Traders January 2015

Interview: Jens Rabe – My Way to Successful Options Trading P. 62

ind

rM Trade 01 15

e Your c a r b Em ns Emotio P. 56

Your Personal Trading Coach Nr. 01, January 2015 | www.tradersonline-mag.com

Bitcoin Trading Taming a Wild Market P. 38

Optimised Bollinger Band Strategies Feather Your Own Nest P. 34

TRADERS´ – Your Personal Trading Coach | www.tradersonline-mag.com

Your Basic Success Factors

Keep the Risk under Control

P. 6

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EDITOrIAL

www.tradersonline-mag.com 01.2015

Ioannis kantartzis Editor-in-chief

Does Trading Make People Happy? » Wham, another year gone. Depending on when you read the current issue of TrADErS’ – Christmas, New year‘s Eve, or New year’s Day is just around the corner. Maybe you are just like many other traders who simply cannot stop thinking of the yearend rally even amid all the feasts and festivities. Or, you may find the time during the quiet days between Christmas and New year’s to reflect on your very own trading year: •

Did you follow your trading rules?

•

Were you able to improve your trading process?

•

What mistakes did you make and what can you learn from them?

Ultimately, these – and others like it – are the questions that you will constantly need to address on the long and rocky road to becoming a successful trader. Only those who keep on working to improve themselves and their performance, will be able to survive in the long term. But does that automatically make you happy as a trader? In the quiet days ahead, why not try consciously appreciating what you already have, instead of always chasing what you would like to have. We often overlook how well-off we are while we trade, analyse, and plan away. Many studies have shown that money alone cannot make people happy – so make sure that trading is not your only source of happiness. Happiness cannot be bought, at least not permanently. Instead, it requires you to appreciate the moment in which you happen to live. The past and the future are nothing but hollow words. The former is memories that cannot be brought back to life by any power in the world, while the latter is visions and expectations that may come true with varying degrees of probability. The only thing we can be sure of is the moment. And if you are happy in the moment that you trade on the stock exchange because you enjoy trading, then that is the right thing. It is in those moments that trading brings lasting happiness – even if you do not make millions with it. So the answer to the question whether trading makes you happy is another question: „Do you feel happy when you trade?“ On that note, we wish you an exciting, successful and, most importantly, happy trading year 2015! « good Trading,

3

TABLE OF CONTENTS

www.tradersonline-mag.com 01.2015

62

6

18

TABLE OF CONTENTS January 2015 COVERSTORY

6

Keep the Risk under Control In our cover story, Christian Stern explores ways to professionally avoid severe losses and minimise the risk of extended streaks of losses. Furthermore, he explains how to intelligently manage position size, as this is one of the turning keys to achieving long term success in the markets.

24 News Find the latest notes and announcements from around the world of trading in our “News“ section.

INSIGHTS

14 TRADERS´ Talk

We talked to Chris Weaver, CEO of My Trading Zone, about his idea of teaching others how to coach traders and about coaching traders in general.

TOOLS

26 New Products

The Latest Trading Technology

18 Transaction Data Compression

28 Book Review





Dirk Vandycke displays the use of charts given in the world of trading and investing with the basics of how they are constructed.

“The Monetary System” by ­JeanFrançois Serval and Jean-Pascal Tranié

22 Trading Seasonalities

30 Appreview





4

Thomas Bopp shows the two encouraging candidates: GBP/USD short and stock Krones long.

CBOE Mobile

TABLE OF CONTENTS

Publisher Lothar Albert

PEOPLE

60 The Pro‘s Process

Part 25: Anne-Marie Baiynd

62 Jens Rabe – My Way to Successful Options Trading

In TRADERS´ 11/2014 we published a cover story about options, written by Jens Rabe. Marko Graenitz interviewed him in his trading room. Enjoy some insights about how he managed to shift his career from selling insurance to professionally writing options for a living.

Subscription Service www.traders-mag.com; www.tradersonline-mag.com; [email protected]; Tel: +49 (0) 931 45226-15 Address of Editorial and Advertising Department TRADERS´ media GmbH Barbarastrasse 31a 97074 Wuerzburg, Germany Contact: E-mail: [email protected] Phone: +44 (0) 7798631716 Mobile: +30 (0) 6932 315450 Editor-in-Chief Ioannis Kantartzis

STRATEGIES

34 Optimized Bollinger Band Strategies

Christian and Andreas Weiss provide you a somewhat unusual method of trading that they picked up in the USA which is similar to the term “to feather one’s own nest”.

38 Bitcoin Trading

Bitcoin and the general concept of crypto currencies are one of the hottest topics in finance right now. Maik Schwaebe shows how to master them.

42 Trading Emerging Trends with the Bowtie Pattern

Dave Landry explains how getting on board emerging trends, this time with the Bowtie Pattern.

BASICS

48 Murrey´s Mathematical System

Oscar Cuevas reveals Murrey´s mathematical system with which support and resistance levels are calculated.

52 The Trader’s Technical Arsenal – Part 11

This time Azeez Mustapha discusses the Standard Deviation and the Stochastic Oscillator.

56 Trader Mind – Part 1

Steve Ward explains how emotions are essential to the decision making process and how they keep our brains focused on critical information in trading.

Editors Katharina Boetsch, Leanne Chesterman, Prof. Dr. Guenther Dahlmann-Resing, Corinne Endrich, Rolf Ganzer, Marko Graenitz, Lena Hirnickel, Sandra Kahle, Inessa Liss, Rodman Moore, Stefan Rauch, Katja Reinhardt, Karin Seidl, Tina Wagemann, Christine Weissenberger, Nadine Wiget Articles Thomas Bopp, Richard Chignell, Oscar Cuevas, Julian Komar, Dave Landry, Azeez Mustapha, David Pieper, Maik Schwaebe, Christian Stern, Dirk Vandycke, Steve Ward, Andreas Weiß, Christian Weiss Pictures © apops, basketman23, Brian Jackson, denis_smirnov, Greg Epperson, IMaster, ivan kmit, kuklos, lassedesignen, Massimo Cavallo, olavs, olly, opicobello, wmedien, Wrangler, zhu difeng / www.fotolia.com

Price data www.captimizer.de; www.esignal.com; www.metaquotes.net; www.tradesignalonline. com; www.tradestation.com ISSN 1612-9415 Disclosure The information in TRADERS´ is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the effectiveness of any trading system, strategy or approach. Traders are advised to do their own research and testing to determine the validity of a trading idea. Trading and investing carry a high level of risk. Past performance does not guarantee future results. © 2014 TRADERS´ media GmbH, Barbarastrasse 31a, 97074 Wuerzburg, Germany

5

COvErSTOry

www.tradersonline-mag.com 01.2015

keep the risk under Control your Basic Success Factors

In our cover story, Christian Stern shows how to protect your capital professionally while significantly reducing the risk of having to go through major losing streaks. In addition, managing your position size intelligently will give you an important tool for achieving long term success in the stock market.

» The Principles of Risk and Money Management

on the subject and examine whether this method can be

Risk and money management (RMM) describes the art of

used for his/her trading. The Kelly criterion, or the Kelly

using our most important trading asset, for example our

formula, is well known in the field of sports betting and

capital, intelligently and above all safely. We define both

was published by scientist John Larry Kelly Jr. in 1956.

risks and opportunities and risks in terms of ratios and

It is aimed at optimal profit maximisation when placing

try to match them perfectly for the development of our

bets or, of course, entering trades that can be expected to

portfolio. Using RMM allows us to identify healthy and

be profitable. The approach can be described by a simple

yet powerful position sizes, enabling us to achieve long

mathematical formula:

term success. While good traders may well fail because of poor risk management, good planning will protect

F=2*P-1

beginners against serious and likely damage. where F is the fraction of the capital to be risked and

The Kelly Criterion

P is the probability of a profit, i.e. our hit rate.

In connection with the risk and money management that

If our hit rate is a quite realistic 65 per cent, the

is elementary for traders, approaches such as the Kelly

optimum size of the bet for each position is calculated as

Criterion keep emerging. The author would like to elaborate

follows: F = 2 * 0.65 - 1 = 0.3

Christian Stern A full-time trader with about twelve years of market experience, Christian Stern is in charge of securities trading and of the training division of Trading Stars, focusing on imparting basic and expert knowledge for successful trading. [email protected]

So according to the Kelly criterion, we should risk 30 per cent of our capital in our first trade. This approach is purely oriented to which investment may lead to the optimum growth of the equity curve of our portfolio and calculates the position size only on the basis of the hit rate of our trading. So the essence of the Kelly approach is that an existing advantage (hit rate > 50%) is always

6

coverstory

www.tradersonline-mag.com 01.2015

T1) Letting Losses Run

However, the HR cannot be used

T2) Limiting Losses

to make a valid statement about the Trade Number

Profit/Loss in Euros

Trade Number

Profit/Loss in Euros

quality or profitability of a trader.

1

20

1

90

George Soros once said: “I am

2

10

2

80

probably right in no more than half

3

30

3

-20

of all cases, but I simply make a lot

4

30

4

-30

of money when I'm right, and I lose

5

-140

5

-20

as little money as possible when I

6

10

6

-40

am wrong.” The examples in Tables

7

20

7

80

8

-130

8

90

9

20

9

-20

10

20

10

-10

Result

-110

Result

200

1 and 2 illustrate that even excellent HRs may result in losses; they show why you should not solely rely on the hit rate – nor, for that matter, base your trading on it. The inclusion of absolute profits and losses seems

This trader takes profits quickly and frequently, but let’s losing positions run, generating a negative result at a hit rate of 80 per cent.

This trader, however, suffers whole series of losses but imposes strict limits on them and achieves a profit with a hit rate of only 40 per cent.

Source: www.trading-stars.de

Source: www.trading-stars.de

indispensable.

Important Index in Trading: the Profit Factor Since the HR can only provide limited information about the quality of our

being risked; the greater this is, the larger the position

trading, the author, in calculating the profit factor, also

size should be. However, why this consideration runs

considers the average absolute profit a nd loss, allowing

contrary to the principles of money and risk management,

him to obtain valid information on profitability. The

for example the protection and preservation of capital,

formula for the profit factor is:

will become clear once we examine what the system is based on – namely, the hit rate.

Profit Factor =

Number of winning trades Ø-Profit x Number of losing trades Ø Loss

The Hit Rate: More Myth than Reality? The hit rate (HR) is described as a generally important index in trading and indicates the relationship between

A PF > 1 is “profitable”. The higher this figure, the better the trader works in his trading approach.

winning and losing trades in percentage terms. It is made up of the quotient of the number of wins divided by the

Also Helpful in Trading: the Risk/Reward Ratio

number of losses. If, for example, five out of ten trades

Usefully complementing the profit factor, the risk/

end up being profitable, we have achieved an HR of 50

reward ratio (RRR) may also describe the general quality

per cent. If, on the other hand, seven out of ten trades end

of individual trades. It reflects the ratio of the absolute

up being profitable, the hit rate will be 70 per cent.

reward to the absolute risk, allowing it to be an index for determining the quality of a trade. Risk is thus given the number 1, the reward is divided by the risk and so represented by a multiple of 1. This means that the RRR can give information about whether a trade is “worth” it

T3) Hit Rate, RRR and Profit Factor

in the first place. Key Figure HR in % RRR PF

Generally speaking, an RRR of 2:1 up to 3:1 is considered 40

45

50

1.5:1

1.5:1

1.5:1

1

1.23

1.5

In this example, the trader makes an average profit of 30 euros and a loss of 20 euros, i.e. an RRR of 1.5. A hit rate (HR) of 40 per cent is sufficient here to not suffer any loss (profit factor, PF = 1). Source: www.trading-stars.de

8

to be desirable. In order to trade successfully over the long term, we have to have the following ratio of RRR to HR: •

An RRR of 1 requires an HR of > 50%

• An RRR of 1.5 requires an HR of > 40% • An RRR of 2 requires an HR of > 33% •

An RRR of 3 requires an HR of > 25%

Coverstory

Honest Identification of Risk and Reward per Position

F1) Example

To a large extent, risk can be calculated in absolute terms, representing as it does the distance between the entry and the stop-loss in euros (pips/ticks x tick size in euros). In addition, there are all the fees for entering and exiting the position – those, too, should be known in advance or be requested from the broker. Unknowns also include a potential slippage (rate difference when executing the order) and the emergence of gaps. Since we cannot calculate these two factors in absolute terms, the author recommends a theoretical per cent mark up to be on the safe side. The reward, too, can be determined along those lines. However, note the spread of the underlying asset (difference between buying and selling price).

100 euros can be made in a trade (reward), but the risk incurred by stopping out is 50 euros. The ratio of reward to risk is now 2:1. Source: www.trading-stars.de

The Experiment: Six Traders in One Room But not only the statistical key figures and theories need to be considered. In practice, these may change in the future and trading will be affected by other negative factors, as is

to maximise profits – but not to keep the risk small or

illustrated by the following experiment: In a closed system

minimise it, running contrary to the principles of RMM. A

(market), six traders trade the EUR/USD with a market

modified version of the Kelly formula takes into account

maker, a CFD broker, for example. Each trader starts with

the important items of the PF, the average profit and loss,

a portfolio of 2000 euros and has a long term hit rate of 50

and could provide a remedy. That version is as follows :

per cent at an RRR of 1:1. 0.05 lots are always traded and the spread is one pip (0.0001 USD). We will now let our

F = WP - (LP / POR)

six traders get on with the job and, from today, let them trade for a few years under the conditions specified. All the while, the capital development emerges in Figure 2. Although the traders all work with the same key

Where F still represents the fraction of the capital to be risked and WP continues to stand for win probability. In addition, there are LP = loss probability and POR (payoff

figures (!), happenstance may cause equity to develop very differently. Think of a simple bet when tossing a coin – although heads and tails each occur with a probability

F2) Equity Curves of the Simulation

of 50 per cent, long sequences may make the practical result appear to be unexpected. Whereas the red trader wins, all the others lose. This is due to spread – comparable to the zero in the classic roulette game. So the broker (shown here in blue) regularly makes some extra money, each time taking a small portion of our traders’ capital. Overall, though, the market maker runs a lucrative business and is the real winner in this experiment. So always keep an eye on the cost of your trading.

The Optimised Kelly Approach Let’s get back to the Kelly criterion. As you have seen, it is only designed

Figure 2 shows the capital development of our six traders. In addition, the broker (blue) also gets his share. Source: www.trading-stars.de

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HR = 50%, RRR 2:1

F3) Exponential Development

F = 0.5 - (0.5 / 2) = 0.5 - 0.25 = 0.25

Capital (exponential)

220

So according to the modified Kelly approach, we are supposed to

200

risk 25 per cent of our portfolio for

180

each position, which our gut feeling tells us is far too much. But where’s

160

the 140

The

Kelly

approach

ignores the possibility of larger losing streaks (drawdowns) than

120 100

catch?

have previously occurred in history 2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

Risk (per Trade)

4.5

and risks the portfolio from that point in time when reality is adversely different from the statistics.

Exponential Development of the Equity Curve

4

In general, the stock market literature

3.5

advises traders to risk around one 3

to two per cent of their capital per position, increase order sizes along

2.5 2

with

increasing

portfolios

(and

minimise them in case of any losses 2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

Figure 3 shows the capital development in the exponential system at an RRR of 2:1. 20 winning trades are followed by 20 losses with the risk being calculated at two per cent per trade, depending on the size of the portfolio. Source: www.trading-stars.de

incurred). Basically, this approach is perfectly okay and protects your money against a total loss (Figure 3). In the case of a winning streak, the capital and also the risk taken for each position increase exponentially while any losses that occur minimise

ratio) = average profit divided by average loss. Let’s make

the risk per trade. So in an exponential system such as

another simple example calculation:

the Kelly approach, for example, you can very quickly enjoy considerable growth by using the so-called “compounding” effect. However, this also increases the

Compounding Effect The compounding effect will come about when interest income is not distributed to investors but is added to the investment and reinvested. Since interest is also earned on the interest, the return on the investment will increase. For example, an investment of 10,000 euros made for one year at an interest rate of three per cent will result in the following interest income: • 300.00 euros; return: 3.0 per cent (annual credit for accrued interest) • 303.39 euros; return: 3.03 per cent (quarterly credit for accrued interest) • 304.53 euros; return: 3.05 per cent (daily credit for accrued interest)

10

absolute risk incurred with each positive trade.

Linear Development of the Equity Curve The linear approach is different from the exponential system. Here risk is determined only once, dependent on capital, and that is in the first trade. Later, the amount of risk remains the same. With winning streaks being the same, the resulting absence of the compounding effect will cause returns to be smaller, too. However, the advantage for the trader is a constant amount of risk. While the absolute high in the account and also the final amount are somewhat lower in the linear system, the bottom line is that there is a similarly positive result. But besides the psychological advantage of small and constant amounts of risk, there is another benefit

Coverstory

to the linear approach. Position

F4) Linear System

sizes remain stable and do not rise along with profits as they do in the exponential system. This means that the buying and selling cost that depends on trading volume, will also

170 160 150

remain low. The author himself is looking

140

for trading systems whose account

130

history resembles a mathematical linear, account

making

Capital (linear)

180

a

low-fluctuation

development

possible,

which is of a major psychological

120 110 100

2

4

6

8

10

12

14

16

advantage in terms of a trading that is relaxed and uses capital sparingly.

18

20

22

24

26

28

30

32

34

36

38

40

24

26

28

30

32

34

36

38

40

Risk (per Trade)

3

Initial Risk per Position Furthermore, the author wants to

2

discuss the extremely important calculation of the initial risk and show, why this should be as small

1

as possible. In the example (Table 4), you can see a sample portfolio of 5000 euros. If a low initial risk is chosen (one per cent), the trader will survive prolonged losing streaks, whereas with a higher (ten per cent)

0

2

4

6

8

10

12

14

16

18

20

22

Figure 4 shows the capital development in the linear system at an RRR of 2:1. As is the case in F3), 20 winning trades are followed by 20 losses, but the risk is only initially calculated as a function of the size of the portfolio and will then remain unchanged. Source: www.trading-stars.de

initial risk he/she could in theory be broke as early as after the tenth trade. So when it comes to the the optimal position sizes (lot sizes) is key. Be sure then to

Diversification – Minimising Risks, Maximising Rewards, Steadying Trading

choose the lowest possible initial risk of one per cent of

Not for nothing did Mr Markowitz receive a Nobel Prize

your portfolio value for each position.

for his work on diversification as early as 1990. In terms

proper implementation of a good RMM, the calculation of

of financial mathematics and stock markets, the term

Required Capital and Minimum Account Requirements

stands for spreading capital or investments over various

With a good broker, a CFD account of 500 euros may

underlying assets or strategies. Using this distribution

already be enough for trading the DAX. The most

can minimise the overall risk and significantly increase

important parameter that you should watch out for is the relevant tick size of the particular financial product, i.e. the absolute changes in the account when the

T4) Initial Risk and Losses

product moves around the smallest possible unit. While this tick size is 12.50 euros a tick (half a point) or 25.00

Portfolio Value in Euros: 5000

euros per point in the DAX future, a finely scalable CFD

Losses in order of magnitude

only changes 25 per cent per DAX point. So capital requirements depend on the underlying asset traded (tick size), the distance to the stop-loss (maximum loss), and the position size (lot size) with small accounts possibly having a limiting effect and making some trades impossible.

1

2

3

4

Probability

50%

25%

12.5%

6.25%

1% Initial risk

-50

-100

-150

-200

10% Initial risk

-500

-1000

-1500

-2000

Choose the lowest possible initial risk per position. Source: www.trading-stars.de

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coverstory

www.tradersonline-mag.com 01.2015

markets, a cluster risk will form that

F5) High Correlation

you should consider jointly.

The Overall Level of Investment If worst comes to worst, you must also be able to cope with a worstcase scenario and assume that all open positions and those yet to be opened will run into the stop-loss. The resulting loss represents the maximum risk of your portfolio and should never be more than ten per cent. This means that if you always risk one per cent of your account per More often than not, stocks of the same or a similar industry are highly positively correlated, as is shown by the example of the German car manufacturers. Source: www.tradesignalonline.com

trade, you may only have a maximum total of ten trades in your order book at the same time.

the chances of sustainability and profitability. Since

How Can I Implement These Theories in a Viable Way?

diversification has this quality, it is a subject that is

Many traders work intensively on the perfect entry

one of the principles that successful advanced market

signal and will open a position once it is found. However,

players need to follow. Of special importance here is

successful traders first analyse what can be planned in the

the correlation of the markets and the underlying assets,

stock market, for example just the exit in case of loss. For

and both positive and negative connections should

that purpose, you use a consistently thought-through risk

be observed and jointly taken into account from the

and money management system made up of the modules

perspective of risk calculation. Think, for example, of the

presented here. Especially beginners should first aim at

stock markets and the DAX and Dow Jones indices. In

linear capital development and not risk more than one

general, these underlying assets behave similarly and

to two per cent of the initial account balance for each

rise or fall together. If you now speculate long in both

position. If the investment has then been earned for the first time after a few years (100 per cent return), the author recommends a payout of the profit and a switch

F6) Low Correlation

to the exponential system, using the compounding effect.

Conclusion While the aggressiveness of the Kelly formula makes it unsuitable for trading, it does give us an insight into

the

mathematical

handling

of risk and money management. Professional traders should aim at linear equity curves to ensure regular capital growth and ride out losing streaks easily. That way, you can invest your capital in a relaxed Different market segments such as, for example, gold (commodity) and the US leading index S&P 500 (stocks) may have a negative correlation, causing them to contribute to diversification. Source: www.tradesignalonline.com

12

and yet sensible way to survive in the capital market over the long term. «

insights – TRADERS´ Talk

www.tradersonline-mag.com 01.2015

Chris Weaver CEO of My Trading Zone

TRADERS´ Talk Coaching Is about Listening

We talked to Chris Weaver, CEO of My Trading Zone, about his idea of teaching others how to coach traders and about coaching traders in general.

» TRADERS´: Your idea of teaching someone how to coach

finds value in the session and is more likely to buy more

other traders is new – what is your motivation behind My Trading Zone?

coaching.

Weaver: Coaching is about listening. A lot of trading coaches are very keen to demonstrate their expertise in

TRADERS´: What is the most important thing when you want to be a coach in the financial market?

an attempt to impress the coaching candidate enough

Weaver: Online infrastructure and product strategy. We

that they will want to buy more coaching. On the surface

are very big on the sales funnel which is the process of

this makes sense, but in reality it doesn’t work. Clients

taking a client who is unknown to your product or brand

normally have a very strong idea of what they actually

and moving them all the way up to a premium customer.

want to learn or get out of a coaching session. It is critical

How your trading and coaching products are displayed

that the coach identifies what the candidate would like

and accessed are directly related to the success of your

to learn and address it during the session. The candidate

business.

14

insights – TRADERS´ Talk

I believe there is a strong demand for quality coaching with well thought out and professionally presented products.

TRADERS´: Are there common mistakes a coach should avoid?

Weaver: My Trading Zone is an online resource centre

Weaver: Do not talk too much and do not assume that you

education providers. We provide websites for individuals

know what the candidate wants to learn. I am stressing

and organisations who would like to run their own trading

this point as I feel it is such a common error that trading

education businesses. We also offer custom and/or white

coaches make. We suggest having a very thorough fact

labelled courses and presentations for trading education

finding document filled in by the client before the series

companies. We also offer free initial consultations and

of coaching sessions begin. This is a great way to get to

product demonstrations to anyone interested in our services.

for both private trading coaches and larger trading

know your customer and portrays a very professional image.

TRADERS´: Webinars are now a common thing. What do you prefer – an online coaching or a personal coaching?

TRADERS´: What do you think about the coaching market: Is there a backlog of demand? What is a trader looking for when he/she is interested in coaching courses?

Weaver: I prefer convenience and comfort. Whichever is best for the client and the coach to be productive makes sense to me. They can both work extremely well.

Weaver: I believe there is a strong demand for quality presented products. More and more retail traders are

TRADERS´: Do you have an idea what can we expect in the future coaching market?

coming to the market every day and they are interested

Weaver: I believe that the “cream will rise to the top”.

in learning. There are plenty of amateurs out there but I

As I stated earlier, the amateur coaches and trading

believe they will be forced to either increase the overall

organisations who are not properly structuring their

quality of their offering or exit the market.

marketing, product offering and presentation will be

coaching with well thought out and professionally

forced out by those who are. I think there will be some real

TRADERS´: So, what can My Trading Zone offer? Are there special products?

quality coaching companies that seize the opportunity over the next few years and generate heavy profits. «

15

advertorial

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Trading from the Top – Keep It Simple As serious traders, we need to think, simplify and focus. Think about a set of trading rules and apply them to our charts. Simplify the analysis techniques and focus on the best trading opportunities that best fit our set of rules. This process needs to be efficient and effective to give the best chance of covering multiple markets or contracts in the shortest possible time.

» The first step is finding a trading platform and chart

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Simply put, all necessary info is easily viewable with a

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opportunities. Our workspace is set up with monthly,

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weekly and daily charts spread over at least two to

from walking in front of the proverbial bus. We use

three monitors; each chart shows up as a decent size for

TradeStation because of its dynamic market scanning

maximum effect and clarity. Nice and simple.

tools and the way it simplifies analysis across multimarkets and instruments.

The Setup

We are from the school of keeping things simple, yet

The trading world is awash with strategies and

detailed enough to cover our bases. This philosophy is

indicators – some so convoluted that when you see them on a chart they look like a bird’s nest – not simple! We use three types of indicators on all of

F1) The Daily Chart

our charts. These aren’t proprietary indicators, but the stock standard Moving Average (10, 20, 50 and 200 period), MACD (Moving Average Convergence Divergence) and RSI (Relative Strength Index). Whether you prefer the Parabolic SAR or the CCI (Commodity Channel Index) for your charts, TradeStation has them all. We suggest not using too many though, just use what you feel comfortable with and make sure your charts remain uncluttered. For swing trading we tend to look at the daily, weekly and monthly

Here is the daily chart of silver with multiple indicators like moving averages, MACD and RSI. Source: TradeStation

16

charts. The daily chart is our ‘go to chart’ as it is the one that is used by

ADvErTOrIAL

short, medium and long term traders alike. Hence it gets

F2) Watchlist Using TradeStation radarScreen

the most view time and so it takes a front seat on our layout.

Unique Functionality The beauty of the TradeStation platform is that it allows us to scan an entire list of products with ease; by linking the symbols on the chart to the symbols in our watch list, it takes just five to ten minutes to scan the many markets we trade regularly. The ability for traders to simply click the next symbol and the charts change in unison makes it so much easier and it allows us to focus on what we need to be doing, which is finding the very best trades based on our strategy rules. A surprising number of charting packages do not have this crucial functionality.

The Optimal Setup There are a number of intricacies when it comes to

We can click on any one of these symbols that we trade and all of our daily, weekly and monthly charts change simultaneously to that symbol. Source: TradeStation

scanning the charts for potential trades. The main one is; what kind of conditions to look for? First and foremost, we look for optimal chart structure on all three time frames. The most basic

decision based on only three potential outcomes – that is

explanation

trending,

we can buy, sell or sit out. Being able to use these multiple

smooth-flowing and thus, more predictable charts as

timeframes to scan quickly means that we can remain

in the example in Figure 1. If it is clear that there is not

focused on the task at hand and make our decisions faster.

optimal chart structure on any of the daily, weekly or

This means it’s less time staring at charts and more time

monthly timeframes then we simply move on to the

to enjoy life! «

means

looking

for

good

next chart. Second, we look for price to interact with the moving averages (MA) in such a way that we enter long or short when price is nearing its equilibrium zone – a zone we

Craig Cobb

define in and around the 10 and 20 MA. If price is close

Craig Cobb is a trader and mentor at Trade With Precision. See Craig in action on one of many trading webinars or join our free newsletter at www.tradewithprecision.com

to this ‘zone’ on two out of three time frames, it indicates that we may be getting close to having enough reasons to pull the trigger on a trade. At the end of the day, as traders, we need to be one thing and one thing only; decisive. We have to make that

17

insights

www.tradersonline-mag.com 01.2015

Transaction Data Compression There’s More to Charts than Price and Time

Nowadays, the use of charts is a given in the world of trading and investing. Computer technology paved the way to fast, even real-time charting in the graphical representation of price evolution of exchange traded products. Even the most conservative fundamental oriented long term investor can be caught taking a peek at a price chart at least once in a while. Charts are taken so much for granted that few people care to descend to the basics of how they are constructed. But it is in those basics that new techniques can be found to synthesise data.

» Price data gets charted in multiple different ways. And

more rewarding because computers can’t read charts

each type of chart has its own disciples and acolytes

and charts do have a subjective edge by time scale and

stating the advantages over other types. The most widely

interval they happen to have.

used price chart depicts candles or bars on a time axis.

But no matter how we look at it, transactions are

Others, like Renko and Point & Figure charts got rid of the

the basic material out of which all of those charts are

evenly distributed time on the x-axis, though they keep

made up. It is by going back to this atomic level that we

some kind of a progressing time idea on that axis.

discover common ground for the different chart types

Besides the fact that charts might be useful, being able to algorithmically analyse the data can be even

18

and, while we are at it, might think of some new types and applications.

insights

F1) Lossy Character of Transaction Data Compression

The same resulting candle can be summarising numerous different patterns of underlying data. Put another way, the original data can never be retrieved from the summarised. The compression is one-way, losing information. Source: www.chartmill.com

Transactions

But these advantages come at a cost. When you take

At the most basic level of price data we have transactions,

a look at Figure 1, a single candle can be the product

and transaction data.

of different sets of transaction data. Put the other

Transaction data states at what time how many

way around, we cannot ever get the transaction data

shares changed hands and at what price. A broad

back from the compressed data. This is called a lossy

market equity can easily have tens of thousands

compression. It is one-way and irreversible. So as soon

of transactions in one single day. To keep things

as interval data is used (as most indicators do), one

manageable, transaction data is compressed over equal

should realise that two errors are made. First there is the

time intervals. The first (open), highest, lowest and last

time redistribution of volume. It is as if we view volume

(close) price in such an interval is recorded, as is the

as uniformly distributed over the interval. Depending on

total amount of shares traded in the interval (volume).

what interval is used, this error can be insignificant (for

This interval compression is called OHLCV (open, high,

example with a 1-minute interval) or a big deal (on a day

low, close and volume) compression.

based interval, volume is very often U-shaped). Secondly

This kind of compression has advantages such as

there is the error of price redistribution of volume. Most

synthesizing large amounts of data into a few single numbers while zooming out of the noise of every

F2) Further Lossy Compression of Already Compressed Transaction Data

single transaction behind it. Also, compressed data is more easily stored and transported. Next, compression goes hand in hand with scale and visibility. There is no use in looking at a chart showing one year of atomic transactions. The details would obscure the message the chart has to offer. And, lastly, as Figure 2 shows, we can further compress already compressed data to ever larger intervals. So weekly candles can be calculated from daily ones without the need for the original transaction data. In fact each transaction can be seen as a candle with open, high, low, close being the same number and keeping its respective volume.

We don’t need the original data to further compress already compressed transaction data. The resulting candle can be calculated by extracting the open of the opening (first) candle, the lowest low, the highest high and the close of the closing (last) candle for the interval. Source: www.chartmill.com

19

insights

www.tradersonline-mag.com 01.2015

We can’t ever get transaction data back from compressed data.

indicators, working on interval data, imply that at every

classic time driven compression showing one candle

price reached in the interval, an equal amount of shares

per day.

got exchanged.

In the middle part of the chart price driven transaction data compression is shown, where one candle is formed for

What Interval?

each 0.25 interval in price. This is the type of compression

Now the next observation is the degree of freedom on

used by Renko and Point & Figure charts (though they

how to define intervals. First they don’t have to be based

employ an extra rule to decide on trend changes).

on equal time intervals, nor does the way the intervals are defined have to be constant through time.

Finally the figure shows volume driven compression in its lower part. Each candle represents the compression

In Figure 3, three different types of transaction data

of 50,000 shares traded (of course approximately,

compression are depicted. In the upper part, there is the

because only by chance would transaction volumes form exact batches of 50,000). So what happened was that transactions were grouped by having 50,000 volume in

F3) Comparison of a Time Driven Compression

total, or having a total price range of 0.25. This can be done from candles as well as from transactions. So one can switch the compression type easily while zooming out to bigger and bigger candles.

Wrap Up We descended to the basics of how candles and bars got in place. In doing this, we discovered there is no limit on how we can play with compression rules, dictating the way transaction data is grouped into candles or other candles are regrouped into bigger ones. Here are a few ideas to start experimenting: •

Price driven compression needn’t be based on an absolute price range (such as 0.25 in Figure 3). Percentage, ATR (Average True Range), or other relative measures could be used.

•

Time driven compression could use candles on different time intervals such as 21 days or 13 weeks, you name it. They even could be formed on new events, mood on a forum or social medium. There is no end to how we can group data in candles. A rule could be as simple as counting a constant number of transactions to form a candle (a pretty useless but

Comparison of a time driven compression of one candle a day (upper chart), price driven compression of one candle per 0.25 close price interval (middle chart) and volume driven compression giving one candle per 50,000 traded shares (lower chart). Source: www.chartmill.com

20

strong example of diversity of possible compression rules). •

Different types of compression (or different rules with the same type). So in a clear trend aboard a winning position we could use volatility charting

INSIgHTS

based on time driven compression, while a price

Dirk vandycke

driven volatility compression might be shown on the chart when looking to enter on breakouts. What this

Dirk Vandycke has been actively and independently studying the markets since 1995 with a focus on technical analysis, market dynamics and behavioural finance. He writes articles on a regular basis and develops software partly available at his co-owned website www.chartmill.com. He teaches software development and statistics at a Belgian University.

means is that one chart could adapt its compression rules on the go. •

This brings up the fact that literally every technical rule or indicator could be used to steer the compression

[email protected]

on a chart. And with it new and different ways to look at the same data. For instance candles might be constructed on the free float volume of a stock. Giving

•

•

a candle for one set of transactions representing the

And then Something New

entire free float.

Always keep in mind though that when transactions are

Compression rules might give different weights to

compressed, a mere five numbers (one interval) might

different transactions. Leaving some out entirely (for

stand for hundreds to even thousands of transactions,

example having zero weight).

possibly hiding a lot.

The starting point of the interval is another degree of

An entirely different approach, instead of tuning

freedom. It could be anchored to the beginning of a

our compression rules, would be to start developing

new day (as is usually the case). But it might as well

indicators based on transactions, instead of interval

always start exactly five days ago, leaving us with a

data. Some examples are the ChartMill Value indicator,

synthetic week candle for every day. In our free float

freely available at www.chartmill.com, which was

example above, each candle might count back the

discussed in the November 2011 issue and Effective

free float in past volume to start its interval, giving us

Volume, to which an article will dedicated in one of the

a candle every day.

upcoming issues. «

21

insights

www.tradersonline-mag.com 01.2015

Trading Seasonalities Part 18: GBP/USD Short and Stock Krones Long

The British Pound has shown weakness against the US-dollar for some time now and therefore it is our first short-candidate of the New Year. Based on seasonality the MDAX-title Krones AG should rise in the months to come and is therefore our first long-candidate of 2015.

» Trading Idea GBP/USD

F1) Trading Idea GBP/USD

The

first

trading

idea

can

be

implemented with a small forexaccount or CFDs. The British Pound against the US-dollar has been in a downtrend since 2014 and at the moment a consolidation at the support level of 1.57 GBP/USD is developing. Based on seasonality we recommend a short position at the start of the New Year with a holding period of 70 days. The average profit of a position with a holding period from 31st December until 10th March The currency pair GBP/USD is in a downtrend since the middle of June. A trend continuation could be possible starting on 31st December – that is the day when you could enter a short position with a holding period until 10th March 2015. Source: www.lp-software.de

22

was 358 pips in the past years, the maximum profit was 1268 pips. The hit rate is a moderate 75 per cent. A correct signal to the downside would

insights

mean that the downtrend since May

F2) Trading Idea Krones

be continued. Figure 1 shows the seasonal line since 1980 that formed a high (dotted red line). If the downtrend were broken at the day of the entry it would be ideal to enter short at the blue resistance area at 1.60. But even if the weakness of the British pound continues,

the

downtrend

may

develop further to the downside – at least based on the angle of fall of the seasonal line, that shows a bottom on 10th March. The average loss of such a position was 230 pips in the past

After the new all-time-high the stock of Krones AG could offer a second chance to enter at a favourable price. The stock should stay in your portfolio until 30th April 2015. Source: www.lp-software.de

years and that should be the stop loss after the entry. At maximum we expect a drop to the next support at 1.48 until the exit day. Based on the current price this

than eleven per cent, whereas the average loss was only

means a profit potential of about 1200 pips. The data of

seven per cent – the maximum profit was 26 per cent.

the Commitment-of-Traders(CoT)-report shows larger

In

November

several

analysts

recommended

positions of the commercials on the buy side, but the

the stock as a buy-candidate. Independent Research

historical comparison shows that the volume is not big

calculated a profit target of 86 EUR. Technical analysis

enough to be a real bottom.

confirms this, as the stock has room to the upper trend border. It would be ideal, if price consolidated until 16th

Trading Idea Krones

January to the break-out-level at 76 EUR and then the

The second trading idea is the German MDAX-share

trend would continue. The stop loss should be placed

Krones AG. The company plans, develops and produces

at eight per cent below the entry, ideally at the green

machines as well as ready-to-go-facilities for all areas of

support line at 75.50 EUR. «

the bottling- and packaging-technology and beverage industry. The company is one of the world wide leaders of this industry.

T1) Seasonal Trades of the Month

The stock made a new all-time-high at the beginning of November after defending the support level between

Instrument

GBP/USD

Krones

63 and 65 EUR. In Figure 2 you can see the uptrend line

Direction

Short

Long

where the price bounced off that trend line.

Entry

31.12.2014

16.01.2015

Exit

10.03.2015

30.04.2015

The stock has a dividend yield of 1.19 per cent and could be bought on 16th January and held for 104 days

%-Win

75%

88.24%

exiting on 30th April. Based on the last 17 years of data

History in years

8

17

there were only two losses. The average profit was more

Average profit

358 Pips

11.77%

Maximum profit

1268 Pips

26.03%

Average loss

230 Pips

7.23%

Maximum loss

917 Pips

10.68%

Holding period

70 days

104 days

Update On 7th and 19th January you can have a look at the update on www.tradersonline-mag.com. We also discuss the question of the best entry and the placing of the stop-losses.

Table 1 shows the key facts of both trading ideas. Source: www.trademinerpro.com

23

insights – news

www.tradersonline-mag.com 01.2015

Yacuna Introduces Cryptocurrency Exchange for Ultracoin The future of cryptocurrencies starts with Yacuna.com:

hybrid PoW/PoS distribution method makes it accessible

The UK-based and regulated trading platform for digital

to both miners and investors who are willing to trust in

currencies launched a new market for the emerging

the growing XBT/UTC market and the increasing trading

cryptocurrency Ultracoin. Customers can now seamlessly

volume of Ultracoins. Ultracoin features a 30 second

exchange Ultracoins into Bitcoins in a secure, safeguarded

confirmation time which makes it as appealing as cash.

and trusted environment at Yacuna.com. Ultracoin was

Ultracoin confirmations are 20 times faster than Bitcoin,

first founded in February 2014 with the goal of a truly

and many times faster than Dogecoin and Litecoin.

convenient, fast, and decentralised cryptocurrency. The

Source: www.yacuna.com

Saxo Bank Launch NDD Style DMA Trading

IG Group launches a collateral offering

Saxo Bank will launch multiple new NDD style accounts

IG Group has launched a collateral service allowing

designed for clients seeking Direct Market Access (DMA) by

clients to use existing shareholdings on their stockbroking

trading anonymously on best in class liquidity sourced from

platforms as margin to open new contracts for difference

the world’s top banks and specialist market makers. With

(“CFDs”) or financial spread bets. CFDs and spread bets

this offering, Saxo provides clients with a choice of pricing

are flexible contracts which allow a client to speculate on

structures; clients can either trade on raw market spreads

the movement of an asset, up or down, without having to

plus volume based commissions, or trade on the same DMA

take ownership of it.

liquidity with an all-inclusive spread. Additionally, Saxo

This new offering means stockbroking clients can use the

Bank is now also offering investors a “SaxoMT4Linked”

value of their investment portfolios as margin on over

account. This allows clients to combine use of MT4 as an

10,000 markets that IG Group offers, without needing to

execution harness for FX and CFDs, with trading on Saxo

sell their shares.

Bank’s proprietary platforms. This provides clients with an

Clients will be able to use up to 95 percent of the value of

opportunity to access the full universe of tens of thousands

their shares to cover the margin required to fund leveraged

of additional products, including Equities, Futures, Options,

trades. This opens up the opportunity for traders to take

Fixed Income and ETFs. All trades flow to a single multi-

more active positions or reduce risk without needing extra

product, cross-collateralised, margin account.

capital.

Source: www.fxstat.com

Source: www.iggroup.com

How to regulate a £75 trillion industry... The new Payment Systems Regulator (PSR) today sets out how it proposes to regulate the £75 trillion payments industry when it becomes fully operational on 1 April 2015. The proposals will further the PSR’s three objectives: to promote competition, to promote innovation, and to ensure that payment systems are developed and operated in the interests of service-users. The PSR’s proposals, alongside initiatives from the Financial Conduct Authority and Competition and Markets Authority, will help create a more competitive banking industry. Open for consultation until 12 January 2015, the package of measures focuses on driving industry strategy and encouraging innovation; opening up the ownership, control and governance of payment systems; and providing fairer and more open direct access to payment systems as well as increasing transparency. Payment systems enable people to spend and transfer money. They underpin the UK’s everyday financial activity. Source: www.fxstat.com

24

Insights – news

Several Awards for BATS BATS Chi-X Europe was honored in three separate annual awards rankings, winning “Hall of Fame – Outstanding Trading Venue” at The Trade’s annual Leaders in Trading awards; “Best Trading Platform or Venue” at the Banking Technology Awards; and receiving a special commendation as “Newcomer/Innovator of the Year” at the 10th annual Funds Europe Awards. The exchange has won eight industry awards this year. Source: www.batstrading.co.uk

ETF Securities awarded Best ETP Provider ETF Securities, one of the world’s leading, independent providers of Exchange Traded Products (ETPs), has been awarded the Best Exchange Traded Product Provider by Shares Magazine. The awards, which took place at the Grosvenor House Hotel on 13 November, celebrate the best of the UK’s financial services industry and are voted for by Shares’ readers. ETF Securities worked closely with investors and IFAs to ensure they provide them with innovative and cost-effective investment solutions that meet their needs. Source: www.etfsecurities.com

WikiBusiness to list on the Canadian Securities Exchange WikiBusiness announced that the company is in the

company. Plans call for an expansion of the present board

process of preparing for a listing on the Canadian

and management before the projected listings.The listings

Securities Exchange (CSE) to take place in January 2015.

on the CSE and FSE are part of the company’s strategy to

WikiBusiness has formed a Canadian holding company

ensure a full roll out of WikiBusiness, as the independent

with the assistance of Canadian law firm MillerThompson,

and dynamic Business Encyclopaedia. WikiBusiness is an

and partner, Glen Lekach. Auditing for the company is

extensive and dynamic Business Encyclopaedia for private

being managed by MNP LLP, Senior Vice President, David

individuals and business professionals. WikiBusiness

Danziger. The Canadian Securities Exchange offering will

gives people access to consolidated historical, factual and

coincide with a listing on the Quotation Board of the

financial business knowledge and data combined with

Frankfurt Stock Exchange scheduled for early January

real time news about companies.

2015 as well. WikiBusiness has seen a strong interest in the

Source: www.wikibusiness.org

A union of two global leaders IronFX Global, Limassol hosted a special inauguration event at its global headquarters, in commemoration of its official partnership with FC Barcelona, one of the world’s most successful football clubs. The inauguration took place in the presence of Javier Faus, Vice President of FC Barcelona, and the IronFX senior management team. After unveiling a dedicated plaque, FCB Vice President Javier Faus was given an exclusive tour of the 2,000 square meter office space, and was presented with a personalized gift in celebration of the global partnership – a handcrafted ornament symbolic of the legendary union of football supremacy with trading leadership. During the tour, Javier Faus also viewed an attractive photo exhibition showing the global reach of IronFX, via more than 60 local offices worldwide. Source: www.ironfx.com

25

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News from the World of Technology

» Admiral Markets UK brings you MetaTrader 5 with lots of

of one of the worlds’ first 40Gb Ethernet technology FX

new capabilities and increased working speed. MetaTrader

solutions. Installed in Tokyo (TY3) with ADS Securities new

5 was developed by Metaquotes Software corp as a full-

OREX platform it offers an ultra-low-latency solution for

featured downloadable platform designed to provide online

forex traders. The deployment in TY3 uses 40Gb network

traders with fast and reliable access to various markets

cards and allows for each tick from multiple liquidity venues

from one and the same application. Integrated into Admiral

to be processed with dramatically reduced delays as the

Markets’ robust ECN liquidity network (same as Admiral.

additional bandwidth mitigates microbursts in volatile

Prime) MetaTrader 5 offers considerable benefits to traders

market conditions. 40Gb technology has been selectively

and provides significant advantages over competing

used in other low latency asset classes, but the set-up

platforms: advanced charting options (including custom

costs have always been high. Recent design changes have

chart time frame support), highly customisable order entry

lowered the datacentre footprint and increased capacity

settings with liquidity-based precise execution strategies,

providing cost effective performance benefits.

one-click trading feature, depth of market and order book

ADS Securities aims to lead the market in user friendly

trading features, opportunity to edit orders directly from

but sophisticated trading platforms. It provides a range of

the chart screen, thousands of free trading strategies,

institutional and retail forex trading services with wholly

scripts and indicators instantly available for download

owned or partner company offices in Abu Dhabi, Hong

from MQ5 coding language community (The Codebase),

Kong, Singapore and London. For more information

and powerful EA testing environment (MetaTrader5

about the technology go to www.ads-securities.com.

Strategy Tester). For further information, please visit www.admiralmarkets.com.

» Thomson Reuters announced the release of StarMine SmartEconomics, a model that generates more accurate

» ADS Securities and Fixnetix are claiming a step forward

forecasts of macroeconomic data and FX rates. This is

for the FX industry with the design and implementation

the first time that Thomson Reuters StarMine has applied its SmartEstimates methodology to economic data and FX rates to help professional investment managers

ADS Securities

generate investment ideas and mitigate risks. StarMine SmartEconomics gives its users enhanced intelligence by providing guidance on what surprises may lay ahead in important economic releases and FX rates. Marrying the breadth of Thomson Reuters Datastream economic data with Reuters polling data, StarMine SmartEconomics rigorously assesses the historical accuracy of each forecast contributor at every point in time on every poll in which the contributor had a forecast. These historical accuracy scores determine the weight that each forecaster receives in the SmartEstimate. Backtests show that the SmartEstimate for economics and FX correctly predicts the direction of macro surprises relative to the consensus forecast over 60 per cent of the time when

26

TOOLS

the SmartEstimate is significantly different from the consensus. For performance over the past year, the

FXCM Mobile App

success rate reached 75 per cent or more on some of the most significant indicators such as US non-farm payrolls. For more information, go to www.thomsonreuters.com. » X Open Hub announces a launch of a new tool available in XOH environment. The new application is a result of a fruitful partnership with Trading Central, a leading investment research provider to financial market professionals. The app is a unique combination of TC Feed, TC Indicator and XOH trading capabilities – all three in one application. Actionable content, user friendly interface, customizable time frames, ability to fill in orders based on TC levels – these are not the most important features of this application. The main point is to save traders time and allow them to trade directly from the application without

However, instead of financial assets, the platform offers

the necessity of switching to the platform. No user set-up

locations. Instead of prices or rates, it offers temperatures.

and configuration is needed, unlike other platforms. To

The trader then predicts, if the real temperature at expiry

learn more, visit www.xopenhub.pro.

will rise or fall from the offered temperature in the option. Recent studies by economists at Penn State’s

» FXCM has launched an updated version of its Trading

Smeal College of Business and College of Earth and

Station

include

Mineral Sciences have tested whether futures markets

the latest range of in-house developed Real Volume

Mobile

application.

Improvements

can be used to accurately forecast the weather, and, so

indicators. It was first launched for Android users, but

far, they have found the markets to be just as accurate

FXCM has promised a version for iPhone as well. As part

as major forecasting services. For more information visit

of the Real Volume series, clients will have access to: Real

www.weathika.com or www.spotoption.com.

Volume indicator, Transactions indicator, Market Movers, Directional Real Volume, and On Balance Real Volume. Additional details can be found at www.fxcm.com.

Weathika

» SpotOption, a binary options platform provider, announces the launching of their latest white label, Weathika. Weathika.com collects data from thousands of local weather stations throughout all major urban areas in the United States. SpotOption’s technology, and trading engine, was the perfect fit for this “up” and “down” weather

prediction

game.

SpotOption’s

traditional

platform technology provides financial assets and their rates, through connectivity with top feed providers. The trader chooses the asset, examines the given option price, and predicts, if the price will rise or fall by the expiry. With the latest breakthrough, Weathika, it works very similarly.

27

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The Monetary System Analysis and New Approaches to regulation by Jean-François Serval and Jean-Pascal Tranié

» Written by respected authors Jean-François Serval

“The

Monetary

System:

Analysis

and

New

and Jean-Pascal Tranié, this important text provides an

Approaches to Regulation” is the latest title by the

in-depth analysis of the definition of money and how

authors of “La Monnaie Virtuelle qui nous Fait Vivre

money operates, taking a courageous and controversial

(The Virtual Currency that is Our Lifeblood)”, a book that

stance in presenting the contemporary implementation

was used extensively by senior treasury staff in several

of money as a social contract, governed by laws and

countries.

regulations set by our society.

The Current Financial Situation The recent global financial crisis raised still-lingering Authors

questions on how to balance actions based on short-term

Jean- François Serval is President of Serval & Associés,

decision-making against the uncertainty of impending

a European accounting practice and a founder and head of United States operations of Constantin Associates, a multinational accounting firm. He sits on several advisory boards. Jean-Pascal Tranié is President of Aloe Private Equity. He has held senior executive positions at Veolia Énergie and was head of Vivendi’s Media and Multimedia divisions, before becoming CEO of the Viventures Partners venture capital arm. Ten years ago, he created a group managing “green” investments in Asia and Europe.

28

long-term change in the economic environment. In this book Jean-François Serval and Jean-Pascal Tranié address a number of key questions about the current financial situation, outlining the conceptual basis required to build a new and more stable financial system, paving the way for a fiscal policy model that places emphasis on rotation rather than on inventories of financial instruments that would result in improved tax policies. The authors explore the historical context of money and reveal how transactions work in today’s global

TOOLS

economic environment. “The Monetary System” is a compelling work that answers a number of key questions about our current financial situation: What underpinning of democratic society facilitated a transition to the economic realities of today? What were the major drivers that characterised the current economic impasse? How can one forecast future trends? What can be done to ‘fix’ the present economic system? Based on exhaustive research, the book offers an overview to the present economic situation throughout the world that is defined by slow growth, rising debts, and low inflation. The authors envisage a healthy economic future and put forward a new model for the global economy.

Conclusion Using this contemporary model of money as a social contract, “The Monetary System” is a comprehensive resource that gives banking professionals, as well as others interested in the topic, keen insight into our current economic situation and offers an understanding of the factors that can help shape a sound financial future. «

Bibliography Title:

The Monetary System

Subtitle:

Analysis and New Approaches to Regulation

Author:

Jean-François Serval and Jean-Pascal Tranié

Pages:

312 pages £60.00, Hardback

Price:

9781118867921

Release:

November 2014

Publisher:

Wiley

ISBN:

29

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APPREVIEW

The App for All Option Traders

The Chicago Board Options Exchange (CBOE) has developed an interesting app for options fans for the iPhone and iPad. It combines market news, option prices, data as well as an interactive educational package, which should be really interesting for beginners. In the following article we put the app to test and discover the advantages and disadvantages.

» There are ever more apps for traders and investors

Let’s dive right in. After downloading from the Apple

every day and they offer many helpful tools for our work

App Store and logging in, we first open the “Market”

– this is true for options as well. CBOE mobile is a free

menu. CBOE mobile offers extensive market data on the

app that offers many features, and the newest version

go – but delayed by 15-minutes. Figure 1 shows the pre-

has been available since mid October.

defined overview of all important US-indices including

30

tools

If you are looking for a certain put or call with a certain expiration date and strike price, you can find it in a few steps.

the VIX on an intraday basis. If you click on an instrument,

secret for many stock market fans because of the high

its particular history is shown as well. This should be

complexity, so the apps’s educational area is especially

sufficient for rough analysis, but for detailed analysis it is

valuable. Whether just starting out, refreshing or

clearly lacking.

extending your knowledge – the clear explanations will

Another feature in the “Market” menu is the obligatory,

be helpful for everybody. A click on “Education” opens a

easy-to-do watchlist for the keeping track of your individual

three-step information and quiz program that covers all

portfolio instruments or interesting candidates. It enables

important topics:

access to important information that we will discuss later (see Figure 2). If you are particularly thirsty for knowledge

Level 1 (Basic Level)

and want to receive multimedia information on the go, the

•

Terminology,

market

participants,

capital

asset

app offers current videos under “CBOE TV”, which can be

pricing models, Covered Calls, Indices, volatility et

filtered by different fields of interest, for example videos

cetera

for certain option strategies or market news. There is also educational content available that you can select with a filter as well.

F1) Market Overview

If that is not enough, you should take a look at the “Social Hub” – information from social media is shown here, including the internal CBOE blog and twitter channel as well as external blogs regarding options trading. In short: Good and useful information regarding options is available aplenty.

Option Search Made Easy In addition to the extensive information another thing is offered from the CBOE app: convenient and quick searches for options. If you are looking for a certain put or call with a specific expiration date and strike price, you can find it in a few steps. Figure 2 shows an example of an option overview for Apple. We chose expiration dates in December 2014 and we filtered for options in the money. The option chain is displayed in table form – if you click on the option, another window opens showing all the details regarding bid/ask, volume and so on.

Options from A to Z – the Educational Area Trading stocks, CFDs or futures attract many private traders and investors, whereas option trading is still a

The pre-defined index-overview offers an intraday performance chart of all important US-indices including the VIX. Source: CBOE mobile

31

tools

www.tradersonline-mag.com 01.2015

Level 2 (Medium Level)

lessons – and it aids in remembering the content. New

•

Components of option price, Greeks, Credit Spreads,

lessons and the reaching of the next level is only possible

calendar Spreads et cetera

once you have earned enough points.

Level 3 (Advanced Level)

Conclusion

•

This update adds usable functionality. The option

Index options, Spreads for advanced, SPX & VIX

search as well as the “Education” area are strongly The theory behind the 75 lessons is to keep things

recommended because they offer the ability to learn

short and understandable and they are complemented

about options in a fun way – especially for beginners.

with graphics – so efficient learning is guaranteed. Every

And if you just want to stay updated on the most traded

topic has an introductory video offering a good orientation.

stocks, the intraday development of the markets or the

The interrogation of the knowledge with multiple-choice

newest blog and video entries, you will also be very

questions is fun and motivates the user to learn the next

happy with this app – for free. «

F2) Product Search

F3) Lesson Overview

With the help of search tools the user can find the correct option within seconds. The option chain is displayed in table form – if you click on the option, another window opens that has all the details regarding bid/ask, volume and so on.

There are 75 lessons including questions available for all traders who want to start or extend their knowledge of options.

Source: CBOE mobile

Source: CBOE mobile

32

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Optimised Bollinger Band Strategies Feather Your Own Nest

Bollinger Bands are certainly well known by many traders. In this article two authors provide you a somewhat unusual method of trading that they picked up in the USA. You may be familiar with the term “to feather one’s own nest”. This is similar to the following strategy.

» Bollinger Bands

from the empirical standard deviation. The calculated

The base of the strategy are the Bollinger Bands,

standard deviation is multiplied with a predetermined

developed in the 80’s by John Bollinger. Based on normal

factor (Bollinger recommends using a value of two) and

distribution, the strategy emanates from the fact that

this value is afterwards added or subtracted with the

current market prices of a bond with higher probability

previously calculated average.

are situated near the mean value of the past market price rather than further away from it.

Modification of the Standard Parameters

To identify market price trends, three values are

The authors use the Bollinger Bands with the following

used. First of all, average price is usually calculated

settings: Instead of the average price of the last 20

with the 20 day moving average. Afterwards, the market

days, they will select the last 55 days (depending on the

price is “encircled” by two further bands calculated

Fibonacci numbers). The standard deviation is changed

34

strategies

from 2.0 to 0.2. They leave out the

F1) Market Entry and Exit of the Strategy

middle Bollinger Band. This gives them two very narrow bands, which they draw in blue. Imagine now, that these bands were a river. These are therefore also shown in blue. This will enable you to better internalise the strategy. With this strategy you wait until the candles have come completely to the other side of the river. This means that, the candle’s body must not touch the flow, which means that it may no longer be “wet”. Only when a complete candle stays outside the river and with it on the other side, also on the dry side, will we start with this strategy.

After the first “dry” candle, the market entry (green line) is placed over the high of this candle and the stop (red line) 20 pips beneath as well as below the Bollinger Bands. The first exit is carried out at 20 pips with a risk-reward ratio (RRR) of 1:1 (blue line), the second exit at 40 pips profit (blue dotted line) with a RRR of 1:2. Source: AgenaTrader

Market Entry, Stop and Risk-Reward Ratio (RRR) You enter into a long position when market prices have crossed the river from bottom to

found that a position that they can continue to run often

top. You buy a lot when exceeding the maximum rate

turns again in the opposite direction and thus gives back

of the first “dry” candle. The initial stop sits below the

all profits. The trader should therefore use a stop-loss as

lower Bollinger Band. The stop should be a multiple of

a sort of trailing stop below the last candles as soon as

five pips, so choose at 17 pips distance from the market

80 to 90 per cent of the movement to the target market

entry price 20 pips stop-loss. You measure this distance

price is achieved. This means that he/she gives back

for the market entry price and then put your target in the

as little as possible from gains already achieved. This

same ratio to stop for the duration of the trade. Your RRR is thus 1:1. For positions in the direction of the

F2) Profit Secured Shortly before Target Reached

short side, the same rules apply inversely. Various studies have shown that this strategy works well in the Forex market – particularly in the majors, so EUR/USD, GBP/USD, USD/JPY, USD/CAD and USD/CHF. The authors mainly

choose

the

15-minute

period as a time unit. They have not adequately tested other time units or markets. You should not risk more than one to three per cent per trade with this method. Now you might wonder, why first of all a RRR of 1.0 is chosen, although the authors have observed that the trend often continues more than the target. The authors have

After reaching about 80 to 90 per cent of the distance to the target market price, the stop is put below the low of the current candle. Here, a small profit was achieved although it would otherwise have been stopped out at a loss below the Bollinger Band. Source: Flattrader (FXFlat)

35

STrATEgIES

Book Review

www.tradersonline-mag.com 01.2015

low margin requirement for CFDs and Forex allows In 2012, Andreas and Christian Weiss’ book “So optimieren Sie Ihr Trading” on the subjects of trading systems, technical analysis and risk management was published. Pages: 224 ISBN: 9783864700033 Price: 34,90 € Publisher: Börsenbuchverlag Release Date: 26.03.2012

you to set up your portfolio in a diversified manner. For example, you can enter these orders early in the morning and go to work. In the evening you can see whether your target market price has been reached or not.

Three Per Cent Risk per Trade Another modification is to apply the strategy with a fixed percentage risk per trade. One possibility would be risking three per cent per trade; which means that on a $10,000 account you risk $300 per trade. So if the stop-loss lies at 20 pips, the position size is calculated as follows: $300 / 20 pips = $15 per pip. The lot size can be adjusted accurately to ensure that for each

ensures that he/she only goes out of the position when

trade the same risk is taken, regardless of whether the

the trailing stop is reached. This has the advantage that

stop stays at 20 or 50 pips away. Trading with a mini lot

it can definitely save a portion of the profits just before

(10,000), 15 lots can be traded. In microlots (1000) it would

reaching the profit target. In Figure 2 we see that the

be 150 lots.

position would have been stopped out at a loss, but it still came out through a meaningful stop setting with a

Elimination of the Risk and Partial Exits

small profit.

Market entry and provision of stop-loss take place

It is certainly difficult to find an ideal solution

as described above. The first take profit is set with

because you can never catch the optimal market entry

half of the position at a RRR of 1:1 and the second half

or exit. In the following lines, the authors show some

with a RRR of 1:2. Example: Stop-loss at 20 pips loss,

variants of this strategy. You can place these trades

first take profit at 20 pips profit with 50 per cent and

with the so-called “OCO order” (One Cancels the

the second take profit at 40 pips. After reaching the

Other) or secured order. You don’t need to continue

first profit target, you drag the stop to break-even, for

observing the trade. You can also simultaneously

example on purchase price. From now on you can’t

enter various trades in more underlying assets. The

lose with the overall trade. The aim of this approach is the elimination of risk for a little less profit. In the classic use of the strategy

F3) Combination with Multi-Time Frame Approach

with a RRR of 1:2, you get a potential gain of $600 in a risk of $300 per trade. If you change your exits as described, you could achieve a maximum profit of 450 dollars and the risk is reduced to $0 (after reaching the first profit target). You sell half of the position at a profit of $150 and have the opportunity to win from it further $300.

More Alternatives Use the same market entry and stop Short market entry after the first “dry” candle under the yellow band. Market entry occurs with the first “dry” candle over the blue (15-minute) Bollinger Band. Source: AgenaTrader

36

as before, then sell 50 per cent of the total position upon reaching the target profit of a RRR of 1:2. After

STrATEgIES

reaching the target profit, you drag the stop to breakeven. Exit to the second half of the position arises

Strategy Snapshot Strategy Name:

Optimised Bollinger Bands

Strategy Type:

Based on indicator; trend-following

Time Frame:

Usually 15 minutes or multi-time frame approach

Setup:

Market entry after the first “dry” candle (long and short), stop on the other side of the “river”,

Entry:

Long: above the high of the first “dry“ candle Short: below the low of the first “dry“ candle

Stop-Loss:

Multiple of 5 pips on the other side of Bollinger Bands or alternative strategy

strategy. You complement your setup (15-minute chart)

Take Profit:

1: 1 or 2: 1 or alternative strategy

with another yellow Bollinger Band in the higher time

Trailing Stop:

Only active after reaching 80-90% of the distance to the market price target

Exit:

Limit order at take profit price

Risk and Money Management:

Max. 3% risk per trade, only one position (long or short)

Average Number of Signals:

1-5 per day (15-minute chart)

either, a) at break-even, or b) the closing market price of the first “dry” candle on the other side of the river (Bollinger Bands). You hereby secure a partial profit with the additional option of further gains from longer trend movements, hence feathering your nest.

Multi-Time Frame Approach Another interesting variant is the following trading

frame of one hour with the same parameters (55; 0.2). This second Bollinger Band serves to generate market entry signals and the other provides a trend filter. It is traded in the 15-minute chart. As soon as the market price is above the yellow band, there is an upward trend. If the market prices are under the yellow band, the downtrend is intact. A trendless phase – a so-called sideways movement – occurs, if prices stay within both Bollinger Bands.

combination with the optimisation opportunities arising through the addition of various filters.

Market Entry and Stop-Loss

Through the combination of different time frames,

This trading strategy is a combination of the blue and

one can benefit from longer lasting period of trends as

the yellow Bollinger Bands, which are shown as blue

well as short term market price movements. Furthermore,

and yellow rivers. Once the market price breaks out of

the higher time frame is used as a filter to specify the

the yellow, you open a long position. The candle must

direction of the trend for the smaller time frame. Then

no longer touch the band. The stop-loss is defined by

only trades are disposed to get into the overridden trend

the blue Bollinger Bands in the 15-minute time frame.

direction. This leads to an increased hit rate, since minor

This means that the long position is closed as soon as

corrections are filtered out and consequently not traded.«

the market price below the blue river closes, thus the Bollinger Bands. The candle has to be a “dry candle”. Only such a signal is valid. Conversely, short positions are opened as soon as the closing market price of the 15-minute candle closes below the yellow river. The position is stopped out as soon as the market price closes above the blue river.

Re-Entry

Andreas Weiss Andreas Weiss studied economics with majors in investment banking and portfolio management. At CapTrader he is responsible for market analysis, creation and optimisation of trading strategies in discretionary and automated trading, managed accounts and portfolio management. [email protected]

Furthermore, there is the possibility that a signal is generated to re-enter a trade. Here, a new long position is opened as soon as the market prices close above the blue Bollinger Bands once again. Conversely, a short position is opened as soon as prices close below the blue band, wherein again the candle should not touch the Bollinger Bands.

Conclusion The strategy presented here can be applied on the one

Christian Weiss Christian Weiss is Managing Director at CapTrader. He studied international business administration with majors in risk management and finance. His focus is primarily equities, Forex and futures trading. He combines discretionary methods (Fibonacci, Ichimoku & Andrews Pitchfork) with automated systems. [email protected]

hand in the classic, simple form; on the other hand, in

37

STrATEgIES

www.tradersonline-mag.com 01.2015

Bitcoin Trading Taming a Wild Market

Bitcoin and the general concept of crypto currencies are one of the hottest topics in finance right now. The battle surrounding this subject is fierce and ideological, involving powerful forces and is far from over. But with Bitcoin prices likely to continue its rollercoaster ride, there is no need for traders to have a personal opinion in either direction to profit from one of the world’s most volatile underlying’s.

Maik Schwaebe

» Different opinions and visions make prices move and

Maik Schwaebe has been trading equities since 1997 and later added commodities and currencies to his repertoire. His main focus is on mechanical trading approaches. A regular contributor on seekingalpha.com, he also manages the Wikifolios “German Top Momentum” and “Pure Hedge”.

the unclearer the future the more volatile the price. One

[email protected]

of the most controversial debates over the past twelve months or so has been Bitcoin and the potential of its underlying technology. While many people believe that so-called crypto currencies represent the future of not only money but also economic transactions in general,

38

strategies

others

are

more

sceptical

and

F1) Bitcoin, 4 Hour Interval, Fall of 2014

perceive it as a scam or a shady tool to finance illegal activities. This wide variation in opinion is one of the reasons why Bitcoin is moving the way it is, with regular price swings that leave most penny stocks in the dust. With developers, entrepreneurs,

banks,

regulators

and central banks trying to get a grip on the subject, the future continues to be wide open. Thankfully, we as traders don’t have to have an opinion; if anything, it is actually a disadvantage to have one as it can cloud your judgment and make you ignore or overlook

This shows the Bitcoin price with an 18-period channel throughout a relatively calm phase. L marks position changes from short to long and S changes from long to short. Seven of those nine signals ended in a profit, returning on average 8.1 per cent after commissions and slippage versus -3.75 for the two losses suffered. Soruce: MetaTrader

patterns that contradict your opinion. So let’s concentrate on the aspects that make Bitcoin such a special trading vehicle and find a way to profit from it.

to first find an efficient venue to trade on and then use that venues data as inputs to determine the suitability of

The Pros and Cons

your strategy. Depending on your country of residence,

First of all, there is relatively limited trading volume and

you will have a few options to either sign up with one

market capitalisation in Bitcoin. With only a few hundred

of the major Bitcoin exchanges or go through one of the

thousand units being traded over several different

increasing number of Forex brokers that offer CFDs on

exchanges per day and a market value of just around $5

the Bitcoin price. Exchanges often offer lower transaction

billion, there is not a lot of space for institutional sized

costs but sometimes lack a convenient way of using

participants to play this market.

leverage and shorting.

Hedge Funds and HFT (High Frequency Trading)-

It is also crucial to keep an eye on the grade of ownership

Outfits being limited to arbitrage strategies is great news

one enters when going long Bitcoin. If your coins will be

for individual traders because trading opportunities or

stored in a so called hot wallet, they could easily be stolen

edges usually tend to disappear once Wall Street’s best

in a hack attack, which is exactly what led to the demise

brains and billions in firepower get involved, especially in

of the largest Bitcoin exchange Mt. Gox last spring. Many

rule based, algorithmic trading.

exchanges now claim to store the majority of funds in cold

Another positive fact is that Bitcoin is the only underlying that is truly traded worldwide at any given moment. Stocks

wallets on servers separate from the operations front end and should therefore be impossible to breach.

can jump around a lot overnight, and even super liquid

To completely sidestep this problem, one could

currencies can be subject to huge weekend gaps; theoretically

choose to only trade Bitcoin via CFDs that are based on the

Bitcoin will never have this problem as market moving news

price movement and never imply any direct ownership.

can be priced in immediately, 365 days per year.

But this seems to be the more expensive way to trade

However, an immature market and the absence of

Bitcoin as some CFD shops charge a fix numerical fee of

institutional liquidity creates many difficulties too, and

up to 6$ per Bitcoin and transaction, which when charged

those have to be addressed in order to trade this market

on a 300$ vehicle will kill any strategy.

profitably. Due to it being a young, unregulated and

Another

big

factor

to

watch

is

the

slippage

decentralised market, there is a variety of competing

experienced when trading, which is usually more extreme

exchanges that post individual bids and asks and trade

in illiquid, low volume markets. The strategy introduced

very different volumes of Bitcoin per day.

in this article will use stop orders at important resistance

As quotes and transaction costs are very important variables to any trading strategy, it is recommended

and support levels to enter and exit trades, which makes slippage an even larger danger.

39

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www.tradersonline-mag.com 01.2015

It is, on the other hand very crucial to follow every

Strategies in this area often use moving averages

signal in trend following strategies as a few good trades

(MA) as directional filters or entry signals. Depending

can make or break a year. So as long as we keep it in

on period, this makes only limited sense with Bitcoin as

check we will have to accept slippage as price moving

those indicators are lagging and might not detect a trend

dynamically in our desired direction.

early enough. For those reasons, one should favour a

The author’s broker of choice acts as a liquidity provider for a couple of exchanges. Participation happens

channel breakout strategy, easily applicable with stop buy and stop sell orders.

via CFDs so there is no risk of losing the actual coins. A fix

The period of time that defines our channel should be

0.5 per cent transaction fee per round turn is charged with

kept rather short to create signals that are more reactive.

no additional costs for borrowing to short or financing

The author has used 3-day highs and lows in a lot of

margin trades.

variations before, which seems like a fair starting point.

Average slippage over the past 20 trades or so has

To make the system less static we will transfer this rule

been at 0.15 per cent per round turn, but we will assume

into a faster time frame by applying a 18-period MA on

0.25 per cent to be on the safe side. These costs will be

a 4-hour chart, for a rolling channel defined by the last

used as inputs to validate our strategy and backtests

three days absolute high and low. Figure 1 shows that

were performed using the same broker’s historical data.

channel and the signals it generated over the past three months.

What Approach to Take?

A single rule that simple is not likely to work perfectly

The type of strategy you choose depends on the pattern

all the time, and a quick look on the results confirms this.

you identified, and in our case, there are not a lot of

While this 3-day channel works well most of the time, it

choices. We are dealing with a highly volatile instrument

really struggled throughout the bubble moves that Bitcoin

that has no problems ten-folding in two months or being

experienced around the end of 2013.

cut in half in a day, which immediately eliminates mean-

With volatility being both an opportunity and a risk

reversion types of strategies and points to the trend

at the same time, it only makes sense to put volatility

following approach.

into a comparable perspective. To achieve this we will put a slight spin on the traditional Average True Range indicator (ATR) and calculate it off per cent values

F2) Bitcoin and Its Per Cent ATR, Nov 2013 to Nov 2014

instead of absolute ones.

1200 long

short

So with a close of $300 and a

1000

range of $6, our ATR will be two

800

per cent instead of $6 so that we have a more accurate expression of

600

range of a volatile price. This reading stores volatility in a better way than

400

comparing an absolute value to the

200 0 04.11.2013 10 9 8 7 6 5 4 3 2 1 0 04.11.2013

most recent close. Averaging those 04.01.2014

04.03.2014

04.05.2014

04.07.2014

04.09.2014

04.11.2014

us a pretty good indication of the last two weeks volatility, and over the course of the last year this average fluctuated between 0.8 and 8. With ranges that different it becomes

04.01.2014

04.03.2014

04.05.2014

04.07.2014

04.09.2014

04.11.2014

The colouration indicates the systems position on the Bitcoin price; blue means long, orange means short. Naturally, there occur more position changes during volatile periods, as defined by an ATR indicator above 4.0. This indicator is crucial to determine how aggressive we pursue trends and our rules should probably be modified when volatility drops significantly over an extended period. Source: Author’s graphic

40

numbers over a period of 86 will give

obvious

that

we

will

have to adjust our parameters at times, and after reviewing our per cent ATR, we can say that spikes over a value of 4.0 only happen in particularly unsettled times. We will use this threshold to tune our

strategies

The type of strategy you choose depends on the pattern you identified.

strategy to be more sensitive to short term trends.

Conclusion

Whenever our per cent ATR is above 4.0 we will shrink

Before jumping head first into the Bitcoin experience,

our channel period down to four 4-hour candles in

please consider all the pros and cons of trading this market.

order to catch fast moving trends in highly volatile

Find a venue or institution that you can get comfortable

environments. Figure 2 shows our systems final long/

with, consider all expenses and security issues that

short periods directly on the Bitcoin price and the

you might encounter. Do your own research on trading

corresponding per cent ATR.

volumes, slippage etc. and then backtest whichever

But even with periods as short as 16 hours, our

strategy you want to pursue with that institution’s data.

channel highs and lows can still at times be 50 or more

The rules outlined here should be seen as an inspiration

per cent apart from each other. Using only the reverse

or a base for doing your own research and not a complete

signal as an exit rule would be extremely dangerous

and secure trading system.

which is why we will apply a simple ten per cent fix stop-

Even while trading, pay close attention to slippage

loss (SL) on entry, safeguarding our capital in the worst

and changes in the nature of how Bitcoin trades; after

case scenario.

all this is a very immature market and one year of reliable patterns does not guarantee anything for the

Results and Considerations

future.

This simple set of rules achieved a total return of +917.6

And last but not least, keep the capital allocated to

per cent after commission and slippage over a period of

any Bitcoin strategy within your own pain limits because

375 days from November 2013 to November 2014. The

after all, trading crypto currencies is still more of an

deepest drawdown accounted to -44.8 per cent, which

experiment than a safe investment. But with all those

was recovered within 20 days. Five out of 89 trades

precautions in place, one should be well prepared to

ended with our worst case stop loss of -10 per cent being

profit off Bitcoin’s wild swings, without having to pick a

tripped while 20 trades of 89 returned over ten per cent.

side in the heated debate over the future of money. «

The winning rate of about 44 per cent is sufficient because the huge difference in average wins (11.7 per cent) versus average losses (-4.2 per cent) makes this method highly profitable. The parameters used here were chosen rather intuitively and are not optimised, but even after trying a couple of different values (ATR period 50, lower or higher thresholds between slow and fast environments and different channel periods), the general tendency of the strategy remains very positive. Considering the

total

drawdown,

return one

and should

maximum actually

calculate the committed capital rather careful to keep temporary losses in a more acceptable range (see Figure 3).

F3) System Equity with Half Position Size, Past 12 Months 350 300 250 200 150 100 0

10

20

30

40

50

60

70

80

90

100

This is the trade-to-trade equity curve for our system, over the same period as in Figure 2. Only half the available capital is invested and commission of 0.5 per cent and slippage of 0.25 per cent is included. The result looks extremely promising but as with any system that has a hit rate below 50 per cent it is extremely important to catch every trade, as a few big wins can make or break the performance. Source: Author’s graphic

41

STrATEgIES

www.tradersonline-mag.com 01.2015

Trading Emerging Trends with the Bowtie Pattern A Simple Technique to Detect and get Onboard gradual Changes in Trends

In the previous articles, we discussed that only short term market forecasts are viable. However, through proper money and position, management positions can be held for weeks, months, and even years should the trend continue. This proper money management involved the use of stops, taking partial profits, and the slowly widening of trailing stops as the positions became more and more profitable. After that we looked at how to get on board established trends with Trend Knockouts (TRADERS´ 09/2014) and Persistent Pullbacks (TRADERS´ 10/2014). And, in the last article we looked at how to get onboard emerging trends with the First Thrust Pattern (TRADERS´ 11/2014). In this article we will keep with the theme of getting on board emerging trends, this time with the Bowtie Pattern.

Dave Landry

» When the Trend Ends a New One Often Begins

Dave Landry has been actively trading the markets since the early 90s. In 1995 he founded Sentive Trading, LLC, a trading and consulting firm. He is the author of three books that have been translated into six languages. He has made several television appearances, has written articles for several magazines and has spoken at trading conferences both nationally and internationally.

Trends do not last forever. Eventually they exhaust

www.davelandry.com

42

themselves and quite often, a new trend in the opposite direction emerges. However, established trends can often last much longer and go much further than most anticipate. Trying to buy a market because it is low or sell short a market because it is high is a loser’s game. The good news is that the market will leave clues that a trend is turning and will

#1 Free Bull Flag Screen

Hunt for stocks going sideways after a run up

with a minimum price of 5$ and volume of 500k

Run This Scan on Chartmill.com

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waiting for the market to reverse so they can get off the

F1) Trend Transitions

hook. Bottom pickers and top pickers who missed the Shorts

top or bottom and do not want to pay up are also waiting Downtrend Begins First Correction

Uptrend

Downtrend Resumes

for some sort of meaningful correction. Unfortunately for these traders, the meaningful correction may never come. Often, once markets begin to roll over, they only pull back very briefly before resuming their new trend. The old market participants will soon be forced out at adverse prices and the bottom/top pickers must pay up or risk being

Longs

left behind. By waiting for the market to have an obvious Uptrend Continues Downtrend

First Corrections Uptrend Begins

When an old trend ends, a new one often emerges. Source: The Layman’s Guide To Trading Stocks

rollover as evidenced by the Bowtie moving averages, you avoid the pitfalls associated with picking tops/bottoms. By looking to enter at the first signs of a correction rather than waiting for something more substantial, there is the potential for your position to be helped along by the predicament of the aforementioned traders.

Indicators vs. Illustrators Before we look at the rules and an example, keep in usually have a minor correction before resuming its new

mind that all price indicators have lag. Therefore, the

trend. Looking to enter after that minor correction and only

world “indicator” is a misnomer. It simply shows what

if the new trend shows signs of resuming is the goal of the

is happening with price, an “illustrator”, if you will. So,

author’s transitional patterns. This is illustrated in Figure 1.

the Bowtie moving averages crossing over (read further) suggests that the trend has changed. A quick glance at

Emerging Trends: Sometimes an Event, Sometimes a Process

the price bars will usually confirm that it has.

As discussed in the last article, markets in major trend transitions often begin with a sharp thrust in the new

The Moving Averages

direction. This often catches participants off guard.

For this pattern, a 10-day simple moving average, a 20-day

Sometimes though, the trend change can be more of a

exponential moving average, and a 30-day exponential

process than an event. This can still catch participants off

moving average are used. The author likes the 10-day

guard. They assume that the market is just resting before

simple moving average since it gives a true average price

it mounts another leg higher (or lower for shorts). Just like

of the stock for the past two weeks (ten trading days). For

the First Thrust as the new trend begins to emerge, they

longer term moving averages, the exponential moving

find themselves trapped on the wrong side of the market,

averages are preferred since they front weight the data. Therefore, although they take into consideration the longer term trend, they are faster to catch up with price,

F2) Moving Average Bowtie

since more credence is given to more current data. Do not worry about the math. Moving averages are available in even the most basic charting packages.

The Rules The goal of the Bowtie setup is to get on a new trend early. You wait for the market to show signs that it has changed direction of its longer term trend and then enter on the slightest correction. Entering new trends is risky, but the payoff can be tremendous, if you catch a new trend early. Through the use of multiple moving averages, it was When the moving averages cross over a short period of time, they give the appearance of a “bowtie.” Source: Dave Landry’s 10 Best Swing Trading Patterns & Strategies

44

discovered that they would often come together and spread out in the opposite direction as the market was making a major transition. That is, they would go from proper

Strategies

downtrend order – the faster moving averages

(shorter

periods)

F3) Moving Average Bowtie

below

the slower moving averages (longer periods) – to proper uptrend order –

(3)

the faster moving averages above the slower moving averages (Figure 2). When

this

happens

over

a

short period of time, it gives the appearance of a Bowtie. After the (2)

Bowtie forms, it suggests that the market has made a major trend shift.

10 SMA

However, it is still prone to correct.

20 EMA

Therefore, you seek to enter after a

30 EMA

minor correction. Here are the rules for buys, short sales are reversed:

30 EMA

(1)

20 EMA

1. The

market

significant

should

low.

make

Longer

a

term

or ideally all-time lows are the best. This helps to ensure that

10 SMA When the moving averages form a “Bowtie” (1) it suggests that the trend has changed. Look to enter after (at least) a one-bar pullback (2) but only on a trigger (3). The market must trade above the prior day’s high. Source: The Layman’s Guide To Trading Stocks

the most amount of people are on the wrong side of the market when the new trend begins to

an all-time high (1). Everyone who owns the stock

emerge. 2. Referring to Figure 3, the moving averages should

is at a profit. However, the momentum has slowed

converge and spread out again, shifting from proper

as evidenced by the fact that the stock hasn’t made

downtrend order (10 SMA < 20 EMA < 30 EMA) to proper

much forward progress on a “net net” basis for over

uptrend order (10 SMA > 20 EMA > 30 EMA). Ideally,

a month. It also has formed a double top. Classical

this should happen over a period of three to four days.

technical analysis used with a setup as trigger

This

creates

the

appearance

of a Bowtie in the averages. 3. The market must make a lower

F4) Short Trade Kodiak Oil & Gas Corp. (KOG)

low and a lower high. In other words, it must make at least a one-bar pullback. Note, in some cases, markets that only make a lower high (vs. a lower low and a lower high) may be considered. This is especially true when the previous day is a wide-range bar and/or when the trend is turning fast. 4. Once qualifications for (2) have been met, go long above the high of (2).

Trade Example Let’s take a look at an example (Figure 4). Kodiak (KOG) makes

The stock makes an all-time high (1) but begins to turn down. This action creates a Bowtie in the moving averages (2) and it suggests that the trend had changed. After a one-bar pullback (3) you look to enter (4) as the new trend emerges. Source: Telechart Platinum

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www.tradersonline-mag.com 01.2015

One Caveat: Look for First Thrust First

F5) Look for First Thrust First

The Bowtie moving averages are great for catching gradual changes in trend. They help to illustrate a trend change that might not be initially obvious by looking at the chart alone. As discussed in the previous article, sometimes the trend change can happen more abruptly. It is an event vs. a process. Therefore, when analysing a market, always look for First Thrusts first. Notice in Figure 5 that the First Thrust has already triggered while the Bowtie is still forming.

Gold or Arrows? Keep in mind when trading emerging trends that there is a chance that Bowties are designed to catch gradual changes of trend. On abrupt changes in trend, make sure you look for a First Thrust Pattern first vs. waiting for a Bowtie to form. Source: Telechart Platinum

what appears to be an emerging new trend might just be a correction in the longer term trend. You are a bit of a “pioneer.” And, like the American Pioneers, you are either going to get

usually makes for more powerful trades. The moving

the gold or arrows in your back. The good news is that

averages come together and spread out going from

all major tops or major bottoms will have a First Thrust,

uptrend proper order (10 SMA > 20 EMA > 30 EMA) to

Bowtie, or other emerging trend patterns. Therefore, the

downtrend proper order (10 SMA < 20 EMA < 30 EMA)

chance of the gold makes it all worthwhile.

over a short period of time (2), giving the appearance

With just a little experience, you will find Bowties very

of a “Bowtie.” The stock makes a higher high and a

easy to recognise. Paying attention to the Bowtie moving

higher low (3). This is actually part of a pullback that

averages in the indices will help keep you on the right

is already in progress. The stock triggers an entry (4)

side of the market. Through the use of multiple moving

as the low of (3) is taken out decisively. The new trend

averages, Bowties often catch gradual changes in trends

begins to emerge.

early. Because they are visually easy to recognise, they are a great pattern for those new to trading emerging trends.

Strategy Snapshot Strategy name:

Bowtie Strategy

Strategy type:

getting onboard emerging trends

Time horizon:

daily chart

Setup:

major low (better all-time low), then SMA 10 and EMAs 20 and 30 converging, crossing, and spreading out again within several days

Entry:

lower low and lower high (at least 1-bar pullback), long above the high of the pullback

Stop-Loss:

below the low of the pullback

Take Profit:

optional partial take profit

Trailing-Stop:

optional partial trailing stop

Risk and Money Management:

max. 2% risk per trade

Looking ahead Now that established and emerging trends have been discovered, the next article will look at the third phase of trends, accelerating trends. We look at how to recognise and get aboard these trends using the author’s Accelerating Momentum Strategy. Then, we will discuss how to pick the best stocks and other markets to trade. Without a plan and money management the best setups in the world are useless. Therefore, we will discuss money and position management in more detail. Without the discipline to follow a plan, your trading results will be random at best. So last, but certainly not least, we will discuss trading psychology. «

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The Program has been designed to train traders in quantified, rule-based trading technologies to manage one‘s portfolio across all time frames and all liquid global markets (Equity indices, Bonds, Commodities, Forex). The techniques can be applied across all instruments (futures, spot, CFD‘s, spread betting). Programme Duration: The Program consists of 12 weeks of intensive supervised training. Trader Training and Development Ltd. will be forming a pre-launch “Protégé Group“ of trainee traders, whereby we will train 12 people, for 12 weeks, without any cost. Trader Training and Development Ltd. after the completion of the Program we will put the trainee traders of the Protégé group on the “Top Trading Talent“ Challenge. Each trainee will have the opportunity to win £12,000 in cash. In order to apply for a position in the “Protégé Group“, email Alex Spiroglou: [email protected] Trader Training and Development Ltd. 145-157 St John Street London, EC1v 4PW United kingdom

BASICS

www.tradersonline-mag.com 01.2015

Murrey´s Mathematical System Study of Support and resistance Based on Harmonic Patterns

The use of support and resistance is one of the most commonly used tools in technical analysis, as it provides the investor with technical points before price touches them. Their use is extended to determine market entry points but also to liquidate positions (target to be reached or maximum amount of money to be lost). Most of the time, these levels are calculated by using mathematical formulas enabling the generation of several levels based on past price evolution. As examples for these formulas we have the Fibonacci sequence or the Gann angles. The current article will be dedicated to one of these techniques, Murrey´s mathematical system.

Oscar Cuevas

» Murrey´s Mathematics

Oscar Cuevas is a computer engineer and provides online webinars on Expert Advisor programming. He has also been a content developer and trading strategies programmer in Visual Chart for more than fi ve years.

The following system was developed by T. Henning Murrey

[email protected]

in his book “Murrey Math Trading System for All Traded Markets”. This system is basically a method looking for harmonic price patterns. Once one of these patterns is found, a group of supports and resistances is generated in relation to the figure´s most significant points.

48

BASICS

Let´s start with an explanation of the pattern we

and lower value. This size must be specified at

are looking for: Murrey´s intention with his system is

the scale of the value obtained in point 2.

translating the study of musical rhythm to sequences

Step 4: Determining the base and height of the square.

analysis in the price. To do so, he generates a figure on the



Once we have the previous elements at our

price chart in order to represent the eight note succession

disposal, we will proceed to the calculation of the

in the musical scale (which is known as an octave).

base and height of the square. This process requires

The figure in question is a square divided in eight

a series of mathematical calculations and as their

parts of equal size so that the octave is represented.

explanation can be a bit boring, we will avoid this

The target of all this is to generate barriers in the price

explanation. For those, interested in the process, it

forecasting.

can be found in the programming algorithm.

In the following section, we are going to explain the building up process of the harmonic square. Later on, we

Step 5: Dividing the square in octaves.

After having extracted the base and height of the

will explain how to interpret the price reaction on each

square, the following step will be dividing the

level (or note, following up with the symphonic similitude)

figure in eight parts of equal size with which we

and the consequences issued from this result.

will be able to represent the size of the octave. The process is simple as it essentially consists

Construction of the Harmonic Square

of dividing the height into eight proportional

In this article you will find the algorithm developed for

segments.

the construction of the harmonic square in Visual Chart 5. Nevertheless, we are going to try to explain briefly

Once we have the lines forming the Murrey square,

the creation process of this figure. The sequence to be

we can draw them over the chart. In Figure 1 you can see

followed is described next:

how a 64 bar compression is represented.

Step 1: Locating the

extreme points.



In function of a certain

F1) The Harmonic Square in IBEX 35 Future 1-Minute Chart

period of bars to be studied, we look for the higher and lower price of this period. Step 2: Determining

the corresponding fractal.



Once the highest point has been found, we need to find the position it occupies inside the rhythmic scale suggested by Murrey and translate this value to the corresponding point. The scales list can be found in the previously mentioned programming code.

Step 3: Calculating the

displacing range.



The following step will be calculating the displacing range between the higher

In the chart above corresponding to the IBEX 35 futures chart in 1-minute compression, we saw a drawing of a 64 period (8*8) harmonic square. For the pattern study the extreme values between the period A and B are taken into account. The indicator calculates the base (around 10,640) and the height of the square, returning a superior level around 10,720. Then, the square is divided in eight sections. After point B, the lines of the square will be extended for 64 bars. These lines will finally be the visible ones when applying the indicator. Source: Visual Chart

49

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If we take a closer look to the example, the square has been calculated by using the higher and lower prices

www.tradersonline-mag.com 01.2015

The price contact with each of these points has a different lesson as we will explain further on.

between points A and B. The indicator designed for Visual Chart 5 runs a study starting up in point B back through

Analysis of Support and Resistance Levels in Murrey System

64 previous bars and draws the figure for this interval. In

As we have stated earlier on, the extension of the main

the chart of the IBEX future we notice the representations

lines of the harmonic square will be the most helpful

of the figure coloured in green. The square is crossed

element for our price behaviour study. Murrey provides

by a series of lines, following the specifications given

each of the lines with a different weight so that each line

by Murrey. As a consequence, a series of crossovers are

has higher or lower influence than the others.

formed and these crossovers are forming, according to

In Figure 2 you can see the lines Murrey Math applied

the author, the key points of the figure. These points will

to a 15-minute chart of the Euro Bund. This will help us in

be the source for the creation of supports and resistances

monitoring the price reaction on each of the levels. Let´s study the characteristics of each group:

to be studied. This representation is merely artistic but it doesn´t help identifying the source of the different levels. In

•

Lines 0/8P and 8/8P

order to distinguish them from each other, each level



These two lines are the extreme levels of the square.

receives a name going from “8/8P” to “0/8P”, as we can

Both are support and resistance key levels and as a

see in the drawing. These levels will be drawn over the

consequence very difficult levels to overcome. Its

64 subsequent bars after the appearance of the harmonic

price auctions outside the square both levels will work

square so that it corresponds to the influence period.

in the opposite sense, in fact, line 0/8P will turn into a

After 64 new bars, we calculate a new square again,

strong resistance level and 8/8P a strong support level.

generating the following extreme values and repeat the process again. The result will be a sequence of levels being calculated



In Figure 2, these lines are drawn in red. Point C and point I represent this situation. In point C, the price touches several times the level 8/8P, and even

every 64 bars (or whichever period we estimate adequate).

though finally the level is broken, its interest as a strong resistance point is evident. The price reaction in point I is even more interesting:

F2) Murrey Math Lines in Euro Bund Future 15-Minute Chart

price breaks out of the level, but is attracted back two days later by the strength of this support. • Lines 1/8P and 7/8P

These new lines are also quite relevant. the price

They

most

are

studied

auctions

normally levels.

If

above/below

these levels, it will probably reach the levels 0/8P and 8/8P respectively. However, if price gets closer to them but does not overcome them, a strong In this chart corresponding to the Euro Bund Future continuous chart in 15 minutes compression, we can see the Murrey lines projected on the price. The period of the study is 704 bars (88 * 8). Once the interval is finished, the square is calculated again thus generations new support and resistance lines (points D and G). The more relevant lines are wider. The levels in red (8/8P y 0/8P) are the stronger resistance barriers; this circumstance is evident especially during April. Source: Visual Chart

50

movement direction

in can

the be

opposite expected.

In Figure 2, these lines are coloured

in

Green

and

are

wider. In point A we notice how

BASICS

The use of patterns is often seen in nature and is not necessarily based in scientific hypotheses, but is instead related to human behaviour, and is common in technical analysis.



price bounces by reaching the level 7/8P. Theoretically,

8/8P. A reversion movement is to be expected when

in order to have a rebound, this level should not be

price gets close to this level (providing the fact that

overcome, however, in this case it is. This fact leads

the movement has started in previously mentioned

us to think that a margin of error factor of X points is to

levels).

be used before developing the trading management. However point G is a perfect example of a price



An example of the above situation occurs in

bounce after touching 7/8P. Point B and point F are

point E. After price fails from line 8/8P, a retracement

breakout examples deriving from a price extension

takes place when reaching the level 4/8P. It is interesting

towards lines 8/8P and 0/8P respectively. This can be

to observe that in the reversion movement, price stops

considered a proper level but we shall no forget the

again in the level 5/8P, movement that could have resume

error margin previously mentioned.

in to a bracketing market, if price had not bounce again

•

Lines 2/8P and 6/8P

in the lower extreme of the congestion zone (level 3/8P).



These levels are considered of less importance by the

However, the bearish movement is stronger and extends

author, even though price can change its direction

the range towards the lower extreme of the square (level

when reaching them. In Figure 2, these lines are grey

0/8P).

coloured but we have not considered them relevant. However, if we take a closer look at the chart, price

Conclusions

reactions occur at these levels. An example can be

One of the most interesting aspects when analysing

studied at the beginning of April just after the turn-

the price reaction on the lines of the harmonic squares

around in point A.

is to take into account that the generation of the

•

Lines 3/8P and 5/8P

pattern is a consequence of the previous phase of the



The author describes these two points as the limits

price movement. However, we are reminded that the

in price bracketing movements. Therefore, we can

harmonic square is based on the study of the music

consider that, while price moves inside the channel

octave thus theoretically there should not be a direct

limits of these two levels, the underlying asset

relation between the generation of the model and its

is in a congestion zone (non-trending). Likewise,

consequence in market price movement. However, we

the breakout of this channel can involve a new

note that the use of patterns is often seen in nature and

distributions process. In Figure 2, these lines are

is not necessarily based in scientific hypotheses, but is

coloured in violet. In the example, the lateral

instead related to human behaviour, and is common in

movements are not significant and consequently

technical analysis. «

price does not remain time enough inside this range. An example of this could be found in May 20th, after the reversion in points G.

Programming Code

•

Line 4/8P



This line also acquires special relevance as it is

Link to the programming code: www.tradersonline-

considered as in important resistance zone during the distribution process started up in the zones 0/8P or

m a g . c o m / d o w n l o a d / e _ t r a 01 _ b a s i c s _ c u e v a s _ programmingcode.txt

51

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The Trader’s Technical Arsenal Common Indicators in MetaTrader – Part 11

This piece discusses the Standard Deviation and the Stochastic Oscillator, as both work in MetaTrader, which continues to increase in popularity (especially version 4.0). In most cases, the indicators’ default parameters are used.

» Standard Deviation (StdDev)

smaller. The indicator is therefore used to determine the

Standard Deviation is an analytical tool that measures

gravity or vulnerability of an extant bias/trend.

the volatility of the price. It also measures the amount of

According to one source, this indicator is normally used

variability or dispersion around an average. What we call

as a constituent of other indicators, like Bollinger Bands.

dispersion is the actual value minus the average value.

Thus, when Bollinger Bands are calculated, the value of the

When the Standard Deviation becomes higher, it means

symbol standard deviation is added to its Moving Average.

the dispersion/variability is greater. When the Standard

Sometimes a particular trading instrument may be very

Deviation is lower, it means the dispersion/variability is

active or it may be very inactive. This fact is reflected

52

BASICS

Resisting temptation to trade irrationally trains us to deal with tougher market situations we might face in the future.

when the value of the indicator is low: It shows that the

the default colour of MediumSeaGreen). The default

instrument is inactive (in an equilibrium phase). We may

parameters are period 20 and Simple Moving Average.

want to stay away from the market when the indicator

You can see how the indicator responds to changes in the

appears flat (and pay attention to the market when the

price actions. When the market is inactive, the indicator

indicator rises), since a flat market does not make sense to

appears almost flat, moving sideways. When the market is

the trend follower. The household mouse is of no value to

active, the indicator slopes upwards whether the dominant

the professional hunter. The trend follower can then look

activity is bullish or bearish. An increase in the market

forward to the time when there would be an increase in the

activity is noticed as soon as the indicator rises – an action

market activity (when there would be a breakout). When

that has immediate effect on open positions. A dry plank is

the value of the indicator is high, it shows that the market

affected by the fire as soon as it is exposed to it.

is currently active, but it could enter an inactive phase very soon. This is one way of using the indicator.

The Standard Deviation is best used with another good indicator, for example the Moving Average Convergence Divergence (MACD). The MACD confirms a trend and also

Computation:

shows when a trend changes; therefore more dependable

StdDev (i) = SQRT (AMOUNT (j = i - N, i) / N)

signals can be generated when it is combined with the Standard Deviation. This helps us resist the temptation to

AMOUNT (j = i - N, i) = SUM ((ApPRICE (j) - MA (ApPRICE

trade irrationally. Resisting temptation to trade irrationally

(i), N, i)) ^ 2)

trains us to deal with tougher market situations we might face in the future. The MACD signifies a bearish bias

Whereas:

when the signal line and the histogram are below the zero

StdDev (i): Standard Deviation of the current bar

line; it signifies a bullish bias when the signal line and the

SQRT: square root

histogram are above the zero line. It should be borne in

AMOUNT(j = i - N, i): sum of squares from j = i - N to i N: smoothing period

F1) The Standard Deviation in AUD/CAD

ApPRICE (j): the applied price of the j-th bar MA (ApPRICE (i), N, i): any moving average of the current bar for N periods ApPRICE (i): the applied price of the current bar Changes in the market volatility would be reflected in the Standard Deviation, for a current trend would be very strong when the value of the indicator is high. In Figure 1, the Standard Deviation is placed in the AUD/CAD 4-hour chart (with

The StdDev is placed in the AUD/CAD 4-hour chart (with the default colour of MediumSeaGreen). The default parameters are period 20 and Simple Moving Average. You can see how the indicator responds to changes in the price actions. When the market is inactive, the indicator appears almost flat, moving sideways. When the market is active, the indicator slopes upwards whether the dominant activity is bullish or bearish. Source: www.metaquotes.net

53

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www.tradersonline-mag.com 01.2015

instrument to its price range over a

F2) StdDev and the MACD in GBP/JPY

given time period. The greater the number of periods calculated by the indicator, the slower its reaction to changes in the price. In a strong bull market, a trading instrument reaches higher highs and lower highs, and so is the Stochastic Oscillator. In a strong bear market, a trading instrument reaches lower lows and lower highs, and so is the Stochastic Oscillator. We see the combination of the MACD with the Standard Deviation in the GBP/JPY hourly chart, plus how they work together to generate dependable bearish and bullish signals. Source: www.metaquotes.net

This

indicator

can

help

us

pinpoint where a strong bias might thin out or end, and this is done as it shows an overbought or an oversold situation in the market. When the price is seriously oversold, some

mind that when the Standard Deviation rises seriously, it

fearful bears may panic and quickly truncate their

can mean two things. It can mean the resumption of the

positions at early signs of rallies. When the quail hears

extant dominant bias or a coming change in the dominant

the voice of the farmer, it slinks away in panic. There

bias. In Figure 2, we see the combination of the MACD

are two lines in the Stochastic which act like the MACD

with the Standard Deviation in the GBP/JPY hourly chart,

signal lines – one is faster and the other is slower. The

plus how they work together to generate dependable

faster line crosses the slower line up or down now and

bearish and bullish signals.

then. In Figure 3, you can see how the Stochastic Oscillator

Stochastic Oscillator

looks like in the daily chart of Gold. The default parameters

The Stochastic Oscillator is an analytical tool which

are 5,3,3 (%K period = 5, %D period = 3, Slowing = 3), with

compares a closing price of a particular trading

Simple Moving Average in it, and Low/High as price field. The indicator lines can be changed to your preferred colours. The indicator is scaled from zero to 100. The default

F3) The Stochastic Oscillator in Gold

levels are 80 and 20. The market is considered overbought when the price goes above the level 80 and the market is considered oversold when the price goes below the level 20. Above the level 80 or below the level 20, there is a possibility of a trend reversal or a significant pullback. Computation: You can see how the Stochastic Oscillator looks like in Gold daily chart. The indicator lines can be changed to your preferred colours. It is scaled from zero to 100. The default levels are 80 and 20. The market is considered overbought when the price goes above the level 80 and the market is considered oversold when the price goes below the level 20. Source: www.metaquotes.net

54

%K = 100[(C - L14) / (H14 - L14)] C: the most recent closing price L14: the low of the 14 previous trading sessions

BASICS

H14: the highest price traded during

F4) The Stochastic Oscillator Period 20 in gold

the same 14-day period %D: 3-period moving average of %K

Other Uses for the Stochastic Oscillator Overbought

and

oversold

signals are more dependable in consolidating trending

markets

markets.

than

Apart

in

from

overbought and oversold readings, there are many other ways to use the Stochastic Oscillator. Some may use the Stochastic Oscillator 5,3,3 to

confirm

conspicuous

bearish

The more the number of periods calculated by the Stochastic Oscillator, the slower its reaction to changes in the price. Nevertheless, this can filter out some bogus signals, causing fewer but better trading possibilities. This is shown in the same Gold daily chart. This time around the readings/signals of the indicator are quite different but the signals generated come with improved hit rate. Source: www.metaquotes.net

and bullish biases, and follow the trend rather than going against it. This is because a highly trending trading instrument may be in an overbought or oversold

when deliberately holding long positions when the

condition for a long time, causing the mean reversion

markets are weak? You do not deliberately jump into the

trader to get kicked in the butt.

river and then complain of coldness. There other rational

As mentioned earlier, the more the number of periods calculated by the Stochastic Oscillator, the slower its

uses for this wonderful indicator, especially when it is combined with another indicator.

reaction to changes in the price. Nevertheless, this can filter out some bogus signals, causing fewer but better

Conclusion

trading opportunities, as effort to make consistent profits

The fact is, success in the markets is within the grasp of

with numerous signals that have a low hit rate could be

everyone – but it requires effort. When we make effort to

a Sisyphean experience. This is shown in the same Gold

understand how a particular indicator works in different

daily chart (let us check Figure 4). Here, the number of

market conditions, we would find it easier to interpret

periods has been increased to 20. This time around the

those market conditions and make logical decisions that

readings/signals of the indicator are quite different but

would have positive impact on our portfolios. The more

the signals generated come with an improved hit rate.

the markets become challenging, the more progress we

Towards the end of October 2013, the Stochastic period

make. The challenges that increase are the catalyst that

20 became overbought by going above the level 80.

makes us enjoy more success as traders. We are happy

When bearish candles started forming, it was evident

to be devoted to the markets. The next article in this

that some were still willing to purchase Gold at that level

series will discuss Volumes and Williams’ Percentage

and it would be wise to sell it to them. There was a nice

Range. «

bearish run following that. Ironically, Gold is best sold to the one who appreciates its value. In another example, traders who like to follow the lines of least resistance may also want to set the level of the Stochastic to 50 only (with period 20), just like some do with the Relative Strength Index (RSI). They are bullish only when the Stochastic lines are above the level 50; and vice versa. When the Stochastic is below the level 50, they do not want to hold any long positions because that

Azeez Mustapha Azeez Mustapha is an official analyst at Instaforex Companies Group, a blogger at Advfn.com, and a freelance author for trading magazines. He is working as a trading signals provider at some websites. He is a senior analyst at Paxforex.com. His articles are also available on other websites like www.ituglobalforex.blogspot.com. [email protected]

would come with certain consequences. Why complain

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Trader Mind

www.tradersonline-mag.com 01.2015

Embrace Your Emotions – Part 1

“Emotions! How many times have traders been told that emotions are bad, emotions get in the way of trading, successful traders are less emotional. Yet Steve Ward explains how emotions are essential to the decision making process and how they keep our brains focused on critical information. Emotional factors in decision making can serve a purpose. In classic ‘Steve Ward’ fashion he grounds his guidance in solid neuroscientific research explanation.“ (Linda Raschke, President at LBR Group Inc, CTA, from the foreword to TraderMind, November 2014)

» Can You Help Me Trade Without Emotion?

can feel hungry and yet not eat anything. You can have

We work with a lot of traders in one-to-one coaching and

a sense of fear and yet still enter the market, or a feeling

workshops and one repeating request that we encounter

of anxiety when in the market, and still stay in a trade.

is “Can you help me to trade without emotion?” In a

Emotions bring an urge for action but we do not have

recent online seminar 79 per cent of attendees indicated

to take that action. It is possible, with practise, through

that they would like to be able to trade without emotion.

developing emotional awareness, and learning how to

Is this the same for you? Would you also like to be able to

regulate more extreme emotions, combined with some

trade without emotion?

commitment to your strategy, to feel an emotion and to

No trader has ever lost or made money solely based

not have to act upon it.

on emotion – it takes action to pull the trigger. The feeling of an emotion and the taking of an action are

The Neuroscience of Emotion

separate events and it is possible to feel a feeling and act

Neuroscience research over recent years has resulted in

differently. You can feel tired and yet get out of bed. You

some big shifts in thinking on the role that emotions play

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BASICS

in decision making and these shifts

F1) The Information Processing Pathway In The Brain

have implications for you as a trader. Emotions have evolved as ways for your brain to make sense of the world around you, they keep your brain focused on critical information, and enable you to act on that information, to gain what you desire and avoid what you fear. You need an emotional factor in decision making to appreciate the possible outcomes of a decision. Most real life decisions cannot be based entirely on logic as the information that you have is

The image shows how your brain processes information. And not only is emotion a key part of this process, it is the first part of it. Source: TraderMind

usually incomplete or ambiguous, and that is certainly true in the markets. George Soros has stated that he relied on his emotions a lot in his investment

Figure 1 shows how your brain processes information,

process because of the inadequacy of knowledge in the

and not only is emotion a key part of this process, it is the

markets.

first part of it. You are feeling, before you are thinking.

Preview

of the next Issue

COVERSTORY

PEOPLE

Mind Fitness Training for Traders

Interview: Mark Mobius

Having a good trading method and the mechanical skills and

Mark Mobius, Ph.D., is executive chairman of the

knowledge alone are not enough to be a successful trader.

Templeton Emerging Markets Group. Dr. Mobius has

Dealing with the uncertainty, novelty and change in the markets,

been investing in global emerging markets for more

and coping with the emotional highs and lows of winning and

than 40 years. He has received numerous industry

losing requires a strong psychology – mind fitness. In our cover

awards, and written several books. Next issue, we

story, Steve Ward will discuss how traders can achieve this.

will discuss his take on investing.

The February/March issue of TrADErS´ will be published on 20th February 2015. 57

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www.tradersonline-mag.com 01.2015

References

1. Emotions are essential to the decision process

(1) ‘Descartes Error’, Antonio Damasio, Vintage, 2006

2. Emotions are data – they provide messages about

(2) Seo, Myeong-Gu and Barrett, Lisa Feldman. ‘Being Emotional During Decision Making – Good or Bad?

your experience 3. Emotions cannot be controlled – but they can be regulated/managed

An Empirical Investigation’, PubMed Central 50, no4 (2007): 923-940 (3) Peffer, Gilbert and Fenton-O’Creevy, Mark (2012). ‘xDelia Final Report: Emotion-Centred Financial Decision Making and Learning’. Open University, CIMNE, Milton Keynes UK (4) ‘Emotional Intelligence 2.0’, Travis Bradberry and Jean Greaves, TalentSmart, 2009 (5) ‘Mindfulness: A Practical Guide To Finding Peace In A Frantic World’ Mark Williams, Piatkus Books, 2011

Because emotion is a key, and actually useful, component of your decision process your goal in trading should therefore, not be to trade without emotion as that, even if it were possible, would actually compromise the effectiveness of your decisions. Rather we would suggest that the goal is to work with your emotions, to be more in tune with them, to improve your ability to coordinate and refine your thinking and feeling processes to enhance your decision making (2).

Emotional Awareness Emotions help you to decipher whether something is a

The first step towards being able to work with your

risk to be managed (fear) or an opportunity to be taken

emotions and manage them more effectively is to develop

advantage of (excitement) – and that is very useful in

a greater awareness of them, to start to notice them.

trading. Knowledge communicated via emotions either

Research with traders suggests that the focus on emotions

explicitly or implicitly enables you to make fast and

in trading should be the development of greater self-

efficient decisions.

awareness of emotional states not the elimination of them (3). According to Dr Travis Bradberry only 36 per cent of

The New Emotions and Trading Paradigm

people, who he studied in his research on self-awareness,

From the relevant neuroscience research three key

were able to accurately identify their emotions as they

guiding principles emerge that we believe are important

happened. For the other two thirds of people this lack of

for you to understand and act upon, if they are to enhance

emotional awareness, who are less skilled at recognising

their decision making and performance;

their emotions in real time, means that they are far more likely to be driven and controlled by their emotions (4). How about you? How is your emotional awareness?

F2) What Makes An Emotion?

A simple first step towards developing your emotional awareness could be to start ‘Checking In’, at times through the day. Emotions can be seen as having four components as shown in Figure 2 (5). There is an inter-play between thoughts, feelings, impulses and physical response that he suggests create your emotional experience. One way of developing your emotional awareness is to periodically stop and start to notice, pay attention to the elements of your emotional experience, ask yourself;

There is an inter-play between thoughts, feelings, impulses and physical response that he suggests create your emotional experience. Source: Mark Williams, ‘Mindfulness: A Practical Guide To Finding Peace In A Frantic World’, 2011

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•

What thoughts am I noticing?

•

What feelings are present?

•

What impulses am I aware of?

•

What physical responses do I have? You could also develop your awareness based upon

the emotions as data idea in a very simple three step process:

BASICS

1.

What am I feeling right now in this moment?

Body Scan

2.

What is the message/data behind the feeling?

3.

What effective action should I take?

• Lie down on your back, making yourself comfortable.

Another way to develop your emotional awareness could be throughout the day keep a running record of whatever emotions you notice, writing them down, creating a ‘ticker tape’ of emotional data. Alternatively, you can just start to notice your emotions in the moment, naming them as you experience them, a process known as affect labelling, and as you will see in part 2 of this series is a very effective emotional regulation strategy. If you want to gain a deeper emotional awareness then the mindfulness ‘body scan’ practise is a great way of doing so. This practise has multiple benefits for traders. Firstly the mere act of practising is creating the metacognitive, awareness and attention, capabilities for you to be able to regulate your emotions more effectively. Secondly, through repeating the practise you are developing changes to your brains function and structure – for example to your amygdala (the emotional radar) – that will impact how you process emotions, reducing your emotional reactivity. Thirdly, with the focus of this practise on the body you are developing your ‘interceptive’ ability, the ability of your brain to be aware of your internal physical signals. A high level of interoceptive ability has been linked to the ability to regulate emotions – awareness first, regulation second.

Close your eyes, if you feel comfortable doing so. (NB some people may prefer, or find it more comfortable doing the practise sitting down – that is perfectly OK) • Take a few moments to bring your attention to the physical sensations in your body, noticing the points of contact between your body and whatever you are lying on. • Remind yourself of the intention behind the practise, to develop an awareness of your experience, without any need to change it. To notice all the sensations within your body as you scan through it. • Start by bringing an awareness to your breath, and to the sensations in your abdomen. Becoming aware of the changing patterns in your breathing as you breathe. • Imagine a spotlight of attention, and bring this to your feet and toes, noticing sensations present there, and investigating them with a sense of curiosity. • Now bring this attention to your legs, then abdomen, lower back, chest, upper back, arms, hands, shoulders, neck and face. Each time spending 20 to 30 seconds noticing any sensations that are there, exploring and investigating without having to actively look for any sensations. • If you become aware of any tension in the body, see how it is if you ‘breathe into’ them. • As with all mindfulness practises, if at any time you notice your mind wanders, simply acknowledge where it has wandered to, and then gently return it back to the part of the body you intended to focus on.

“Since I have been working on the mindfulness exercises one thing I have noticed is a reduction in my

be fearful when others are greedy, and greedy when

emotional swings.” – Equities Trader, London

others are fearful’ states Warren Buffet, and Mark Cook, interviewed in ‘Stock Market Wizards’ talks about how

Developing emotional awareness is the first step

he uses his own fear to know when the right time to buy

towards embracing emotions. It is also a precursor to

is. He figures that if he is feeling scared, then most of

being able to regulate them – which becomes important

the market probably is too. Being in tune with your own

as emotions move towards the extremes – although

emotions can put you in tune with the market, and enable

interestingly, awareness alone actually acts as a regulator

you to get an edge from it. «

helping you to reduce the impact of more extreme and intense emotions on your trading decisions, reducing the number of bad trades you make, and then subsequent spirals that can occur as you seek to correct them and recover losses.

Emotional Awareness and Market Sentiment Developing your own emotional awareness can also help you to get a greater awareness of the emotions,

Steve Ward Steve is one of the world’s leading experts in trading performance and psychology, having spent the last 10 years working with traders and fund managers in banks, funds, energy companies and proprietary trading groups across the globe. www.highperformanceglobal.com

the sentiment, of the market. ‘We simply attempt to

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» Hometown: Charlotte, NC » Interests: How things work – everything » Trading Style: Day and short term swing » Website: www.thetradingbook.com

The Pro’s Process Part 25: Anne-Marie Baiynd

In this series we are asking Pro Traders about their psychological processes. Delving a little into how it feels to them when trading. The good and the bad. How this has changed over time and what preparation they do mentally for performing as a trader. One of the key features for us was that we wanted traders with experience who have been through the mill over the years and of course, we appreciate those who were kind enough to talk to us so candidly. We hope this gives developing traders more to learn from. Each interview in this series was conducted by Richard Chignell who is himself a trader. Please visit his blog at http://embracethetrend.com.

» Chignell: How long have you been trading?

react the same way – if I cannot find anything significant

Baiynd: This September makes it nine years.

to nullify why I entered the trade, I will continue to stay in the trade.

Chignell: What style of trading/investing do you practice (technically driven, fundamental, systematic, a combination)?

Chignell: How have these feelings changed over your trading career?

Baiynd: Technically driven with some attention to

Baiynd: I was a very emotional trader who thought she

fundamental performance.

was not emotional at all. The worst kind of trader – selfdeceived – makes for a lot of losses. When I figured out

Chignell: How do you feel when a trade goes against you?

who I thought I was and who I really was, the road to

Baiynd: Truthfully, I am always a little anxious when a

success began. But not before I had lost a great deal of

trade goes against me for any period of time… say more

money. It was a slow process for me, but I never gave up.

than a week or so. I begin to immediately look for reasons

Chignell: How do you feel when a trade goes for you?

Chignell: Do you have any practices that you do away from the trading screen to help you mentally and emotionally handle trading?

Baiynd: What can I say, I live in a heightened sense of

Baiynd: I try to disconnect completely from my screens

awareness, if I am engaged in the market in any form or

when I am away. Whether it is at the end of the day

fashion. I constantly look for reasons I might be wrong. I

or when I take time away. I spend so much time in a

that I might be wrong. If I cannot find anything significant, I will sit on my hands.

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People

When I figured out who I thought I was and who I really was, the road to success began. heightened sense of awareness, that I exhaust myself at

that we are wired to wait until the last minute, and that

the end of the day, and in order to replenish and be sharp

we can’t stand being wrong so we must re-engineer our

the following day or week, I must disconnect.

minds to manage those facts.

Chignell: Have you always done this?

We would like to thank Anne-Marie Baiynd for sharing about

Baiynd: Definitely not. I learned that less is more when

the way she tackles the market from an emotional/mental

I believed that more is better. I burned myself out and

side of things and for her willingness to allow us to post this as

got very sick from 20 hour days, and thinking about

a free resource in the hope that traders who have been in the

the market through interrupted sleep for the remaining

market for less time or are thinking of entering can perhaps

four hours. My body finally told me it was time to create

pick up some A-HA’s. If you are interested in finding more out about Anne-Marie

balance or I was not going to be able to enjoy retirement.

Baiynd, you can find her:

Chignell: If not, how have you learnt to deal with the feelings that come up when trading?

»

Twitter: @AnneMarieTrades

Baiynd: Feelings are real and must be managed; if they

»

Blog / site: http://www.thetradingbook.com «

are suppressed, they rise up in the worst places. I learn to listen to my ‘centre’. The solar plexus and lower back are spaces that I feel a lot of physical tension, so I work through mentally why I might be feeling that building in myself. If I realize it is a feeling coming from fear or worry, I immediately stop what I am doing and begin to triage the event. I know that sounds antiseptic, but it really isn’t. It is about learning to understand myself, and why I feel a certain way. Usually, if my gut begins to tell me that I am wrong, I usually am, so I have learned to listen to my core.

Chignell: Can you describe a time in your trading life which really rammed home the point that so much of trading comes down to psychological factors? Baiynd: When I became technically proficient but still could not stay green week over week, I knew I was missing the really important part. It is not about the knowledge base, but the execution events that make or break the trader. And execution, consistent execution over time, cannot continue, if personal and psychological management are not made paramount.

Chignell: If you could give aspiring traders one piece of advice about emotionally handling the market, what would it be? Baiynd: Don’t be afraid of your emotions. Don’t stifle them. That doesn’t work. Our success is not about how much knowledge we have, but how we make decisions when our senses are heightened by fear or anxiety. Realize that we are wired to take risks in the wrong places;

Anne-Marie Baiynd Anne-Marie Baiynd, president and CEO of TheTradingBook. com, focuses her successful trading system around use of support and resistance and wave patterns recognition in the market. Her trading systems combine the proper use of simple indicators to create highly effective models, even in volatile markets. Ms. Baiynd began her career as a neuroscience researcher, and has been a corporate speaker and trainer, VP of sales, and CEO of a recruiting firm. She was introduced to technical trading in 2005 and began trading full-time soon after. Presently, Ms. Baiynd divides her time between being an active trader, developing automated trading systems for grey and black box environments, and mentoring traders through rigorous training programs with small group and one-on-one instruction. She speaks to and advises proprietary traders, portfolio managers, and hedge fund managers. Ms. Baiynd’s daily routine includes the management of a premium educational blog for day and swing traders through TheTradingBook.com, which is focused on the application of her high probability trading strategies. Her books, The Trading Book, and its companion workbook, The Trading Book Workbook, provide a simple and successful solution based on the mastery of a few technical indicators. Ms. Baiynd has a BA in applied mathematics and her Master’s work includes statistics, biostatistics, and behavioral studies.

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Jens rabe My Way to Successful Options Trading

In TRADERS´ 10/2014, we published a cover story about options trading written by Jens Rabe of optionsstrategien.com. Today, we will present an interview with him that, among other things, is all about how he managed to make the leap from a trained insurance specialist to a professional options writer. He will also show us a few instructive trades.

» TRADERS’: When did you first come into

contact with the stock market? Rabe: That was in the mid-1990s and originated from a mix of interest and “boredom”.

TRADERS’: Boredom? Rabe: Well, at the time I was doing my national service in the German army, completing basic training. During one of the weekends in the barracks when I had nothing to do, I was leafing through some books on the stock market and immediately got the bug. It was the time when the new market evolved and an enthusiasm for stocks was palpable in Germany. So I was still in the army when I made my first trade.

TRADERS: Do you remember how you did on this trade? Rabe: Yes, I do. It was a warrant on the German mark against the US dollar and a tip in a magazine caused me to enter. After a few weeks, my position was 70 or 80 per cent profitable and I exited the trade.

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PEOPLE

TRADERS’: A good winning trade right at the start – how did that make you feel?

F1) Where Is the Market NOT Going?

Rabe: Very good, of course. And like any raw beginner, I instinctively started

to

do

the

maths

and

concluded that I was going to be rich before long: If you can make 80 per cent in just a few weeks, then that will be… in a year, and so on. I am sure you know what I mean.

TRADERS’: Yes, that is sort of the norm, but is also very dangerous, of course. However, we assume that you didn’t quit your day job right away – actually, what were you doing after basic training? Rabe: I was selling insurance and basically, everything was going quite well in this job. But I also did quite

As an option seller, I ask myself where the market is not likely to go. After the DAX has broken downwards through the 8900-point mark, the market is unlikely to rise above the break-off edge at 9400 points in the coming weeks. Accordingly, you could write call options quoted out of the money with strike prices in this area. If volatility falls, a profit can be achieved that way with the DAX price unchanged. Source: www.tradesignalonline.com

well with my trading. After all, it was the time of the New Market and I made quite a lot of money up to the year 2000 – at least by my own standards at the time. In

In the wake of sharply rising prices and margins, I then

2001, though, I lost everything again, the classic story of

felt that some contracts were getting too expensive in

that time, so to speak.

the years 2004 and 2005, which meant that I was no longer able to implement my risk management the way

TRADERS’: How did you cope with that?

I wanted to. So I moved on to trading futures spreads

Rabe: Well, accepting such losses wasn’t easy. At first

I

thought, of

course,

that

the stocks were to blame for my loss, but obviously that isn’t true.

F2) Selling a gold Call in a Downtrend

Nevertheless, I first kept looking for other instruments. Eventually, I came to know someone whose advice was to trade commodities. The key point that fascinated me was that a commodity cannot ever fall to zero, as is possible with equities since commodities are always worth something.

TRADERS’: When was this and how did you do initially in your commodity trading? Rabe: In 2002, I started to trade commodity futures on an endof-day basis, and basically made money on that from the beginning.

On 17th September 2014 (first vertical blue marker), a call was sold with a strike of 1335 (red horizontal marker) at a then-current gold price of around 1235 USD/ounce. The price of gold fell further in the next few days and was able to be bought back as early as 13 trading days later – i.e. far ahead of its expiry date, 24th Nov 2014 (second vertical blue marker) – at a minimal residual value. Source: www.TradeNavigator.com, www.optionsstrategien.com

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The most important thing was to experience the “peripherals” – the mood on the floor, the behaviour of share prices.

and just a little later to trading options and I have stayed

TRADERS’: What did you learn there?

with the latter to this day.

Rabe: First, of course, all the basics, and then the trading techniques. But that was not the decisive factor

TRADERS’: Did you teach yourself how to do all these things?

in my view. Rather, the most important thing was to

Rabe: No, not quite. At some important key points,

behaviour of share prices; why they go up or down and

other traders have helped me a lot to develop a proper

when institutional investors buy or sell. You were able to

understanding. For example, I had a mate who was a

actually tell whether it was an uptrend or a downtrend

market maker on Eurex. He explained to me in a simple

day without looking at the price. All this made it possible

and intelligible manner how all these things worked, and I

for me to gain a completely new perspective on the

ended up being really fascinated by futures trading. Later,

markets and on how everything works. Each trader had

I once joined my friend and fellow-trader Michael Voigt

different strategies, which was incredibly exciting. While

on the trading floor in Chicago where I got to know a few

some made 300 trades a day, there were also traders who

traders. I promptly asked, if it was possible to learn the

only executed one trade a week. And every one of them

trading techniques there – and that’s how I came to spend

knew exactly what he was doing. That was exactly what

many a week in Chicago in the years 2006-2008 in order

I wanted to do!

experience the “peripherals” – the mood on the floor, the

to complete my training there.

TRADERS’: Alongside your trading, you continued to work for the insurance company. When did you take the plunge to become a full-time trader?

F3) Selling a Coffee Call in a New Downtrend

Rabe: That was in 2007. My plan was to allow myself one year to become successful. My motto was: “Either I’ll make it or I won’t.” I sold my Porsche and switched to a small car. Also, I rented an office from the very beginning so as not to trade “from the kitchen table” at home but do a truly serious and professional job – with clear strategies just the way I do to this day. On 20th August 2014 (first vertical blue marker) a call was sold with a strike of 270 (red horizontal marker) at a coffee price of then 185. The option’s remaining time to maturity at this point was still more than eleven weeks. As early as 27th August 2014, i.e. only six trading days later, however, the trend again seemed to turn upwards so that the trade was smoothed with a small loss for reasons of risk provisioning. Source: www.TradeNavigator.com, www.optionsstrategien.com

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TRADERS’: This bold step ultimately enabled you to achieve what so many dream of – long term success in trading. So the next question is an

People

www.tradersonline-mag.com 01.2015

the market. It may quickly rise when

F4) Further Performance of Coffee Future

markets collapse and panic reigns, but usually it will revert to its long term mean value faster than many had believed during the collapse. And since volatility influences the price of an option significantly, you can, in the event of high volatility, collect

a

correspondingly

high

premium as a writer – which, when there is a decrease in volatility, will be lower again. The same applies to fast rising prices since, unlike the situation in stocks, things may Prices continued to rise after the end of the trade (see Figure 3) for another few days only to drop sharply and form new highs once again in October. Even if the option is highly likely to expire worthless on the expiry date, it was good to end the trade prematurely since this would have become necessary later at a much higher loss. Source: www.TradeNavigator.com, www.optionsstrategien.com

get volatile in both directions in the commodity markets.

TRADERS’: Do you have an example to illustrate this mechanism? Rabe: Yes, but let’s stay with stocks. When markets fall as they did, for

obvious one: Which strategy did you use or are you still using to achieve that?

example, in mid-October (Figure 1), I don’t ask myself

Rabe: The most important thing is that you have some

the opposite question – where is the market not likely to

sort of advantage over the other market participants.

go? This question tends to be easier to answer.

how far down they are likely to go. Instead, I ask myself

In my case, it is a statistical advantage. As a seller of

To stay with the example in Figure 1: After the market

options, also known as a writer, my advantage is that

has broken downwards through the support at 8900

many of these contracts ultimately expire worthless.

points, there are not likely to be any new all-time highs

When that happens, I can post the option premium

anytime soon. However, this level is too far away to write

initially collected as a profit. What benefits us here is the

options since the premiums to be collected are minimal.

effect that volatility always reverts to its mean value in

However, the market is also unlikely to go above 9400

Key Terms Call: Option on Rising Prices. Covered Call: Option strategy, where an investor holds an underlying asset (for example share) and additionally, sells a call on it (“writing” an option). This causes additional premiums to be collected from the sale of an option. At the same time, the maximum return is limited since the value of the entire construct will not increase any more, if on the exercise date the underlying is above the strike price of the option sold. Futures Spreads: With a futures spread the trader buys and sells one futures contract each and participates in the development of the price difference between these two contracts. Greeks: Sensitivity Ratios for Options. You indicate the change in the option price with respect to the change in risk factors. Examples: sensitivity to underlying price (Delta), volatility (Vega), remaining time to maturity (Theta). Put: Option on Falling Prices. Weekly Option: Weekly options are usually listed on a Thursday and have a maximum life span of up to five weeks. The only time that no weekly options are placed is always the week with a “normal expiry day” on which the standard options expire anyway. During a trading month, there is now instead of the previous one original maturity of an option, an expiry date of a series of options on every Friday. Except for the short original maturity, weekly options now have the same features as conventional puts and calls.

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points in the next three to four weeks. Accordingly, I could

real advantage in the market. Both approaches are rarely

therefore write call options with strike prices in this range

successful in the long term.

that were clearly quoted out of the money according to the time of analysis (10th October 2014). When I write a

TRADERS’: Do you also trade weekly options?

call option, I will get the option premium – and may post

Rabe: Yes, that is something that really complements my

it completely as a profit if the DAX is not quoted above

strategy. When you use weekly options, you are closer to

9400 points at maturity. During the original maturity, I

the market since the original maturity is so much shorter,

will also benefit when volatility falls. That way, I can even

you can manage things more actively and benefit more

make a profit with a DAX price unchanged.

from time decay. This means that weekly options are definitely an interesting tool for option traders.

TRADERS’: What are the advantages of an option writer’s strategy over other trading strategies?

TRADERS’: What does your risk management look like?

Rabe: My view is that option-writer strategies make it

Rabe: The main problem for the writer of options is that

easier to let profits run. Anyone who is familiar with risks

the potential risk of loss is nearly unlimited. So generally

and has really understood trading knows how to limit

speaking, I usually exit, if my position sustains a loss of

losses – but letting profits really run is a fine art. When

100 per cent and hence the premium of the option has

selling options, profit per trade is limited from the start,

doubled. I sometimes use charting with weekly options,

so I can fully concentrate on controlling losses. Not for

but with longer-dated options these levels are not

nothing is the hit rate for writer transactions much higher

accurate enough due to the other determining factors like

than for other trades, which also makes the approach

volatility and original maturity. As a result, I rather use

easier psychologically.

fixed values such as the aforementioned 100 per cent as a stop-loss.

TRADERS’: What markets do you trade? – so basically, options on stock indices, liquid individual

TRADERS’: What does your trading look like in a portfolio context?

stocks and on all major futures as well as on ETFs. I place

Rabe: At any moment in time, the option trading

almost all my trades on the US markets.

software I use makes sure that I know my overall risk

Rabe: I trade everything on which there are liquid options

TRADERS’: Do you use other strategies besides pure writer transactions?

F5) Selling a Call on AUD/USD

Rabe: I have four to five strategies that I use depending on the market environment. The most important thing is to really use any strategy only when the time happens to be right for it. For example, you should only trade covered calls in bull markets and short puts at the beginning of a bull market or during the extreme phase of a crash. Other

strategies

include

strangles, calendar spreads, and earnings trading. I think that too many traders make the mistake of being tied to only one strategy or one underlying. Most of the time this means that they will either be incapable of taking any action or will constantly be trading without any

On 24th September 2014 (first vertical blue marker), call options with a strike of 0.925 (red horizontal marker) were sold at a then-current AUD price of 0.8835, following a strong downtrend on a correction day. The sharp price drop had caused volatility to rise strongly so that a declining volatility could be expected in the event of a weakening trend or an end of the trend. Prices fell initially for another few days, but then went into a sideways trend. Due to the declining volatility and the time-value loss, options could be bought back as early as 23 trading days later at the targeted profit of 80 per cent of the option premium, although the original idea of further falling prices had not materialised. Source: www.TradeNavigator.com, www.optionsstrategien.com

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People

www.tradersonline-mag.com 01.2015

You get a unique perspective on the economy and society and you see the big picture.

for all the positions in the market. I track my exposure

position with a huge loss. On Tuesday, share prices were

for the entire portfolio, which may include ten to

falling ...

50 positions, via the classical indices, the so-called “Greeks”.

TRADERS’: What’s your daily routine like? Rabe: In general, my working day is from 7.30 am to

TRADERS’: If you could choose a market environment that you like best, what would it be?

6 pm, but I don’t work non-stop. First, I go through

Rabe: Clearly, the time immediately after a crash. Then

from the previous evening, write down any necessary

the option premiums are at their highest and begin to

adjustments that may be needed and think about new

fall for some time to come. This was the situation at the

trades or trading ideas that might happen to make sense.

beginning of 2009, and it turned out to be my best trading

Then I either do some sports or read books or articles.

year so far. But 2008, the year of the crash itself, was also

When the US stock markets open in the afternoon, I’ll

a very good year, since there were also instances of high

enter my orders. Basically, though, something new

volatility in the market and hence a perfect environment

happens every day in one way or another, so it’s never

for option sellers.

boring.

TRADERS’: Where do you see any disadvantages in your option-writer trading approach?

TRADERS’: Finally, can you let us know what fascinates you most about the stock market?

Rabe: Actually, this is no real disadvantage, but it is safe

Rabe: Sure. As a trader you get to know what happens in

to say that it is hardly possible to make a lot of money fast

the markets and in the world and what events have what

by using this strategy. After all, the maximum profit an

impact. You get a unique perspective on the economy

option seller can make is always limited to the premium.

and society and you see the big picture. Obviously,

And that’s why you never remember your winning trades

trading itself is also fun, but to me it is still only a means

but invariably only the losses that may be much higher

to an end – its purpose is to make money, and it is not

sometimes.

there for the fun of it. Alongside my trading, I built up a

my checklists, check my positions and any changes

company in recent years that advises other companies

TRADERS’: Can you give us an example of a large losing trade you remember?

on issues of security and also trains interested clients to

Rabe: Yes, of course. A stark example was a wheat short

interesting people and create new enthusiasm for the

call back in 2007, if my memory serves me right. The

subject. And I have the impression that that makes me a

market was up, so I traded counter-cyclically, which, of

better and, above all, more reflective trader. Otherwise,

course, was stupid. After my position had been opened,

though, my life does not always revolve around work

the price kept going up and I started the weekend with

and the markets, since I also want to spend time with my

a large accounting loss. On Saturday and Sunday I was

wife and our three children. Trading is one of the best

extremely nervous, all the time checking the weather and

jobs in the world provided you don’t make yourself a

precipitation outlook since prices at that time had gone

slave to the markets. «

be professional traders. That way, you also get to know

up because of a persistent drought. Unfortunately, there hadn’t been any rain until Monday and I closed out the

68

The interview was conducted by Marko Graenitz.

MArkET rAP

Is Trading a lonely Experience? TrADErS´ Cup Winners tell you that is mostly a Team Affair... It is easier to make money if you start with a good mentor: but mentors that make millions on their own and still accept to teach, are really few in the industry. More common to find a good system since an Algo can easily be duplicated and sold. But when you speak to the TRADERS’ CUP winners you understand that in the end there is also a hope for the average Joe: maybe you will not make a fortune but you can still learn how to make money.

We organize in Italy and in many

making

other European countries since 1999

you find people, like for example

the TRADERS’ CUP, a real money

Giuseppe Minnicelli, that have a

real

trading

competition

machine,

very

seldom

which

higher bright education and a real

in 2015 will reach its 17th edition

grasp of what counts in finance and

(www.traders-cup.it)

will

in life. Giuseppe Minnicelli is also

be sponsored also by TRADERS’

and

it

a part time painter and his trading

MAG UK. I audited more than 5000

room is filled with his masterpieces.

accounts of traders coming from UK,

But average successful traders are a

Germany, Switzerland, France, Spain

pain in the neck if you talk to them

and Italy.

about life, arts or politics.

Dr. Emilio Tomasini is Adjunct Professor of Corporate Finance at the University of Bologna, Italy, where he is also Chief Editor of the Italian TRADERS´ edition. He is a leading authority in Europe for quantitative trading and now he writes in English his legendary stock picks on www.volatilitystocks.com

Out of this competition some

Second thing you realize is that

of the most famous traders around,

in the long run success depends also

met the glory that they deserved like

from a team work: successful traders

Achille Capecce who made dozens

tend to meet and form a group

of millions in trading or the latest

for obvious scale economies you

interesting message: you can make

winner, Giuseppe Minnicelli, who in

have in trading together with other

money for sure, the amount of that

35 trading days transformed a 5.000

successful traders. If you are lucky

will depend on your focus and skills.

euro account in an almost 55.000

and you enter such a group you can

But in the end, you can. It is why we

euro account trading mostly Italian

make good money, even if it is rare

invite you to join our next edition

and French biotechnology stocks.

you will become a top trader. So good

of the TRADERS’ CUP that will also

When you are facing such successful

news is that you can learn, bad news

have an English standing for English

traders, first thing that springs to

is that you will not learn everything

traders. Competition will start in

mind is if trading skill is transferable,

because in the end there is nothing

May 2015 and end in October 2015,

which is logical as you too you want

to learn. If you were born to be a top

award-giving will be at the Milan

to make millions.

trader you already would be a top

Stock Exchange in late October 2015.

trader and you would not be hovering

Good luck ! Either as a mentor or as

around looking for a mentor.

a student you need to see how real

First thing you realize when you speak to a top trader is that you will never be like him since what you lack is focus. A top trader is a real money

So like

a

trading

TRADERS’

CUP

competition

trading is in the biggest European

convey

real money competition.

an

69

COLUMN

www.tradersonline-mag.com 01.2015

Why Everybody Should Be Trading

Julian komar

Julian Komar has been into technical analysis and trading for over three years. He has a private blog: blog.julian-komar.de

» What is more successful in the long term: Trading

The goal in trading is to find a method as well as a

or Investing? I do not have a firm definition of those

system to answer these questions. This system has to have

two terms. Investing is often described as long term

a positive expectation to achieve a profit in the long term.

Buy&Hold, whereas trading is the short term buying and

But that is not all – many traders are in that position already

selling. But both methods have a buy and sell decision in

without being successful. Another important risk factor is

common. The question regarding investing is: Do you sell

your own self – in entrepreneurship as well as in trading. If

at all or is it a decision without an exit plan? Therefore I

an exit from a business is necessary, then you really have to

would like to call it trading and Buy&Hold.

do it. Furthermore, you have to strike at the right moment

My own definition of trading develops continually. But

and start your business – or your trade.

I know one thing for sure: It is the only method to survive

Trading is the only way to act risk-aware and to take

in the financial markets in the long term. Buy&Hold is

your financial faith in your own hand. Risk is priority – this

not. I personally do not know the development of the

is independent from the method of decision (fundamental/

next years. I cannot predict the future and I do not have

technical, system trading/individual decisions). In my

a crystal ball. The only thing I know is that prices will

opinion trading is the only way to protect and increase

move.

your capital in the long term. But I am not saying that you

Buy&Hold investors are always subject to risk: stock market crashes and long term falling prices. Investors

need to become a daytrader. There are many and also long term ways to trade.

always assume that prices will rise in the long term and

One important thought that I read several times in

they do not have a plan for an exit or a risk limitation.

the Wizards of Wallstreet (book series of Jack Schwager)

But as the example of Japan shows us, this can be the

is the conviction that your capital is in the best hands

case: 20 years of decreasing prices. Who can hang on that

possible, if you look after it yourself. You do not want to

long? Is Buy&Hold the right way?

leave your money to somebody else. Can you say that

I am convinced that you have to think risk-aware:

for yourself? How about your confidence in your trading?

When will I exit a position, if the assumptions of my trade

Often traders lose sight of their goals of capital

turn out to be wrong? The goal is to earn money in the

preservation and long term augmentation. They focus

long term – and not to lose. Therefore I have to think like a

on action, technique or treat it as a hobby. But there

manager: Which investments turned out to be successful

is only one thing more to say: Never play with money.

and which investments should I cancel? Where are the

Trading is a business and you have to invest much time

markets that offer good possibilities and when is the right

to become a good trader. If you are not ready to do so,

situation to open a trade? Those are the thoughts that

you have to trust your money to someone who is already

occupy my mind.

successful. «

70

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