conditions do change so continually analyzing and
instrument is losing steam. adjusting may be required over the long term, but making too
One example of using indicators to exit a position may be many changes could change a winning a plan into a losing one
to exit: just before it is about to become profitable. A rule of thumb
■ When the price moves back below its 200-day is that if you have experienced 10 or more losses in a row in
moving average, or spite of following your system, you may need to make
changes. If you are sticking to your money management
■ When there is a close below a former swing low or rules, then you will not have lost more than 10% of your
a close below a major trendline, or capital. That can be made back with a thorough analysis and
■ The stock at the end of the day if no other exit criteria some changes.
has been triggered. When making a trading plan, it should account for all
contingencies that may occur in trading. Money management
Exits should be tested for profitability given entry and rules should explain exactly how much is risked on each
money management criteria. Coming up with your own trade. Entry and exit rules should be laid out and only when
signals and testing them will give you confidence in your a trade matches that exact criteria should it be entered or
signals, and the likelihood that you will stick to the plan is exited.
greatly increased. Taking time to make such a plan will allow you to approach
the market with confidence and give you a much greater
THAT’S A PLAN, STAN chance of beating the market over the long term.
Money management, entries, and exits all work together. All
three areas must be focused on to come up with a profitable Cory Mitchell is an independent trader specializing in short-
trading system. All areas must work in synergy with each to medium-term technical strategies. He is the founder of
other. The trading plan should always be written down for vantagepointtrading.com, a website dedicated to free trader
easy reference so the emotions of trading do not cause the education and discussion.
trader to deviate from the plan that was created while the
mind was clear and the plan tested for profitability. The more
confident a trader is in his plan, the less likely it is that the
trader will make foolish mistakes.
S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (10-15): Trade System Evaluation by Donald W. Pendergast Jr.
TRADING SYSTEMS

Monte Carlo Conniptions

Trade System Evaluation

Here we evaluate a simple trading

system that will enable you to
simulate the results of realistic
trading with a portfolio of stocks.

by Donald W. Pendergast Jr.

valuating your trading sys-

E tem performance before you

put real money on the line is
essential to your profitabil-
ity. In this article, we’ll evaluate a
simple momentum-based system
using TradeSim Enterprise, a
Monte Carlo simulation/
backtesting program that enables
a trader to simulate the results of
realistic trading with a portfolio
of stocks. Then we’ll dig a little
deeper, learning how to best inter-
pret the statistics, matching sys-
tem performance characteristics
to a trader’s temperament.

A BASIC SYSTEM
A simple, daily-based momentum
system provides the basis for all
of the statistical analysis here. It’s
a moving average convergence/
divergence (MACD) crossover sys-
tem, but with the entry and exit triggers reversed. The system INITIAL RUN
enters at the next day’s open after a buy signal, and it exits at The vehicles chosen for testing were the NASDAQ 100 com-
the next day’s open after a sell signal. No stop-loss is used. ponent stocks, tested during the period from February 23,
Only long entries were taken, and no margin was used in 1990, through October 23, 2008 (Figure 1). To establish the
testing. All key portfolio trade parameters are listed later in system’s viability, first I loaded all 100 stocks into the
this article. This system is included with TradeSim. MetaStock TradeSim Enterprise exploration. Results con-
firmed that the trading system would have achieved real-
BACKTESTING, MONTE CARLO STYLE world (in this case, when trading the NASDAQ 100 component
Portfolio backtesting is the only practical way to obtain stocks) profitability during February 1990–October 2008.
realistic trading system test results, especially if you trade a This time period included two bull markets and two bear
variety of stocks (futures, mutual funds, and so on) at any markets, each of which was significant in intensity and/or
given time. Further, such portfolio backtesting needs to be duration. The key portfolio trade parameters are shown in
simulated using thousands of different iterations to ensure Figure 2.
that any given mix of tradables will reliably attain profitabil- The most important trade system statistics produced by the
ity. TradeSim Enterprise easily automates portfolio 20,000 Monte Carlo runs (iterations) are summarized in
backtesting with its advanced Monte Carlo analysis. Figure 3.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (10-15): Trade System Evaluation by Donald W. Pendergast Jr.

NDX: Nasdaq 100 Index 5000

1990-2008 4500

FOUR KEY STATISTIC 4000

TELL THE TALE 3500
Essentially, the stats are saying that this Bear 3000
simple momentum system is likely to
achieve a 100% probability of profit in Bear 2500
the real world. Four of those key statis- 2000
tics are shown in Figure 2: Bull
1500
1334.78
1) Profit: How much money the 100
system earned. Bull
500
2) Probability of profit: What 0
percentage of the 20,000 itera-
tions was profitable. FIGURE 1: INITIAL TEST ON THE NASDAQ 100 FROM FEBRUARY 23, 1990 TO OCTOBER 23, 2008. The
reversed MACD crossover system test results span two bull and two bear markets.
3) Peak to valley drawdown:
How much money the system
gave back after making a new
equity high.

The fourth key statistic is the profit to

drawdown ratio, which is derived from
the profit and peak-to-valley drawdown
figures:
4) Profit to drawdown ratio:
Profits divided by the peak-to-
valley drawdown.

Before we examine all of these statis-

tics in detail, let’s analyze why there
appears to be such a wide range of profit
and drawdown values across the 20,000
iterations of the Monte Carlo testing

WHICH ONES TO USE? FIGURE 2: MACD REVERSED KEY PORTFOLIO PARAMETERS. TradeSim Enterprise features in-depth
In examining the profit figures first, the portfolio parameter details.
average profit of all 20,000 Monte Carlo
runs yielded $259,844, with a maximum
profit of $342,813 and a minimum profit
of $183,857. That’s right: Due to random
variations in trade ordering during the
20,000 passes, the single best run yielded
a profit more than 85% greater than that
of the worst-performing run. How can
that be?
Well, let’s say that on any given trad-
ing day of this test, the system yielded 12
buy signals. Assume also that the system
was already long four stock positions.
The portfolio trade parameters only al-
low for a maximum of eight positions at
any given time, so on one iteration, the
Monte Carlo analyzer might randomly
select (of the 100 stocks in the NASDAQ
100) stocks 1, 94, 47, and 81 among the
12 stocks generating buy signals. On the FIGURE 3: THE MONTE CARLO REPORT STATISTICS. The key statistics are featured here.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (10-15): Trade System Evaluation by Donald W. Pendergast Jr.

% Net Profit Distribution (MACD Crossover Reversed) Traders utilizing

four key trading
statistics can
determine the
profitability and
Absolute frequency

tradability
levels of the
systems they
develop.

% Profit
FIGURE 4: A MORE MEANINGFUL MEASURE. Profit distributions for the MACD reversed system feature a positive skew.

next iteration, it might choose stocks 50, 1, 49, and 31. On In case you’re wondering how the normal MACD crossover
another iteration, it might pick stocks 21, 8, 49, and 94. system performed on the NASDAQ 100 components, here’s a
The Monte Carlo analyzer will keep mixing things up like brief overview:
this to create as many unique “universes” as possible within
Maximum profit: $286,840
the range of 20,000 runs. This explains why there is such a
Average profit: $192,993
variance in the profit, drawdown, and expectancy results, as
Minimum profit: $111, 975
each sequential group of stocks traded during each run
Average percent of winning trades: 38.41%
creates a unique system results outcome. Regardless of the
Maximum absolute drawdown: $55,538
variability of expected outcomes, it is reassuring to know that
Average absolute drawdown: $30,919
the system also achieved a 100% probability of profit across
Minimum absolute drawdown: $19,281
all 20,000 iterations.
Not only does the MACD reversed crossover system produce
MACD REVERSED CROSSOVER SYSTEM CODE more profits with smaller drawdowns, but it’s also a more stable
For MetaStock Exploration and predictable system than the normal MACD crossover system,
Long entry: with significantly lower standard deviations across all perfor-
Cross(Mov(MACD( ),9,E),MACD( ))
mance metrics. It also wins nearly twice as much as the normal
MACD crossover system.
Short entry:
Cross(MACD( ),Mov(MACD( ),9,E)) MORE MEANINGFUL
Which number is the best representation of this system’s
profitability? Should we use the $342,813 figure, the $183,857
For MetaStock TradeSim Enterprise Exploration: figure, or just settle for the average figure of $259,844? The
EntryTrigger := Ref(Cross(Mov(MACD( ),9,E),MACD( )),-1); answer is none of the above, although the minimum $183,857
EntryPrice := OPEN; figure is still critical, as it represents the absolute worst-case
ExitTrigger := Ref(Cross(MACD( ),Mov(MACD( ),9,E)),-1); outcome, something that every trader needs to evaluate when
ExitPrice := OPEN; comparing systems.
InitialStop := 0; { no initial stop used } The most meaningful way to evaluate the profitability is by
way of the standard deviation figure, which is $18,493. Two
ExtFml( “TradeSim.Initialize”);
ExtFml( “TradeSim.RecordTrades”, standard deviations on either side of the average $259,844
“MACD Crossover Reversed”, { Trade Data figure will encompass approximately 95% of all probable
Filename } outcomes when trading this system, so we simply add $36,986
LONG, {Trade Position Type} (2 * $18,493) to $259,844, which gives us $296,830. Then we
EntryTrigger, {Entry Trigger} subtract $36,986 from $259,844, which yields $222,858.
EntryPrice, { Entry Price } We can now say that roughly 95% of the time, this system
InitialStop, {Optional Initial Stop} would have returned profits in the range of $222,858 to
ExitTrigger, {Exit Trigger} $296,830 from February 1990 to October 2008. This is likely
ExitPrice, {Exit Price}
the best set of figures to use when evaluating this system,
START); {Recorder Control}
bearing in mind that it would still be possible for real-world
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 27:3 (10-15): Trade System Evaluation by Donald W. Pendergast Jr.
TRADING SYSTEMS

SOME TRADE EXAMPLES

A few individual trade examples from the MACD reversed crossover system, long-entry only
can be seen in sidebar Figure 1.
Some trades have significant intratrade drawdowns, which is one of the drawbacks of PUTTING IT ALL IN PERSPECTIVE
trading without a fixed stop-loss exit. When you consider the logic behind the MACD reversed Now that we know how to realistically assess
crossover system, such intratrade drawdowns are understandable; when a normal MACD the performance ranges of the MACD reversed
crossover system fires, thousands of traders will trade in the direction of the signal, crossover system, let’s look at a measurement
temporarily (in some cases) causing a drawdown for those using the MACD reversed that will help determine if the system is appro-
crossover system. Given the fact that the MACD reversed crossover system wins nearly twice priate for our trading temperament by calculat-
as much as the normal MACD crossover system, such drawdowns are usually temporary, as ing the profit to drawdown ratio. Since we
the majority (nearly 68%) of trades eventually swing to the closed-profit zone. want to be conservative when attempting to
estimate future system performance, we’ll sub-
Ticker Date in Entry Date out Exit Pct. G/L MAE MFE tract two standard deviations from the average
price price profit figure and then add two standard devia-
TLAB 10/7/08 3.56 10/14/08 3.94 10.67% (8.70%) 12.64%
tions to the average peak to valley drawdown
figure and then calculate a hypothetical ratio
ERTS 5/2/2006 54.93 5/30/2006 43.86 (20.15%) (24.19%) .44% based on how much profit giveback this sys-
LRCX 3/30/2000 44.38 4/10/2000 56.81 28.01% (23.66%) 28.01% tem manifests. Typically, a system with a profit
to drawdown ratio of 8 to 1 or better is consid-
SIDEBAR FIGURE 1: MACD REVERSED CROSSOVER SAMPLE TRADES ered very tradable.

While at first glance it appears as if we’ve discovered a

reasonable tradable system, one we might be able to reli-

Average profit minus

results to come in closer to the minimum profit amount of two standard deviations = $259,844 – $36,986
$183,857 — or even worse, due to the unpredictable nature = $222,858
of black-swan events, disruptive market conditions, or other
unknowable/ unquantifiable circumstances. The profit distri- Average peak to valley drawdown
butions of the MACD reversed system is displayed in Figure plus two standard deviations = $25,596 + $11,146
4. See sidebar, “MACD reversed crossover system code,” and = $36,742
sidebar, “Some trade examples.”
Of course, you could drive a tank through that potential Profit to drawdown ratio = $222,858 / $36,742
range of profits — it’s a difference of almost $74,000. What = 6.07 to 1
outcome would you actually get if you traded this system? No
one knows what the profit outcome would be, but at least the giously follow, we now need to consider the possibility that
educated trader who ran 20,000 Monte Carlo iterations would the real-world results could be closer to the minimum profit
know just how random this system was before putting money figure of $183,157.
on the line. Imagine the surprise of a system developer who
achieved a backtested profit of $342,813 with one run, THE OTHER SIDE OF THE TRACKS
thinking he’d found the perfect system, only to run it in real Now let’s see how the other half lives by using the worst
trading and ending up with $183,857 in profits. possible profit and drawdown figures of $183,157 and $52,012,
For non–Monte Carlo system testers, such an unantici- respectively. A much smaller profit to drawdown ratio is the
pated outcome might be in their future. Single-pass system result:
testing on a portfolio of stocks is nothing more than a toss of
the dice and could be fatal to a trader’s long-term success. Profit to drawdown ratio = $183,157 / $52,012
= 3.52 to 1

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (10-15): Trade System Evaluation by Donald W. Pendergast Jr.
TRADING SYSTEMS

should help put them miles ahead of the average system trader.
Now we’re looking at a different animal, a system that
would be hard for anyone other than the most heavily capital- Donald W. Pendergast Jr. placed his first trade in 1979.
ized and emotionally stable trader to stay with for the long Since the late 1990s, he has spent thousands of hours re-
haul. Amazing, isn’t it? These wildly different results are searching technical analysis techniques, trade system devel-
derived from trading the same 100 stocks with the same opment, and broad economic trends. He may be reached at
trading system, using the same portfolio trade parameters www.chartw59.com or via email at trader@chartw59.com.
during the same time period, the only internal variation being
the order in which the individual trades were made. Without RELATED MATTER
accurate Monte Carlo analysis, a trader has no way to assess Appel, Gerald [1985]. The Moving Average Convergence-
all of the possible outcomes when trading a portfolio of Divergence Trading Method, Advanced Version, Scien-
stocks. tific Investment Systems.
Bryant, Michael R. [2001]. “Position Sizing With Monte
SIMPLER IS BETTER Carlo Simulation,” Technical Analysis of STOCKS & COM-
Despite the fact that many trading system software packages MODITIES, Volume 19: February.
provide the system developer with scores of statistics and Ferguson, James William [1990]. “Martingales,” Technical
performance graphs, the four key statistics covered in here really Analysis of STOCKS & COMMODITIES, Volume 8: Febru-
do cover the most vital aspects of system evaluation. If the ary.
system you develop can pass muster according to its profitabil- _____ [1990]. “Reverse Martingales,” Technical Analysis of
ity, probability of profit, peak-to-valley drawdown, and profit STOCKS & COMMODITIES, Volume 8: March.
to drawdown ratio, and that only after thousands of iterations Gopalakrishnan, Jayanthi [1999]. “Trading The MACD,”
of Monte Carlo testing, well, you may be onto something worth Technical Analysis of STOCKS & COMMODITIES, Volume
pursuing. If the system you develop can’t make the grade, at 17: October.
least you’ll have saved yourself the pain of wasting your Hartle, Thom [1991]. “Moving Average Convergence/Di-
trading capital on a marginal or even a losing system. vergence (MACD),” Technical Analysis of STOCKS &
As we’ve learned, single-pass system results (on a portfo- COMMODITIES, Volume 9: March.
lio of stocks, commodities, or mutual funds) could very well • Compuvision Australia Pty Ltd
give a distorted view of the true nature of trading systems, http://www.compuvision.com.au/
resulting in unanticipated outcomes for the unsophisticated
trader. Traders utilizing the four key trading statistics dis-
cussed here can determine the profitability and tradability S&C
levels of the systems they develop and/or deploy, and that

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (83-88, 93): Traders’ Resource: Online Trading Services by Technical Analysis, Inc.

Online Trading Services

You can find a wealth of information on TRADERS'
RESOURCE
the Internet for nearly any subject imag-
inable, including investing, trading, and TOP 10 VIEWED
the financial markets. You can even find LINKS ONLINE TRADING SERVICES
a good amount on technical analysis.
Each month in STOCKS & COMMODI-
TIES’ Traders’ Resource, we present a Product Company
listing for different categories of prod- 1. www.gftforex.com Global Forex Trading (GFT)
ucts and services related to trading, all to aid our readers in 2. ClearStation.com E*TRADE Group, Inc.
their pursuit of trading. This month, we focus on the topic of 3. ChartPattern.com ChartPattern.com
online trading services. 4. www.interactivebrokers.com Interactive Brokers
We contacted companies that offer services to traders over
5. eSignal Learning eSignal
the Internet as well as financial website developers and asked
6. pfgbest.com PFG, Inc.
them to fill out an online survey form to describe their Internet
site. Here, you’ll find an excerpt of the data we collected. 7. QCharts eSignal
These websites offer charting, price quotes, and financial 8. RagingBull.com eSignal
news and information; others offer a more specialized service 9. www.SignalWatch.com Nirvana Systems, Inc.
that may be useful to investors and traders. Features may 10. ablesys.com AbleSys Corporation
include stock screening, articles, discussion forums, online These are the 10 online trading services viewed most often on the Traders' Resource
support, and more. website, where each company is listed in order of clicks received. This is not an editorial
rating or ranking. For more information on specific products and services, try checking
store.Traders.com for archived S&C product reviews.
TRADERS’ RESOURCE AT TRADERS.COM
In addition to the information given here, Traders’ Resource
is also available at our website, http://www.Traders.com, click on the Traders’ Resource link. Then follow the online
and in much greater detail. At our website, you’ll not only trading services category link, or use the search feature to find
find out much more about all the online trading services listed products or services with specific attributes in this or other
here, but you’ll also find information on products and ser- categories.
vices in numerous other categories as well, such as data If you’re looking for some trading advice or trading-
services, brokerages, courses & seminars, and others. Just related information, here are some websites to check out.

Company Website Product Updated Quotes?

2dtrading 2dtrading.blogspot.com 2dtradingresources.blogspot.com Weekly

321Gold.com www.321Gold.com www.321Gold.com Daily Yes
A.B. Watley Direct, Inc. www.abwatley.com www.abwatley.com Hourly Yes
ABG Analytics and Consulting, LLC www.abg-analytics.com abg-analytics.com Daily
AbleSys Corporation www.ablesys.com ablesys.com Daily Yes
Access Market Research, Inc. www.accessmarketresearch.com AccessMarketResearch.com Daily
Advantages In Options www.optioncaddie.com Advantages In Options Daily Yes
AlphaKing.com alphaking.com alphaking.com Daily Yes
American Futures and Options, Inc. www.americanfutures.com AmericanFutures.com Monthly Yes
ANCO Futures, a div. of PFGBest.com www.ancofutures.com www.ancofutures.com Daily Yes
www.ancofutures.com www.tradeamerican.com Daily Yes
ANFutures www.anfutures.com ANFutures Daily Yes
ATRADE Investment Technologies, LLC www.findmynexttrade.com ATRADE Online - visual stock alerts Daily Yes

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 27:3 (83-88, 93): Traders’ Resource: Online Trading Services by Technical Analysis, Inc.

Company Website Product Updated Quotes?

Attain Capital Management www.AttainCapital.com www.SystemRank.com Weekly

B4Utrade Corporation www.b4utrade.com B4Utrade.com Daily Yes
BigTrends.com www.BigTrends.com BigTrends.com Daily
Blue Crown Futures LLC www.bluefutures.com Blue Crown Futures Daily Yes
Bollinger Capital Management, Inc. www.BollingerBands.com www.BollingerBands.com Weekly No
www.BollingerBands.com www.BollingerOnBollingerBands.com Hourly Yes
www.BollingerBands.com www.EquityTrader.com Daily Yes
www.BollingerBands.com www.FundsTrader.com Daily Yes
www.BollingerBands.com www.GroupPower.com Daily Yes
bullchart.com www.bullcharts.com www.bullcharts.com Daily Yes
Candlestick Forum www.candlestickforum.com www.candlestickforum.com Daily Yes
www.candlestickforum.com www.candlestickforum.com Weekly Yes
www.candlestickforum.com www.candlestickforum.com Daily
Cannon Trading Co, Inc. www.E-Futures.com E-Mini.com Weekly Yes
www.E-Futures.com www.e-futures.com Weekly Yes
CANSLIM.net www.canslim.net CANSLIM.net Daily Yes
www.canslim.net CANSLIM.net Hourly Yes
Chart-Ex, LLC www.chart-ex.com www.chart-ex.com Daily Yes
ChartPattern.com www.ChartPattern.com ChartPattern.com Not provided
Cobra Trading, Inc. www.cobratrading.com www.cobratrading.com Daily Yes
Commodity Futures Options Trading, Inc. www.usafutures.com Commodity Futures Options Trading On-Line Monthly Yes
Commodity Research Bureau www.crbtrader.com www.crbtrader.com Daily Yes
Computer Trading Support, Inc. www.ctstrend.com www.ctstrend.com Not provided Yes
Computrade Systems, Inc. www.marketedge.com Market Edge Daily Yes
Creative Breakthrough, Inc. www.traderassist.com S&P Day Trading Live Hourly Yes
Crown Futures Corporation www.scaletrading.com www.scaletrading.com Hourly Yes
DataView, LLC www.marketgauge.com MarketGauge - Macro Analysis Daily Yes
www.marketgauge.com MarketGauge HotScans Hourly Yes
www.marketgauge.com www.MarketGauge.com Hourly Yes
Day Traders Win daytraderswin.com www.DayTradersWin.com Daily Yes
daytraderswin.com www.DayTradersWin.com Daily Yes
Daytraders Bulletin www.daytradersbulletin.com Daytrader’s Bulletin Daily Yes
DayTrading Institute www.dtitrader.com dtitrader.com Daily Yes
Decision Point www.decisionpoint.com Decisionpoint.com Daily Yes
Delta Stock Inc. www.deltastock.com www.deltastock.com Hourly Yes
Desert Son Media Corp. www.tradersnation.com TradersNation.com Daily Yes
E Street Trading.com www.EStreetTrading.com E Street Trading Hourly Yes
E*TRADE Group, Inc. www.etrade.com ClearStation.com Not provided
Easy Forex www.easy-forex.com Easy Forex Hourly Yes
Efutures www.efutures.com efutures.com Hourly Yes
Elton Stephens - Investments www.eltonstephens.com www.eltonstephens.com Monthly Yes
Equity Station www.equitystation.com www.equitystation.com Monthly Yes
eSignal www.esignal.com eSignal Learning Daily
www.esignal.com FutureSource.com Hourly Yes
www.esignal.com QCharts Not provided Yes

ONLINE TRADING SERVICES. Look for the complete listing at Traders.com under Traders’ Resource.
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 27:3 (83-88, 93): Traders’ Resource: Online Trading Services by Technical Analysis, Inc.

Company Website Product Updated Quotes?

eSignal (cont’d.) www.esignal.com RagingBull.com Hourly Yes

www.esignal.com www.Quote.com Hourly Yes
FCStone LLC www.fcstone.com www.futuresdirect.com Weekly Yes
Field Financial Group www.fieldfinancial.com www.fieldfinancial.com Weekly Yes
Financial-edu.com www.financial-edu.com Free trading education center Daily
Financial-edu.com www.financial-edu.com Value Line Investment Survey Not provided
FinancialMentor.com www.financialmentor.com www.financialmentor.com Monthly Yes
Flash Futures www.flashfutures.com www.FlashFutures.com Daily Yes
Floyd Upperman & Associates www.upperman.com Floyd Upperman & Associates Daily Yes
Floyd Upperman & Associates www.upperman.com Upperman.com Daily Yes
Forex.com www.forex.com www.forex.com Monthly Yes
FOREX.com www.FOREX.com www.gaincapital.com Monthly Yes
FOREXSTREET S.L www.fxstreet.com FXstreet The Forex Market Hourly Yes
FOREXSTREET S.L www.fxstreet.com FXstreet.com The Futures Market Daily Yes
Fx-charts.com www.fx-charts.com Fx-charts.com, free forex trend signal charts Hourly Yes
Genesis Securities LLC www.gndt.com Genesis Securities LLC Daily Yes
G-FORCE TRADING, LLC www.GForceTrading.com G-Force Trading, LLC Daily Yes
Global Forex Trading (GFT) www.gftforex.com/ www.gftforex.com/index.asp?aid=98 Daily Yes
Global Futures Exchange & www.GlobalFutures.com www.GlobalFutures.com Not provided Yes
Trading Company, Inc.
Grace Financial Group, LLC www.gracefg.com www.gracefg.com Weekly Yes
Greenback Trading www.greenbacktrading.com greenbacktrading.com Weekly Yes
Growth Stock Analytics, LLC www.growthstockanalytics.com HI-EPSRS Database Daily Yes
guppytraders.com www.guppytraders.com guppytraders.com Weekly Yes
Hills Capital Management www.hillscapital.com/ www.hillscapital.com Daily Yes
ICE Investments, LLC www.forextradewinds.com ForexTradewinds Weekly Yes
iFOREX www.zifx.com iFOREX - Forex Forecasts,
Trading Signals and News Daily Yes
INSIIDE Track Trading www.insiidetrack.com INSIIDE Track Trading Weekly Yes
InstantCharts www.instantcharts.com InstantCharts WWW and WAP Service Hourly Yes
Interactive Brokers www.interactivebrokers.com www.interactivebrokers.com Weekly Yes
InvestorGuide.com www.investorguide.com InvestorGuide.com Daily Yes
Investtech.com www.investtech.com Investtech.com Daily Yes
Ira Epstein & Company www.iepstein.com Ira Epstein & Company Futures Hourly Yes
www.iepstein.com www.iepstein.com Hourly Yes
Jadco jadco.com Jadco Stock Charts Weekly Yes
Kingsbury Financial Management, Inc. www.tradersparadise.com Trader’s Paradise Weekly Yes
longtermtrading.com www.longtermtrading.com longtermtrading.com Not provided
LowRisk.com www.lowrisk.com LowRisk.com Daily Yes
M. Gordon Publishing Group www.mgordonpub.com TradingMarkets.com Hourly Yes
Market Valuation Institute www.tovionline.com tovionline.com Daily Yes
MarketWatch, Inc. cbs.marketwatch.com bigcharts.com Hourly Yes
cbs.marketwatch.com cbs.marketwatch.com Hourly Yes
Mastertrader.com www.mastertrader.com mastertrader.com Daily Yes
MG Financial Group www.mgforex.com www.forexnews.com Hourly Yes

ONLINE TRADING SERVICES. Look for the complete listing at Traders.com under Traders’ Resource.
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 27:3 (83-88, 93): Traders’ Resource: Online Trading Servicesby Technical Analysis, Inc.

Company Website Product Updated Quotes?

Money.net, Inc. www.money.net PCQuote.com Daily Yes

Moore Research Center, Inc. www.mrci.com MRCI Online Daily Yes
MTPredictor Ltd. www.mtpredictor.com MTP Trader Hourly Yes
Mtrader.com www.mtrader.com www.mtrader.com Weekly Yes
National Futures www.nationalfutures.com www.nationalfutures.com Daily Yes
Need to Know News www.needtoknownews.com Needtoknownews.com Daily Yes
NEOWAVE, Inc. www.neowave.com www.neowave.com Monthly Yes
News Technologies LLC www.triggernews.com Triggernews.com Not provided Yes
Nirvana Systems, Inc. nirvanasystems.com www.SignalWatch.com Daily Yes
North Systems www.CandlePower6.com www.chartandscan.com Monthly Yes
OAK Trading Systems LLC www.oaktrading.com oaktrading.com Monthly Yes
Online Trading Academy www.tradingacademy.com tradingacademy.com Daily
OPTIONETICS, Inc. www.optionetics.com Optionetics.com Daily Yes
Options Industry Council www.888options.com Options Central Not provided Yes
OptionSmart.com www.optionsmart.com OptionSmart.com Daily Yes
OptionVue Research, Inc. www.optionvueresearch.com OptionVueResearch.com Daily Yes
Orion Futures Group, Inc. www.orionfutures.com Online Futures Brokers Hourly Yes
Pardo Group Limited www.pardogroup.com www.pardogroup.com Daily Yes
PFG, Inc. www.pfgbest.com pfgbest.com Daily Yes
Pivot Research & Trading Co. www.PivotTrader.com pivottrader.com Weekly Yes
PM Traders, Inc. www.pmtraders.com PM Traders Weekly Yes
Power Financial Group, Inc. www.poweroptionsapplied.com PowerOptionsApplied.com Not provided
PowerOptions www.poweropt.com PowerOptions (www.poweropt.com) Hourly Yes
PrimeMarketSignal www.PrimeMarketSignal.com PrimeMarketTrader.com Daily
Pring Research, Inc. www.pring.com pring.com Daily Yes
ProActive Futures www.proactivefutures.com www.proactivefutures.com Monthly Yes
Profit Trading www.profittrading.com Profit Trading.com Daily
www.profittrading.com Profit Trading.com Daily Yes
Profitspi Pte Ltd. www.profitspi.com Profitspi Online Stock Tools Hourly Yes
Prophet Financial Systems, Inc. www.Prophet.net Prophet.Net Not provided
www.Prophet.net Prophet.net Hourly Yes
www.Prophet.net Prophet.Net - Silver Service Hourly Yes
ProSticks Financial Solutions www.prosticks.com ProSticks.com Daily Yes
PTI Securities & Futures L.P. www.ptisecurities.com www.PTISecurities.com Daily Yes
R.J. O’Brien www.rjofutures.com rjofutures.com Hourly Yes
RealityTrader.com www.realitytrader.com realitytrader.com Hourly Yes
RealTime Forex www.realtimeforex.com www.realtimeforex.com Daily Yes
Recognia Inc. www.recognia.com www.recognia.com Daily Yes
Richard Lees Capital Management www.rlcm.com www.RLCM.com Weekly Yes
Schaeffer’s Investment Research, Inc. www.schaeffersresearch.com schaeffersresearch.com Hourly Yes
Scientific Trading Solutions, Inc. www.trendchannel.com Trendchannel.com Daily Yes
Seasonex.com www.seasonex.com Seasonal Trading Powertools Monthly Yes
SolerInvestments.com www.solerinvestments.com SolerInvestments.com Daily Yes
Spectrum Commodities www.spectrumcommodities.com spectrumcommodities.com Daily Yes
StockCharts.com, Inc. www.stockcharts.com StockCharts.com Daily Yes

ONLINE TRADING SERVICES. Look for the complete listing at Traders.com under Traders’ Resource.
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 27:3 (83-88, 93): Traders’ Resource: Online Trading Servicesby Technical Analysis, Inc.

Company Website Product Updated Quotes?

StockMarketStore.com www.stockmarketstore.com stockmarketstore.com Daily Yes

www.stockmarketstore.com www.stockmarketstore.com Daily Yes
Stock-Trak Inc. www.stocktrak.com www.stocktrak.com Monthly Yes
StreetInsider.com www.streetinsider.com StreetInsider.com Daily Yes
Striker Securities striker.com www.strikeronline.com Weekly Yes
Technical Analysis, Inc. www.Traders.com Traders.com Advantage Daily Yes
www.Traders.com Working-Money.com Weekly Yes
The Elliott Wave Chart Blog www.wavechart.com The Elliott Wave Chart Page Weekly Yes
The Futures Group, Inc. www.about-online-trading.com www.about-online-trading.com Weekly
The Inger Letter www.ingerletter.com www.ingerletter.com Hourly Yes
The Market Vu Show www.themarketvushow.com TheMarketVuShow.com Hourly Yes
The Mastery Group. LLC www.MasteryNexus.com www.MasteryNexus.com Daily Yes
The Pattern Trapper www.PatternTrapper.com The Pattern Trapper Daily Yes
The Price Futures Group www.pricegroup.com www.pricegroup.com Weekly Yes
timetotrade www.timetotrade.co.uk timetotrade Not provided Yes
Townsend Analytics www.realtick.com http://www.realtick.com Monthly Yes
Track Data Corporation www.trackdata.com www.tracktrade.com &
www.Mytrack.com Weekly Yes
Trade The News www.tradethenews.com Trade The News Hourly Yes
Trader Advocate www.stock-charts-made-easy.com Stock-Charts-Made-Easy.com Monthly Yes
Traders Audio www.tradersaudio.com A-Live Quotes S&P Squawk Box Daily Yes
www.tradersaudio.com www.tradersaudio.com Daily Yes
Traders International www.TradersInternational.com TradersInternational.com Daily Yes
Traders Media www.tradersmedia.com InsideFutures.com Daily Yes
Traders Network Inc. www.tradersnetwork.com www.tradersnetwork.com Daily Yes
Traders Software Company www.traderssoftware.com RealTimeFutures.com Hourly Yes
www.traderssoftware.com SquawkE.com Hourly
TradeSignals.com www.tradesignals.com Tradesignals.com Hourly Yes
Tradetrek.com www.tradetrek.com FXtrek.com Hourly Yes
www.tradetrek.com Tradetrek.com Hourly Yes
Trading Educators Inc. www.tradingeducators.com www.spread-trading.com Weekly
www.tradingeducators.com www.spread-trading.com Daily Yes
www.tradingeducators.com www.tradingeducators.com Weekly
TradingCharts.com, Inc. www.tradingcharts.com DataToGo: Quotes for Cell Phones Hourly Yes
www.tradingcharts.com TFC Commodity Charts & Market Quotes Hourly Yes
www.tradingcharts.com TradingCharts.com Hourly Yes
TradingEducation.com, LLC www.TradingEducation.com www.TradingEducation.com Weekly Yes
TradingMarkets.com www.tradingmarkets.com TradingMarkets.com Hourly Yes
Tradingschool.com www.tradingschool.com Tradingschool.com Monthly
Tradology www.tradology.com www.eminitv.tv Monthly Yes
Treasure State Futures www.treasurestatefutures.com www.treasurestatefutures.com Daily Yes
TTM Web Enterprises www.everytrade.com www.everytrade.com Hourly Yes
TurnSignal Inc. www.turnsignal.biz TurnSignal.biz Not provided Yes
ValuEngine, Inc. www.ValuEngine.com ValuEngine.com Daily Yes
VCIP Systems www.vcipsystems.com www.VCIPSystems.com Daily Yes

ONLINE TRADING SERVICES. Look for the complete listing at Traders.com under Traders’ Resource.
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 27:3 (83-88, 93): Traders’ Resource: Online Trading Servicesby Technical Analysis, Inc.

Company Website Product Updated Quotes?

Vestyl Software, LLC www.stockfetcher.com/ StockFetcher Daily Yes

Walter Bressert, Inc. www.walterbressert.com Walter Bressert Stock Indices & Futures OnLine Monthly
Wolters Kluwer Financial Services www.gainskeeper.com GainsKeeper.com Hourly Yes
www.daytradingshares.com www.daytradingshares.com http://www.daytradingshares.com Weekly Yes
www.daytradingshares.com http://www.stockmarketindian.com Weekly Yes
www.FuturesKnowledge.com www.futuresknowledge.com www.FuturesKnowledge.com Daily Yes
Yahoo! Finance finance.yahoo.com Yahoo! Finance Hourly Yes
Yenman.com www.yenman.com yenman.com Weekly Yes
S&C
The information in Traders’ Resource is the most accurate at the time of posting and is subject to change. Because the vendors posting to Traders’ Resource are responsible for their own listing, Technical Analysis,
Inc. declines any and all liability for any representations made by the businesses and individuals listed. Nor can Technical Analysis, Inc. endorse any business or individual listed on Traders’ Resource. Technical
Analysis, Inc. makes no warranties, express or implied, as to the accuracy and reliability of claims herein. You agree to release Technical Analysis, Inc., together with its respective employees, agents, officers,
directors and shareholders, from any and all liability and obligations whatsoever in connection with or arising from your use of Traders’ Resource. If at any time you are not happy with the information posted to
Traders’ Resource or object to any material within Traders’ Resource, your sole remedy is to cease using it.
This list is updated frequently. If you are aware of a business that should be listed, please email us at Editor@Traders.com.

ONLINE TRADING SERVICES. Look for the complete listing at Traders.com under Traders’ Resource.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
Here is this month’s selection of Traders’Tips, contributed by various
developers of technical analysis software, all to help readers more
easily implement some of the strategies presented in this issue.
Internet users will also find these and most previous Traders’ Tips
at our website at www.Traders.com. To locate the various tips, use
our site’s search engine, or click on the Stocks & Commodities
magazine link on the left-hand side of our home page, then scroll
down to the “This month in S&C” heading in the middle section
and click on“Traders’ Tips.” For previously published Traders’ Tips,
visit the “Back issues archive” located at http://www.traders.com/
Documentation/FEEDbk_docs/backissues.html. Code can then be
copied and pasted into your program.

Most of this month’s Traders’ Tips are

TRADING SYSTEMS

Monte Carlo Conniptions

Trade System Evaluation

based on Donald Pendergast’s article in
this issue, “Trade System Evaluation.”
Here we evaluate a simple trading
system that will enable you to
simulate the results of realistic
trading with a portfolio of stocks.

Other tips are on a topic of the contribu-

by Donald W. Pendergast Jr.

E
valuating your trading sys-
tem performance before you
put real money on the line is
essential to your profitabil-

tors’ choosing.
ity. In this article, we’ll evaluate a
simple momentum-based system
using TradeSim Enterprise, a
Monte Carlo simulation/
backtesting program that enables
a trader to simulate the results of
realistic trading with a portfolio

Code for MetaStock for implementing Figure 1: TRADESTATION, SPECIAL K AND KST. The daily Special K and daily KST indicators
of stocks. Then we’ll dig a little
deeper, learning how to best inter-
pret the statistics, matching sys-
tem performance characteristics
to a trader’s temperament.

A BASIC SYSTEM

are displayed on five years of S&P 500 index data. These indicators were described in Martin
the reversed MACD crossover system
A simple, daily-based momentum
system provides the basis for all
of the statistical analysis here. It’s
a moving average convergence/
divergence (MACD) crossover sys-
tem, but with the entry and exit triggers reversed. The system INITIAL RUN

Pring’s December 2008 Stocks & Commodities article, “The Special K.”
enters at the next day’s open after a buy signal, and it exits at The vehicles chosen for testing were the NASDAQ 100 com-

from the Pendergast’s article is included

the next day’s open after a sell signal. No stop-loss is used. ponent stocks, tested during the period from February 23,
Only long entries were taken, and no margin was used in 1990, through October 23, 2008 (Figure 1). To establish the
testing. All key portfolio trade parameters are listed later in system’s viability, first I loaded all 100 stocks into the
this article. This system is included with TradeSim. MetaStock TradeSim Enterprise exploration. Results con-
firmed that the trading system would have achieved real-
BACKTESTING, MONTE CARLO STYLE world (in this case, when trading the NASDAQ 100 component
Portfolio backtesting is the only practical way to obtain stocks) profitability during February 1990–October 2008.

at the end of this document. Additional

realistic trading system test results, especially if you trade a This time period included two bull markets and two bear
variety of stocks (futures, mutual funds, and so on) at any markets, each of which was significant in intensity and/or
given time. Further, such portfolio backtesting needs to be duration. The key portfolio trade parameters are shown in
simulated using thousands of different iterations to ensure Figure 2.
that any given mix of tradables will reliably attain profitabil- The most important trade system statistics produced by the
ity. TradeSim Enterprise easily automates portfolio 20,000 Monte Carlo runs (iterations) are summarized in
backtesting with its advanced Monte Carlo analysis. Figure 3.

code is presented here as contributed Market System Analyzer, and Rina. Costs for these products
10 • • S &C

by software developers. range from free to several thousand dollars.

Readers will find our Traders’ Tips section in its entirety at
the Stocks & Commodities website at www.Traders.com in
the Traders’ Tips area, from where the code can be copied Special K
and pasted into the appropriate program. In addition, the Martin Pring’s article “The Special K” (Stocks & Com-
code for each program is usually available at the respective modities, December 2008) describes a timing indicator that
software company’s website. Thus, no retyping of code is seeks to identify the direction of the primary trend, along with
required for Internet users. short-term buy and sell signals and trade reversal signals.
(See Figure 1.)
Special K is based on the Kst (Know Sure Thing) indica-
tor that Pring developed in the 1990s. Special K is defined in
terms of daily and weekly bars. The daily Special K, weekly
Special K, and Kst code are all provided here.
To download the EasyLanguage code for this study, go to the
F MEATSTOCK: REVERSED MACD CROSSOVER SYSTEM TradeStation and EasyLanguage Support Forum (https://www.
See the sidebar to Donald Pendergast’s article in this issue, tradestation.com/Discussions/forum.aspx?Forum_ID=213).
“Trade System Evaluation,” for the MetaStock code to imple- Search for the file “PringAndPendergast.eld.”
ment Pendergast’s Macd crossover technique.
Strategy: Pendergast Crossover

inputs:
FastLength( 9 ),
SlowLength( 26 ),
F TRADESTATION: MONTE CARLO System Evaluation / MACDLength( 9 ) ;
SPECIAL K
variables:
Donald Pendergast’s article in this issue, “Trade System MACDValue( 0 ),
Evaluation,” describes a method for performing Monte Carlo XAvgValue( 0 ) ;
simulations and provides a simple strategy to demonstrate the
process. Strategy code in EasyLanguage is presented here. MACDValue = MACD( Close, FastLength, SlowLength ) ;
XAvgValue = XAverage( MACDValue, MACDLength ) ;
TradeStation relies on external add-ons to perform Monte
Carlo simulations of strategies. There are active discussions if XAvgValue crosses over MACDValue then
in our support forums on the merits of various Monte Carlo Buy next bar market ;
add-ons. These discussions mention the following products
if XAvgValue crosses under MACDValue then
(not a recommendation of any particular add-on): ProSizer, SellShort next bar at market ;
@Risk, Portfolio, MC Sim, Risk Analyzer, TreeAge Pro,

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
Indicator: Daily Special K

inputs: P1( 100 ), P2( 100 ) ;

variables: SpecialK_D( 0 ), SpecialK_MA( 0 ) ;

SpecialK_D = Average( RateOfChange( Close, 10 ), 10 )

+ Average( RateOfChange( Close, 15 ), 10 ) * 2
+ Average( RateOfChange( Close, 20 ), 10 ) * 3
+ Average( RateOfChange( Close, 30 ), 15 ) * 4
+ Average( RateOfChange( Close, 50 ), 50 )
+ Average( RateOfChange( Close, 65 ), 65 ) * 2
+ Average( RateOfChange( Close, 75 ), 75 ) * 3
+ Average( RateOfChange( Close, 100 ), 100 ) * 4
+ Average( RateOfChange( Close, 195 ), 130 )
+ Average( RateOfChange( Close, 265 ), 130 ) * 2
+ Average( RateOfChange( Close, 390 ), 130 ) * 3
+ Average( RateOfChange( Close, 530 ), 195 ) * 4 ;

SpecialK_MA = Average( Average( SpecialK_D, P1 ), P2 ) ;

Plot1( SpecialK_D, “SpecialK_D” ) ;

Plot2( SpecialK_MA, “SpecialK_MA” ) ; Figure 2: eSIGNAL, REVERSED MACD CROSSOVER. This sample eSignal chart
Plot3( 0, “ZeroLine” ) ; shows the MACD and MACD signal indicators. The study is a long-only system that
colors the prices bars lime green to indicate a long position and black when no
position is in force.
Indicator: Weekly Special K
inputs: P1( 52 ), P2( 26 ) ;
variables: SpecialK( 0 ), SpecialK_MA( 0 ) ;

SpecialK = XAverage( RateOfChange( Close, 4 ), 4 )

+ XAverage( RateOfChange( Close, 5 ), 5 ) * 2
+ XAverage( RateOfChange( Close, 6 ), 6 ) * 3 F eSIGNAL: Reversed macd crossover system
+ XAverage( RateOfChange( Close, 8 ), 8 ) * 4
+ XAverage( RateOfChange( Close, 10 ), 10 ) For this month’s Traders’ Tip, we’ve provided the eSignal
+ XAverage( RateOfChange( Close, 13 ), 13 ) * 2 formula, Macd_RevCrossover.efs, based on the formula
+ XAverage( RateOfChange( Close, 15 ), 15 ) * 3 code from Donald Pendergrast’s article in this issue, “Trade
+ XAverage( RateOfChange( Close, 20 ), 20 ) * 4
+ XAverage( RateOfChange( Close, 39 ), 26 ) System Evaluation.”
+ XAverage( RateOfChange( Close, 52 ), 26 ) * 2 The formula simply plots the Macd and Macd signal
+ XAverage( RateOfChange( Close, 78 ), 26 ) * 3 indicators (Figure 2). The formula contains parameters that
+ XAverage( RateOfChange( Close, 104 ), 39 ) * 4 ;
may be configured through the Edit Studies option to change
SpecialK_MA = Average( Average( SpecialK, P1 ), P2 ) ; the fast length, slow length, and smoothing. The study is a
long-only system that colors the price bars lime green to
Plot1( SpecialK, “SpeclK” ) ;
Plot2( SpecialK_MA, “SpeclK_MA” ) ; indicate a long position and black when no position is in
Plot3( 0, “ZeroLine” ) ; force. The formula is also compatible for backtesting in the
Strategy Analyzer.
Indicator: Daily KST To discuss this study or download a complete copy of the
variables: DKST( 0 ) ; formula code, please visit the Efs Library Discussion Board
forum under the Forums link at www.esignalcentral.com or
DKST = Average( RateOfChange( Close, 10 ), 10 )
+ Average( RateOfChange( Close, 15 ), 10 ) * 2 visit our Efs KnowledgeBase at www.esignalcentral.com/
+ Average( RateOfChange( Close, 20 ), 10 ) * 3 support/kb/efs/. The eSignal formula scripts (Efs) are also
+ Average( RateOfChange( Close, 30 ), 15 ) * 4 ; available for copying and pasting from the Stocks & Com-
Plot1( DKST, “Daily KST” ) ; modities website at www.Traders.com.
Plot2( 50, “50” ) ;
Plot3( -50, “-50” ) ;
/*********************************
Provided By: 
This article is for informational purposes. No type of trading eSignal (Copyright c eSignal), a division of Interactive Data
or investment recommendation, advice, or strategy is being made, Corporation. 2008. All rights reserved. This sample eSignal
given, or in any manner provided by TradeStation Securities or its Formula Script (EFS) is for educational purposes only and may
affiliates. be
modified and saved under a new file name. eSignal is not
—Mark Mills responsible
TradeStation Securities, Inc. for the functionality once modified. eSignal reserves the right
A subsidiary of TradeStation Group, Inc. to modify and overwrite this EFS file with each new release.
www.TradeStation.com
Description:       
MACD Reversed Crossover Strategy, by Donald W. Pendergast
Jr.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
  
Version: 1.0 01/08/2009 if(xSignal.getValue(-2) >= xMACD.getValue(-2) &&
xSignal.getValue(-1) < xMACD.getValue(-1) && !Strategy.
Formula Parameters: Default: isLong()) {
Fast Length 12 Strategy.doLong(“Long”, Strategy.MARKET,
Slow Length 26 Strategy.THISBAR);
Smoothing 9 }

Notes: if(xSignal.getValue(-1) > xMACD.getValue(-1) && Strat-

The related article is copyrighted material. If you are not egy.isLong()) {
a subscriber of Stocks & Commodities, please visit www.traders. Strategy.doSell(“Exit Long”, Strategy.MARKET,
com. Strategy.THISBAR);
}
**********************************/
if(Strategy.isLong())
var fpArray = new Array(); setPriceBarColor(Color.lime);
var bInit = false; else setPriceBarColor(Color.black);
var bVersion = null;
return new Array(xMACD.getValue(0), xSignal.getVal-
function preMain() { ue(0));
setPriceStudy(false); }
setShowTitleParameters( false );
setStudyTitle(“MACD Reversed Crossover Strategy”); function verify() {
setColorPriceBars(true); var b = false;
setDefaultPriceBarColor(Color.black); if (getBuildNumber() < 779) {
setCursorLabelName(“MACD”, 0); drawTextAbsolute(5, 35, “This study requires version 8.0 or
setCursorLabelName(“Signal”, 1); later.”,
setDefaultBarFgColor(Color.green, 0); Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
setDefaultBarFgColor(Color.red, 1); RELATIVETOLEFT|Text.BOLD|Text.LEFT,
setDefaultBarThickness(2, 0); null, 13, “error”);
setDefaultBarThickness(2, 1); drawTextAbsolute(5, 20, “Click HERE to upgrade.@
   URL=http://www.esignal.com/download/default.asp”,
Color.white, Color.blue, Text.RELATIVETOBOTTOM|Text.
var x=0; RELATIVETOLEFT|Text.BOLD|Text.LEFT,
fpArray[x] = new FunctionParameter(“FastLength”, FunctionPa- null, 13, “upgrade”);
rameter.NUMBER); return b;
with(fpArray[x++]){ } else {
setName(“Fast Length”); b = true;
setLowerLimit(1); }
setDefault(12); return b;
} }
fpArray[x] = new FunctionParameter(“SlowLength”, FunctionPa-
rameter.NUMBER);
with(fpArray[x++]){
setName(“Slow Length”);
—Jason Keck
setLowerLimit(1); eSignal, a division of Interactive Data Corp.
setDefault(26); 800 815-8256, www.esignalcentral.com
}
fpArray[x] = new FunctionParameter(“Smoothing”, FunctionPa-
rameter.NUMBER);
with(fpArray[x++]){
setName(“Smoothing”);
setLowerLimit(0);
setDefault(9); F AMIBROKER: Reversed macd crossover system
} In “Trade System Evaluation” in this issue, author Donald
} Pendergast suggests that realistic system performance evalu-
var xMACD = null; ation can be achieved by means of series of Monte Carlo tests
var xSignal = null; that randomly pick candidates for trading.
Implementing such random-pick series of tests is easy in
function main(FastLength, SlowLength , Smoothing) {
AmiBroker, thanks to its built-in ranking and scoring algo-
if (bVersion == null) bVersion = verify(); rithm that allows you to pick the trades based on user-defined
if (bVersion == false) return;   scores. All signals are sorted by position score on bar-by-bar
if (getCurrentBarIndex() == 0) return; basis, and only top-N signals are traded.
All this happens using the standard AmiBroker portfolio
if ( bInit == false ) { backtester, and it does not require any external expensive
xMACD = macd(FastLength, SlowLength, Smoothing);
xSignal = macdSignal(FastLength, SlowLength, Smoothing); tools.
bInit = true; Implementing random picks requires adding just one line
} to your existing system code (PositionScore = 100 * mt-
if (xSignal.getValue(-1) == null) return; RandomA();). It is worth noting that AmiBroker features a

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
LISTING 1

// General-purpose MC part
HowManyMCSteps = 20000; // adjust that to change the number of
MC tests

PositionScore = 100 * mtRandomA();

// that is single-line that causes random picking of signals

Step = Optimize(“Step”, 1, 1, HowManyMCSteps , 1 );

// this is dummy variable, not used below

// The trading system itself

// ( you may enter your own system below instead of one from the article )

NumPos = 8; // maximum number of open positions

SetOption(“MaxOpenPositions”, NumPos );
SetPositionSize( GetOption(“InitialEquity”) / NumPos, spsValue );
// as in the article - no compounding of profits
// SetPositionSize( 100 / NumPos, spsPercentOfEquity );
// uncomment this for compounding profits

// signals
s = Signal( 12, 26, 9 );
m = MACD( 12, 26 );
Buy = Cross( s, m );
Sell = Cross( m, s );
Figure 3: AMIBROKER, MONTE CARLO SIMULATION. This list shows the results SetTradeDelays( 1, 1, 1, 1 ); // trade with one bar delay on open
of Monte Carlo test runs of the system presented in Donald Pendergast’s article price
sorted by Net % Profit. Such result lists can be copied and pasted into Excel (by just BuyPrice = Open;
pressing Ctrl+C) and from there, one can easily create a distribution chart of any SellPrice = Open;
system metric using Tools->Data Analysis, “histogram” option.
—Tomasz Janeczko
amibroker.com
built-in high-grade random number generator — the Mersene
Twister — which is superior to standard generators found in
other software. The choice of a high-quality random number
generator is essential in Monte Carlo applications.
A ready-to-use formula for the article is presented in Listing F WEALTH-LAB: Reversed macd crossover system
1. To perform series of tests using random-picking, choose It’s not at all common to encounter a strategy that’s profitable
Tools->Optimize from the Formula Editor menu. The result when reversing the entry and exit signals, but simplicity and
will be the list of performance statistics for each individual metrics generated by the reverse Macd strategy (described
step of the optimization that is equivalent to one Monte Carlo in Donald Pendergast’s article in this issue, “Trade System
test run, as shown in Figure 3. Evaluation”) merit further investigation.
Before testing, you may need to adjust your system test Figure 4 shows the results from a Monte Carlo lab “Trade
settings and adjust the filter to match the basket you want to Scramble” using the results from a weekly simulation from
test on. It is worth noting that the author’s claim that Monte 1990. We found that running the strategy with weekly data
Carlo tests gives realistic results, in this case, is not true, tended to increase profit and reduce drawdown — another
simply because he ignored the single, most important factor uncommon combination! Tradability may be further increased
influencing the results — the survivorship bias. When testing by installing a 20% stop-loss, corresponding to a 2.4% max
for long periods of time (as in the period used in the article drawdown per position at 12% of equity sizing.
from 1990 until the present), one must account for delisted Since the Nasdaq 100 constituents have had a more than
stocks and changes in index component listing over the course 200% turnover since 1995, it’s probably worthwhile to revisit
of years when a test is performed. Failing to do that means the this strategy with a dynamic WatchList that represents the
tests are performed on winners (survivors) only who stayed current index.
in business through the years-long period, and this generates
WealthScript code (version 3/4):
a large positive bias on the results. Once delisted stocks are
included, the results drop significantly. var Bar, macdPane, hMACD, havgMACD: integer;
Fortunately, it’s possible to account for delisted stocks us- macdPane := CreatePane( 100, true, true );
ing AmiBroker with data sources such as PremiumData that hMACD := MACDSeries( #Close );
havgMACD := EMASeries( hMACD, 9 );
include historical data for delisted stocks. To do this, one PlotSeries( hMACD, macdPane, #Maroon, #Thick );
needs to switch active watchlists every time the Nasdaq 100 PlotSeries( havgMACD, macdPane, #Black, #Thick );
index is modified (see http://www.amibroker.com/members/
for details). for Bar := 80 to BarCount - 1 do

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS

Figure 4: WEALTH-LAB, MONTE CARLO SIMULATION. Shown here is a Monte Figure 5: NeuroShell, REVERSED MACD CROSSOVER SYSTEM. Here is the
Carlo Lab Trade Scramble of weekly simulated trades, with no options selected. reversed MACD crossover system in NeuroShell Trader.

begin
if LastPositionActive then
whether the system parameters should be optimized per ticker
begin symbol or across the entire portfolio of ticker symbols. After
if CrossUnder( Bar, havgMACD, hMACD ) then backtesting the trading strategy, use the “Detailed Analysis
SellAtMarket( Bar + 1, LastPosition, ‘’ ); …” button to view the backtest and trade-by-trade statistics
end
else if CrossOver( Bar, havgMACD, hMACD ) then
for the strategy.
BuyAtMarket( Bar + 1, ‘’ ); Users of NeuroShell Trader can go to the Stocks & Com-
end; modities section of the NeuroShell Trader free technical sup-
port website to download a copy of this or any past Traders’
—Robert Sucher Tips. See Figure 5 for a sample chart.
www.wealth-lab.com —Marge Sherald, Ward Systems Group, Inc.
301 662-7950, sales@wardsystems.com
www.neuroshell.com

F NEUROSHELL TRADER: Reversed macd

crossover system
The reversed Macd crossover system described by F AIQ: Reversed MACD crossover system
Donald Pendergast in his article in this issue, “Trade System The Aiq code for the reversed Macd crossover
Evaluation,” can be implemented in NeuroShell Trader by system described in Donald Pendergast’s article in
combining a few of NeuroShell Trader’s 800+ indicators and this issue, “Trade System Evaluation,” is shown here. In the
trading strategy wizard. article, Pendergast uses Monte Carlo testing on a portfolio of
To recreate the system, select “New Trading Strategy …” the Nasdaq 100 stocks.
from the Insert menu and enter the following formula in the The suggested system does not include a sorting algorithm to
appropriate locations of the Trading Strategy Wizard: choose trades when there are more trades than we can take on
any single day based on our capitalization and position sizing
Buy long when all of the following conditions are true: rules. Instead, the author suggests that we randomly choose
CrossAbove( MACDSignal(Close,9,12,16), MACD(Close,12,26) ) the trades that are to be taken using Monte Carlo analysis,
which samples trades without replacement. In addition, from
Sell long when all of the following conditions are true: the description in the article, it appears that the order of the
CrossBelow( MACDSignal(Close,9,12,16), MACD(Close,12,26) ) trades is not randomized. In order to apply this type of Monte
Carlo analysis to a system, I will make several assumptions
You can apply the system to as many ticker symbols as regarding the characteristics of the system and how the testing
desired, in this case the entire Nasdaq 100, by selecting will proceed:
“Add/Remove Chart Pages …” from the Format menu. If
you have NeuroShell Trader Professional, you can also choose

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
profit and drawdown amounts, even with systems that take
all trades generated.
This analysis might be useful for more complex systems
that use stops to enter. In this case, we can’t use a sorting
algorithm in backtesting because we don’t know which stop
orders will be hit the next day after the setup conditions are
true. In any case, we can perform an analysis similar to the
one run by Pendergast using a free add-in program called
“TradeIt!” that is specifically designed to work with the Aiq
software. In Figure 6, I used the add-in program to generate 20
equity curves running the system on the Nasdaq 100 list of
stocks. The equity curve graphic is helpful in visually seeing
how much variance there is between the possible equity runs.
The software also produces a numerical report as shown in
Figure 6: AIQ, REVERSED MACD CROSSOVER. Shown here are 20 equity curves the table in Figure 7.
produced by the reverse MACD system that were generated by randomly choosing The code can be downloaded from the Aiq website at www.
which trades to take when there were more trades than could be taken.
aiqsystems.com and also from www.TradersEdgeSystems.
com/traderstips.htm.

!! TRADE SYSTEM EVALUATION

! Author: Donald W. Pedergast Jr., TASC March 2009
! Coded by: Richard Denning
! www.TradersEdgeSystems.com

C is [close].
MACD is expavg(C,12) - expavg(C,26).
MACDsig is expavg(MACD,9).
! LONG ENTRY RULE FOR INVERSE MACD CROSS OVER (LE):
LE if MACD < MACDsig and valrule(MACD > MACDsig,1).

! LONG EXIT RULE FOR INVERSE MACD CROSS OVER (LX):

LX if MACD > MACDsig and valrule(MACD < MACDsig,1).

—Richard Denning
richard.denning@earthlink.net
Figure 7: AIQ, ANALYSIS OF REVERSED MACD CROSSOVER EQUITY CURVES. for AIQ Systems
This table shows a numerical summary and statistical analysis of the 20 equity curves
shown in Figure 6.
F TRADERSSTUDIO: Reversed MACD crossover system
The TradersStudio code for the reversed Macd crossover
1) The system must generate more trades than can be system presented in the article in this issue, “Trade System
taken when capitalization is applied, Evaluation” by Donald Pendergast, is given here.
2) Trades are not reordered, samples are taken without Although Pendergast applies Monte Carlo testing on a
replacement, and portfolio of the Nasdaq 100 stocks, I wanted to try the Monte
3) A sorting algorithm is not part of the system. Carlo approach as it might apply to testing the reverse Macd
system on futures. I loaded a portfolio of futures that included
If we had a system where there were no excess trades and two of the more liquid markets from each of the futures sectors.
all trades were taken, or if our system uses a sorting algorithm I then ran the system and examined the results on a market-
to choose trades, then the Monte Carlo analysis would yield all by-market basis. I should note that in the TradersStudio code
the same results and would be of no analytical value. For the provided here, I modified the system so that it can trade long
simple system used for illustration purposes, since the trades or short or both based the input “longOnly” (see the notes at
are entered the next day at market, as a system developer, I top of the code listing).
would never randomly choose the trades but would add an In my tests, I used both long and short trading combined.
algorithm, such as sorted rate of change or relative strength, Most of the futures markets that I tested showed net losses
to choose the trades to take. For systems that do not meet the for the test period from November 2002 to January 2009
three requirements, it would be better to use the bootstrap with the default Macd parameters of 12,26,9. One of the
method of sampling, where trades are replaced and hence can markets that showed a profit was heating oil. I decided to
be chosen more than one time. By sampling with replacement, work with just this market. With a single-market system
we could generate multiple equity curves with different total and with futures trading in general, we usually design the

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS

FIGURE 8: TRADERSTUDIO, ANALYSIS OF REVERSED MACD CROSSOVER.

Here are resulting statistics for a variety of Monte Carlo tests on the reversed MACD
system as applied to heating oil futures contract for the period November 2002 to
January 2009.
FIGURE 9: TRADERSTUDIO, REVERSED MACD CROSSOVER SYSTEM. Here is
a sample drawdown distribution using a sample size of 20 with 20,000 random reor-
system to take all the trades that the system generates (after ganizations of the equity curve for the reversed MACD system as applied to heating
oil futures contract for the period November 2002 to January 2009.
filtering), so the type of test that Pendergast performed is
not applicable to futures testing.
A similar type of test using the Monte Carlo approach is to of trades, as is done in many Monte Carlo–type analyses, you
sample drawdowns for the purpose of setting a system profile destroy any serial correlation that may exist in the trading
and setting realistic expectations. I ran a parameter-robustness system. Using an inappropriate chunk size may cause inac-
test on heating oil by optimizing the three Macd parameters curate results that are not reliable. To solve this problem, the
over the in-sample test period of November 2002 to January macro within TradersStudio has a chunk or sample-length
2009. I concluded that the system was robust for heating oil variable that can be changed to suit the system being tested.
because 93% of the optimization sets were profitable and If the system has a tendency for wins to follow wins, then
because it also passed other parameter-robustness tests. the sample size would need to be larger. The bottom half of
In normal system development, I would have run a walk- Figure 8 shows the effect of running the analysis with varying
forward test using TradersStudio’s built-in walk-forward chunk or sample length using a run size of 20,000.
processor, but this was omitted due to a shorter-than-normal In Figure 9, I show the drawdown distribution graph that
publishing deadline. Instead, I just used one of the better results from using a sample size of 20 and 20,000 runs.
parameter sets and proceeded to run several Monte Carlo Additional graphs for other sample sizes will be posted
randomizations to give me an idea of the maximum drawdown. to the websites listed at the end of this tip. As the sample
TradersStudio comes with a preprogrammed macro that does size is increased, the maximum drawdown at the various
Monte Carlo analysis on drawdowns. confidence levels starts to approach the drawdown from
In addition, any other type of sampling technique, such the original trades order. It appears that using too small of
as bootstrapping (sampling with replacement), can be pro- a sample size will overstate the maximum drawdown and
grammed with the macro scripting language. I made a few might cause one to reject a system that has potential. Further
modifications to the built-in macro script for Monte Carlo research is needed to determine the best method of finding
drawdown analysis so as to output additional statistics. The the appropriate sample size.
modified macro script code is not shown here but will be The main benefit of this analysis is to provide a down-to-
posted to the websites listed at the end of this Traders’ Tip. earth expectation of what the system might do in real trading
In Monte Carlo analysis, there is the question of how many regarding the risk of account drawdown and also to provide
runs are sufficient. To answer this question, I simply ran a shutdown point should the maximum drawdown exceed the
several tests with different run lengths as shown in Figure 8. confidence level chosen.
Although 20,000 runs are more than is needed, I ran the rest This code can be downloaded from the TradersStudio website
of the analysis with 20,000 as there is no harm in using too at www.TradersStudio.com ->Traders Resources->FreeCode
many runs. and also from www.TradersEdgeSystems.com/traderstips.
Another important factor in correctly analyzing drawdown htm.
is the trade sampling chunk or serial correlation sample size.
What we are doing in this type of analysis is to take a group
of trades in the original order that they occurred and then re-
organize the order of the chunks. If you do not sample chunks

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
‘ TRADE SYSTEM EVALUATION
‘ Author: Donald W. Pedergast Jr., TASC March 2009
‘ Coded by: Richard Denning
‘ www.TradersEdgeSystems.com

Sub REVERSED_MACD(longOnly,useEquisMACD,macdFastLen,
macdSlowLen,macdSigLen)
‘ if longOnly = 1 then only the long side is traded
‘ if longOnly = -1 then only the short side is traded
‘ if longOnly = 0 then both long and short side is traded
‘ if useEquisMACD = 1 and inputs = C then
‘fast=0.15, slow=0.075 will be used for the inputs
‘and the MACD will match the built-in MACD from Metastock/
Equis
Dim myMACD As BarArray
Dim sigMACD As BarArray
If useEquisMACD = 1 Then
myMACD = MACD_EQUIS(C, 0.15, 0.075)
Else
myMACD = MACD(C,macdFastLen,macdSlowLen,0)
End If FIGURE 10: STRATASEARCH, TRADE SYSTEM EVALUATION. As shown by Donald
sigMACD = XAverage(myMACD, macdSigLen, 0) Pendergast in his article, the Monte Carlo simulations for his MACD reversed crossover
system were profitable 100% of the time.
If longOnly > 0 Then
If CrossesUnder(myMACD,sigMACD,0) Then
Buy(“LE”,1,0,Market,Day)
If CrossesUnder(sigMACD,myMACD,0) Then ExitLong(“SE”,””,1 usage). What we discovered, however, is that there are many
,0,Market,Day) trading rules that perform better when they are similarly re-
Else If longOnly < 0 Then
If CrossesUnder(sigMACD,myMACD,0) Then versed. Thus, most trading rules in StrataSearch are no longer
Sell(“SE”,1,0,Market,Day) designated as long or short only, allowing users to test a variety
If CrossesUnder(myMACD,sigMACD,0) Then ExitShort(“SX”,””,1
,0,Market,Day)
of traditional and reversed usages.
Else As with all our other Traders’ Tips, additional informa-
If CrossesUnder(myMACD,sigMACD,0) Then tion, including plug-ins, can be found in the Shared Area of
Buy(“LE”,1,0,Market,Day)
If CrossesUnder(sigMACD,myMACD,0) Then the StrataSearch user forum. This month’s plug-in contains
Sell(“SE”,1,0,Market,Day) trading rules based on both traditional and reversed Macd
End If
End If implementations. Simply install the plug-in and let StrataSearch
‘custom report to show quick summary of results by market: identify which works best, and which supplemental trading
marketbreakdown2() rules work best alongside the Macd.
End Sub

—Richard Denning //***************************************************************************

// MACD REVERSED CROSSOVER SYSTEM
richard.denning@earthlink.net
//***************************************************************************
for TradersStudio Entry String: CrossBelow(MACD(), mov(MACD(),9,e))
Exit String: CrossAbove(MACD(), mov(MACD(),9,e))

—Pete Rast
Avarin Systems, Inc.
www.StrataSearch.com
F STRATASEARCH: REVERSED MACD CROSSOVER SYSTEM
While the Macd crossover trading system used in Donald
Pendergast’s article in this issue, “Trade System Evaluation,”
may be a rather simple example, Pendergast brings up two very
good points about trading system development. The first is F NINJATRADER: REVERSED MACD CROSSOVER SYSTEM
that there are a variety of ways of examining the performance The Macd reversed crossover system as discussed in “Trade
of a trading system, of which Monte Carlo simulations are System Evaluation” by Donald Pendergast in this issue has
just one. Many traders also look at the surrounding parameter been implemented as a sample strategy available for download
sets of the formulas to ensure the system is robust, while at www.ninjatrader.com/SC/March009SC.zip.
others like to run a full walk-forward analysis for additional Once downloaded, from within the NinjaTrader Control
confirmation. StrataSearch users can examine any of these Center window, select the menu File > Utilities > Import
types of analyses. NinjaScript and select the downloaded file. This strategy is
The second point Pendergast brings up is the surprising for NinjaTrader version 6.5 or greater.
success of the reversed Macd when compared to the tradi- You can review the strategy’s source code by selecting the
tional Macd. When the automated search functionality in menu Tools > Edit NinjaScript > Strategy from within the
StrataSearch was first developed, trading rules were initially NinjaTrader Control Center window and selecting “Macd-
organized into their traditional roles (that is, long and short CrossOver.”

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS

FIGURE 11: NINJATRADER, REVERSED MACD CROSSOVER. This NinjaTrader screenshot shows the MACD reversed crossover strategy backtested in the NinjaTrader
Strategy Analyzer.

NinjaScript strategies are compiled Dlls that run native, not Entry: MACD[Diff,Close,12,26,9,D,1] < 0 AND
interpreted, which provides you with the highest-performance MACD[Diff,Close,12,26,9,D,2] >= 0
possible.
—Raymond Deux & Josh Peng
Exit: MACD[Diff,Close,12,26,9,D,1] > 0 AND
NinjaTrader, LLC MACD[Diff,Close,12,26,9,D,2] <= 0
www.ninjatrader.com
We ran this formula in StrategyDesk on the current list of
Nasdaq 100 securities between January 1, 2000, and December
31, 2008. Based on $10,000 entries with no reinvesting and
including commissions, we received the following results:
F TD AMERITRADE STRATEGYDESK:
TRADE SYSTEM EVALUATION $624,623 net profit
In this issue, author Donald Pendergast discusses the evalua- 67.47% winning trades
tion of trading strategies in his article “Trade System Evalu- Net average trade profit of $79.18
ation.” To demonstrate the metrics provided in StrategyDesk,
we’ll set up and run the Macd crossover strategy discussed This first iteration was run with no cap on portfolio size,
in the article. basically utilizing a never-ending stream of cash. Using the
In the article, Pendergast bases his analysis on a simple portfolio-backtesting capabilities in StrategyDesk, we re-ran
Macd crossover formula that shows positive results. It’s a this experiment using the same variables as above, but on a
simple crossover, but reversed from the more common itera- portfolio size of $100,000, reinvesting gains/losses this time,
tion so that the entry occurs when the Macd crosses below and assuming no margin. Let’s see how the results changed:
the zero line with the exit occurring when the Macd crosses
back above the zero line. In addition, it should be noted that $233,890 net profit
the formula waits until the next day’s open to perform the 67.12% winning trades
entry or exit. Net average trade profit of $70.30
Here is the syntax for this in StrategyDesk:

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS

FIGURE 13: Trade Navigator, REVERSED MACD CROSSOVER. Here is the

FIGURE 12: TD AMERITRADE, REVERSED MACD CROSSOVER. Here are the rule setup in Trade Navigator.
backtesting results for the strategy.

(See Figure 12 for backtesting results.) To set up the Macd reversed crossover short entry func-
The main difference here is that using a limited, not un- tion, repeat the steps above using the following code:
limited, portfolio size will only allow a certain amount of
positions at one time. Crosses Above (MACD (Close , Fast period , Slow period ,
False) , MovingAvgX (MACD (Close , Fast period , Slow period
If you have questions about this formula or functionality, , False) , 9)).1
please call TD Ameritrade’s StrategyDesk help line free of
charge at 800 228-8056 between the hours of 8 a.m. and 8 After you have created the two functions, go to the Strategies
p.m. ET Monday through Friday, or access the Help Center tab in the Trader’s Toolbox. Click on the New button. Click
via the StrategyDesk application. StrategyDesk is a download- the New Rule button. To create the long entry rule, type the
able application free for all TD Ameritrade clients. Regular following code:
commission rates apply.
This article and accompanying illustrative graphics are for IF MACD Reversed Crossover Long Entry (Fast period , Slow
informational purposes only. No type of trading or investment rec- period)
ommendation, advice, or strategy is being made, given, or in any
manner provided by TD Ameritrade or StrategyDesk. Set the Action to “Long Entry (Buy)” and the Order Type
—Jeff Anderson to “Market” (Figure 13). Click on the Save button. Type a
TD AMERITRADE Holding Corp. name for the rule and then click the OK button. Repeat these
www.tdameritrade.com steps for the short entry rule using the following code:
IF MACD Reversed Crossover Short Entry (Fast period , Slow
period)

Set the Action to “Short Entry (Sell)” and the Order Type
F TRADE NAVIGATOR: REVERSED MACD to “Market.” Be sure to have the Allow Entries to Reverse
CROSSOVER SYSTEM option checked on the Settings tab on the Strategy screen.
The Macd reversed crossover system discussed in Donald Save the strategy by clicking the Save button, typing a name
Pendergast’s article in this issue, “Trade System Evaluation,” for the strategy, and then clicking the OK button.
is easy to recreate and test in Trade Navigator. You can test your new strategy by clicking the Run button
First, we set up two functions: Go to the Trader’s Toolbox to see a report, or you can apply the strategy to a chart for a
and select the Functions tab. Click on the New button and visual representation of where the strategy would place trades
type in the following code for Macd reversed crossover over the history of the chart.
long entry: Genesis Financial Technologies has provided this strategy
Crosses Above (MovingAvgX (MACD (Close , Fast period , Slow as a special downloadable file for Trade Navigator. Click on
period , False) , 9) , MACD (Close , Fast period , Slow period the blue phone icon in Trade Navigator, select Download
, False)).1 Special File, type “SC0309,” and click on the Start button.
—Michael Herman
Click on the Save button, type a name for the function, then Genesis Financial Technologies
click the OK button to save the function. www.GenesisFT.com

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS

F VT TRADER: REVERSED MACD CROSSOVER SYSTEM

Our Traders’ Tip is inspired by “Trade System Evaluation”
by Donald Pendergast in this issue. In the article, Pendergast
uses a reversed Macd crossover system to discuss using the
Monte Carlo method of backtesting a trading system.
We’ll be offering the reversed Macd crossover trading
system for download in our client forums. The VT Trader
instructions for creating the sample trading system are as
follows:

Sample Trading System for the Reversed MACD Cross-

over System

1. Navigator Window>Tools>Trading Systems Builder>[New] FIGURE 14: VT TRADER, Reversed MACD crossover System. Here is the reversed
button MACD crossover system attached to a EUR/USD 30-minute candlestick chart.

2. In the Indicator Bookmark, type the following text for Name: MACD (Histogram)
each field: * Checkmark: Indicator Output
Select Indicator Output Bookmark
Name: TASC TASC - 03/2009 - Reversed MACD Crossover System Color: green
Line Width: thin
Short Name: tasc_RevMACD
Line Style: histogram
Label Mask: TASC - 03/2009 - Reversed MACD Crossover Placement: Additional Frame 1
System (MACD: %Pr%,%pershort%,%perlong%,%maTp%,%Sig [OK] button...
%,%TpS%)
[New] button...
3. In the Input Bookmark, create the following variables: Var Name: LongSignal
Name: Long Signal
Description: Displays a buy signal when the Signal Line crosses
[New] button... Name: Pr , Display Name: MACD Price , Type: above the Fast Line
price , Default: close * Checkmark: Graphic Enabled
[New] button... Name: perShort , Display Name: MACD Short MA * Checkmark: Alerts Enabled
Periods , Type: integer , Default: 12 Select Graphic Bookmark
[New] button... Name: perLong , Display Name: MACD Long MA Font […]: Up Arrow
Periods , Type: integer, Default: 26 Size: Medium
[New] button... Name: maTp , Display Name: MACD Short / Long Color: Blue
MA Type , Type: MA type , Default: Exponential Symbol Position: Below price plot
[New] button... Name: Sig , Display Name: MACD Signal MA Select Alerts Bookmark
Periods , Type: integer, Default: 9 Alert Message: Long signal detected! The MACD Signal
[New] button... Name: TpS , Display Name: MACD Signal MA Line crossed above MACD Fast Line.
Type , Type: MA type , Default: Exponential Radio Button: Standard Sound
Standard Sound Alert: others.wav
4. In the Output Bookmark, create the following variables: [OK] button...

[New] button... [New] button...

Var Name: Fast Var Name: ShortSignal
Name: MACD (Fast Line) Name: Short Signal
* Checkmark: Indicator Output Description: Displays a sell signal when the Signal Line crosses
Select Indicator Output Bookmark below the Fast Line
Color: blue * Checkmark: Graphic Enabled
Line Width: thin * Checkmark: Alerts Enabled
Line Style: solid Select Graphic Bookmark
Placement: Additional Frame 1 Font […]: Down Arrow
[OK] button... Size: Medium
Color: Red
[New] button... Symbol Position: Above price plot
Var Name: Signal Select Alerts Bookmark
Name: MACD (Signal Line) Alert Message: Short signal detected! The MACD Signal
* Checkmark: Indicator Output Line crossed below MACD Fast Line.
Select Indicator Output Bookmark Radio Button: Standard Sound
Color: red Standard Sound Alert: others.wav
Line Width: thin [OK] button...
Line Style: solid
Placement: Additional Frame 1 [New] button...
[OK] button... Var Name: OpenBuy
Name: Open Buy
[New] button... Description: In Auto-Trade Mode, it requests a BUY market
Var Name: OsMA order to open a BUY trade

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
* Checkmark: Trading Enabled CloseBuy:= ShortSignal AND (EventCount(‘OpenBuy’) >
Select Trading Bookmark EventCount(‘CloseBuy’));
Trading Action: BUY
Trader’s Range: 10 OpenSell:= ShortSignal AND (EventCount(‘OpenSell’) =
[OK] button... EventCount(‘CloseSell’));
CloseSell:= LongSignal AND (EventCount(‘OpenSell’) >
[New] button... EventCount(‘CloseSell’));
Var Name: CloseBuy
Name: Close Buy 6. Click the “Save” icon to finish building the reversed Macd
Description: In Auto-Trade Mode, it requests a SELL market
order to close a BUY trade crossover trading system.
* Checkmark: Trading Enabled
Select Trading Bookmark To attach the trading system to a chart, select the “Add
Trading Action: SELL
Trader’s Range: 10 Trading System” option from the chart’s contextual menu,
[OK] button... select “TASC - 03/2009 – Reversed Macd crossover system”
[New] button... from the trading systems list, and click the [Add] button. See
Var Name: OpenSell Figure 14 for a sample chart.
Name: Open Sell
Description: In Auto-Trade Mode, it requests a SELL market
To learn more about VT Trader, visit www.cmsfx.com.
order to open a SELL trade Forex trading involves a substantial risk of loss and may not be
* Checkmark: Trading Enabled suitable for all investors.
Select Trading Bookmark —Chris Skidmore
Trading Action: SELL
Trader’s Range: 10 Visual Trading Systems, LLC (courtesy of CMS Forex)
[OK] button... (866) 51-CMSFX, trading@cmsfx.com
www.cmsfx.com
[New] button...
Var Name: CloseSell
Name: Close Sell
Description: In Auto-Trade Mode, it requests a BUY market
order to close a SELL trade
* Checkmark: Trading Enabled
Select Trading Bookmark
Trading Action: BUY
Trader’s Range: 10 F TRADE-IDEAS: REVERSED MACD CROSSOVER SYSTEM
[OK] button... “I measure what’s going on, and I adopt to it. I try to get my
ego out of the way. The market is smarter than I am so I bend.”
5. In the Formula Bookmark, copy and paste the following —Martin Zweig
formula: For this month’s Traders’ Tip, we offer an alternative to
//Provided By: Visual Trading Systems, LLC & Capital Market Donald Pendergast’s use of Monte Carlo analysis on a simple
Services, LLC Macd crossover system. While we agree that backtesting is a
//Copyright (c): 2009
//Notes: March 2009 T.A.S.C. magazine practical way to obtain trading system test results, we differ
//Notes: “Monte Carlo Conniptions: Trade System Evaluation” by on the point of whether that requires thousands of different
Donald W. Pendergast, Jr.} iterations across years and years of data. The most credible
//Description: Reversed MACD Crossover System
//File: tasc_RevMACD.vttrs backtesting methodologies weigh the most recent results more
so than those in the past. In the real trading world, as a trader,
{Error Control}
I want to know what’s working now — not what worked well
Error_MacdShMaPeriods:= Error(perShort=0,’Input Error: “MACD in ’00, ’06, or even most of ’08. Fortunately, we present our
Short MA Periods” cannot equal zero!’);
Error_MacdLgMaPeriods:= Error(perLong=0,’Input Error: “MACD backtesting tool, The OddsMaker, and show how (given a
Long MA Periods” cannot equal zero!’); strategy or system) your set of trading plan rules can generate
Error_MacdMaComparison:= Error(perShort>=perLong,’InputErr high probabilities for winning trades in any market — in this
or: “MACD Short MA Periods” cannot be greater than or equal to
“MACD Long MA Periods”!’); case, with Pendergast’s Macd pattern.
Error_MacdSignalMaPeriods:= Error(Sig=0,’Input Error: “MACD This strategy is based on the Trade-Ideas inventory of alerts
Signal MA Periods” cannot equal zero!’);
and filters found in Trade-Ideas Pro. The trading rules are
{MACD} modeled and backtested in its add-on tool, The OddsMaker.
Fast:= Mov(Pr,perShort,maTp) - Mov(Pr,perLong,maTp); Here is the strategy based on finding over-extended moves
Signal:= Mov(Fast,Sig,TpS);
OsMA:= Fast-Signal;
in price:
Like Pendergast’s system, we look for stocks within the
{Signal Long and Short} Nasdaq 100 (which we create as a separate symbol list
LongSignal:= Cross(Signal,Fast); within Trade-Ideas Pro) exhibiting daily-based momentum as
ShortSignal:= Cross(Fast,Signal); triggered by an Macd. In Trade-Ideas we call this signal the
{Auto-Trading Functionality; Used in Auto-Trade Mode Only} “Running up or down confirmed” alert. We also do not use
a stop-loss for this system. Unlike Pendergast’s system, we
OpenBuy:= LongSignal AND (EventCount(‘OpenBuy’) =
EventCount(‘CloseBuy’));
apply a slightly different set of trading rules to accommodate

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS

FIGURE 15: TRADE-IDEAS, MACD crossover System. Here is the combination

of alerts and filters used to create the “long MACD running up” strategy.

FIGURE 17: TRADE-IDEAS, MACD crossover System. Here are the OddsMaker
results for the “long MACD running up” strategy.

• Running Up (confirmed); with a ratio value of 5

• Min Price Filter = 5 ($)
FIGURE 16: TRADE-IDEAS, ODDSMAKER MODULE. This shows the OddsMaker • Max Spread = 15 (pennies)
backtesting configuration for the Trade-Ideas “long MACD running up” strategy. • Min Distance from Inside Market Filter = 0.1 (%)
• Min Daily Volume Filter = 300,000 (shares/day)
our and The OddsMaker’s preference for results based on
recentness. We enter at the time of the signal (versus waiting The definitions of these indicators appear here: http://www.
until the next day’s open after the buy signal) and hold the trade-ideas.com/Help.html.
trade until the open three days or until we receive a sell signal
(versus waiting until the next day’s open after the sell signal). Trading rules
The results speak for themselves for the three weeks ending That’s the strategy, but what about the trading rules? How
1/6/2009 (though they will test a trader’s risk appetite): a 53% should the opportunities the strategy finds be traded? Here is
success rate where average winners are almost twice as large what The OddsMaker tested for the past three weeks ending
as average losers. 1/6/2009 given the following trade rules:
• On each alert, buy the symbol: go long (price moves up
Provided by:
Trade Ideas (copyright © Trade Ideas LLC 2009). All rights reserved.
to be a successful trade)
For educational purposes only. Remember these are sketches meant • Schedule an exit for the stocks at the open after three
to give an idea how to model a trading plan. Trade-Ideas.com and days
all individuals affiliated with this site assume no responsibilities for
trading and investment results. • Exit the position if the same symbol triggers a “running
down (confirmed)” alert set at the same ratio of 5
Description: “LONG MACD Running Up”
• Start trading from the open
Type the following string directly into Trade-Ideas Pro using • Stop new trades 60 minutes before the end of each day’s
the “Collaborate” feature (right-click in any strategy window) close.
(if typing, spaces represent an underscore):
The OddsMaker summary provides the evidence of how
http://www.trade-ideas.com/View.php?O=100000_1_0&QRU well this strategy and our trading rules did. The settings are
C=5&MaxDNbbo=0.1&MaxSpread=15&MinPrice=5&MinVol
=300000&WN=LONG+MACD+Running+Up+HOLD+3d+Ope shown in Figure 16.
n+-+EXIT+RDC+%285%29+-+No+Trades+60m+B4+Close+- The results (last backtested for the three-week period ended
+No+SL&SL=8 1/6/2009) are shown in Figure 17. You can better understand
these backtest results from The OddsMaker by consulting the
This strategy also appears on the Trade-Ideas blog at http:// user’s manual at http://www.trade-ideas.com/OddsMaker/
marketmovers.blogspot.com/ or you can build the strategy Help.html.
from Figure 16. That screen capture shows the configuration —David Aferiat, Trade Ideas LLC
of this strategy, where one alert and four filters are used with david@trade-ideas.com, www.trade-ideas.com
the following specific settings:

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (70-82): Traders’ Tips by Technical Analysis, Inc.

TRADERS’ TIPS
F METASTOCK: REVERSED MACD CROSSOVER SYSTEM ExitTrigger := Ref(Cross(MACD( ),Mov(MACD( ),9,E)),-1);
ExitPrice := OPEN;
The MetaStock code for the reversed Macd crossover system InitialStop := 0; { no initial stop used }
from “Trade System Evaluation” by Donald Pendergast in
this issue is below. ExtFml( “TradeSim.Initialize”);
ExtFml( “TradeSim.RecordTrades”,
MACD REVERSED CROSSOVER SYSTEM CODE “MACD Crossover Reversed”, { Trade Data Filename }
For MetaStock Exploration LONG, {Trade Position Type}
EntryTrigger, {Entry Trigger}
Long entry: EntryPrice, { Entry Price }
Cross(Mov(MACD( ),9,E),MACD( )) InitialStop, {Optional Initial Stop}
ExitTrigger, {Exit Trigger}
Short entry: ExitPrice, {Exit Price}
START); {Recorder Control}
Cross(MACD( ),Mov(MACD( ),9,E))

For MetaStock TradeSim Enterprise Exploration: —Donald W. Pendergast Jr.

www.chartw59.com, trader@chartw59.com.
EntryTrigger := Ref(Cross(Mov(MACD( ),9,E),MACD( )),-1);
EntryPrice := OPEN; S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (68): Websites For Traders: ForexFactory.com by Jayanthi Gopalakrishnan

WWW.FOREXFACTORY.COM
Gone are the days when the foreign
exchange market, the world’s largest
over-the-counter market, is restricted to
banks, hedge funds, and other large
financial institutions. With trading vol-
ume growing even in these volatile
times, the pressure is strong for those
services that want to meet the needs of
the retail forex trader.
ForexFactory.com, a popular finan-
cial website focused on providing ser-
vices to forex traders, has added new
features to its website in response to the
increasing number of retail forex traders.
Forexfactory.com is a community of
forex traders. Members of this commu-
nity can participate in forums, read forex-
related market news and commentary,
and gain access to the forex calendar. We
first reviewed ForexFactory.com back FIGURE 1: FOREXFACTORY.COM CALENDAR. This is what you will see when you open up the calendar.
in October 2007, and since then, the
forex calendar (Figure 1) has had some
new features added to it, which are
worth looking at.
The calendar updates almost in real-
time and displays a list of all events that
could affect the forex markets by date,
time, and currency. It also displays the
severity of the impact that the news re-
lease may have on the forex market
through the use of a color-coded “fac-
tory” icon. In the case of an economic
data release, you will see the actual fore-
cast and previous releases if applicable.
You do have the option of filtering the
news stories based on certain currencies
or based on the severity of the impact.
The “Detail” view is where you will
find what is relevant to your trading.
For example, when I viewed the detail
for the NZIER Business Confidence (Fig-
ure 2), an event that was expected to
have a high impact, it displayed the
“Specs” and “History.”
The Specs give traders a brief descrip- FIGURE 2: NZIER BUSINESS CONFIDENCE SURVEY. Here you see what selecting the Detail view brings up.
tion of what that data measures, its usual
effects, how often it is released, its next
related to this news release.
release, how to apply it, and why a trader ForexFactory members Registration is free. But you can eas-
should find this information useful. can participate in ily navigate around the site and see what
The History section will display the
data for the last two years for this spe- forums, read forex- is offered. If you think the information
will be useful to you, by all means
cific data. This gives you some idea of related news, and gain register on the site.
where the current release is with respect access to the forex —Jayanthi Gopalakrishnan, Editor
to the previous two years. You can also calendar.
see links to other news stories that are S&C

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (56-57): Working Money: A Collapse Or A Bubble? by Thomas Maskell

TRADER’S NOTEBOOK DJIA The 1929 Stock Market Crash

500

A Collapse 400
A
381

Or 300

A Bubble? 200
194

Or is it the opportunity C
of a lifetime? 100

B
by Thomas Maskell
64 41
1910 1920 1930 1940

Be afraid. Be very afraid! The FIGURE 1: DOW JONES INDUSTRIAL AVERAGE (1910-45). From 1910 to 1923, the stock market was chugging
politicians are coming to along in a modest trading channel. Then in the 1920s it began to roar and the stock market jumped out of its channel
save us. Whenever they turn their in 1924 and skyrocketed in 1929. Then the market collapsed and the economy fell into depression. Then in 1932
attention toward the free market, it’s the bear went into hibernation.
time to keep a wary eye, prepare for
a bumpy ride, and hang onto your wallets. The only people who But look closely at Figure 1. Did the market collapse? Or
are likely to be saved are themselves and their friends. You will did a bubble burst?
be on your own. This latest downturn in the stock market is no
exception. BURSTING BUBBLES AND THE INTERNET
To survive this onslaught of do-goodism by our politi- Figure 2 is an excellent example of a stock market bubble. It
cians, you will need a clear perspective of what has happened compares a bundle of Internet stocks to the broader index of the
and what is going to happen. The stock market is all about the Standard & Poor’s 500. At the end of 1998, the Internet stocks
future. A successful investor is a seer, and a successful seer is skyrocketed to unbelievable heights. By 2000, as a group, they
mindful of history. So in this view of today’s market, we shall had outperformed the broader market tenfold. Unfortunately,
put this current market downturn into historical context and or more accurately, realistically, the bubble burst in 2000, and
look into the future to determine a reasonable course of action. the Internet stocks fell back into line with the S&P 500.
How did they get so out of whack? The answer is: Who
THE CRASH OF 1929 cares? The whys are always different; the result is always the
The standard by which all stock market downturns are same. In the case of the Internet, it was a mix of new
measured is the big one — the 1929 crash. What can we technology, misguided hype, and faulty metrics. People bought
learn from it? unprofitable dotcoms based on measurements such as price-
Figure 1 charts the Dow Jones Industrial Average (DJIA) to-sales ratios and burn rates. The pundits were proclaiming
from 1910 to 1945. This encompasses the 1929 crash with a “new economy,” where profits were passé. However, no
enough pre- and post-years to place it in perspective. The matter how much the pundits protest reality, they cannot
perspective we are looking for is a technical one. We are not change it. Profits do matter, and the dotcoms burned them-
interested in the fundamentals or the financials or the exuber- selves out. The bubble burst.
ance of the margin buyers. We are only interested in what the However, for our purposes, the bubble is not the whole
chart says. The chart will always tell us what happened with story. The story is in the aftermath. After the Internet bubble
factual certainty. We will leave the uncertainty of the “whys” burst, the stocks began to follow a course that was a reason-
to the pundits. able reflection of the Internet’s potential. From 2002 to 2006,
What happened in 1929 was that the stock market was Internet stocks grew at twice the rate of the S&P 500, which
chugging along in a modest trading channel from 1910 to was reasonable for the Internets, given their status as an
1923: a sane and sensible pattern, given the nature of the US emerging market. If you had the foresight and courage to buy
economy. Then the 1920s began to roar and the stock market into the Internet boom after the pop (mid-2002), by 2007, you
jumped out of its channel in 1924 and skyrocketed to its peak would have quadrupled your money, a more than 40% annual
— 391 — in 1929. rate of return.
You don’t have to be an accomplished chartist to guess
what happened next. The bottom fell out, the market col- 1929 REVISITED
lapsed, and the economy fell into a depression. Of course, this Keeping that recent bubble in mind, let’s revisit the crash of
didn’t all happen overnight. It wasn’t until 1932 that the bear 1929. Again, the “whys” are numerous, but the result is the
market went into hibernation with a DJIA of 41. Around then, same. So let’s add a couple of trendlines to the raw price data
the US economy began slipping into the Great Depression. in Figure 1 to get Figure 3, and it is easy to see that the stock
The exuberance of the Roaring Twenties and the collapse of market didn’t really crash in 1929. It bubbled and then burst.
the stock market have cast a shadow over the US economic Even if you believed the hype surrounding the Roaring
psyche that is still visible today. Twenties and operated on a 10% uptrend assumption (blue
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (56-57): Working Money: A Collapse Or A Bubble? by Thomas Maskell

The stock market didn’t Price Comparison Between SP500

really crash in 1929. It and an Index of Internet Stocks
bubbled and then burst. +1,000%
+800%

lines) rather than the historical trading +600%

IIX
channel of the early 1900s (green area), +400%
the market was clearly inflated by 1927.
+200%
The problem was exacerbated in 1928,
and then finally, the day of reckoning SP500 +0%
arrived in 1929.
While it has often been stated that -200%
97 98 99 00 01 02 03 04 05 06
during the 1929 crash the market lost
89% of its value over two years (381 to
41), a more honest appraisal would be
that the market fell 36% below the low
point of its historical trading channel
(64 to 41). This 36% correction is hardly
a catastrophe. And once the novices DJIA The 1929 Stock Market Crash
were driven from the market, the sane 500
and sensible took over. The market cor-
rected the correction and then found its 381
400
footing on a long-term growth path of A
10%, a path that is still traveled today. The Great Depression
300
ARE THERE LESSONS
TO BE LEARNED? 194
A bursting bubble is a dramatic event, 200 10%
yet it is also very predictable and finite. C
In both examples, the event ended when
the market fell back to its historical 100
trend. Granted, the fall overshot the trend, 10%
B
but the overshoot was temporary and the
64 41
trend quickly reestablished. This is not
1910 1920 1930 1940
the case in a collapse. When a market
collapses, there is no natural endpoint
and no expected aftermath. The market
that rises out of the ashes of a collapse is
unpredictable and establishes a new para-
digm.
So the question surrounding this market: Is this current
downturn a collapse or a bubble?

Thomas Maskell is an engineer and MBA. His current book,

The Complete Guide To Investing During Retirement (Adams
Media), provides an excellent primer for new investors and
a timely reminder for seasoned investors and traders in the
stock market. It is available online or at your local bookstore.
S&C
Signed copies are also available.

Copyright (c) Technical Analysis Inc.

Stocks & Commodities V. 27:3 (34-42): Working Money: Bubblenomics 101 by Matt Blackman

Bubblenomics 101
Can government intervention in markets work? nomic woes we now face. Although the mother of all bubbles KEN SMITH

formed on Bush’s watch and are partly attributable to the

by Matt Blackman actions or inaction of government, Treasury, and Federal
Reserve, they were not of George W. Bush’s making.
As each new bubble formed, from the tech bubble in the

C
1990s to the latest bubble from 2002 through 2007, the
urrently, we are experiencing the bursting of the government adamantly denied their existence. But then as the
greatest number and size of asset bubbles in history, latest bubbles began to pop, many who denied their existence
and such periods have never had a happy ending. But that began taking desperate steps to patch them. More disturbing,
hasn’t stopped governments around the globe from trying government reverted to the same actions that helped cause
every trick they can to stop the rapid price decompression. these bubbles in the first place.
During the US Presidential campaign of 2008, Democratic Notwithstanding this socialization of Wall Street, we still
competitors spent considerable effort attempting to one-up live in a free market society, and it is not the government’s job
each other with successively generous bailout suggestions to to make it work. History tells us that the periods following
deal with the economic tsunami sweeping the country. And bubble implosions are directly proportional to the size and
all candidates blamed the Bush administration for the eco- scope of the bubble and take years, sometimes decades, to
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (34-42): Working Money: Bubblenomics 101 by Matt Blackman

MARKET COMMENTARY Market Cap 16000

Wilshire 5000 Index = $18.726 trillion 15500
15000
14500
14000
heal. In other words, the higher asset 13500
13000
prices climbed, the longer and more 12500
painful the aftermath. 12000
11500
By the end of November 2008, more 11000
10500
than $8 trillion in various bailouts, pack- Market Cap = $11.672 trillion 10000
9768.63
aged stimuli, and loan guarantees had 9500

METASTOCK.COM
Cumulative Loss = -$7.153 trillion
9000
been offered by the US government, 8500
with roughly 60% of that coming from 8000
A M J J A S O N D 2005 A M J J A S O N D 2006 A M J J A S O N D 2007 A M J J A S O N D 2008 A M J J A S O N D
the Federal Reserve, according to
FIGURE 1: Chart of the Wilshire 5000 Index, the broadest index of US stocks showing the 38.3% drop over the last
Bloomberg magazine. And this was be- year, which translates to loss of more than $7 trillion in US stock values. The Wilshire 5000 dropped back to lows
fore the introduction of additional pro- not seen since May 2003 before putting in the recent bounce.
grams promised by the incoming Barack
Obama administration.
How much damage was done and can such programs stop History tells us the periods following
the hemorrhaging? bubble implosions are proportional to
the size and scope of the bubble.
NEEDLE AND THE DAMAGE DONE
Since peaking in late October 2007, Figure 1 shows how badly Chinese stocks suffered the greatest damage after dropping
stocks were pummeled. Total market capitalization for the more than 70% in the last year. More than a dozen interna-
Wilshire 5000, the broadest measure of North American stocks, tional stock indexes lost in excess of 50% (red shading).
peaked at $18.73 trillion at the end of October 2007. But by Markets losing between 30% and 50% (orange) included
Halloween in 2008, the index had lost nearly 40%, carving the Value Line Geometric, the Standard & Poor’s 500, Dow
more than $7 trillion in total from US market capitalization (see Jones Industrial Average (DJIA), and Mexican IPC (high-
Figure 1). Global losses, however, were far higher. lighted in blue). The Toronto TSX Composite has fared better,
As we see from Figure 2, the damage on this side of the thanks mostly to the fact that it is rich in commodity stocks,
Atlantic and Pacific seems modest in comparison with other but now that commodities are falling, the index could see
markets, and as we see, no part of the globe has been spared. losses accelerate.

Security Name Close* Month% Year% Security Name Close* Month% Year%
China Shanghai Composite 1717.72 -17.20 -70.87 Spain Madrid General 981.33 -7.95 -42.50
S&P/TSX CDNX Venture 951.42 -13.07 -69.40 Brazil Bovespa 37785.7 -2.09 -42.15
Peru Lima General 8205.74 -12.44 -61.56 CAC 40 INDEX 3387.25 -1.61 -39.66
Russia Moscow Times 9268.05 -8.22 -60.75 Dow Jones World 186.98 -3.72 -39.37
Greece General Share 2070.4 -17.58 -60.67 Egypt CMA 1882.19 -20.06 -38.65
FTSE AIM INDEX 455.59 -13.62 -59.22 Dow Jones Wilshire Global 1851.11 -2.20 -38.41
IRISH SE INDEX 3059.84 0.18 -57.43 Australia All Ordinaries 4106.5 -4.31 -37.05
Austria ATX 2001.45 -7.40 -56.91 Malaysia KLSE Composite 895.95 -7.65 -36.58
HANG SENG INDEX 13790 -13.51 -56.41 DAX 100 INDEX 2580.34 2.83 -35.51
Luxembourg SE LUXX Index 811.347 -18.53 -55.53 S&P 500 Index 952.77 -3.27 -35.40
JSX ISLAMIC INDX 201.798 -9.52 -54.79 United Kingdom FTSE 100 4272.41 -0.96 -32.59
MSCI BRIC 329.659 -7.88 -51.51 Dow Jones Indu Average 9139.27 -1.28 -31.11
Argentina MerVal 1135.79 -17.97 -51.39 Johannesburg All Shares 20951 -0.01 -30.96
India BSE 30 9734.22 -16.77 -51.27 Mexico IPC 20446.8 -1.12 -30.88
Turkey ISE National-100 27373.7 -11.05 -49.39 Pakistan Karachi 100 9183.14 0.02 -30.85
Thailand SET 462.93 -5.97 -48.98 S&P/TSX Composite Index 9887.2 0.59 -29.97
Indonesia Jakarta Composite 1307.9 -9.90 -48.79 Switzerland Swiss Market 6177.15 1.71 -29.57
Belgium BEL-20 2132.87 -4.82 -48.51 Major Market Index 1017.29 -2.47 -25.46
Philippines PSE Composite 1941.62 -15.16 -48.35 CRB Index 267.97 -14.02 -24.42
NIKKEI 225 INDEX 8899.14 -12.37 -46.55 Chile IPSA 2596.18 10.70 -21.62
Value Line Index (Geometric) 250.59 -8.19 -45.00 Slovakia SAX 367.8 -16.06 -17.04
TRADESYSTEMGURU.COM

Israel TA-100 664.24 -17.36 -43.87 Venezuela IBC 35423 -4.32 -9.57
KOREA SE KOSPI 100 INDEX 1065.45 -15.05 -43.78 LONDON GOLD 753.25 -17.50 -9.49
NIKKEI 225 9521.24 -6.25 -43.56 US Dollar Index 84.606 4.56 12.22
TOPIX INDEX 909.3 -6.99 -43.42 * As of November 5, 2008
FIGURE 2: List of 50 global indexes showing annual returns with North American indexes highlighted in blue. On average, losses were 43.13%.

Copyright (c) Technical Analysis Inc.

 Stocks & Commodities V. 27:3 (34-42): Working Money: Bubblenomics 101 by Matt Blackman

MARKET COMMENTARY

Figure 3 (of the Bloomberg World Ex-

change of market capitalization for global
stocks) shows the extent of the losses around
the world. After peaking on October 30,
2007, at $62 trillion, stock values plum-
meted nearly $30 trillion over the following
year, more than four times the losses in US
markets.
According to Kyle Bass of Hayman Ad-
Oct 30-07 visors, in the US alone, with Lehman, AIG,
70.00 Bear Stearns, Fannie Mae, Freddie Mac,
$61.996 trillion
WaMu, Countrywide, and the rest of the
60.00 companies that have failed to date, there are
another $8 trillion of assets already in re-
ceivership, conservatorship, liquidation, and
50.00 backed by the taxpayer. He also expects to
see at least $1 trillion of corporate debt
default over the next two years.
40.00
Oct 30-08 VALUE CHALLENGE
There has been much ado about how easy it
$32.275 trillion 30.00
Bloomberg World Exchange Market was for just about anyone who could sign his
or her name to get a mortgage. But this
Market Cap (WCAUWRLD)
mortgage madness was not limited to the
BLOOMBERG

2006 Apr Jul Oct 2007 Apr Jul Oct 2008 Apr Jul US. In Australia, for example, banks were
lending based on nine times median income,
FIGURE 3: The chart of the World Exchange Market Index shows the market capitalization of global according to Bass. The historical average in
stock markets. Bad as it seems, equity values dropped to where they were in May 2004 as global
most developed countries was three and a
equities markets lost $29.72 trillion in value.
half times. It was the first time in history that
real estate euphoria was distributed around
Case-Shiller Real Home Price Index 1890–2008 the globe.
210
By August 2008, residential real estate
190
prices in the US had fallen more than 20%
170
DATA BY SHILLER; CHART BY TRADESYSTEMGURU.COM

from their peak in 2006, according to the

150 Case-Shiller home price index. Considering
130 that the total value of residential real estate
Average was $21 trillion at its peak, this translates into
110
90 a loss for US homeowners of $4.2 trillion and
70 counting. Economist Nouriel Roubini esti-
mates that losses stemming from the subprime
50
mortgage market will now be “closer to $3
1890

1899

1908

1917

1926

1935

1944

1953

1962

1971

1980

1989

1998

2007

trillion.”
FIGURE 4: Annual inflation-adjusted US home price index showing the bubble that has just burst. After
CS Index cofounder Robert Shiller has
peaking at 202.89 in 2006, the index has fallen to 170.76 so far in 2008. The long-term average is 106.4. Over collected inflation-adjusted home prices
the last 120 years, housing prices have fluctuated above and below 100, roughly keeping up with inflation across the country for more than 100 years
until 2000 when prices moved beyond their previous inflation-adjusted high of 128. After peaking above 200 and calculated an index that fluctuated be-
in 2006, home prices now have a long way to fall before getting back to anywhere near their history norm.
tween 80 and 130 in the 19th and 20th
centuries. In the first 110 years, home prices
basically kept up with inflation, rising above
their historical average during good eco-
nomic times and dropping below during
deflationary periods and recessions.
But something new began to emerge in
2000. After hitting an index value of 128,
which was the prior inflation-adjusted high
reached, prices kept moving up over the
Copyright (c) Technical Analysis Inc.
 Stocks & Commodities V. 27:3 (34-42): Working Money: Bubblenomics 101 by Matt Blackman
Price-to-rent ratio Median Price of 1-Family Existing Home as a Percent of
1987:Q1 – 2008:Q2 Median Household Income
160 480

150
440
140
400
130

120 360 Mean (1980 – 2001) + 1 Standard Deviation

Mean (1987:Q1 – 2008:Q2) Mean (1968 – 2007)
110
Mean (1987:Q1 – 2001:Q4) + Standard Deviation
320
Mean (1980 – 2001)
100 Mean (1987:Q1 – 2001:Q4)
280
90
NORTHERN TRUST

80 240
88 90 92 94 96 98 00 02 04 06 08 1970 1975 1980 1985 1990 1995 2000 2005

FIGURE 5: Quarterly chart showing changes in the price-to-rent ratio over the last FIGURE 6: Value of the family home as a percentage of median income showing that
two decades. The bubble beginning in 2002 and ending in 2005 is clearly visible on the correction still has a long way to go.
the right-hand side. It also shows that we have a long way to go to get back to the
historical norm in mean (average) prices to average incomes over different periods.

How many other financial companies, banks, lenders, and

next six years until they had risen above 202, nearly 60% corporations are in similar financial straits but just haven’t
above their previous all-time high (Figure 4). In other words, told us yet? The problem, according to Bass, is that many
even though prices in the US have fallen over 20%, home corporations were simply making up values on their assets.
prices still have to fall more than 32% just to get back to highs History tells us that the two years leading up to an election
reached in previous peaks and more than 60% to return to is the most important time for any government. If the economy
their historical average price! is robust as voters head to the polls, there is a good chance that
This contention is supported by other historical real estate the incumbent party will be elected or reelected. If not, their
metrics. As we see in Figure 5, home prices still have a long chances of winning are poor.
way to fall in relation to rents. To return to the average home And stimulus programs during preelection periods have
price to rent ratio, home prices still have to fall at least 12% had a powerful effect on markets throughout history. A
further nationwide or rents would have to increase roughly strategy to buy the 30 companies of the DJIA at the midterm
15%, the former being much more likely than the latter in a low 26 months before the election and selling after the
recession. election captured 93% of all DJIA gains between 1902 and
Next, we see a chart of the ratio of the value of the family 2006, compared to just 7% in the 22 months after the election.
home as a percentage of household income (Figure 6). Prices And our study showed that this election effect is getting more
still have a long way to fall to return to normal compared to powerful.
median incomes as well. But every stimulus program has a price. Since World War
It is clear that residential property prices are still high — II, with the exception of the relatively brief 1987 correction,
too high to be sustainable. every serious bear market and recession has occurred in the
two-year post-election period as the government worked to
PRIMING THE ELECTION PUMP right the excesses built up during the preelection party. After
Corporate assets are more difficult to measure. The now- nearly every election, it has taken two years of pain just to get
extinct Lehman Brothers is a good example. On March 18, the economy back on track again.
2008, the company announced net income of $489 million for Actions taken by the Bush administration during the final
the first quarter with net assets totaling $395.9 billion. By the two years, especially in the final months leading up to the
third quarter, however, the company had gone bankrupt. How election, are a case in point. Unfortunately, even though the
can that be? How could a company with $400 billion in assets government outdid itself compared to previous preelections
disappear? in an attempt to fix our broken economy, the trillions of
In light of Lehman’s credit derivative swap auction, it dollars have so far achieved little of the desired effect. So far,
became clear that these assets weren’t worth anything near more than $8 trillion have been thrown into the economy to
their stated value. As we learned from the auction, the try to stop the massive asset repricing now under way. But
Lehman assets weren’t worth $200 billion. They weren’t even this incredible amount pales compared to the losses at
even worth $40 billion — they were only worth 8.625 cents home and abroad.
on the dollar. As we see from Figure 7, in the weeks leading up to the
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (34-42): Working Money: Bubblenomics 101 by Matt Blackman

MARKET COMMENTARY

Monetary Base
80%
1500 Monetary Base
Y-o-Y% Difference
1300 60%
1100
40%

Billions$
900
700 20%
500
0%
300
TRADESYSTEMGURU.COM

100 -20%
Dec-84

Dec-86

Dec-88

Dec-90

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Dec-02

Dec-04

Dec-06

Dec-08
FIGURE 7: On the monetary base graph (money in circulation in the US), we can see that between the end of
August and early November 2008, money in circulation has grown an eye-popping 72.24%. On a year-over-year
basis, it works out to an increase of 75.5%. This compares to an annual average growth rate between 1986 and
2007 of 6.6%.

election, the Fed cranked the money presses into high gear, November 2008, and every dollar spent at home means a
pumping roughly 75% more money into our economy to try dollar less to lend to the US. And other emerging nations are
to fix the problem. The fed funds rate dropped below 1% and joining in the bailout game.
the government did their best to force banks to spread the It is looking more as if our government will have to learn
money around. The government and the Fed are nearing the the painful truth the hard way. It is financial folly to try to stop
end of their resources to stimulate the economy. So far, such the massive repricing when an asset bubble breaks. It’s like
tactics haven’t worked, but somehow, geniuses in govern- trying to stop a runaway freight train. But more important,
ment think more of a bad thing will actually be good. What’s bailouts transfer the losses from those in the private sector
the definition of insanity? who made bad investments to the taxpayers, many of whom
Now that the government is running out of options and were responsible borrowers and did not take on unmanage-
money, it has been estimated that the budget deficit will soar able levels of debt.
from $400 billion in 2008 to more than $1 trillion in 2009. As the Japanese learned, trying to fix the problem through
How will the government (and the Fed) get what it needs? government bailouts and using creative accounting to hide or
Based on the current situation, it won’t be raised domesti- bury losses versus letting financial gravity take its course
cally. Even during the good times, our national savings rate only prolongs the pain.
was negative. We have become dependent on the generosity
of foreigners to finance our standard of living and keep our TAKING THE LOW ROAD
interest rates low. But this free ride may be coming to an end To sum up, the underlying premise of these bailouts is to
sooner rather than later and has the potential to drive interest stimulate a rapid reversal and return to the days of high prices
rates into the stratosphere. and bloated valuations. But this will come at a cost — a fiat
But even with interest rates (the effective fed funds rate) currency with no real relationship to true value and rapidly
near zero, people are losing their jobs in increasing numbers. rising inflation accompanied by a staggering loss in purchas-
Unemployment hit 6.5% in October, a level not seen since ing power or an outright deflationary spiral. In the first
1994. At the current rate of job losses, it may not be long instance, we will be left with unprofitable companies and
before we reach the 9.5% peak, reached in 1982 during the homes that no one can afford. In the second instance, prices
last severe recession. If anything, consumers, who are the for everything will fall but even at lower prices, few will be
main drivers of our economy, will need to spend whatever able to afford these goods.
savings they have to pay the mortgage or the rent and buy As a best-case scenario, we risk years of anemic economic
necessities. performance, a rapidly declining dollar combined with
Will the Chinese and Japanese, who have been the major stagflation, and an eventual spike in interest rates as foreign-
buyers of US Treasuries, continue to support our economy ers avoid dollar-denominated assets in search of those that are
even though their own economies are suffering slowdowns? realistically priced.
But now, instead of their buying $33 billion of our Treasuries If these bailouts fail, and they will if history is any guide,
every month, we will need them to buy more than $80 billion we can expect a continuation of extreme levels of volatility as
monthly, given current budget deficit projections of more markets swing between periods of euphoria as new stimula-
than $1 trillion. tive plans are announced and then depression as prices
However, the Chinese are now getting into the bailout act. plummet and the realization hits home that the latest plan has
They announced a $586 billion plan of their own in early failed.
Copyright (c) Technical Analysis Inc.
Stocks & Commodities V. 27:3 (34-42): Working Money: Bubblenomics 101 by Matt Blackman

MARKET COMMENTARY

Matt Blackman is a technical trader, author, reviewer, key- • Democrats Set to Take On Stimulus Bill as Price Rises
note speaker and regular contributor to a number of trading http://www.bloomberg.com/apps/
publications and investment/trading websites in North news?pid=20601110&sid=aXUnWNKW7P5I
America and Europe. He also writes a free weekly and • China Unveils 4 Trillion Yuan Spending as World Faces
monthly market letter for TradeSystemGuru.com. He can be Recession
reached at matt@TradeSystemGuru.com. http://www.bloomberg.com/apps/
news?pid=newsarchive&sid=augL9_cumtA4
SUGGESTED READING • Emerging Economies Pledge Stimulus to Fight Slump
• Pledges Top $7.7 Trillion to Ease Frozen Credit http://www.bloomberg.com/apps/
http://www.bloomberg.com/apps/ news?pid=20601110&sid=aVGp.cu7Yhvs
news?pid=newsarchive&sid=an3k2rZMNgDw • Democrat Rahm Emanuel Says Auto Industry Essential
• Treasury, Congressional Democrats Clash on Policing to US Economy
Bank Loans http://www.bloomberg.com/apps/
http://www.bloomberg.com/apps/ news?pid=20601110&sid=aSy5ga58yIJg
news?pid=newsarchive&sid=aNRUoQDt.aLY • Wilshire 5000 Index Characteristics
http://www.wilshire.com/Indexes/Broad/Wilshire5000/
• Fed Balance Sheet Swells Above $2 Trillion Characteristics.html
http://www.reuters.com/article/marketsNews/
idUSN0640103620081106
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