Traders Mag Sep2013

Interview: René Wolfram – Third Place at the Trading World Cup P. 74

FRED

09 14

ss Addre t s r i F The ic Data m o n o for Ec to Z from A P. 38

Your Personal Trading Coach Nr. 09, September 2014 | www.tradersonline-mag.com

How to Supercharge in 7 Easy Steps

Supercharge Your Trading News Trading in Euro/Dollar How to Take Advantage of Big Events at the Stock Markets P. 40

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

Trend Knockouts Get in Only after the Weak Hands Are Out P. 50

P. 6

Learn To Trade With Discipline ‘This is a life changing course’ - S.M. (UK) ‘This is in my opinion the best spent money I have ever done in terms of trading courses’ - N.B. (USA) ‘Firstly let me say your course has turned my trading around…’ – D.P. (Australia)

Online trading psychology program with leading trader performance coach Steve Ward starts 2nd October TRADERS’ readers SAVE £100 (use code TRAD100 on checkout) Find out more at www.highperformanceglobal.com/discipline Train your mind, strengthen your discipline, maximise your returns

EDITORIAL

www.tradersonline-mag.com 09.2014

Ioannis Kantartzis Editor-in-chief

Why the Low Interest Rates Are Poisonous » Key interest rates have been so low for such a long time that some market players have forgotten by now why it is important to have an interest-rate level that makes sense. After all, permanently low interest rates do not cause an “automatic healing process“ of the economic system as might be assumed after years of brainwashing by the central banks. Quite the contrary – interest rates are a control variable in an economy and may lead to devastating inefficiencies if they are permanently suspended, as has been the case in the last few years. But let me explain this step by step. What would the interest-rate level be like if it were determined not by the central bank but by supply and demand? Who would then buy Spanish, Portuguese, or Greek government bonds that entail high risks but by now only earn the sort of interest that is barely recognisable? The answer is obvious: Nobody. The interestrate level would be much higher. In addition, there are the guidelines from Basel which, as was the case in previous years, practically forced large institutional market participants to buy government bonds, pushing interest rates lower. Without this mechanism, interest rates would be – and would have been so earlier – significantly higher and institutional investors like insurance companies could have higher equity exposure (and be more profi table). But let’s now turn to why the low interest rates are poisonous for our entire economic system: Interest rates have lost their steering effect as a result of systematic manipulation. In “normal“ times, bad investments achieving low returns do not survive, which means that in the long run only the good projects will continue to exist. But if interest rates are too low for too long, there will be no such correction. It will permanently be unclear what good investments are since bad projects will survive as well, leading to increased uncertainty and lack of transparency. Furthermore, there will be a shortage of good staff for the profi table projects because those workers will also join the “bad“ competitors that normally would not be there in the first place. In other words, the entire investment sector of the economy will increasingly be out of kilter and inefficient as long as interest rates are near zero. This is a situation that will not be rectified automatically. After all, it’s only when the tide goes out – in terms of higher interest rates – that you can see all those people swimming without wearing swimming trunks. « Good Trading,

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TABLE OF CONTENTS

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www.tradersonline-mag.com 09.2014

74

TABLE OF CONTENTS September 2014 COVER STORY

46

06 Supercharge Your Trading There’s no magic formula for becoming a great trader. All sorts of different personalities can be successful at trading. A Supercharged Attitude to Life is the common theme amongst all super-successful people. Skip Archimedes, former 2 X British Gymnastics Champion, will delve into im-portant principles such as having high energy, not trading health for money and acting according to your true priorities.

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

INSIGHTS

14 Trading without Losing Being right is not enough – Clem Chambers explains how you can lose even when you win.

16 Market Dynamics – Part 2 Dirk Vandycke elaborates on the powerful law of nature in the financial markets, how it appears in different spots in their dynamics.

20 Hedge Fund Series – Part 6 In this part, Bruce Bower will explain how you can build your own “Hedge Fund core”.

24 Trading Seasonalitiy‘s – Part 14 This time, we show you two long setups for Nike and Orange Juice.

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TOOLS

30 New Products News from the World of Technology

32 Software Review MetaTrader Signals Service and Social Trading

36 Book Review “Clash of the Financial Pundits” by Joshua M. Brown and Jeff Macke

38 App Review FRED

TABLE OF CONTENTS

PEOPLE

74 René Wolfram – Third Place at the Trading World Cup René Wolfram got involved in the markets during the New Economy bubble at the end of the 1990s. Like so many others his way was quickly uphill only to go quickly down hill as the bubble burst. But Wolfram is among those who has learned from his losses how to finally become a successful trader. In 2013 he was placed third in the Robbins Trading World Championship.

STRATEGIES

40 News Trading in Euro/Dollar

Christian Stern und Stefan Friedrichowski show how to use big events at the stock markets for your trading.

46 The Trend Is Your Friend

David Pieper introduces a long-term trading strategy you can systematically make profits with in the weekly chart.

50 Trend Knockouts

In this article Dave Landry will dicscuss the thee phases of trend and one of two setups for getting onboard established trends.

54 Inventory Retracement Bar

Rob Hoffman explains his award-winning trading strategy.

BASICS

58 Risk- and Money-Management – Part 6

In part 6, Jens Klatt explains how to determine the optimal position size.

62 Market Structure Indicators – Part 1

Rudolf Wittmer describes in his first part of his new series the basics of analysing the market structure.

66 The Trader‘s Technical Arsenal – Part 9

This time, Azeez Mustapha discusses the On Balance Volume and the Parabolic SAR.

72 Trading Journal

Alexander Mantel introduces a trade with E.ON.

Publisher Lothar Albert 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 (CY) Ltd Amorgou, 14A 3047, Limassol, Cyprus Contact: E-mail: [email protected] Phone: +44 (0) 7798631716 Mobile: +30 (0) 6932 315450 Fax: +49 (0) 9 31/4 52 26-13 Editor-in-Chief Ioannis Kantartzis, Anastasios Papakostas Editors Katharina Boetsch, Leanne Chesterman, Prof. Dr. Guenther Dahlmann-Resing, Corinne Endrich, Marko Graenitz, Lena Hirnickel, Sandra Kahle, Stefan Rauch, Katja Reinhardt, Karin Seidl, Tina Wagemann, Christine Weissenberger, Nadine Wiget Articles Skip Archimedes, Thomas Bopp, Bruce Bower, Arturo Bris, Clem Chambers, Stefan Friedrichowski, Rob Hoffman, Jens Klatt, Dave Landry, Alexander Mantel, Azeez Mustapha, David Pieper, Christian Stern, Dan Valcu, Dirk Vandycke, Rudolf Wittmer Pictures © agsandrew, alswart, basketman23, berc, bluedesign, Brian Jackson, DavidArts, ferkelraggae, gavran333, Georg Preissl, IMaster, Kurt Kleemann, Melpomene, Minerva Studio, mma23, opicobello, sergey_p, shotsstudio, THesIMPLYFY, wmedien / 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 (CY) Ltd, Amorgou, 14A, 3047, Limassol, Cyprus

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coverstory

www.tradersonline-mag.com 09.2014

supercharge your trading How to supercharge in 7 easy steps

You all have heard of the saying, “health is your greatest wealth.” But how does it correlate with trading? Coaching thousands of people over the world and running transformational live events globally, have led to the uncovering of many essential formulas for success.

» As traders, you need to be able to manage your

To achieve a strong mindset, you must learn to

emotions effectively, be “on the ball” in moments of

manage your emotions and continuously sharpen your

decision making and have the energy it takes to keep

intellectual knowledge of the subject field you are in.

you focused on the outcome you want to achieve. It is

These qualities are pivotal in becoming successful in

common belief that 80 per cent of trading is psychology.

any field.

6

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coverstory

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Healthy You = Healthy Trades

of high finance. After all, it’s all a numbers game, isn’t

Many people who are obese and looking to lose weight,

it? That may well be so, but gut instinct/intuition, can

battle with the emotions of fear, greed and indiscipline.

also play an important part in those time-critical trading

These emotions can create a junk food habit until the fear

situations. But have you considered that your brain and

of staying obese and not reaching their goals kicks in. I

gut can only operate at maximum efficiency if they are

have seen all the clients I have coached go through similar

kept healthy and alive? What happens to your decision

emotions. And these are the very emotions that many

making processes when you become jaded and sluggish?

of my trader friends and clients also struggle with. The

It’s a bit like driving while under the influence of drink or

fear of losing the profits that they have gained leads to

drugs – you think you’re in perfect control, until you study

indiscipline and results in not consistently executing their

the results – if you’ve seen The Wolf of Wall Street you’ll

trades. Looking after your health can help you overcome

know exactly what I mean.

the emotional battle and achieve a strong mindset for profitable trading.

Looking after your physical body is essential to keeping the physiology of all your bodily functions

In our recent interview with Thiru Nagappan, trader

in optimum condition. And we’re not talking about

and founder of Master the Markets, we uncovered

physical fitness alone here. Your body and brain need

some amazing insights into the relationship between

to be fit for purpose – inside and out. The important

maintaining a healthy lifestyle and developing a strong

point that relates specifically to trading is that a clean,

mindset for trading. Everyone can benefit by adding a

fit and energetic physical body will help heighten

few simple but very effective habits to their life.

your awareness and mental acuity. These are critically important for remaining in the present moment, and

Fitness to Finance

being able to see and act on trade opportunities as they

You might think that the brain is the most important

present themselves.

organ in the body when it comes to the cerebral business

Here are a few Skip’s Tips that you will immediately feel the benefits from: Skip’s Tip 1:

F1) 10 Commandments 4 Health on Your Chart

Oxygenate with Correct Exercise Your

most

valued

and

needed

nutrient is oxygen. Unfortunately, most people don’t even realise that they aren’t breathing correctly, so they can’t correct the shortfall. Stress adds to this problem as it causes us to start to use our diaphragm less and breathe from our upper chest area, leading to a diminished oxygen intake. Yawning is a signal that our brain is going to sleep, but it’s also the body’s mechanism for gulping great draughts of oxygen into our lungs to wake the brain up again! So for this reason, when you Post the 10 Commandments 4 health on the chart and read through them before and while you are trading. This will get you in the state to “Trade in the Zone”. Source: TradeSignal

8

are trading, make sure you practice power breathing. This will connect your mind to the present and stabilise

Coverstory

your emotions. It will help massively when trades are

This exercise will also engage your lymphatic system

going against you by sharpening up your brain and

and help eliminate unwanted toxins that can affect your

allowing you to stay with your trading plan and execute

performance.

your trades consistently and with discipline.

Finally, to maintain that oxygen flow, make sure that

Here’s an effective power breathing technique

you commit to moving your body for 45 minutes per day

which may sound simple, but its power should not be

with some kind of fun exercise. This helps deal with stress

underestimated.

and releases endorphins that literally make you feel good

Set a reminder to do it a minimum of three times a day and notice the multiple and immediate positive effects:

instantly. And don’t forget that latest research shows that physical exercise is more effective at keeping Alzheimer’s and dementia at bay than mental exercise.

•

Breathe in all the way down to your diaphragm for a count of two.

Skip’s Tip 2: Thou Shalt Live with Passion

•

Hold your breath for eight.

Know exactly the higher goal and vision that is the reason

•

Breathe out over a count of four.

you are trading. This may be for the benefit of your family

•

Complete this ten times

and children and even for a wider community. Have this

Preview

of the next Issue

COVERSTORY

PEOPLE

Invest Like a Pro

Interview – Ruediger Born

Very few fund managers are able to achieve better returns further

Ruediger Born is managing director of BORN Traders

down the road than passive investments. Today, ETFs can be used

and also founder and head of trading of BORN STAHL-

to invest in almost all asset classes, be they stocks, indices, bonds,

BERG & PARTNER, his asset managing enterprise in

commodities, or real estate. This enables private investors to put

Switzerland. Since early in the 90s he is an active trader

together their own “hedge funds”. In our coverstory, Rudolf Wittmer

at the international financial markets. Besides, he is a

will explain the basic approach to creating such a structure.

well-known TV market expert and speaker.

The October issue of TRADERS´ will be published on 25th September 2014. 9

coverstory

www.tradersonline-mag.com 09.2014

Know exactly the higher goal and vision that is the reason you are trading.

vision next to you to serve as a reminder when you are

or passions. It’s often said that if you want a job doing

trading. This will help you to overcome all the challenges

well you should give it to someone who is always busy,

and difficulties you will face on the way to becoming a

because they are accustomed to working to deadlines

professional trader.

and usually to high standards. If you have only the one

Finding your passions outside of work is essential.

passion and it’s also your job, you run the risk of becoming

Passion electrifies the body and mind more than anything

too narrowly focused and incapable of bringing outside

else – more than food and more than drink. It doesn’t

experiences to bear on your decision-making processes.

matter what it is, you just have to have passion for it. The more you connect with things through passion, the more

Skip’s Tip 3: Educate Yourself

electrified you are, the more alert you are and the better

“Use it or lose it!” Education keeps us growing and

you function at optimum levels.

expanding so we feel unstoppable. If you don’t continue to educate yourself it can start to feel like you’re on a

Passion Killers

decline.

If trading is your passion, you’re killing two birds with one

Information is power. Most big profits are gained

stone, but beware of becoming one-dimensional. Most

through one person knowing something that most

ultra-successful people have wide-ranging interests

other people don’t. Most losses are incurred through not recognising the value of some essential piece of information. Educate yourself on the subject

F2) Smart Breathing during Consolidation

of lifestyle habits that will serve you, your body and your business. These tips are a good starting point and will give you an easy filter for lifestyle choices that will literally

supercharge

your

life.

Educate yourself by researching more deeply into these subjects as you would when you’re looking at future investment and trading opportunities. You become who you hang around with, so make a conscious effort

to

socialising

educate and

yourself

networking

by with

people you admire and look up The calm before the storm. Consolidation breakout on EUR/JPY. Take deep diaphrammic breaths during a consolidation so as not to enter in the trade with impulse action. Patience is virtue and smart breathing can help. Source: TradeSignal

10

to. Don’t forget that you are your greatest asset so you must also invest in your good, healthy and vital self.

Coverstory

Skip’s Tip 4: Hydrate Yourself

isn’t widely accepted is that you can get a greater high

Your brain is over 80 per cent water and the rest of your

from living a supercharged life than from any artificial

body is about 70 per cent water, so it clearly pays to keep

stimulant.

properly hydrated. Dehydration is the enemy of clarity,

Many people who live by the tenets in my philosophy

the number one faculty needed for watching trading

find that they can function at an extraordinarily high

positions and knowing when to act.

vibrational level for over 24 hours at a stretch without

Regular hydration with clean water helps to keep your

any adverse reactions and recover in ultra-quick time

mind in the present, clearly focused, alert and aware of

because their systems have no toxins to remove while

opportunities as they arise. Clarity also helps to prevent

they are resting and recovering.

the stress arising from the very act of trading. Water is the only liquid that can cross the blood/

Skip’s Tip 5: Meditate Regularly

brain barrier, so it’s the only thing that can hydrate the

Meditation can help stabilise your emotions and let

brain. And as the body has so much water in it, water is

your intellect shine. This is the reason why some of the

one of the most essential nutrients for all the organs and

top traders in the world meditate. It’s a practice that is

systems of the body.

also becoming prevalent in the city, as you may have

By drinking approximately two litres of good clean

read in the papers. Taking some time to meditate each

water each day, you give your body and brain one of the

day connects you to your inner guidance system. Your

foundation stones of good health and vitality to keep you

intuition then instinctively kicks in to help you make

ahead of the game.

decisions that would otherwise be troublesome.

Many people in stressful jobs resort to stimulants to

It may sound very weird or mystical, but the fact is

keep them going long after their senses have told them

that many of the clearest thinkers in history have studied

they ought to be closing down and recovering. Coffee,

and depended on meditation as an aid to showing them

energy drinks (which are mainly caffeine and sugar based), and in extreme misguided cases, alcohol

F3) Let it Go and Get in Motion

or drugs are all commonly used to provide a boost or a dulling effect. They often work to an extent, but with what after-effects? The jury is still, to an extent, out on the long-term effects of caffeine. The problem is that most coffee is doctored with a medley of

artificial

chemicals,

none

of

which are any good for our bodies. Sugar and sugar substitutes are the number one enemy of good health, commonly held as being the main contributor to obesity, heart disease, diabetes and most of today’s biggest killer conditions. There’s nothing to be said about the harmful effects of alcohol and drugs that hasn’t been covered in a million articles, studies and reports already. What

If you have missed the move, let it go. Do not let your emotions override you and jump into the trade. Get off the screens and get your body in motion. Go and exercise. Get your blood circulation moving, reset yourself and come back. Now, you will be more present for future trading opportunities. Source: TradeSignal

11

coverstory

www.tradersonline-mag.com 09.2014

So many people spend their health gaining wealth, and then have to spend their wealth to regain their health. (A. J. Reb Materi)

the truth. The act of meditation allows the mind to be free

adopt a cleaner lifestyle so that you can live and follow

from the chatter of the world around you. Much of this

your purpose effectively for as long as you wish. With

noise is indecipherable from important information under

you, this may be trading. Every great leader embraces

normal circumstances, but meditation can help to filter it

challenges and rises to them.

out and allow you to focus on what is truly important.

There’s nothing worse than feeling unwell when you

You’ll create space between those thoughts that will

are supposed to be working, so try focusing on having

connect you with a power, a wisdom and an intelligence

health, energy & vitality as your purpose and you will

that resides inside of you.

avoid and even reverse those challenges.

You can meditate in any quiet place. Sit or lie down comfortably and empty your mind until trivia stops

Skip’s Tip 7: Proper Nutrition

coming in and the things that are truly important to you

Sitting in front of a computer screen for hours on end

start to take its place. It does take practice and the more

is recognised as one of the main reasons why Western

you do it the better you’ll feel. Eventually you won’t want

nations are becoming more and more obese. The lack

to live a day without the gift of meditation. New found

of exercise and uncomfortable sitting positions that are

mental and emotional balance will help you to become an

inherent in a sedentary, office situation are clearly bad

unshakable trader in any situation.

for your health and therefore for your ability to stay sharp and focused.

Skip’s Tip 6: Have a Purpose and a Higher Ideal

But poor diet is the king of causes of today’s major

Having a higher ideal helps you overcome all the emotional

killer conditions. Eating junk food is often a result of

battles that will happen to you when you are in a trade.

boredom and by itself can have major effects on your

When that voice in your head echoes to take the profit

mental awareness whilst trading.

off the table, when your trading plan tells you otherwise,

Your body and mind are the only things that are with

remind yourself of the higher ideal and the bigger picture

you for every trade, so it makes sense to feed yourself

of why you got into trading in the first place. Then you

what is nutritious and tasty so that you’re fuelled with

can control your emotions and get your trading plan in

the best nutrition available to you. This will ensure that

line with your true purpose.

you don’t suffer from energy dips throughout the day and

If you make health, energy and vitality your purpose

stay clear and focused. Little and often is key here.

then you’re basically committing to a life without the

As a trader, you know all about forward planning, so

aches, pains, illnesses, ailments that most people suffer

is there any reason not to plan your eating for a day or a

with, and as you age your bodily functions won’t break

week in advance?

down. People think that as they get older, the body naturally stops working. This is simply not true. What’s happening

With this planning, you could rebuild your relationship to food and ensure that the right food will help fuel your body and mind so you can trade with more energy.

with the ageing process is that your body is getting

In order to feel alive then you simply need to start

more toxic from a lifetime of bad choices, environmental

eating more live foods. That is, foods in their natural

pollution, etc. So it is essential that you cleanse, detox and

state. You don’t want to be ingesting junk that’s going

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coverstory

to drain your body of energy. Foods that contain high

skip Archimedes

sugars or sugar substitutes, are processed, fried or covered in chemicals and are simply not nourishing

Skip Archimedes is a former gold medallist in the British Championships. Facing many tough times himself, he is dedicated to the study of how we can achieve startling results in the face of crippling adversity or to simply reach higher levels of excellence in all areas of life.

your body and mind. You are in fact trading your body’s energy for a quick fix that ultimately leads to more body stress. Most people go about their day with high levels

www.superchargeyourlifeuk.com

of acid inside their body. This is literally making their body rot from the inside outwards and where ever there is weakness in your body then the acid will rot that place first. For some it is in their joints and others it could be body parts like their eyes. By consuming foods in their

Looking after your mind and body is a very low

natural state you’re taking in live enzymes, nutrients,

risk investment, but the returns are enormous – almost

vitamins and minerals that your body and mind need so

obscene. You could have boundless energy and look

you can function well.

forward to every day with optimism and certainty. Live

Simply make your plate colourful with live foods. Getting these into the body as you wake with a alkalizing

your life supercharged and you will supercharge your trading.

green juice or smoothie will flood your body with live

Trade after-work drinks to wind down, for exercise,

nutrients so you feel more alive for your day. Most

time with your family, or quality time alone. Become the

processed foods cause the body to use a lot of energy to

leader that you know is within you, starting with leading

digest it, so you end up trading your energy for a meal,

yourself into making decisions that will empower you in

instead of the meal putting energy into your body. It’s

your trading by understanding that health is your greatest

easy to see this isn’t a smart trade. Try trading in your

wealth.

morning coffee for a live green smoothie or juice. You’ll feel the boost of energy almost immediately. It will also

So the question is, are you ready to trade your old habits for supercharged ones? «

help you start to alkalise your body from an acidic state to a balanced state. Food stress is a common condition that people fall into by eating out of convenience. If you can plan your food intake one day or longer, ahead, you can be one step ahead of the game. If you fail to plan then you’re planning to fail. Plan your live green juices/smoothies and meals a day ahead so that you know that your body and mind are being nourished on a daily basis.

Buy Low, Sell High – Low Risk, High Return Two aims that are easier written than achieved, you might say. And that’s true, both of your life as a trader and your existence as a human being. As a trader, you pull out all the stops to manage both of these maxims, but what about in your lifestyle? How much effort and planning, passion and purpose, living and breathing and learning are you prepared to put into your health and longevity? Because admittedly the costs of being fit and healthy are low.

Supercharge Your Life in London Skips Naked Health and TRADERS´ Magazine have collaborated to offer TRADERS´ Magazine readers a special discount on Skip’s live London event this September. TRADERS´ Magazine readers can secure their place on what’s billed as the most powerful transformational weekend event available. Held on the 20th & 21st of September, tickets are only £147 but as a TRADERS´ Magazine reader you can purchase tickets for a discounted price of £97. Simply go to www.superchargeyourlifeuk. com to benefit from this opportunity to join us for a supercharged weekend. You will learn first-hand important steps on how to become a more vibrant version of yourself taking your business, health and relationships to a whole new level. Go to www.superchargeyourlifeuk.com and enter “TRADERS” into the discount code box to receive your discounted ticket.

13

insights

www.tradersonline-mag.com 09.2014

trading without Losing Being Right is not Enough

Don’t let margins and interest nibble away at your profit. Private investment guru Clem Chambers, CEO of the financial markets website ADVFN.com and author of “ADVFN Guide: A Beginner’s Guide to Value Investing”, explains how you can lose even when you win.

» My old dad used to say, “All you need to know is whether

What you should trade is certainties. That’s pretty

the market is going up or down, the rest is just detail.”

tricky. Trading is pretty tricky too. Often correlation is

The best advice is always simple and the more it annoys

causation. So why not look for the blatantly obvious and

the more likely it is to be useful.

trade that?

Most traders lose money speculating on 50/50 trades

Let us try one for size. The euro is going to fall. That is

– so marginal that their costs eat up their capital. They can

pretty obvious, isn’t it? It is not a matter of if, it’s a matter

be more right than wrong and still lose all their money. A

of when.

death by a thousand cuts is a classic route to poverty for high frequency, short life traders.

The pound is going up because it’s been made clear that interest rates will rise soon. America has clearly telegraphed the end of QE and thus the march to rising interest rates; meanwhile back in Europe, they are trying

Clem Chambers Clem Chambers is CEO of ADVFN (www.advfn. com) and author of several books such as “101 Ways to Pick Stock Market Winners” and “A Beginner‘s Guide to Value Investing“.

to go the other way. Europe is moving towards loosening and everyone else is moving away from loosening. Long term, it’s a no brainer.

The Position Should Reset to Its Previous Levels What the Chart Shows So look at the chart in Figure 1. It’s the long-term pound vs. the euro, the mainstreams of loosening and tightening

14

insights

in this loose money world. Which way is the chart going?

you will be stopped out for a loss. With a given volatility

Up. The fundamentals say up and the chart says up.

it is nigh impossible not to get stopped out. Any win is

The question is, did the basic relationship between the UK and Europe change that much since 2008? I’d say

countered by a mountain of costs from multiple bid/offer spread re-entry costs.

not. So why wouldn’t the pound/euro relation reset to

Then there is the matter of interest. Say I have a

near those post trauma levels? If you forget the noise this

financing rate of five per cent a year. I have a million

very simple picture is a map for a long-term position with

pounds of cash in the account. I go £1,000,000 long on

big profits along the way.

AAA PLC. I pay five per cent on the whole £1,000,000 of

Let’s go sideways a tad. You think the low interest

leverage. The £1,000,000 is margin, often not even the

rates in Europe will drive European equities. Well jump

£100,000 deposit used is taken off the whole amount. So

in. Wait, what is the point of a fat profit in euros if the euro

at the end of the year, I have spent £50,000 on interest.

tanks? Better hedge that! So you see a very simple road map informs your other trades.

So say you started with just the £100,000, used ten times leverage at five per cent and held for a year. You

Many traders think that being right is all they need to

could have traded four stocks over the year instead. But

make money. There are many ways to be right and still

in the end, the stocks didn’t move up or down. You just

lose. The main one, of course, is costs but the other is

lost 50 per cent of your capital in interest. If you used

gambler’s ruin. Let us say the chart of the euro vs. pound

20 times leverage, you spent the lot!

is correct; how can the trader possibly go wrong outside

Conclusion

of thrashing his account to death?

So what is the way to go? If you see a long-term trend,

The Broker Always Wins

enter and sit on it. If you want to grow the position buy

The next most frequent answer is leverage. Leverage

the tips. Use leverage sparingly if at all. Be aware of the

kills. Let me give you a practical example.

financing of your leverage and watch it closely. Keep the

At the bottom of the crash of 2008, I went long. In fact I was on CNBC having a bust up saying that the market

usual extreme volatility in mind when you leverage and keep plenty of margin at hand.

was in a panic. The presenter said I was simply trying to

Most important of all, don’t get distracted by the

encourage one and I retorted I was now very long because

noise of other opportunities. Don’t make your broker rich

you buy when everyone is selling. (Or words to that effect.

because unless you are making as much profit as the

The interview is likely still on YouTube somewhere.)

commission you are paying, you are doing it wrong. «

I made about 200 per cent on that position but had no leverage. I was, as poker players would say, “All in.” This

F1) EUR/GBP Long-Term

was fortunate because that portfolio had to drop another 20 per cent before it turned to zoom to the moon. With ten times leverage, half of what I could use if I had chosen to, I’d have been closed out with at least a 50 per cent loss. Leverage is very tricky. This is why we get offered it. If I was a broker and I didn’t hedge or make your trade. The leverage coupled with stop-losses is what pumps the trader’s money into my account. It works like this: With leverage you need a stop, your margin is a stop in its own right. The more you leverage the tighter the implied stop. The tighter the stop the more times

The pound versus the euro over the last 15 years – the effect of the 2008 crash is clearly seen. Source: www.advfn.com

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www.tradersonline-mag.com 09.2014

Laws of Physics in Financial Markets

Market Dynamics – Part 2 Physics laws shape the world we live in. Most of the observations we make, how we function as organisms as well as practically all biological processes are, in effect, tuned in harmony with these universal forces. There’s no escaping them and today’s most successful species have learned to use them to their advantage. In financial markets too, there are underlying forces an investor or trader has to know and needs to respect in order to be successful. This article series aims at exposing the underlying forces driving market dynamics while detaching them from their protruding visible consequences that are way better known to traders.

» In the previous article we showed how gravity and

furthermore as the law of the vital few (and trivial many),

capacity are two of financial markets’ strong underlying

sometimes described as factor sparcity. This rule,

forces. In this article we’ll elaborate on the powerful

although more an empirical observation than a true

law of nature in the financial markets, how it appears in

law of nature, states that roughly 80 per cent of effects

different spots in their dynamics, effecting participants

(output) come from 20 per cent of the causes (input), as

and what markets keep in store for them.

depicted in Figure 1. Nowadays it’s even common to see it pop up under denominators such as power laws (giving

Less Drives More

rise to Pareto type distributions), long tail economics with

Most people are familiar with the 80-20 rule, also

a lot of attention towards areas like rupture dynamics. We

named the Pareto principle or Juran’s principle, known

won’t go there in this article. Although the numbers 80 and 20 are used, in trying to grasp the main point, one shouldn’t focus on them for

Dirk Vandycke 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. [email protected]

two reasons. First of all, they don’t have to be exactly 80 and 20, they can be numbers describing minority versus majority. Secondly, they don’t have to add up to a hundred, even though they are expressing percentages. The reason for that being they describe totally different things. So this commonly observed effect might show itself as 17 per cent of causes accounting for 91 per cent of the effects (91 and 17 not adding up to a neat 100).

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What this rule is actually saying

F1) The 80/20 Rule Depicted

is that most things in life aren’t distributed evenly. As a consequence not all efforts have the same or even proportional impact on the outcome of what it is we try to achieve (return in the case of trading). Lastly, don’t think the Pareto Principle means only 20 per cent of the work needs to be done (if one is satisfied with 80 per cent of the result). It may be true that 80 per cent of a bridge is built in the first 20 per cent of the time, but you still need the rest of the bridge in order for it to work. It may be true that 80 per cent of the Mona Lisa was painted in the first 20 per cent of the time, but it wouldn’t be the masterpiece it is without all the details. So this principle is mostly

The 80/20 rule is a general rule explaining that a large part of a systems output is determined by a small part of its input (vital few). Accordingly a large part of its input (trivial many) doesn’t matter that much as far as output is concerned. Although heavily present in business and management, the rule is applicable to trading as well. Source: www.chartmill.com

useful in situations where we don’t seek perfection but want to optimise our bang for the buck. In those cases, focusing on the critical 20 per cent is a time and energy

average have few large winners (the vital few) and lots of

saver. See what activities generate the most results and

small losses (the trivial many). There you have it, 80-20 in

give them your appropriate attention.

one’s trades. But it doesn’t stop there. If we take this a bit further, 20 per cent of ones trades will also represent 80

Market Application

per cent of one’s profits.

Can we find the 80-20 rule in financial markets? For sure, we

There’s a conservational law stating that the money

can. Numerous studies show how the minority of (hedge)

flux must be constant (we won’t consider money being

funds earn the majority of alpha, how the majority of

printed or destroyed because on an individual scale it

stock movements happen in the minority of time, how the

doesn’t matter much). Furthermore at any time market

minority of stocks make for the majority of the action. But all

dynamics will follow the path of least resistance. It is

these studies are looking at power laws from the viewpoint

easiest to pay off the smallest group. So if winners on

of the market. In this article we want to zoom in on how 80-

average have big positions, chances are that there are

20 can make a difference for the individual trader.

more people losing at any one time. If there would be

Let’s start with some root cause analysis on

more winners than losers, their positions couldn’t be

profitability. In trading profitability comes from the

larger. If the number of winners and losers would be

combination of frequency and size of wins and losses

equal, markets would on average be nothing more than

(see Figure 2). And no matter how much the financial

breaking even. From this it must follow that, on average,

industry makes its customers focus on the number of

any trader can expect to have more losing trades than

winners (having more winners), we have far more control

winning trades in the long run. 80-20 time and again. 80-

over the size of wins and losses (just by selling – if you

20 among traders. The ‘on average’ here implies that it

sell each position at a five per cent loss, your average loss

don’t have to be the same people winning every time. But

can never get bigger than five per cent).

for each stand-off, there will be a power law distribution

This is where an interesting deduction can be made.

between winners and losers in the market. With some

For if we need to focus on cutting losses (minimising the

caution one might start to wonder if that would mean that

average loss) while maximising the average winner to

on average 20 per cent of traders gets away with 80 per

be profitable in the long run, profitable traders will on

cent of the money on a lager time scale.

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www.tradersonline-mag.com 09.2014

is what we call analysis, because the

F2) Expectancy Depicted as scales

sole purpose of any type of analysis is getting us more winners. Therefore getting from 30 to 40 per cent winners might take some effort (energy/time/ money for analysis), trying to get from 40 to 50 per cent will cost us several times that effort. This is a power law, showing that, although analysis might not be futile, it obeys a law of diminishing returns. To put this in another way: We probably do Being profitable in the long run with trading, or every investment based enterprise for that matter, is about cutting losses and letting profits run. Although this is a hearsay thing of ages, statistical expectancy actually proofs the saying mathematical. Making money is not so much about being right or wrong as it is about handling both profits and losses well. Source: www.chartmill.com

way too much analysis. We should focus on 20 per cent of the simplest analysis (like relative strength) which will get us the most value/effect. Before you know it you are spending lots of time on the minor details (like reading everything through what

What about Analysis

fundamental analysis has to offer). Analysis doesn’t have

Take a look at Figure 3. If we wonder how getting from zero

to be perfect but good enough, the rest can be left to

per cent losers towards 100 per cent relates to the effort

execution. Focus your effort on the 20 per cent that makes

to get there, some things are pretty obvious. First, no one

a difference, instead of the 80 per cent that doesn’t add

can have 100 per cent winners, for that would implicate

much. Again with caution we can start to wonder if 20 per

that someone being able to see the future. If such a system

cent of analysts produce 80 per cent of total analysis value.

would exist, markets would become obsolete very quickly. Since we can’t get to 100 per cent, the relationship can’t

System Quality

possibly be linear. So even though we don’t know how the

To take this away. What holds for a trader can easily

relationship looks like, it must be asymptotic to the vertical

be transposed on a trading system. A system probably

line at 100 per cent and it must increase towards the right for

will earn 80 per cent of its money in 20 per cent of its

less effort won’t get us more winners. Climbing that slope

time/trades. So on average a system probably will be out of synch with the market the majority of its time and 20 per cent in synch. To separate both phases one could do equity curve analysis on a system. If its equity curve

F3) Analysis Explained

goes down, money is taken away from the system but it keeps paper trading while being monitored. If its (now paper) equity curve starts going up, the system is put back on live trading modus. As far as a portfolio is concerned, lots of research is done and it would takes us way to far even just by giving an overview here. But a great place to start would be comparing what is called the Pareto efficient frontier with the efficient frontier in modern portfolio theory.

Conclusion 80/20 is a great decision making technique in general but Catching more winners (in percentage) gets exponentially harder. Trying to ride that steep hill is what we call analysis. Any form of analysis is done with the sole purpose to aim for more winners. Source: www.chartmill.com

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in the financial markets it might be lurking around every corner of trading activity. Pay attention to it and always keep the big picture in mind while taking care of each individual trade. «

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www.tradersonline-mag.com 09.2014

Hedge Fund Series Part 6 – The Steps to Building an Investment Process

In the world of investing, hedge funds have an interesting reputation. They are well-known for producing vast riches and famous fund managers, but their actual operations are still cloaked in secrecy. This mismatch gives rise to some obvious questions. How do they function? How do they make money? How did their founders become so wealthy? And, most importantly for traders everywhere: Could you or me become one of those fabulously successful individuals, like George Soros or Ray Dalio? In this final part of his series of articles, hedge fund trader Bruce Bower will explain how you can build your own “Hedge Fund core”. It’s the most powerful concept of all.

» Define Which Markets You

to start out on, but nonetheless, you’ll want to determine

Will Be Looking at and Investing in

one. By defining your universe, you’re doing two things

You have to strike a balance between being specific

at once: Understanding and reinforcing your areas of

enough that you’re handling a manageable number of

strength and avoiding other areas, where presumably

potential of investments, versus being so specific that

you would be weaker.

there aren’t enough real opportunities.

The reason is obvious. If you’re a Latin America

Take where you have experience and start from

specialist and a broker suggests an interesting trade in

there. If your background is fixed income, trading both

Petrobras, then you would definitely take a look at it,

government and corporate bonds, then define that as

because it’s your expertise. If that same broker suggests

your playing field. If you have experience trading equities

a trade in the shares of Tesla, the electric car company,

in Latin America, then that’s your scope. If you are just

then you would quickly realise that you have no real edge

starting out, then you might want to have a small universe

there and not look any further. Understand where you

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have an advantage and do it; if it falls outside of your

an operation, they could just rely on a piece of paper

circle of competence, just pass.

to standardise and systematise its implementation.

By defining your universe, you’ve built the first part

What’s more, the more junior doctors and nurses could

of the funnel. You know that you’re going to narrow your

refer to the checklist and were empowered to stop a

focus to an area where you have a good understanding.

procedure if something had been skipped over. The

What Are You Looking for in a Potential Trade?

and contributes to. Just like in any other successful

You will want to sort through your universe in some way

business. This is exactly what we should do with our

to look for interesting opportunities. To do that, you need

investing.

result? A standardised process, which everyone uses

to be clear in your own mind what constitutes a good trade:

…Applied to Trading

•

What are you looking for?

(TRADERS´ 08/2012) as an example. It’s a methodology

•

How would you describe a good trade?

designed for investing in stocks in developed markets.

•

What is absolutely essential to see?

There are seven pillars to his investment philosophy

•

What is helpful but not necessarily critical?

(see Info Box). These represent the seven points on the

•

What kind of trade would you not do?

checklist.

When you read in books like “Market Wizards” about

universe to find investments that meet these criteria.

traders having a methodology, this is the real nuts and

For instance, you can set up a quantitative screen to find

bolts of it. While different traders are looking for different

stocks that are trading at 52-week highs, or which have

criteria before getting into any position, they all have

very rapid earnings growth, or which show leadership

some criteria in mind.

within their respective industry groups. These screens

Let’s use the William J O’Neill CANSLIM system

You can set up several ways to screen through your

Think of it like a checklist. You have a few things

would produce a smaller list of companies that you

that need to be there before you are ready to put on an

would want to concentrate your research on. Then you

investment. You look at an investment and check those

would dive deeper into the remaining companies and

boxes. There are a few more that you would like to see.

get to know their respective management teams, their

You check those additional boxes. If it meets your criteria

businesses etc. and figure out whether or not they really

then you put it on.

meet all criteria.

A Surgeon’s Advice… In his book “The Checklist Manifesto”, the famous surgeon

7 Pillars of CANSLIM Investment Philosophy

Atul

C Current quarterly earnings. Companies should have

Gawande

introduces

pre-operation

checklists

into all of his operating rooms, with transformational results. By writing it all down on paper and systemising things, it made it easier to get everyone on the same page and remember what needed to be done. Surgeons are obviously very smart people, so this is not done to compensate for their low intelligence. Rather, it’s meant to spare them the effort of trying to remember everything pre-operation; instead, they can just focus on the difficult operation-related tasks. As the book demonstrates, just this simple exercise helped them to remember everything that they needed to do pre-operation and to do it right. Having this little game plan in place dramatically reduced the amount of preventable errors during operations, leading to improved patient outcomes. It’s reminiscent of the famous quip, “failing to plan is planning to fail”. The cumulative effect was huge because instead of having to reinvent the wheel every time they did

high growth in earnings per share this quarter. A Annual earnings. Earnings growth should be similarly strong, at least 25 per cent per year. N New Products or Services, New Management, New Highs. You want a company that develops new products and services; its stock price should be hitting new highs. S Supply and Demand. A product or service that is in demand by the public, which will drive earnings growth. L Leadership. The stock should be the leader in its industry group in terms of earnings and stock price performance. I Institutional Support. There should be large institutional buyers which are supporting the stock. M Market direction. Only buy winning stocks in an uptrending market.

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Bruce Bower Bruce Bower manages a portfolio of emerging market equities at a hedge fund. He has a keen interest in markets, psychology and self-development, having trained as a hypnotherapist. www.howoftrading.com

considerations. At each step of the investment process, you are making decisions according to a set of criteria, which provide rules and guidance for your activities. In a sense, you have a set of rules for “planning the trade”, and then you have them for “managing and getting out of the trade”. These rules, and the flow from one step to another, constitute your investment process.

Not Just for Hedge Funds The point of all of this work is to take the entire equity

This thinking applies equally well to people who wouldn’t

universe and to apply your own investment criteria

characterise themselves as hedge funds with a rigorous

to generate a list of possible investments. Obviously,

investment process. Think of intraday equities traders,

there can be other factors that you look for instead of

like the ones at SMB Capital as profiled in Mike Bellafiore’s

CANSLIM. Warren Buffett’s list of criteria would look

“The Playbook”. They have many filters and checklists

quite different, and that’s because his investment

that they apply to look for potential trades, such as for

process has evolved differently over many decades. The

example:

point is that you need several rigorous criteria on which to filter your investment universe and to get to a list of

•

Stocks that are “in play”

potential investments. You are getting rid of the noise

•

Key levels

and left just with the signal.

•

Order flow

•

Intraday activity

After that, it’s a question of what it takes for you to get in a position. In this sense, you are planning the trade that you will make. In the CANSLIM system, once a company

Moreover, they have evolved a set of guidelines to

has met the first six criteria, the last point is “Market”.

determine how to manage an existing position, both in

That means you want to wait for an up trending overall

terms of dialling up and down the position sizing and

market before buying anything. And preferably, the stock

also getting out of a position altogether. Thus, at every

that you buy should be breaking out from a base pattern,

step of the way there are guidelines or rules that help

suggesting that it will have a big run once you put on the

shape a trader’s decision-making, getting them Step 1 (a

position. Thus, you plan the trade by constructing a list of

broad universe) to the last Step, becoming a consistently

all the companies that meet your screening criteria, and

profitable trader.

then the entry point that you would seek, plus the kind of

While the topic could sound hopelessly abstract

market conditions that you would want to see in order to

– after all, you can’t exactly touch an investment process –

take risk.

we hope that this has made it relevant to your activities.

After putting on a trade, you also have the criteria that you need to get out of a position. Eventually, you

Summing it up for you to learn, there are some questions for self-reflection:

will want to close the position, either to take profit or to cut your loss. Closing the position could be about

•

Do you have an investment process?

the individual position itself, i.e. the fundamentals have

•

Is it well-defined?

changed or the stock price has run 100 per cent, or it

•

Could someone replicate your results by following it, or at least come close?

has hit your stop-loss. Or it could be about the overall market – the trend shifts, so you decide to exit all

•

Does it work in all market conditions?

outstanding positions. Nonetheless, you have certain

•

Has it been consistently profitable?

criteria that is there for exiting a position and you need

•

In light of these questions, how will you change your

to be rigorous about executing them.

thinking about your investing or trading?

The overall sum of those two is the portfolio construction. While this is overly simplified, the portfolio

This was the last part of our Hedge Fund series. We

is the result of the balance between positions that you

hope you could learn a good deal for your trading. Please

are entering and exiting, whether those are due to

check out Bruce Bower’s blog going forward; it contains

position-specific factors or overall risk management

consistently great posts about trading. «

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trading seasonalities Part 14: Long setups for nike and Orange Juice

Part 14 of the series “Trading Seasonalities” includes two long candidates for the month of September. First, the US stock Nike (symbol: NKE), which by now has found its way into the Dow Jones, and secondly, the January 2015 futures on frozen orange juice (symbol: OJF5).

» Trading Idea for Nike

a very short time in late July, the Nike stock has remained

In this day and age, everybody knows the major sporting-

a favourite with investors. The industry leader continues to

goods manufacturers whose products by now have found

be on track. In the 2013-14 fiscal year, the company was able

their way into the most remote corners of the world. While a

to increase its sales by ten per cent to 27.8 billion dollars. Its

profit warning caused adidas to lose about 20 per cent within

gross margin improved from 43.6 to 44.8 per cent and net profit increased by nine per cent to 2.7 billion dollars. Thanks to the football World Cup, order volume is such that

F1) trading idea nike Long

prospects are also good for the current fiscal year of 2014/15. It all ties in with the expected positive seasonality where you can include the stock in your portfolio on 4th September. The corresponding exit would then be due just before Christmas on 17th December. In Figure 1, the stock has moved into a slight correction phase and was able to escape – quite well, albeit not completely – the negative environment of the overall market. In the past 16 years, there was a rise in The sporting-goods manufacturer Nike is holding on relatively well considering the losses in the equity markets. In the case of an entry on 4th September (green line) and a holding period until 17th December (red line) you were, if successful, able to achieve 13 per cent growth in the last 16 years. Source: www.lp-software.de

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94 per cent of the cases, amounting to an average of 13 per cent. If that were to continue all the way to the entry point, which is marked by a

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green vertical line on the chart, a

F2) Trading Idea January 2015 Orange Juice Futures Long

breakout to a new historic high would be possible, attracting in turn new groups of investors. In the one year of losses within the last 16 years, the stock lost seven per cent during the period mentioned, resulting in a risk/ reward ratio of almost two. However, using the maximum profit as a benchmark causes this number to increase to four. By investing in this stock, you also bet on a Thanksgiving rally materialising during the holding period as well as on further gains by the end of the year. In the case of a breakout beyond $80, there will be a minimum potential of another $10.

The ideal seasonal entry point for orange juice futures is 29th September (green line). If successful, there was a rise of more than 250 ticks. Source: www.lp-software.de

Trading Idea for January 2015 Orange Juice Futures The second trading idea involves orange juice. Here you

caused the US Department of Agriculture to assume that

can build a long position on 29th September which can

crop yields in the United States would decrease by twelve

be closed at Christmas. In the January 2015 futures to be

per cent compared to the previous season. In addition,

traded here, there was an average rise of 1947 US dollars in

the hurricane season is again due to begin in Florida,

the last ten years in 80 per cent of the cases, corresponding

starting with the entry date. In the last few years, there

to 259 ticks with a value of 7.50 dollars. To trade one of those

have often been striking price jumps upwards when such

futures, you need at least 1760 dollars as a margin. The

a storm hit the orange-growing regions between Daytona

average profit – calculated in terms of the margin – would

and Palm Beach.

therefore be an increase of slightly more than 100 per cent.

Both trading ideas presented can be implemented

A stop-loss should be placed more than 177 ticks below the

by using options. You can write either corresponding

entry. Here, the risk/reward ratio is not quite as good as it is

puts below the stop-loss line or build a bullish position by

in the case of the Nike stock, but still acceptable. The futures

buying calls. «

are traded on the NYBOT, using the symbol OJF5. In Figure 2, you can see a bullish downward wedge where the peak has been reached right at the entry point.

T1) Seasonal Trades of the Month

This is matched by the emergence of lows in two seasonal lines during this time period. Things took a dive not long

Instrument

ago after the agricultural authorities of the sunshine state

Direction

Long

Long

of Florida announced that US demand for orange juice

Entry

04.09.2014

29.09.2014

had most recently fallen to its lowest level for twelve

Exit

17.12.2014

24.12.2014

years. Still, there is no threat of a glut though since the

%-Win

94%

80%

dry spell in Florida as well as an ominous tree disease

History (years)

16

10

Update On 4th and 29th September one update each will be made available

on

www.tradersonline-mag.com,

addressing

the question of where to enter and where to place the corresponding stop-losses.

Nike

Orange Juice

Average Profit

13%

111%

Maximum Profit

33%

319%

Average Loss

7%

76%

Maximum Loss

30%

119%

Holding Period in Days

104

86

The table shows the key data of the two trading ideas. Source: www.trademinerpro.com

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insights – news

www.tradersonline-mag.com 09.2014

St. Louis Fed Financial Stress Index

This index measures the degree of financial stress in the markets and is constructed from 18 weekly data series: seven interest rate series, six yield spreads and five other indicators. Each of these variables captures some aspect of financial stress. Accordingly, as the level of financial stress in the economy changes, the data series are likely to move together. The average value of the index, which begins in late 1993, is designed to be zero. Thus, zero is viewed as representing normal financial market conditions. Values below zero suggest below-average financial market stress, while values above zero suggest Source: http://research.stlouisfed.org/fred2/series/STLFSI

above-average financial market stress. Source: Federal Reserve Bank of St. Louis

Relative Rotation Graph Charts Available on Stockcharts.com Relative Rotation Graph (RRG) charts

stock’s Relative Strength versus its

strength and good momentum, it

are now available on StockCharts.

Momentum.

typically will start to lose momentum

com. This innovative charts give

First things first: stocks generally follow

and rotate into the yellow “Weakening”

you an immediate, concrete sense

a natural clockwise rotation on an RRG

quadrant. Next its relative strength will

of how well or how poorly each

chart as time passes. For instance, if a

probably falter and it will move into the

stock in a related group of stocks

stock starts out in the green “Leading”

red “Lagging” quadrant. After a while,

has been doing by plotting each

quadrant because it has good relative

things may start to improve (relative to the other stocks on the chart) and momentum

will

pick

up

moving

the stock into the blue “Improving” quadrant. Finally, relative strength will return causing the stock to move back into the green “Leading” quadrant. RRG charts have large dots on then showing you where each stock is currently on the chart. Extending backwards from each dot is a long “tail” that gives you a sense of the stock’s recent travels through the chart. On the live RRG Chart page, you can interactively control the start and end date of the chart and watch the stocks spin around over time.” Source: http://stockcharts.com/freecharts/rrg/

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Insights – news

TRADERS´ Editor Wins First Triathlon of His Life On 27 July 2014 our editor Marko Gränitz achieved one of his goals in life: He became the overall winner of a triathlon race. The race, called “Hofheim Triathlon”, consisted of a 1.9 km swim, 76 km bike and 20.4 km run split (almost half-Ironman distance). „It has always been my dream to cross the finish line as the overall winner. Just once in life. An insane feeling to actually achieve this! A miserable torture at the end of the race though, but it was well worth it“!

To save a few seconds he decided to go

get the lifetime opportunity to win a

on the run without putting on socks –

race, you’ll run until your feet fall off“,

a clear mistake as he soon discovered

he later said about his decision to keep

just a few minutes later. Over the course

going no matter what. In the end, it

of the next 20 km the horny skin at his

was a meager two minutes advance

foot detached, causing lots of pain on

he managed to keep against his closest

the run (and putting him on crutches

competitor when finishing with a total

after the race for about a week). “Under

race time of four hours, 14 minutes,

different circumstances I would have

44 seconds.

quit the race. But hey, if you actually

Source: www.triathlon.graenitz.org

BATS Chi-X Europe Includes ETFs BATS Chi-X Europe (BATS) has extended interoperable

equity trading activity on BATS, allows participants to net

clearing to include exchange traded funds (ETFs) and

their ETF/ETP trades executed on BATS with their trades

exchange traded products (ETPs), as it continues its

that are executed on other venues.

campaign to address inefficiencies in the European

Given as much as 70 per cent of all European ETF

market so as to increase participation and liquidity for

trading occurs over-the-counter, BATS has also made

all investors and traders. Since 21st July 2014, trading

the interoperable model available to participants using

participants are able to select one of three central

the Exchange Trade Reporting capabilities within BATS’

counterparties (EuroCCP N.V., LCH.Clearnet Ltd, or

market-leading BXTR suite of products. This will allow

SIX X-Clear) to clear their trades executed on BATS’

customers and their clients to realise significant collateral,

order books. The change, which brings the clearing and

risk and cost benefits.

settlement treatment of ETFs and ETPs in line with other

Source: www.batstrading.co.uk

27

insights – news

www.tradersonline-mag.com 09.2014

tradegear launches 1touchtrading.com forex trading service tradegear LLC, Swiss fintech company,

and execute it automatically with

users to grow and learn how to trade

has

1touchtrading.com

forex broker through 1touchtrading

profitably in a safe environment.

online service for retail forex traders.

launched

platform. All the trade parameters are

Therefore 1touchtrading.com is for

The new service helps both beginner

pre-calculated to optimise the risk/

free as long as it is used with demo

and advanced traders to trade easier

reward profile, but the user can also

broker account (for “paper trading”).

and more profitably, especially from

adjust them.

Once the trader develops enough

mobile devices. What’s unique about

“1touchtrading.com

created

skill and opens a live (funded) broker

the service is that it is free for unlimited

to relieve traders from boring and

account, he or she can use the service

period of time if used with demo

mechanic tasks and enable them to

for as little as 4.99 US$ per month.

(“paper trading”) broker account.

concentrate on making decisions

Advanced traders can benefit from

User

subscription

instead on time-consuming research

expanding their range of markets,

through guided creation of currency

and details of placing orders. As

strategies and time frames, at the

portfolio

of

traders ourselves, we understand

same time saving a lot of effort in all

researched and explained trading

what forex traders need and how

phases of trading”.

strategies and one of several intra-

trading can be made easier and

tradegear

day timeframes (daily and weekly

more

is

1touchtrading.com – features such as

timeframes

supported).

optimised for mobile devices and

automatic alerts on economic news,

1touchtrading.com will alert the user

no app installation is necessary”,

portfolio monitoring and poweful

when a trade opportunity matching

said Aleksandar Cetkovic, Head of

trade reports will be available soon,

his or her preferences occurs in forex

Technology & Products with tradegear

as well as automated access to further

market. Using any device user can

LLC. Predrag Micic, Head of Marketing

forex brokers.

decide whether to place the trade

& Operations, adds: “We want our

configures to

a

trade,

are

also

selection

was

enjoyable. The

service

continues

to

develop

Source: www.tradegear.ch

George Soros Bets $2B-plus on Stock Market Collapse Billionaire businessman George Soros has upped his ante

Specifically, the most recent 13-F filing Mr. Soros made

in what some industry insiders say in his long-running bet

with the Securities and Exchange Commission indicates

that the United States will suffer a massive stock market

that the Soros Fund Management that he heads up has

collapse in the coming months. His financial filings show

increased its “puts” on the Standard & Poor 500 exchange-

that he’s been predicting such a collapse in the Standard

traded fund by a massive amount, between the first and

& Poor’s 500 Index since late 2013, Newsmax reported.

second quarters. By the numbers, Mr. Soros boosted his position to 11.3 million put options — bringing the dollar value of his position from $299 million to $2.2 billion. Stock market insiders say such a move is little more than a bet that the price of the stock market will take a dramatic fall, Newsmax reported. Investors

generally

watch

the

quarterly filings because they give a good indication on where “smart” money is choosing to invest. Source: www.washingtontimes.com

28

Insights – news

Free Seminar with Anton Kreil: Trading the Truth Berlin on 8 September 2014 Unfortunately the vast majority of Retail Traders globally lose money. This is because the standard of Trading and Portfolio Management education that is available to them is far too low. Retail Traders in the majority of cases are “taught” how to trade by people who are not experts in Trading and Portfolio Management and do not have their best interests at heart. Consequently, Retail Traders never get to know the real truth about how to make money consistently from Trading, Portfolio Management and the Financial Markets. Until now. You are invited to join Anton Kreil at a free seminar in

be taught everything you need to know from basic to more

Berlin where you will be taught things such as:

advanced techniques. The approach is challenging both to

•

a beginner and more experienced traders. The professional

Professional trading secrets they don’t want you to know

• Why the vast majority of retail traders lose money

trader approach is like nothing you have ever seen before.

• Navigating through the Retail Trader landscape –

This is because it is simply not taught to the Retail Trader and

A Survivors Guide

is usually only reserved for professional traders.

You do not need any prior experience in Trading and Portfolio

Register at www.instutrade.com/education for the seminar

Management to attend one of our seminars. All you require is

on September 8th.

a basic level of common sense and arithmetic ability. You will

Source: www.instutrade.com/education/

29

TOOLS

www.tradersonline-mag.com 09.2014

NEW PRODUCTS

WEBREVIEW

SOFTWAREREVIEW

New Products

BOOKREVIEW

APPREVIEW

News from the World of Technology

» Ward Systems Group has released a set of renko

user can fill in orders based on Trading Central key

bar indicators that may be optimised based on price

levels directly from the trading platform screen. The TC

change, volume, or a combination of price & volume.

Indicator app will display the latest Trading Central article

Developed by Richey Enterprises for NeuroShell Trader,

whether on an intraday, short-term, or midterm basis. If

the InterChart Tools Renko Bars include parameters that

you want to read more, visit www.tradingcentral.com.

allow the user to specify the number of ticks used to calculate both the up and down part of the renko bar.

» Stage 5 Trading integrates trading, brokerage services,

Since rising price jitter is often different from falling

and education. The company states its goal is to help

price jitter, and since the function of the bars is to

traders improve their trading through monitoring,

absorb noise, the IctRenko Bars permit an asymmetrical

feedback, and individual assistance. The company offers

definition to accommodate this difference. For more

individual performance monitoring so clients can better

information visit www.neuroshell.com.

evaluate and improve their trading results. Stage 5 also offers its clients live interactive webinars, chat rooms,

»TRADING CENTRAL, a developer of technical analysis

professional risk management, and homework sessions.

tools, has launched a new application, TC Indicator,

The company also offers its proprietary S5 Trade Analyzer

which is a multilingual and customisable plugin that

tool to help clients gain insight into their trading in real

superimposes

time. Individual feedback may also be available to select

strategies,

Trading

forecasts,

Central’s

technical

commentary,

and

analysis

key

levels

(support/resistance/targets/stop pivots) onto live charts

clients to help them construct successful strategies. More information on www.stage5trading.com.

on most tradable instruments. The plugin is available on MT4, NinjaTrader, and other trading platforms. The

» McMillan Analysis Corp. has launched a website at www. mcmillanasset.com, which introduces its McMillan Asset Management service. A variety of money management

Neuroshell

services are offered, all geared toward the use of listed derivatives (primarily options) in individually managed accounts. The primary strategy used is Lawrence McMillan’s Volatility Capture, a proprietary investment approach that combines option writing with strategies designed to protect downside risk. The approach involves the sale of puts and put spreads, hedged by the purchase of volatility derivatives. McMillan has more than 35 years of experience trading options and is the author of several longtime newsletters on options. An overview of how the firm’s managed accounts are structured is given at the site. McMillan Analysis Corp. is a registered Commodity Trading Advisor and Registered Investment Advisory. If you want to read more, visit www.mcmillanasset.com.

30

tools

NEW PRODUCTS

www.tradersonline-mag.com 09.2014

WEBREVIEW

SOFTWAREREVIEW

BOOKREVIEW

APPREVIEW

Metatrader signals service and social trading the Development Process

MetaQuotes Software continues to enhance the MQL5 Signals service, improve the mechanisms, add new functions and fix flaws. Only two years ago automated copying of trades was launched in the MetaTrader platforms. The service already managed to come a long way. The MetaTrader Signals Service of 2012 and the current MetaTrader Signals Service are simply not comparable. MQL5 developers have paid the utmost attention to the security of subscribers, improvements in Signals statistics and enhancements of copying abilities. Currently, the implementation of Virtual Hosting Cloud service, which consists of a network of servers to support specific versions of the MetaTrader client terminal, is about to be finalised and introduced. Traders will only need to complete five steps in order to rent the virtual copy of their terminal with minimal network latency to their broker’s trade server, directly from the MetaTrader client terminal.

» The Beginning

Signals. The idea of this project was to make trading a

MetaTrader Social Trading appeared in the summer of

more widespread phenomenon: The target audience

2012. That’s when MetaQuotes finally decided to launch

was novice traders with no experience or special skills.

a new service for automatic trade copying: Trading

The stringent requirements were set for the new service:

32

tools

Clarity, maximum availability regardless of skills and

results may be of random nature’, ‘Low trading activity

knowledge, a transparent operation mechanism and

– only three trades three detected in the last month’, etc.

protection of subscribers.

MetaQuotes also implemented additional security

The deadline for launch was the beginning of October,

measures: Signal suppliers do not know who their

on the start of the Automated Trading Championship

subscribers are (they know only the number of signal

2012. This online competition was the most ideal venue

subscribers), every deal carries a unique digital signature,

for introducing and testing the new service, because

service developers do not collect personal information

it always attracted the attention of a great number of

of subscribers and do not have access to their accounts.

traders. Indeed, the signals were welcomed by traders:

They have done everything to ensure security and help

The launch of the service during the Championship

their clients enjoy the service, being confident that their

enabled users to copy trading of successful participants

account is protected.

on their own MetaTrader 5 accounts. This was a brand

Signals Statistics

new feature at the competition. A month later, in November 2012, support for trading

Much work has been done to improve the statistics of

signals appeared in the MetaTrader 4 platform. Suppliers

the signals. When selecting a suitable signal, a trader

of signals received access to an audience of millions

primarily checks the statistics carefully to understand

of potential investors, and the service began to gain

how successfully the signal provider trades and how

momentum. At the beginning of November, about ten

reliable the signals are. Therefore, it was important to

signals were added daily; at the end of the month up to 25

provide adequate demonstration of trade statistics. At the start of the Signals service in the autumn of

were registered each day.

2012, only the two basic charts of growth and balance

Subscriber Security

were available. The first one showed deposit growth

At the initial stage MetaQuotes’ task was to create a

in percentage terms calculated based on the results of

massive service for signal distribution, which would

trading operations, the second chart showed the amount

protect subscribers from connecting to unprofitable

of funds on the account without floating unfixed profit of

signals. Trader’s protection was the top priority, as

current open positions.

MetaQuotes understood the danger of copy trading,

A little later, in early 2013, MetaQuotes added a new chart

which could lead to loss of money. So they decided to

of Distribution that showed the distribution of the symbols

distribute signals on the principle of quality rating, which

and the Sell/Buy ratio. This allowed the service users to get

is calculated based on a variety of parameters. The

a better understanding of the trading strategy of a selected

higher the quality rating, the higher the position of the signal in the list, and the greater its credibility among

F1) Distribution Chart

potential subscribers. In this scheme, potentially dangerous signals appear at the end of the list. However, not only the rating protects users from the danger of subscribing to a losing signal. Depending on the degree of risk, the subscription option can be disabled for some signals. In special cases, a warning message is shown, like ‘A large drawdown may occur on the account again’, ‘This is a newly opened account, and the trading

The Distribution chart in signal statistics shows the distribution of the symbols and the Sell/Buy ratio. Source: MetaTrader

33

tools

www.tradersonline-mag.com 09.2014

the statistics again were significantly

F2) Monitoring Line

expanded: A vertical line appeared in the growth and balance charts to divide trading before connection to the monitoring and after that, colour change was introduced for every non-trade transactions (depositing or withdrawal), a new option for tracking the best and worst trade series was added to the statistics. The aim of these changes in statistics was to provide potential subscribers with a complete picture of the signals offered by suppliers. With the same purpose in mind, a little earlier, in January 2013, The Monitoring line is a vertical line in the growth and balance charts to divide trading before connection to the monitoring. Source: MetaTrader

MetaQuotes

introduced

a

unique

innovation for the entire industry: visualisation on charts. This new feature made the service even more convenient for traders, because now

signals vendor. In the summer of 2013 MetaQuotes added

they can see the entire history of signal trading on charts. A

the “Equity” chart to show the account equity taking into

single button opens charts of all currency pairs, which were

account the current open positions. A few months later

traded on the signal account. Despite the unique nature of this service, traders very quickly got used to it and began to perceive it as an integral part of copy trading.

F3) Visualisation of Signal’s Trading History

Signals in MetaTrader are like a living organism, they evolve in accordance with the laws dictated by the developers. MetaQuotes is not in content with the current situation, and they constantly review the quality ratings,

select

signal

evaluation

criteria and change the calculation formula. These actions are intended to feature only the best and proven to succeed signals in the top list.

Compatibility of Trading Conditions of the Subscriber and the Signal Provider Another important aspect of the Signals

service

is

compatibility

of the trading conditions of the subscriber and the signal provider. After clicking “Visualise”, the client terminal automatically downloads the signal’s trading history, opens appropriate charts and displays signal’s deals as graphical objects in the same way as it is done for the trading account’s history of the client terminal. Source: MetaTrader

34

This is a critical element for the normal operation of the service, since

differences

in

conditions

may lead to a worse copy quality

tools

or even complete inability to copy

F4) Trading Signals Tab in the Client Terminal

trades. If trading conditions are incompatible,

a

signal

is

either

invisible to the subscriber, or is in the list of prohibited subscription. It is important that the subscriber is always informed of the differences with

the

provider’s

trading

conditions, both when subscribing and during each synchronisation of the terminal with the signal server. Over enhanced

time, this

MetaQuotes element

has

further.

It started as a comparison of the subscriber’s account settings with those of the signal provider (deposit currency and leverages), then the comparison of settings of each trading instrument was introduced. From the comparison of trading conditions in

All trading signals with automatic execution on trader account in MetaTrader 4 Client Terminal. Any trader can choose signal and subscribe to it in a few clicks. Source: MetaTrader

the subscriber’s terminal, we then proceeded to provide this comparison for subscriptions that were performed mql5.com site. After some time, they added mapping of

latency to their broker’s trade server directly from the

instruments – now without defining the matching of an

MetaTrader client terminal. This will provide round the

instrument, the service can find the most appropriate one.

clock operation of the terminal where traders copy trades

For example, if the subscriber does not have EUR/USD,

of signal providers. Furthermore, MetaQuotes is planning

which is traded by the provider, signals can be copied for

to introduce even better statistics of signals and provide

EUR/USD.m, if the subscriber has this one. Mapping has

a new option for traders to form their own portfolio of

greatly expanded the possibilities of copy trading, as even

signals. «

on different servers of the same broker names of instruments may vary.

Outlook

F5) Synchronisation Warning in the Client Terminal

MetaQuotes continues to enhance the Signals service, improve the mechanisms, add new functions and fix flaws. The MetaTrader Signals Service of 2012 and the current MetaTrader Signals Service are like two completely different services. Currently, they are implementing A Virtual Hosting Cloud service which consists of a network of servers to support specific versions of the MetaTrader client terminal. Traders will need to complete only five steps in order to rent the virtual copy of their terminal with minimal network

If a profit on the provider’s account is positive, the appropriate window will appear explaining the situation and offering to wait for better market conditions. Traders may accept the risk and synchronise immediately. Source: MetaTrader

35

TOOLS

NEW PRODUCTS

www.tradersonline-mag.com 09.2014

WEBREVIEW

SOFTWAREREVIEW

BOOKREVIEW

APPREVIEW

Clash of the Financial Pundits How the Media Influences Your Investment Decisions for Better or Worse by Joshua M. Brown and Jeff Macke

» How to Separate the News from the Noise

most of today’s media news. It’s an eye-opening crash

There is no shortage of financial advice these days. From

course in separating financial facts from fiction; featuring

cocky cable pundits to nattering news columnists to off-

interviews with some of the world’s most influential

grid online bloggers, there are more so-called experts than

investors, including:

ever before. And the noise can be downright deafening. This no-bull, bottom-line guide from “The Reformed

•

Jim Cramer (Mad Money) takes you behind the scenes

Broker” Josh Brown and Yahoo Finance’s Jeff Macke

of his polarising TV program and talks about his clash

will help you cut through the cacophony and make the

with Jon Stewart on The Daily Show. •

Henry Blodget (Business Insider) shares anecdotes about tangling with Eliot Spitzer, covering the Martha

Joshua M. Brown & Jeff Macke

Stewart trial, and launching his Business Insider site

Joshua M. Brown is the CEO and co-founder of Ritholtz

as a “marked man.”

Wealth Management, a national registered investment

•

really feels about Bernanke, Bogle, Buffett, and

advisory firm. He is the author of “Backstage Wall Street”, the creator of The Reformed Broker blog, and an on-air contributor to CNBC.

bailouts. •

Money, founder of Macke Asset Management, and a hedge fund manager.

36

Karen Finerman (CNBC’s Fast Money) exposes the hype behind the headlines and the “show biz”

Jeff Macke is the host of Breakout on Yahoo Finance. Prior to that he was an original cast member of CNBC’s Fast

Ben Stein (Win Ben Stein’s Money) reveals how he

demands on television news pundits. •

Herb

Greenberg

(TheStreet.com)

explains

why

investors need to follow social media, where the “real” news is disseminated.

TOOLS

•

Barry Ritholtz (Bailout Nation) reveals his secret for “watching” financial TV. Bibliography You’ll also find invaluable insights from the original

father of financial TV, Jim Rogers, and from James Altucher, the most shockingly honest commentator in the history of the medium. And you’ll get a front-row seat for the processing and packaging of the news and learn everything you need to know about the talking heads who shape each day’s narrative. Up-close. In-depth. Alltrue. “Clash of the Financial Pundits” is the one guide that will change the way you look at markets and investing forever: •

• •

Title:

Clash of the Financial Pundits

Subtitle:

How the Media Influences Your Investment Decisions for Better or Worse

Author:

Joshua M. Brown, Jeff Macke

Pages:

256

Price:

$25 Hardback

ISBN:

978-0-071-81792-9

Release:

May 2014

Publisher:

Wiley

Draws essential lessons from history providing investors and traders with guidelines to better

financial crises and asks readers to choose whether

navigate markets in today’s tumultuous times.

to go long, short, or step aside.

Offers valuable insights on understanding and anticipating market responses to shocks and crises.

Conclusion

Introduces his companion website with a Q&A

If you’re looking for a better way to make it in today’s

section containing charts from key moments in past

dynamic markets, look no further than this timely book. «

37

TOOLS

NEW PRODUCTS

www.tradersonline-mag.com 09.2014

WEBREVIEW

SOFTWAREREVIEW

BOOKREVIEW

APPREVIEW

FRED The First Address for Economic Data from A to Z

For making medium- to long-term financial decisions it is recommended to use a combination of technical and fundamental analysis. But for investors who prefer this mix it is not easy to find the right data. Therefore it is very good that there is one institution that offers extensive economic and financial data: the St. Louis FED. In the following article we introduce the English app “FRED” and put it to the test.

» FRED means Federal Reserve Economic Data and this

NBER offer data series from the categories money and

already describes the service: It offers extensive economic

finance, population data, production- and financial

and financial data – in total 153,000 – based on dozens of

market data from all around the world – it is all categorised

sources. The research-department of the federal bank of

further and therefore whatever you search for will be easy

St. Louis offers this huge data to interested people and

to find. If you do not find it here, where else should you?

has become the first place to go to for in the recent years.

In the area “releases” the user can search for a certain

Under www.research.stlouisfed.org everybody can make

report (for example home sales, consumer sentiment

use of this information, studies and data tools – and it is

and so on) and can select the ones interesting for him

completely free. This is a good reason for us to put the

from a wide range of detailed data. The search for data

mobile version of FRED to the test.

of one particular source (for example Eurostat or world bank) is fastest with the menu “Sources”, where you have

Endless Data

thousands of data series at hand again.

Let’s start with the overview. You can download the app to your ipad or iphone for free in the app store and then you

Flexible Charting, Good Information

can start using it immediately. On the main page you see

The high quality and transparency of the data impress:

the most important information and the 25 most popular

Whether it is the development of the high school

time series that you can display as charts. These are for

graduates of the state New York, the daily gold price

example the consumer price index (CPI), the development

fixing or the spread between investment grade- and junk-

of the GDP, yield curves or the stress index created by the

bonds – you will find all necessary data below the chart

central bank.

in table form, including the source and length of data

The area “categories” includes everything you can wish for: data bases of the economic research institute

38

history, the publication frequency, the adjusting as well as a short description of the particular data series.

TOOLS

Figure 1 shows an example for a

F1) User Interface

request. You see the volatility index for gold. The chart can be displayed in full, you can share it in social media and of course you can save the picture on your tablet. The editing of the chart (colour choice, lines and so on) is easy to handle on the ipad and therefore your individual design is only a few steps away. If you click on the star symbol you can insert the chart to your favourites to have it ready for your next search. If you want to get even more information you have to click on the button “view data” and you see all the single data points – on the website you can export this data to Excel. The app also offers

The app offers a clearly structured and extensive data base including short information and export function. Source: FRED/St. Louis FED

tips for other, similar data series: Directly below the chart you click on “Related” respectively “Suggested” and immediately you get further, similar data that only

you want even further information we recommend the

wait to be analysed.

blog of the St. Louis FED (www.fredblog.stlouisfed.org).

For those who are not into the fundamental analysis

Another app called “EconWise” completes the offer

you will still find FRED interesting: In the area “Calendar”

of the central bank and can be downloaded for free as

you can find out, which data will be published that day.

well. You will find interesting articles as well as videos

Unfortunately at our test there were identical results for

that cover a broad range of topics. «

every trading day – a bug that will surely be fixed shortly. Readers who like to take a look at

F2) App “EconWise”

economic data should register – then they can use the User Dashboard as well. This is an individual area where the user can create his own control centre for future analysis.

Conclusion The app FRED lives up to its promise: extensive data in high quality and order. If you love data and you are interested in the financial markets you will find everything you are looking for. The broad and deep database invites to experiment with Excel and to combine technical indicators with fundamental data of the FRED-database. If you want to stay up-to-date with the financial world with the help of articles and

Interested economy- and financial market-fans should take a look at the app “EConWise” from the St. Louis FED. Source: FRED/St. Louis FED

39

strategies

www.tradersonline-mag.com 09.2014

News Trading in Euro/Dollar How to Take Advantage of Big Events at the Stock Markets

Traders always search for volatility – there is even a dependency of it, because without market movements you will not earn profits. Around the time of the publication of important economic news the stock markets often show erratic movements in many underlyings. We show you how to use these movements successfully with an example of EUR/USD.

» The Trading Idea

F1) EUR/USD on the Day of the ECB-Decision

There are days when prices only move in slow-motion – there are only sideways phases and many false breakouts. But then there are days where everything changes: dynamic breakouts up or down, sometimes even to both sides within minutes. These events can take place completely unplanned (for example because of attacks, riots, natural disasters) or predictably at big news-events like the publication of the gross domestic product (GDP)

On this day, the 6th March 2014, the ECB published an interest-rate decision at 1.45 pm (see mark). Source: www.trading-stars.de

40

or the NFP-data (non-farm payrolls) or a press conference of the Fed. Dynamic

price

movements

take

strategies

If price has decided for one direction, will it stay there for the next hour? The answer is in general “yes”.

place, but you know the date and time in advance. We want to introduce a trading idea based on the monthly ECB-interest rate decision and we want to show that we can recognise a mathematical probability advantage

F2) Relative Change of Price EUR/USD 2.00% 1.50% 1.00%

and use it for a real profit. An old saying goes: “Close your trades prior to important news or at least protect them with a stop-loss.” This is absolutely true. There

0.50% 0.00% 00:00:00 06:00:00 12:00:00 18:00:00 24:00:00 30:00:00 36:00:00 -0.50%

may be some insiders who know in advance what will be published, but the reaction of the market is hard to predict. For example nonfarm payroll data is published and they are better than expected, which should mean a bullish move. But maybe because of this the market

-1.00%

EZB_03.04.14 EZB_06.03.14 EZB_06.02.14 EZB_09.01.14 EZB_05.12.13 EZB_07.11.13 EZB_02.10.13 EZB_05.09.13 EZB_01.08.13 EZB_04.07.13 EZB_06.06.13 EZB_02.05.13 EZB_04.04.13 EZB_07.03.13

-1.50% -2.00% You can clearly see the higher volatility at the time of the ECB-decision. The x-axis shows the time difference in hours based on 1.45 pm. Therefore we look at the price development twelve hours before and 36 hours after the decision. Source: www.trading-stars.de

fears that the monetary measures will be reduced and therefore the DAX drops 100 points. In hindsight we can always explain the “Why”. But to be honest, this could be an explanation for the contrary as well. The consequence is clear: Stay still and close open positions – unless you want to trade the news systematically.

Assumption and Reasoning Is it reasonable to trade the breakout of a certain price-span prior to the news? Or put differently: If the price has decided for one direction, will it stay there for the next hour? The answer is in general “yes”, but this has to be proved. We evaluated the last 14 ECB-decisions (a period of more than one year) and measured the change in price of the EUR/USD

F3) Relative Change in Price EUR/USD in Detail 2.00% 1.50% 1.00% 0.50% 0.00% 00:00:00

01:00:00

02:00:00

-0.50% -1.00%

03:00:00

04:00:00

EZB_03.04.14 EZB_06.03.14 EZB_06.02.14 EZB_09.01.14 EZB_05.12.13 EZB_07.11.13 EZB_02.10.13 EZB_05.09.13 EZB_01.08.13 EZB_04.07.13 EZB_06.06.13 EZB_02.05.13 EZB_04.04.13 EZB_07.03.13

-1.50% In this picture we zoom in the time around the decision. Source: www.trading-stars.de

41

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www.tradersonline-mag.com 09.2014

is over and the price stabilises.

F4) Order Placement

Only once (on 7th November 2013) the price movement started in the first few seconds. Some times the movement only started 45 minutes after the decision (press conference). Clear “fake signals”, which means that the price “feints” one direction and then turns, do not happen that often.

Entry It is not difficult to create a profitable trading strategy based on this data. This picture shows how to place the orders in EUR/USD. The candle at 2.15 pm activated the long-order. At the same time the short-order was deleted. The stop-loss was placed at the close of 1:44:59 pm. Source: www.trading-stars.de

A detailed evaluation showed that it is wise to place a stop-limit and a stop-sell order 0.3 per cent below respectively

above

the

close

of

1:44:59 pm. That means we enter in relation to the price at 1:44:59 pm – the price prior to

long if the price increases by 0.3 per cent after the interest

the news. You can see the result in Figure 2.

rate decision or short if the price decreased by 0.3 per cent.

Watch the Regularities

Back-Calculation

Prior to the news it is often very quiet. But with the

You can see in Figure 5 that it is ok to close the trade

publication of the decision the movement comes back to

after about six hours. Afterwards there is not that much

the market and you can often see that the first direction

movement. We placed a stop-loss at 0.3 per cent below/

stays in the aftermath. After about six hours everything

above the entry and therefore a profit of three per cent (see chart after six hours) means that we earned ten times more than we risked. A nice result – with only 14

F5) Aggregated Movement of EUR/USD

ECB-interest-rate decisions.

5.0%

Risk Management with 1R-Rule If you trade the strategy consequently

4.0%

and you always risk 1R you get the equity curve shown in Figure 6 after 3.0%

14 months. Please notice that we did not determine “R” as a percentage of the trading capital, but with an

2.0%

absolute amount (for example 100 EUR per trade). Only then you can create professional linear lines in the

1.0%

equity curve.

Position Size Management

0.0% 02:00:00 06:00:00 10:00:00 14:00:00 18:00:00 22:00:00 02:00:00 06:00:00 10:00:00

Figure 5 shows the average movement of the EUR/USD in per cent (increasing or decreasing) for the last 14 ECBinterest-rate decisions assuming that the same rules were used. Source: www.trading-stars.de

42

We place two orders at the last 15-minute

candle

prior

to

the

decision: One stop-buy order 0.3 per cent above the price and one

strategies

stop-sell order 0.3 per cent below the price. If one of the

ask and bid) and slippage (difference between placed

two orders is executed, the other one is cancelled (one-

order and executed order) can have a negative effect and

cancels-other (OCO)-order). The close equals the stop-

therefore you should always consider these facts when

loss of the position. Because of the relatively close stop

choosing a broker.

and the unlimited take profit we get a very attractive riskreward ratio at the end of the trading day. R-Multiple

Exit After a trade is opened there are two possibilities to exit. Either the position reaches the close (and the stop-loss) before the news or we close it in profit. We use a fixed exit time at 10 pm. On the one hand it is statistically proven that afterwards there is no dynamic movement and on the other hand we exclude the risk of price movements overnight at low liquidity. Furthermore you have to pay overnight fees with some brokers. Another advantage is that we do not hold a position over the weekend and therefore weekend-gaps are not an issue.

The Quality of the Broker Is Important The choice of the right broker is very important with this strategy. The size of the spreads (difference between

The concept of the R-multiple was introduced by a trader named Chuck Branscomb in 1993 and published by Dr. Van Tharp. It is a method to make trading strategies comparable in different markets and it does not only compare the absolute profits. The R-multiple is the profit or loss of a trade in relation to the initial risk. The initial risk is the difference between entry price and stop-loss. An example: A trader buys the stock X at 100 EUR and places the stop at 95 EUR. The initial risk is five EUR. This value is 1 R. If the trader sells the stock at 110 EUR the profit of ten EUR is in relation to the entry risk a R-multiple of 2 (10 / 5). If the trade is stopped out at 95 EUR the R-multiple is -1 (-5 / 5). You always divide the trade-result by the initial risk.

43

strategies

www.tradersonline-mag.com 09.2014

decisions of the ECB the Fed-

F6) equity Curve in r-Multiple

sessions can also be used for trading

12

– because the central banks direct the monetary policy and the interest

10

rate (the price of money) decides about the engine of the markets, the

8

liquidity. There

6

numerous

events

that lead to higher volatility and possible

4

trading

strategies.

The

employment data show the current development of the economy and

2

serve as basis for the decisions of the central banks. In Germany

0 01.03.13

are

01.06.13

01.09.13

02.12.13

04.03.14

04.06.14

the

Bundesagentur

für

Arbeit

publishes the monthly figures as

You see an equity curve with a nice linear development and with only small drawdowns. Source: www.trading-stars.de

well as the current unemployment rate. In the US there are different figures: for the stock markets the monthly employment data – the so-

Strategy Snapshot

called nonfarm payrolls – are the most important. It is published on the first Friday of each month at 2.30 pm

Strategy Name:

Trading Stars ECB-interest-rate decision

Strategy Type:

News trading

Time Frame:

Intraday, 15-minute chart

Entry:

0.3 per cent above (long) or below (short) close prior to the news, OCCO-order

Stop-Loss:

Close prior to the news

Geschaeftsklimaindex is important in Germany and

Exit:

Stop-loss or time-stop at 10 pm

therefore it moves the stock markets. In the US the same

Risk Management:

1R (absolute) of the trading capital

goes for the ISM. It is published on the first working day

German time. Early indicators shall give an indication about the development of the economy and often serve as basis for the decisions of the central banks. The ifo-

of the month for the past month.

Conclusion Economic Data with High Relevance

If you have the right strategy, news trading can be very

Many market participants adjust their behaviour to

profitable. It is always wise to search for advantages in

fundamental news and economic data – the market

probability and to use them for profit. You can also create

shows higher volatility and dynamic movements at

strategies for other news events and for nearly all liquid

these events. In addition to the mentioned interest-rate

underlyings like the DAX or gold. «

Dr. stefan Friedrichowski

Christian stern

Dr. Stefan Friedrichowski is physicist and fulltimetrader and manages the scientific work and the development of trading strategies. The main focus is statistical research and validations to create trading strategies. Furthermore he teaches knowledge in Excel and C-programming for traders.

Christian Stern is full-time trader and heads the treasury and the education department at Trading Stars. The focus is on teaching basic and expert knowledge for successful trading.

[email protected]

44

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strategies

www.tradersonline-mag.com 09.2014

The Trend Is Your Friend Systematic Profits on the Weekly Chart

Bollinger Bands are one of the most well known and at the same time most versatile indicators in technical analysis. They combine trend-following elements and volatility elements and therefore you can use them for many different trading approaches. The following article shows how longterm traders and active investors can profit from the trends at the stock markets with a simple entry- and exit-strategy – long and short.

» The international stock markets show strong uptrends

Bollinger Band-Breakout Activates the Position

in the long term which are interrupted by strong down

The use of the 40-week or 200-day moving average (MA)

movements. If you are a long-term trader you want to

to measure the superior trend has been known forever.

profit from the strong bull markets – a good example

The logic behind it says: If the market moves above the

is the ongoing rally since early 2009. You do not need a

(increasing) MA the bulls are in control of the market – and

crystal ball but a simple and logic system that deduces

if the bears are in control, Figure 2 shows a trading example

entry, exit and stop-loss directly from the most important

in a downtrend. The black vertical arrow highlights the

source – the price development. The use of Bollinger

Inventory Retracement Bar (IRB). The black horizontal arrow

Bands as trend indicator offers a good possibility to

shows the entry in the short trade shortly afterwards as the

create such a system.

price breaks through the low of the IRB downwards.

46

strategies

The entry is defined by the break out above or below the outer bands.

the price is below the (falling) MA. If

F1) DAX Weekly Chart with Trading Signals and Equity Curve

we take a look at the past we see that it is wise to consider this “old-school indicator” when entering a longterm trade. But we want the signal to be clear and significant – that means, the price has to break out above or below the MA significantly – and therefore we use Bollinger Bands. In contrast to the standard settings 20/2 we use one Bollinger Band with the setting 40/1. Instead of calculating the upper and lower border with two standard abbreviations based on the MA, we only use the single distance as the basis for the calculation and for the signal generating – but based on the 40-week-line instead of the 20-week line.

The use of this simple trading strategy delivers a clear outperformance in comparison to a buy-and-hold strategy over the past 20 years. Source: www.tradesignalonline.com

Entry and Exit Rules The entry is defined by the breakout above or below the outer bands. If the stock market index’

this trading strategy captures the big trend movements

weekly close is above the Bollinger Band, we enter long

very well – although there are of course some false

at the beginning of the following week. We stay in the

signals in volatile sideways phases.

position as long as the stock market index closes below

Figure 2 shows the development since June 2011.

the lower Bollinger Band. Now you have two possibilities:

There was a short-signal at 6893 points first. In March

Conservative investors, who only want to be invested

2012 the position was switched at 6593 points. Since then

long, close their long position and wait (flat position). If you like to take more risk, you can enter a short position, which means you switch sides and enter short – and you stay in the position until price exceeds the opposite band on the weekly close. In this setup the Bollinger Bands serve as a trailing stop in a trending market. At the same time you can calculate the position size by measuring the difference between the entry price and the level of the opposite Bollinger Band. Figure 1 shows that this strategy is very simple to use. You see the weekly chart of the DAX with the Bollinger Bands and the settings 40/1. The red background colour represents the short-phases and the green background represents the long-phases. You can see at one glance that

Bollinger Bands Bollinger Bands calculate the level of the price in relation to the past price. The bands are calculated based on the moving average (MA) with the standard settings of 20 periods. The upper Bollinger Band is calculated by adding the double standard abbreviation of the prices (measurement of the volatility) to the moving average. The lower band is calculated by deducting the double standard abbreviation from the moving average. If the bands are close together, there is low volatility. If they are far apart, there is high volatility.

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be completely different in the years

F2) DaX Weekly Chart with trading signals and equity Curve

to come. This is a good reason to backtest several other indices. If you use the same strategy with the EURO STOXX50, S&P 500 and the Japanese NIKKEI 225, you get nearly 80 trades for the same period. Although

there

are

differences

between these indices regarding their

historical

performance

of

the strategy – the core statement stays the same: The Bollinger trend breakout strategy is simple yet profitable and therefore it is a good basis for long-term traders and investors. Individual modifications and changes of the basic setup

The Bollinger trend breakout strategy is in long mode since March 2012. Source: www.tradesignalonline.com

are of course possible, but you should put them to a detailed test. For example you could think about closing a short position already at

the long-position is unchanged. Only if price breaks the

the break of the median of the Bollinger Bands or you

lower Bollinger Band at the weekly close, the position

could use additional stop-losses or another position-

would be exited.

size management.

Is This a Robust Strategy?

Conclusion

Because of the few trades in the DAX – there were only

The introduced trading strategy is trend following

ten transactions since 1996 – you cannot really evaluate

and therefore it goes strong in trending phases – in

this strategy. The price development of the DAX may

volatile sideways phases there are more false trades. The hit rate on the short side is very low with under 30 per cent and therefore it is important to use the

Strategy Snapshot

right position size as well as to understand the psychological pressure: Either you are strong enough

Strategy Name:

Bollinger Trend Breakout

Strategy Type:

Trend following

Time Frame:

Weekly chart

long trend movement is high – or you trade the long-

Setup:

Weekly chart and Bollinger Bands with setting 40/1

only-strategy where you have fewer false signals. All

Entry:

Long at breakout above the upper Bollinger Band (per weekly close), long exit resp. short entry below lower Bollinger Band

in all you can earn money with this simple strategy

Stop-Loss:

Opposite Bollinger Band

Trailing Stop:

Opposite Bollinger Band

Exit:

Long only: if the stock market index closes below the lower Bollinger Band. Long-Short: switch to short-side, if stock market index closes below lower Bollinger Band. You stay in the position as long as the opposite Bollinger Band is exceeded per weekly close

Risk and Money Management:

According to risk adversity

Average number of signals:

According to index and market phase

48

to trade the long-short strategy, but then you need to do so consequently, because the danger to miss a

based on a weekly chart with a relatively low trading frequency. «

David Pieper David Pieper is a CIIA and has been interested in stock markets since the end of the Nineties. He concentrates on trading with CFDs and is a freelance author. [email protected]

Strategies

www.tradersonline-mag.com 09.2014

Trend Knockouts Get in Only after the Weak Hands Are out

In the previous two articles (TRADERS´ 07 and 08/2014), it was 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. In this article we will discuss the three phases of trend and one of two setups for getting onboard established trends.

» Phases of Trend

in an established trend pulls back and then resumes its

As illustrated in Figure 1, there are three phases of

trend. Trend Acceleration is when a market that is in a

trend: Trend Resumption, Trend Acceleration, and

gradual uptrend accelerates higher, pulls back, and then

Trend Transition. Trend resumption is when a market

continues its sharp uptrend. Trend Transition (emerging

50

Strategies

trends) occurs when the previous

F1) 3 Phases of a Trend

trend ends and a new trend begins to emerge. For purposes of this 2-part series, we’ll look at two of the author’s favourite trend resumption patterns: The Trend Knockout (TKO) and Persistent Pullbacks. Setups to get on the other two phases of trends will be discussed in upcoming articles.

Detecting Trends Before looking to trade a trend, you must first identify that trend. Keep it simple. If the right side of the chart is noticeable higher than

There are three phases of a trend: Trend Resumption, Trend Acceleration, and Trend Transition. Source: www.davelandry.com

the left, then it is possibly that the market is trending higher. Then, use the following techniques to further qualify that trend.

a strong uptrend should have strong closes and gaps higher. It should not have down gaps and weak closes.

Net Net – Draw Your Arrows

Persistency and moving average relationships can also

The simplest and most obvious way to determine trend

help to qualify a trend.

is to look at markets on a “net net” basis. Where did the market close a week ago relative to now? A month

Moving Averages

ago? Two months ago? You then have to compare this

The slope of the moving average and “daylight” can

to the volatility of the instrument. If the stock bounces

help to determine trend. Crossovers can also be useful,

around 10-20 per cent daily, then a 20 per cent move over

especially for emerging trends. The slope for uptrends

a month’s time isn’t necessarily a trend. That could just be daily noise alone. However, the same move might constitute a trend in a lower volatility stock that moves

F2) Daylight

only ½-1 per cent daily. Judging the volatility can be done with indicators such as historical volatility or quite simply “eyeballing” the stocks range. Speaking of indicators, always look the distance the market has travelled first before applying any indicators. Since all price based indicators introduce lag, the author isn’t a big fan of price indicators. In fact, other than the occasional moving average, he doesn’t use any directional indicators.

Trend Qualifiers The great thing about trending markets is that they leave clues behind. These “trend qualifiers” help to determine a trend. These include base breakouts, gaps, laps, trend acceleration, wide-range bars-especially with strong closes, and obviously, how far a stock moves over a given period of time (i.e. the aforementioned “net net” movement). Look for these characteristics within the trend. Markets should have mostly positive qualifiers in the direction of the trend. For instance, a market in

“Daylight” forms when the lows are greater than the moving average. In other words, there is a “gap” between the low and the moving average. Since daylight is price based, it helps to eliminate the lag of the moving average itself. Source: www.davelandry.com

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Always look at price moves first since all price indicators have lag.

should be a positive one. Obviously, since there is lag we

F3) Persistency

do not know if the trend has changed but at least we know that the market has been trending. “Daylight” forms when the lows are greater than the moving average. In other words, there is a “gap” between the low and the moving average. Since daylight is price based, it helps to eliminate the lag of the moving average itself. Daylight and slope are illustrated in Figure 2. These two simple concepts can often keep you on the right side of the market. Again though, always look at price moves first since all price indicators have lag. Persistency is market’s ability to follow through from one day to the next. For those more mathematically inclined, this can be measured by complex statistical methods such as linear regression. The rest of us can simply look at the chart and draw a trendline through as many bars as possible. Source: www.davelandry.com

Persistency Persistency is market’s ability to follow through from one day to the next. For those more mathematically inclined, this can be measured by complex statistical methods such as linear regression. The rest of us can simply look at the chart and draw a trendline through as many bars as possible. This is illustrated in Figure 3.

F4) Scheme of Trend Knockout Setup

Getting on Board Once a trend is detected, you then need to look for a setup which will allow you to get on board that trend.

Trend Knockouts Trend Knockouts (TKO’s) are a simple yet effective pattern. They remain one of the author’s favourites, especially when combined with persistency. Those with very little money or patience will be quick to dump a market at the first sign of a correction. While it is a good idea to trade in the direction of the trend, you are much better off waiting until the weak hands are knocked out of the market before entering yourself. This reduces the probability of these traders dumping their positions and taking you out with them. The knockout move also attracts, and can subsequently shake out, top and bottom pickers. TKOs work in both uptrends and downtrends. In The stock should be in a strong uptrend and ideally, a persistent uptrend (1). Use trend qualifiers and/or moving averages to gauge trend. Do not forget to draw your arrows. Then, the stock should trade below at least the two prior lows. Ideally, this should also be on an expansion of range. In other words, it should be a sharp move lower — a wide range bar (WRB) down (3). Now go long above the high of the knockout bar (3). Source: www.davelandry.com

52

uptrends, the knock out move attracts eager shorts who refuse to believe that the stock deserves its high valuation. They have confused the issue with facts. Should the trend resume, they will be forced to cover their short position. This buying helps to propel the trend even higher. In downtrends, the knock out move attracts eager bottom

StrategieS

fishers who want to buy a stock while

F5) real World example

it is still cheap. Should the downtrend resume, these fickle traders will likely dump their position. This additional supply will exacerbate the slide. Trend Knockouts (TKO’s) identify strong trends from which the weak hands have already been knocked out. By placing your order above the market (or below for shorts), you have the potential to capture profits as the trend resumes. Here are the rules for buys (Figure 4): 1.

The stock should be in a strong uptrend and ideally, a persistent uptrend (1). Use trend qualifiers and/or

moving

averages

to

gauge trend. Do not forget to draw your arrows. 2.

Celldex Therapeutics (CLDX) begins to accelerate higher (1) from a gradual uptrend. The accelerating trend is also a persistent one. The stock then has a wide range bar (WRB) down (2). This “Trend Knockout” (TKO) shakes out the weak hands and it attracts eager shorts. An entry is triggered (3) when the high of the knockout bar is taken out. After a bit of a slow start, the stock goes on to double in value. Source: www.davelandry.com

The stock should trade below at least the two prior lows. Ideally, this should also be on an expansion of range. In other words, it should be a sharp move lower — a wide range bar (WRB) down (3).

3.

Go long above the high of the knockout bar (3), and remember, no trigger, no trade. The bigger the move lower, the better the chance more players will be knocked out. One great thing about TKO’s is that you can frequently

trade them in a textbook fashion more than many other patterns. Your entry can often go right above the high and the protective stop can be placed right below the knockout bar. Now, let’s look at a real world example. Referring to Figure 5, Celldex Therapeutics (CLDX) begins to accelerate

Strategy Snapshot Strategy Name:

Trend Knockouts

Strategy Type:

Trend Following

Time Horizon:

Daily chart

Setup:

Persistent gradual uptrend accelerates, retraces with sharp wide-range bar

Entry:

Above high of wide-range bar (for Long)

Stop-Loss:

Below low of wide-range bar (for Long)

Take Profit:

Optional; suggested to use for partial position size

Trailing Stop:

Optional; suggested to ude for partial position size

Risk and Money Management:

2% risk per trade max

Average number of signals:

Several/day for whole universe of US stocks

higher (1) from a gradual uptrend. The accelerating trend is also a persistent one. The stock then has a wide range bar (WRB) down (2). This “Trend Knockout” (TKO) shakes out the weak hands and it attracts eager shorts. An entry is triggered (3) when the high of the knockout bar is taken out. After a bit of a slow start, the stock goes on to double in value.

Looking Ahead Next time, we’ll cover the second setup for getting onboard established trends, the Persistent Pullback. Stay tuned! «

Dave Landry 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. www.davelandry.com

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inventory retracement Bar an award-Winning approach to Finding the great trades

Developed and used to win trading competitions around the world, the Hoffman Inventory Retracement Trade is quickly becoming one of the most popular ways to identify where short-term countertrend institutional inventory has subsided and when it’s time to re-enter into a trade’s original trend direction. What you will learn here is how to identify when the conditions arise to make the trade, the entry points, and exit strategy.

rob Hoffman

» What Is the Hoffman Inventory Retracement Trade?

Rob Hoffman is two-time International Trading Champion and a trader who has won numerous live, real-money only trading competitions. Rob is President and CEO of BecomeABetterTrader. com and is also a frequent speaker for top brokerage firms and financial exchanges, skilled educator and passionate mentor.

The Hoffman Inventory Retracement Trade is a strategy

[email protected]

that is used to identify specific types of institutional trading activity that is counter to the prevailing trend at hand, and then identify entries when the short-term countertrend inventory activity has come to an end and the market is likely ready to resume its original trend.

54

strategies

In an uptrend you’re looking for the market to break one tick/cent above the high of the Inventory Retracement Bar.

While it is common folklore in the investment industry

in an uptrend. If it’s sideways, or worse yet, trending in

that institutions, like wolves, travel in packs, the reality

the opposite direction, your trade is much more likely to

is that institutions are not all sitting around at a table

fail.

conspiring as a group about how to part retail traders with their money. The institutional investment business

The Entry Strategy

is extremely competitive and these firms are very much

Once an IRB and proper trend is identified, the next step

out for themselves and have their own objectives and

is to allow the market to move along and wait for the price

performance metrics to achieve to appear most attractive

action to break one tick/cent below the low of the IRB in

to prospective investors at any given time.

a downtrend. In an uptrend you’re looking for the market

Therefore, this strategy is designed to identify when

to break one tick/cent above the high of the IRB. While

one or a handful of institutions are moving inventory in

it is not an absolute, it is preferred that the price breaks

and out of the market and are straying away from the

beyond the IRB within the next 20 bars based on the time

markets current path causing a short-term retracement

period you’re trading. For example, if you’re trading off of

against the trend. We are subsequently looking for the

a 2-minute chart, you would ideally like to see the break

market in question to resume its pre-existing trend when

in the next 40 minutes.

those short-term countertrend institutional activities and

The Trailing Stop Exit Strategy

inventories have dried up.

While many traders are specific dollar target traders, the

IRB Bar Characteristics

preferred method is more of a support and resistance

In an uptrend, look for candlestick bars that open and

target based methodology backed up by a trailing stop

close 45 per cent or more off their high. In a downtrend,

to ensure you are not giving back those profits during

look for candlestick bars that open and close 45 per cent

any snapbacks against your position. Typically, a 50

or more off their low. These are Inventory Retracement

per cent trailing of profit achieved until you approach

Bars (see examples in Figure 1).

a major support or resistance level is desirable, then move the stop to 90%+ of profit achieved as the major

Trend Identification In the absence of advanced trend identification

systems,

a

simple

F1) Inventory Retracement Bars (IRBs)

approach to trend identification is looking at the 20 EMA (Exponential Moving Average) and asking yourself if it appears to be in approximately a 45 degree angle based on the timeframe you’re looking to trade. The next higher timeframe above the one you’re looking to trade should also be flowing in the same direction. For instance, if you’re trading off of a 5-minute chart and it’s in an uptrend, you would like to see that your 15-minute chart also is

Figure 1 shows four individual examples of the IRBs in an uptrend and four more individual examples in a downtrend for illustrative purposes. The candles open or close 45 per cent or more off their high (in an uptrend, see left) respectively vice versa (in a downtrend, see right). Source: www.tradestation.com

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support or resistance level is hit. Common major levels

F2) IRB in Action

include key Fibonacci levels, previous day’s highs and lows, daily, weekly and monthly pivot points, etc. For maximum comfort with the strategy, it is preferred that you use this with your own favourite support and resistance levels.

Stop Management Based on the premise of this trading strategy, the expectation upon the entry is that the market will continue into the original direction it was heading after its brief institutionally driven pullback against the trend. Very frequently, after breaking through IRBs, the market will actually rapidly accelerate with fast action and wide ranges as everyone starts to realise that the brief pullback was merely a pause against the intended direction and the market plays catch up with itself. With that said, once a trade is entered, the price should not retrace back beyond the opposite side of the IRB. For instance, if the trade is entered one tick/cent below the low of the IRB in a downtrend, it should not stop and reverse to one tick/cent above the high of that IRB. If it does, that market may be forming more of a reversal pattern and thus the need to exit the position and move on to the next opportunity.

When Not to Use the Strategy This strategy was primarily designed to identify and take advantage of trend continuations after counter trend inventory exhaustion. Therefore, this trade is not to be used in sideways market conditions as continuation failure will frequently occur.

Why This Strategy Works In general, the market tends to trade directionally with as few retail traders on board the correct direction as possible. This strategy is so effective due to its ability to find high probability areas where three things are happening Figure 2 shows a trading example in a downtrend. The black vertical arrow highlights the Inventory Retracement Bar (IRB). The black horizontal arrow shows the entry in the short trade shortly afterwards as the price breaks through the low of the IRB downwards. Source: www.tradestation.com

56

to retail traders in an uptrend: 1. Buyers are being distracted from taking long side trades when they see the pullbacks off the highs, scaring them into believing the move is over.

strategies

2. During pullbacks, sellers are being given false hope

Use a proven trend qualification tool. In the absence

that any shorts taken earlier in the uptrend may finally

of a well-tested tool of your own, trade in the direction of

start to work.

an approximately 45 degree angled 20 EMA.

3. Buyers who bought the high during rapid wide range

This strategy has very diverse applications across

ascents hoping it will go higher get stopped out on

many markets and asset classes. For instance, in addition

the pullback.

to trading conventional equities, futures and Forex instruments, traders can consider using this strategy to

After all of these events above, once a new IRB to the

analyse underlying equities and then trade high delta, in

upside appears and is pierced, the market is much more

the money options plays as an example for active options

likely to move without all of those traders above on the

day traders.

right side of the market. In a downtrend these three things are happening to retail traders:

The Conclusion What we have shown you here is a simple, award-winning strategy that you can take away and explore. It is an excellent

1. Sellers are being distracted from taking short side

tool used for identifying where retail traders are misjudging

trades when they see the pullbacks off the lows,

the markets movement. It shows where institutions are

scaring them into believing the move is over.

temporarily breaking away from the trend due to short-term

2. During pullbacks, buyers are being given false hope

inventory acquisition or liquidation. Once that inventory

that any buy side trades taken earlier in the downtrend

need is exhausted the overall market is free to resume the

may finally start to work.

existing trend offering new opportunities for retail traders

3. Sellers who sold the low during rapid wide range

to trade back in the direction with the overall trend. «

descent hoping it will go lower get stopped out on the pullback. After all of these events above, once a new IRB to the downside appears and is pierced, the market is much more likely to move without all of those traders above on the right side of the market.

Strategy Snapshot Strategy Name

Hoffman Inventory Retracement Trade

Strategy Type

Trend Continuation

Time Frame

Intraday as well as daily and weekly signals

Setup

IRBs are created where the open and close of the bar are 45% or more off the low in a downtrend and 45% or more off the high in an uptrend

Entry

One tick/cent below the low of the IRB in a downtrend and one tick/cent above the high of the IRB in an uptrend

Stop-Loss

One tick/cent above the high of the IRB in a downtrend and one tick/cent below the low of the IRB in an uptrend

Trailing Stop Exit Strategy

50% of profit achieved until you approach a major support or resistance level, then move the stop to 90%+ of profit achieved as the major support or resistance level is hit

Risk and Money Management

< 1% per trade

Average Number of Signals

Every instrument and time duration will be different based on its frequency of trending; however for active traders as an example, in general, it is possible to see as many as 25+ IRBs on a 2-minute chart over a 24 hour period

Key Points to Remember No more weight is given to any IRB based on whether its close is above or below the open (i.e. green or red candle). In addition, think about the concept of over-extension. If the IRB has an extraordinary range as compared to the Average True Range of the last 10+ bars before it then the break back through the IRB is far more likely to fail. This will more likely result in an entry that has a higher likelihood of reversion to the mean as much of the energy and profit opportunity has potentially dissipated leaving the trader with a much smaller profit or perhaps a stop-loss. Trail your entries to reduce the risks of reversion to the mean while still giving a trade a chance to push into your intended direction.

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Risk- and Money-Management Part 6: What Is the Optimal Position Size in a Good Risk-Management Plan?

In this series of articles we introduce the multi-level process of creating a riskand money-management plan. The sixth part deals with the question of the right position size for you.

Jens Klatt Jens Klatt is a market analyst at DailyFX.de and moderates the German DailyFX-forum. He has been in the financial sector for over eight years. Besides technical and fundamental observation of the markets, he focuses on sentiment analysis in the forex markets and develops his trading decisions based on this analysis. www.dailyfx.de

» The right position size is one of the most important parts of a trading plan and one of the trading components that you can influence easily. Traders often seem to forget this. The main reason for large losses in trading is often the fact that the position size and the risk is too big in comparison to the trading capital. Most of the time the result of the risk-aversion leads to the fact that the trader

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BASICS

keeps losing positions too long – because he hopes, that

broad valley, for example the Grand Canyon, which you

the trade will “reverse finally” and turn into a winning

have to cross over a bridge. The breadth of the bridge

one. This article will show you, how to determine an

you need to cross is directly linked with your positions

appropriate position size for your account.

size. If it is a bridge over a highway with ten tracks, you will not be afraid to fall from the bridge. You know that

What You Should Not Do

the risk to fall is very small, because the bridge is very

In general you can use a simple rule of thumb: If you

stable.

start thinking about a trade in absolute money amounts

But the bigger the position size compared to your

that you can win or lose – then the position size is not

account, the narrower your bridge. If you use the leverage

appropriate for you. Right this moment you will come into

respectively your position size to the maximum, you will

an emotional state where the best analysis is worthless.

only balance on a thin rope. You are well aware, that only

Two thoughts will pass your head and change steadily:

a small gust of wind can bring you down.

Hope, that the trade will turn around and lead to a winning trade (therefore you keep losing trades too long) and too

Reasonable Position Size

early profit-taking after “I take what I have”. The result:

You have to answer an elementary question to find the

sooner or later you will lose your capital and your trading

right position size: What is the size of risk in per cent

career will end sooner than it started.

that you are willing to accept per trade? In the trading literature you often read something about one per cent of

The Metaphor of the Bridge

the total trading capital. But this is not optimal, as it does

We want to visualise the risk that you enter based on your

not include main components – for example the size of

position size and therefore we use a metaphor of Mark

the trading account or the risk appetite of the trader. But

Douglas, one of the leading trading psychologists and

the author recommends to limit the risk per trade to two

author of the book “trading in the zone”: You imagine a

per cent of the trading capital – better less.

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Example

F1) Order Ticket

We assume that we want to risk one per cent of our trading capital at the most. If the account size is 10,000 EUR we can risk 100 EUR per trade. Based on your analysis and the resulting stop level you can determine your position size accordingly. If we assume that your analysis shows a risk of 100 pips. Therefore you can risk one Euro per pip, because 1 EUR/pip x 100 Pips = 100 EUR. Good trading stations calculate the so-called pip-value based on your position size automatically.

How the Leverage Influences the Profitability The author already talked about the risk that a too large position can endanger your trading career. DailyFX analysed twelve million live trades and the significant effect of an appropriate leverage respectively a reduction of the position size to the size of the account. The study showed that the profitability of a trader nearly doubled, if he reduced his effective leverage in his trading from 26 to five. The research team of DailyFX analysed the average position in relation to the actual account balance of the trader for the effective leverage. A trader with an account of 10,000 EUR who enters The chart shows that the position size in this example is 13 microlots or 13,000 units EUR/USD. The pip value is 0.95 EUR per pip (13,000 / 1.36223). A stop of 100 pips equals a risk of 95 EUR (and therefore a little below the 100 EUR). Source: FXCM

a position of 100,000 units in EUR/USD uses an effective leverage of 10 to 1: Effective leverage = value of the position / account balance = 100,000 / 10,000 = 10 This shows the possibility to

F2) Effective Leverage and Profitability

influence the effective leverage. Either you increase the trading capital or you reduce your average position

size

to

increase

your

profitability. It is wise to use an effective leverage of less than 10 to 1 in trading – that means, that you move 100,000 units of a currency pair at maximum if you have an account of 10,000 EUR. You can reduce or increase your position size and this is a The chart shows that the reduction of the effective leverage has a dramatic effect on the profitability of the trader. An effective leverage of 26 to 1 means for example, that the trader moves 26,000 units of a particular currency pair with an account of 1000 USD (first bar). The average position size of a trader with an account balance of 10,000 USD was 50,000 units with an effective leverage of 5 to 1 (third bar). Source: FXCM

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strong weapon for every trader. It goes hand in hand with active management of the average profit or loss and therefore with active riskand money-management. «

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Market Structure Indicators Part 1: Principles of Market Structure Analysis

With the exception of the Dow Jones, most stock indexes weight the individual components with market capitalisation, causing the movements of indices to be significantly influenced by the stocks with the highest capitalisation. This raises the question of whether such indices actually indicate what’s really happening beneath the surface. To arrive at a better assessment of this, market structure indicators are used.

» Stock prices do not exist in a vacuum. It takes more than

broad base of stocks or is only due to the behaviour of

just good corporate results for the price of a stock to rise.

a particular sector or an individual stock. Consequently,

Among other things, the stock’s environment is equally

this type of indicator is also known as a market-breadth

important. This includes in particular the macroeconomic

indicator.

environment as well as investor sentiment. Here an evaluation of the general “health” of an equity market

Types of Indicators

may help to early identify high or low points in the

For a better overview of market structure indicators, we

market with market structure indicators being capable of

first want to place this type of indicator within the context

providing important information.

of technical analysis. Altogether, we distinguish four

These indicators are designed to closely examine

types of indicators:

the index-based overall market behaviour of individual stocks. The purpose of this is to make a statement as

1. Trend Indicators: These indicators use price data

to whether the movement of an index is supported by a

to determine the direction of the trend. Well-known

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BASICS

examples

include

Moving

F1) Market Structure

Averages and indicators such as the Moving Average Convergence Divergence (MACD). 2. Oscillators: These are typically used

as

counter-indicators

and fluctuate within set limits around a mean value. They are calculated on the basis of price data.

Examples

include

the

“Stochastic” and the Relative Strength Indicator (RSI). 3. Sentiment Indicators: They are used as counter-indicators and do not require any price data for their calculation. put/call

Examples

ratios

and

include

indicators

based on surveys such as sentix, AAII or Investors Intelligence. 4. Market

Structure

Indicators:

They are calculated by counting

Figure 1 shows the market structure indices for the US stock market of 11th December 2013. The first column shows the number of rising and falling shares for various indices and the overall market. This is followed by the second column showing the up/down volume and the third column showing the ARMS indices as well as the number of shares above their 10, 20, 50, and 200-day moving averages for NASDAQ, S&P 500 and Russell 2000. Source: www.tradestation.com

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is supported by a broad base, i.e.

T1) Examples of Market Structure Indicators

a large number of shares. If this is Original Name

Definition

not the case, the indicator should

Advance Issues

Number of risen shares

show an exhaustion of the trend on

Decline Issues

Number of fallen shares

the basis of a divergence from the

Advance Decline Line

Difference between advance and decline

development of the index.

Advance Decline Ratio

Ratio of decline to total number of shares

New Highs

New 52-week highs

New Lows

New 52-week lows

Up Volume

Total volume of all risen shares

Down Volume

Total volume of all fallen shares

be extended to the trading volume,

McClellan Oscillator

Oscillator on the advance/decline line

making it possible for an index to

ARMS Index

Ratio of advance/decline to up volume/down Volume

be calculated from these data that

Number of stocks above X-day moving average

Number of shares above an X-day moving average

Number of stocks below X-day moving average

Number of shares below an X-day moving average

9-to-1 Up Volume

Martin Zweig’s volume indicator

For most indicators of this kind, the procedure is of a similar nature. Doing a count will determine how many shares of an index rise or fall. Alternatively, this method may also

is updated on a daily basis. For the major U.S. stock indexes, this data is provided by most data providers.

The table shows examples of market structure indicators that we will be discussing in the next few issues.

Advantages of Market Structure Indicators In a healthy upward trend, the number of rising stocks should be significantly higher than the proportion of falling shares. The

the stocks of an index based on certain criteria. Again,

same is true of trading volume, enabling statements to

no price data are required here. Examples include the

be made on the stability of a trend.

Advance/Decline Line and the New Highs/New Lows Index.

Since abrupt trend changes only occur in the rarest of cases, market structure indicators also provide timely hints of the weakening dynamics of a trend.

Basic Principle

This is especially important in correction phases

Market structure indicators should always be used

where the mere price development of an index cannot be

in conjunction with another type of indicator such as

used to determine whether it is nothing but a correction

trend indicators. The disadvantage of trend indicators

or whether a change in trend is happening.

is a more or less significant time lag, depending on the time horizon. This means that a trend will invariably not

Disadvantages of Market Structure Indicators

be detected until part of the movement is already over.

While analyses of market breadth may allow a statement

The same applies to trend changes that invariably can

to be made about whether a trend or market phase

only be shown by trend indicators in retrospect. This is

can be described as being balanced or extraordinary,

exactly where market structure indicators come in. They

such statements are inadequate to allow exact timing.

are designed to indicate whether the trend of an index

Likewise, it takes quite a bit of experience to correctly interpret any divergences here.

Rudolf Wittmer Rudolf Wittmer, who has a university degree in engineering, has been active as a fund manager and hedge-fund consultant in recent years and is a passionate trader who turned his hobby into a career more than 20 years ago. By constantly refining his trading models, he has made a name for himself as a systems trading specialist in Germany. [email protected]

Outlook In several contributions appearing in the next few issues of TRADERS´, we will describe in more detail the methods listed in Table 1. In particular, we will be discussing specific examples as well as advantages and disadvantages. In addition, some trading strategies will be presented that have been developed by the author on the basis of market structure indicators. «

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BASICS

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The Trader’s Technical Arsenal Common Indicators in the MetaTrader – Part 9

This piece discusses the On Balance Volume and the Parabolic SAR, as both work in MetaTrader, which continues to increase in popularity (especially version 4.0). In most cases, the indicators’ default parameters are used.

Azeez Mustapha

» On Balance Volume (OBV)

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.

This is an indicator based on momentum and it uses

[email protected]

volume to forecast changes in the price. It was created by Joseph Granville and introduced in his book, which was published in 1963. This is based on the premise that an increase in the volume when the price does not go southward significantly, will force the price to go

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BASICS

northward. The premise can be reversed for the opposite

is positive. When an instrument closes below the day’s

direction. With this tool, the intensity of short and long

close (or the period’s close), volume is negative.

orders is gauged as volume is added on a bullish day or subtracted on a bearish day. With this premise in mind,

If the closing price is above the prior close price then:

speculators can look for divergences between the OBV

Current OBV = Previous OBV + Current Volume

and the market so as to look forwards to changes in the If the closing price is below the prior close price then:

market. We want to recognise the nuances in the markets,

Current OBV = Previous OBV - Current Volume

which showcase the difference between institutional market players and retail market players. When majority

If the closing prices equals the prior close price then:

of traders go short on what the big institutions believe

Current OBV = Previous OBV (no change)

would rally (going long), volume would reflect this. Ultimately, it is volume that would determine where

Using the On Balance Volume for Long and Short Trades

the price goes next. When majority of traders begin to

When using the On Balance Volume, we would like to

open long orders, that would be the time when those

pay attention to its behaviour rather than its value. The

institutions believe the price would plummet (going

indicator is based on closing prices of the instrument in

short). These price actions are what cause convergence

consideration, and this should be borne in mind when

and divergence in the market. In Figure 1, you can see

using the indicator as explained below.

how the default On Balance Volume looks like in the Silver

Also notice that OBV is based on closing prices.

daily chart. The default parameters are used, except that

Therefore, closing prices should be considered when

the colour is changed to FireBrick. In the chart, we can

looking for divergences or support/resistance breaks.

see a downtrend, followed by a period of consolidation

We need to bear these points in mind when using the

and then a rally.

indicator:

Since OBV was created with the premise that volume comes before price, the OBV moves upwards when

1. OBV is used according to its direction: It foreshadows

volume on bullish days (or periods) is more than the

short trades when it is falling and long trades when it

volume on bearish days (or periods). When volume of

is rising.

bearish days is more, OBV moves downwards. As OBV

2. The instrument we want to speculate on must also be

rises, it shows positive volume pressure that can likely

falling if we want to go short or rising if we want to go

lead to rallies. As OBV falls, it shows negative volume than can likely lead to plunges in the market. The creator

F1) On Balance Volume in the Silver Daily Chart

of the indicator noted that it moved before the market direction, for the market might later rise when the indicator rose and the market was consolidating or bearish. Conversely, the market might fall when the indicator was falling and the market was consolidating or bullish.

Computation The OBV is a total of positive and negative volume. When an instrument closes above the day’s close (or the period’s close), volume

This is what On Balance Volume looks like in the Silver daily chart. In the chart, we can see a downtrend, followed by a period of consolidation and then a rally. We can see how it behaves in uptrends and downtrends. Source: www.metaquotes.net

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Using the On Balance Volume to Trade Divergences

F2) A Downward Divergence on Silver

Astute

speculators

use

OBV

to

determine when there are upward or downward divergences. In a situation where volume goes before a directional movement in the price (as it is true of the OBV), there is an upward divergence when the OBV moves upwards (whether straight or zigzag) and the price is still clearly This is a form of downward divergence in Silver daily chart. Silver has been in a tardy and precarious uptrend, and where there is a red vertical in the chart, there is a bullish candle, while the OBV has already started a downward slope (lower low and lower high). The price later goes downwards. This kind of price action can be reversed for an upward divergence. Source: www.metaquotes.net

bearish. The tepidity in the bears may enable the price to move upwards. There is a downward divergence when the OBV moves downwards (whether straight or zigzag) and the price is still clearly bullish. This may result in lassitude on the part of the

long. This must be in agreement with the direction of

bulls, which may cause the price to plunge. These forms

the OBV.

of divergences alert astute speculators to possibilities of

3. The signal to go short is strong after a support

changes in the markets.

level has been breached to the downside. Likewise,

Figure 2 shows a form of downward divergence in

the signal to go long is particularly strong after a

Silver daily chart. In the chart, the candles are enlarged so

resistance level has been breached to the upside. The

that the price action can be seen clearly. Silver has been in

start of a new uptrend would mean the disappearance

a tardy and precarious uptrend, and where there is a red

of the influence of the bears, particularly when

vertical line in the chart, there is a bullish candle, while the

the uptrend is strong enough. When a dark room

OBV has already started a downward slope (lower low and

becomes illuminated, the darkness in it disappears.

lower high). The price later goes downwards – seriously.

4. Crazy spikes or false breakouts based on unexpected

We want to open positions around the price zones where

fundamentals may temporarily render the indicator

speculators tend to be wrong and get whacked. When

unreliable, till the spike or false breakout has been

we sell, we want it to be around the prize zones where

corrected.

the bulls have been caught in a wrong direction and are now fighting for survival. This kind of price action can be reversed for an upward divergence.

F3) Parabolic SAR in the EUR/CAD 4-Hour Chart

Finally, the OBV can be combined with chart patterns and other forms of chart analyses, either to confirm an existing bias or to look for potential reversal.

Parabolic SAR The full name is Parabolic Stop and Reverse. This indicator was created by Welles Wilder and it is based on The EUR/CAD 4-hour chart contains the Parabolic SAR (default parameters). It appears as dots in the chart. We go long when the indicator is below the price and go short when it is above the price. As soon as the indicator appears above the price, long orders are liquidated. As soon as the indicator appears below the price, short orders are liquidated. Source: www.metaquotes.net

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time and price, which are used to generate tradable setups. It is also used to locate where effective stops and trailing stops can be put. An important aspect of the indicator is

BASICS

the SAR (stop and reverse); it trails a market as it moves

would see that the red vertical line in the chart depicts

significantly in a direction. The Parabolic SAR shows

where the indicator signals the end of the prior bullish

under the price in an uptrend. As long as it is under the

trend and the beginning of a new bearish trend. A trading

price, the uptrend is valid. It shows above the price when

instrument moves southward more quickly than it moves

it is in a downtrend. As long as it is above the price, the

northwards.

downtrend is valid. Having said this, the indicator ‘stops

In the chart, the up arrow points to where the prior

and reverses’ when the price assumes a new direction.

bullish trend ends and a bearish signal is generated. The

This means the indicator that is previously below the

left arrow shows where the Parabolic SAR first appears

price in an uptrend would change and show above the

above the price to generate a ‘sell’ signal. The same first

price when the market starts a downtrend.

appearance is also used as a stop-loss area, and so, an

This indicator was created before the widespread use of the computer; yet it remains useful and popular.

Parabolic SAR: Computation

Please let us see Figure 3. The EUR/

It is somewhat difficult to compute the SAR because of certain factors that must

CAD

4-hour

chart

contains

the

Parabolic SAR (default parameters). It appears as dots in the chart. The most common default colour is lime, but here, it has been changed to blue. We go long when the indicator is below the price and go short when it is above the price. As soon as the indicator appears above the price, long orders are liquidated. As soon as the indicator appears below the price, short orders are liquidated. What does this reveal? It reveals that the indicator gives entry and exit signals. This is particularly comfortable for intraday and swing traders who are looking for specific entry and exit points. That is why the indicator is also good for timing, for an exit signal is generated as soon as a trade is no longer going in the desired direction. Another helpful aspect of the Parabolic SAR is its use to locate a stop-loss area as well as its use as a trailing stop. In Figure 4, the candlesticks are enlarged to make it conspicuous that the indicator can also be used as a stop and as a trailing stop. In that Figure, the AUD/JPY 4-hour chart, which was in a bullish trend in the beginning of May 2014 (the Parabolic SAR gave a correct bullish signal for this), turned bearish on May 14, 2014. The signal

be put into consideration, like if/then variables. However, the example below would give an overall idea of how this indicator is computed. Since the formulas for rising and falling SAR are not the same, the computation is done in two ways. One is about rising SAR while the other is about the falling SAR. Rising SAR Prior SAR: The SAR value for the previous period. Extreme Point (EP): The highest high of the current uptrend. Acceleration Factor (AF): Starting at .02, AF increases by .02 each time the extreme point makes a new high. AF can reach a maximum of .20, no matter how long the uptrend extends.

Current SAR = Prior SAR + Prior AF (Prior EP - Prior SAR) 13-Apr-10 SAR = 48.28 = 48.13 + .14(49.20 - 48.13) The Acceleration Factor is multiplied by the difference between the Extreme Point and the prior period’s SAR. This is then added to the prior period’s SAR. Note however that SAR can never be above the prior two periods’ lows. Should SAR be above one of those lows, use the lower of the two for SAR. Falling SAR Prior SAR: The SAR value for the previous period. Extreme Point (EP): The lowest low of the current downtrend. Acceleration Factor (AF): Starting at .02, AF increases by .02 each time the extreme point makes a new low. AF can reach a maximum of .20, no matter how long the downtrend extends.

Current SAR = Prior SAR - Prior AF (Prior SAR - Prior EP) 9-Feb-10 SAR = 43.56 = 43.84 - .16(43.84 - 42.07) The Acceleration Factor is multiplied by the difference between the Prior period’s SAR and the Extreme Point. This is then subtracted from the prior period’s SAR. Note however that SAR can never be below the prior two periods’ highs. Should SAR be below one of those highs, use the higher of the two for SAR. Source: www.stockcharts.com

was timely. With a closer look, you

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On Balance Volume foreshadows short trades when it is falling and long trades when it is rising.

oval shape is put around it. The actual entry price for this

will expose you to whipsaws in choppy/sideways markets

trading signal was 95.53. According to the indicator, the

– something that you certainly do not want. The indicator

stop was put at 96.09. You can see the actual price and

is a trend-following one: It works great when it is used

time for a dot appearance by merely placing your cursor

to catch trend and signal a reversal in a highly trending

on the dot. The down arrow shows how the indicator

instrument.

trails the price and helps the speculator adjust her/his

This indicator is also good in trading a strong but

stop as the price continues to move in the forecasted

fleeting reversal against a dominant bias. Sometimes,

direction. This ensures that you both eliminate risk on

this kind of fleeting reversal may be strong enough to

the trade and lock some of your profits which are now

give a decent profit before one takes another signal in

guaranteed.

agreement with the dominant bias.

When one goes short and happens to be correct,

Another way of increasing the dependability of this

the Parabolic SAR stop is lowered gradually. This kind of

indicator is to confirm its signal on two timeframes; one

trailing stop is also increased gradually on a correct long

higher timeframe and the other lower timeframe. When

trade, for the indicator follows the price like a trailing stop.

a Parabolic SAR signal is taken on the higher timeframe,

It is even more satisfactory when optimal lot sizes are

one would make sure that one is not trading against the

used in proportion to equity ratios. However, the position

Parabolic SAR signal on the lower timeframe. This would

sizing methods for huge portfolios may be dangerous for

be explained further in another article.

retail portfolios. It must be noted that the indicator is not very useful

Conclusion

in equilibrium markets. Therefore, you may want to use

Indicators can be a great tool for traders. A careful

it only in trending markets and put it aside temporarily

observer of the markets can detect the winning nuances

when equilibrium phases are perceived. Failure to do this

in the charts. A careful eye can see the nose beneath it. As the price ambles in the chart, we want to see how the indicators respond so that we can reach logical conclusions.

F4) The Usefulness of the Parabolic SAR

When an indicator is mastered and used properly in conjunction with the realities in the markets, the results can be surprising. This improves the

accuracy

of

the

technique

being considered and reduces the number of spurious setups, which in turn would step up the number of dependable setups and will make you have more confidence in the technique. This chart depicts how the Parabolic SAR signals the end of a northward journey on the AUD/JPY, gives a new signal for a southward journey, shows an optimal stop area, and shows a good trailing stop possibility. Source: www.metaquotes.net

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The next article in this series would

discuss

Relative

Strength

Index and Relative Vigor Index. «

BASICS

www.tradersonline-mag.com 09.2014

Trading Journal: Alexander Mantel Trade with Rectification

In the trading journal traders – beginners or professionals – introduce one of their trades. In this issue Alexander Mantel describes a trade where he had the need for risk reduction after opening the trade – and he thought about how to achieve it without limiting the profit potential or increasing the risk of being stopped out.

» Initial Situation

in February 2013, because the fundamental situation

At the end of 2012 I decided to invest in E.ON SE. At

was uncertain. But I did not want to use a method that

this time the stock started building a bottom at 14 EUR.

reduced my profit potential, because I already had to

The company was (and is) in a challenging fundamental

earn the agio of the options. Therefore a combination of

situation. But I was convinced that all the bad news was

a call and a put was out of question. I was convinced that

already included in the price and that there was potential

the stock had already reached its bottom, but I feared

in this stock – in the long term. I did not want to use a lot of

that the duration of the options was not long enough for

money therefore I decided to trade with options. I bought

the stock to increase in value as much as to compensate

a call (strike 14 EUR) with a duration until December 2015

the option premium. I assumed that the stock would hold

at a price of 0.21 EUR (ratio 1:10).

the bottom at 14 EUR and therefore I chose a discountcall-option with the strikeprice twelve EUR and a cap at

The Trading Idea

14 EUR (duration December 2014). The option cost 0.74

Although the capital invested with options is smaller

EUR and two EUR were paid if the price of the stock was

than with stocks I wanted to reduce my risk further

at least 14 EUR at the end of the duration. Therefore I

72

BASICS

I did not want to use a lot of money therefore I decided to trade with options.

decided to buy as much discount calls that would result

position and to earn a profit. Because of the uncertainty in

in the same amount I had invested at the end of 2012

the energy sector I decided to close the position in profit.

in the initial position at the end of the duration of the discount call.

In total the result was as following: The initial position (classic options) lead to a loss of 14 per cent. The discount

Even if the stock would not increase any more and I

calls earned a profit of 122 per cent. Considering the

would lose the premium for the classic option, I would

division (six discount calls per one classic option) it

not lose any money if the stock would quote at at least

resulted in a total profit of 36 per cent, which equals an

14 EUR at the end of the duration of the discount call.

annualised yield of 22 per cent.

The discount call would still pay for the loss in the initial position up to a price of 12.75 EUR. Only if the

The Result

price of the stock fell below 12.74 EUR I would lose

The trade was executed as planned. The discount calls I

additional money with the discount calls. That seemed

bought to hedge the initial position served their purpose,

to be a justifiable risk – especially if you think about

because they compensated the loss of the initial position

the additional profit potential in case of a profit (in

and even earned a profit. I cannot yet answer the question,

contrary to most of the hedging-strategies). If the stock

if the closing of the position was too early, because the

increased to a price where the classic call option would

duration of the discount calls is until December 2014. But

lead to a profit, the discount call would earn a profit as

I feared that the stock would drop below 12.74 EUR and

well because the price would be above the cap of the

then the capital for the initial position as well as the money

discount call.

for the discount calls would have been lost. In total I was satisfied with the outcome, because I was able to achieve

The Trade

a profit although the initial position resulted in a loss. «

In addition to the classic call options I bought at the end of 2012 I bought discount calls on the 21st February 2014 at a price of 0.74 EUR. One

F1) E.ON Daily Chart

discount call would pay two EUR in case of profit and therefore the profit of the discount call would compensate the loss of six classic options (2 EUR - 0.74 EUR = 1.26 EUR / 0.21 EUR = 6). Therefore I bought one discount call per six classic call options. In other words: I bought 0.167 discount calls per option. On 19th June 2014 the stock of E.ON increased to nearly 15 EUR for the first time since I bought the initial position. The call quoted at only 0.18 EUR and therefore at a loss. In contrary the discount calls were in profit already. They quoted at 1.65 EUR – more than enough to compensate the loss of the initial

The chart shows the entry in classical call-options (first mark), the entry in discount calls (second mark) as well as the closing of the positions (third mark). Source: www.tradesignalonline.com

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PeoPle

René Wolfram Third Place at the Trading World Cup

René Wolfram belongs to that generation of traders whose attention was drawn to the stock market in the late 1990s when share prices spiralled out of control during the New Economy bubble. As was the case with many other traders, things very soon went extraordinarily well only to go downhill when the bubble burst. There were also quite a few others who were thrown out of the market or gave up for good altogether. René Wolfram is one of those who have learned from their losses and ultimately managed to become successful traders. Marko Graenitz visited him and talked to him about his beginnings, his learning curve, and his trading philosophy – and about how he managed to finish in third place at the Robbins World Cup in 2013.

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PeoPle

The cups of the Robbins World Cup Trading Championship of futures trading.

» TRADERS´: For starters, the almost obligatory question: What got you into trading?

TRADERS´: When did the breakthrough come?

Wolfram: That happened in 1997 or 1998 when the

a Larry Williams seminar that really opened my eyes.

markets began to rise increasingly. At the time, I was

Essentially, I then threw away everything I had done up

doing my national service (non-military option) and

to that point. That’s how convincing I found his approach.

Wolfram: I think it was in late 2001 or early 2002. I attended

some of my mates made a lot of money playing the stock ballpark figure. You can imagine that that appealed to me

TRADERS´: That sounds really interesting. What were his core ideas?

and got me interested in the stock market.

Wolfram: In principle, everything he did was based on

market. Around 100,000 deutschmarks, to give you a

statistical evaluations. This suddenly turned trading and

TRADERS´: So you opened an account and got going?

its probabilities into something concrete. Which days

Wolfram: Exactly. I started off with 30,000 marks. By

do which setups make sense on and at which trading

then, I had begun to study economics but spent more and

hours? What do the seasonal patterns look like, and so

more time in front of my computer instead of attending

on? Of particular importance was his concept of volatility

lectures at university. Things were going well – in fact, my

occurring in waves and then retreating again. This means

success was too good to be true. I remember my account

that periods of high fluctuation ranges alternate with

hitting 250,000 marks sometime in early 2000.

quieter periods (Figure 1). It’s a simple concept but it is one that many traders seem to ignore. After the seminar,

TRADERS´: But then the bubble burst ...

I began to compile a huge set of evaluations of all kinds

Wolfram: Basically, I had no idea what I was doing but as

of statistical data in spreadsheets. Simultaneously, I

long as it worked, it didn’t really matter. However, after

was reading more of his books as well as those by other

peaking in 2000 prices fell and I made losses caused by

US traders like Joe Ross. The concepts went far beyond

too large positions in illiquid stocks, haphazard buying

what was known and used in Germany. Over here, most

based on the name of a company and so forth. That way,

traders still followed simple ideas related to technical

my account dropped to 30,000 marks again in 2001. The

analysis like head-and-shoulder patterns or support

only profit I had made was the extra experience I’d gained.

and resistance levels. By contrast, using statistical evaluations made me feel that I had reached a much

TRADERS´: What motivated you to continue trading?

more professional level.

Wolfram: I spent a lot of time in front of my computer 14 hours a day. Somehow I just knew that I would be able

TRADERS´: When did you “finish” your new trading approach?

to recoup my losses if only I traded more systematically.

Wolfram: In 2003 I had found my basic concept, i.e. my

This belief was so strong, that I couldn't give up.

rough draft.

carrying out all kinds of analyses, sometimes for up to

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Wolfram: Exactly. I use a volatility

F1) Equity Curve and Basic Cycle of Volatility 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 -2000

filter

Equity S&P Power-Candle Setup (5 minutes)

which

filters

only

those

markets that are currently moving well. This concept I introduced in 2007

after

frequently

counter-cyclically

prior

operating to

that.

While this had caused me to achieve high hit rates, my average profits were disappointingly low. Since then, I have been doing more trendbased

and

volatility-dependent

trading. Cyclicality of trend and consolidation

TRADERS´: How does the volatility filter work? Wolfram: Basically, it’s quite easy. When volatility is low, there is an increased probability of an imminent The graphic shows a real equity curve of René Wolfram’s Power Candle strategy and below the typical basic cycle of volatility. The blue boxes in the equity curve mark the periods when the system was in a drawdown. These are also those periods when there was a regression of volatility in the underlying market. By contrast, the red boxes indicate the performance periods of the system. These are also those periods when there is higher volatility in the market again and the intraday ranges increase and performances become more trendy. Source: www.tradesignalonline.com

stronger movement and vice versa. For instance, a market is likely to make a breakout movement with a markedly wider range after two to three days of unusually low fluctuation. That is simply the nature of the markets.

I have always been fascinated by being successful in the markets and making my way there. Of course, I’m

TRADERS´: Which time frames do you trade?

still working on the details to this day since the process

Wolfram: I have strategies for intraday trading, but also

never ends.

for longer-term approaches with holding periods of up to several months. I think a good mix of time horizons

TRADERS´: How much do you intervene discretionarily in the rules governing your system?

is important in order to achieve a stable overall equity curve.

Wolfram: As little as possible. The rules help me to avoid leaving any way for interpretation. The absence of clear

TRADERS´: And which markets?

rules constantly makes you wonder in the end what’s the

Wolfram: Futures. Mostly the S&P E-mini, a bit of coffee,

right thing to do. This automatically leads to mistakes,

sugar, and gold as well as just a few currencies. The latter

which is what I want to avoid.

market’s volatility has often been too low lately. Basically, only the yen pairs went well in 2013. In 2008, however,

TRADERS´: How did your strategies do in times of crashes like those in the autumn of 2008 or in August 2011?

there were huge currency movements resulting in very good opportunities.

Wolfram: My concept is to build up positions into rising movements during periods of low volatility. Therefore,

TRADERS´: Why no shares?

these were the very periods that often went my way since

Wolfram: I stopped trading shares back in 2003. The

there is a marked increase in volatility in times of crashes,

bear market of that time showed me that shares or their

allowing me to capture larger movement amplitudes.

companies may disappear or that share prices may drop very sharply. If I trade an index or a commodity, the value

TRADERS´: So you are not active in quiet markets with no rise in volatility?

76

cannot just drop to zero, at least. There will always be something left there.

People

Good trading principles are also helpful in normal life.

TRADERS´: At the Robbins World Cup of Trading in 2013, you came in third. Could you tell us the story behind that, please?

feeling that you could no longer put your trust in the

Wolfram: The first time I heard about that championship

amount in your account by your trading and then losing

was via the story of Larry Williams and his incredible

everything again because your broker is broke. Although

return of more than 11,000 per cent. I don’t want to

I spread my trading by engaging several brokers, the

speculate on how he achieved this performance. At any

risk is difficult to calculate hovering as it does like a dark

rate, I found it fascinating that someone achieves such

cloud above us, especially after such events. Who can tell

worldwide fame this way. You must remember that US

who will be hit next?

infrastructure of the markets. Imagine doubling the

and Asian culture is different from ours in Germany. Larry Williams was celebrated like a rock star over there.

TRADERS´: What happened next?

So I looked at the conditions for entering the competition

Wolfram: I then pondered the pros and cons of

conditions and found out that in addition to a fee of $1000,

participating again in the following year. Basically, things

you had to pay at least $10,000 in real money in advance.

had been going quite well until the PFG mess happened.

While this put me off at first, I later decided to enter the

Admittedly, my wife had strongly advised me against

2012 competition.

participating – but I did anyway.

TRADERS´: How did it go?

TRADERS´: Could you please tell us how the year turned out.

Wolfram: Unfortunately, everything went wrong. This

Wolfram: Right on the start page of the Robbins Cup

was actually not my fault though, but was due to the

website you can see a list of the current top five traders

bankruptcy of PFG, the brokerage firm that handled the

of the competition year in question. After just two weeks

trades of the Robbins Cup that year. After all, Robbins

a participant had achieved a return of 50 per cent. Three

himself is only the introducing broker but at the same

months another one had taken the lead with an incredible

time the organiser. I had to drop out of the competition.

return of 500 per cent! Within a few days he had jumped

While there was an evaluation of the fourth quarter later

ahead, which is a clear sign of extremely risky trading.

on, the massive amount of paperwork involving countless

That’s the only way to pull it off. I was treading water and

documents I had to contend with as a foreigner meant

doing so at a distinctly lower level, trading mainly micro

that it didn’t work out any more.

contracts and behaving very defensively. I distinctly

TRADERS´: How did you feel? Wolfram: Well, as you can imagine, not all that great. First the collapse of MF Global, then PFG. You had the

Larry Williams – His seminar was the cornerstone of René Wolfram’s approach Larry Williams is one of the best and most famous traders in the world. At the 1987 Robbins World Cup Trading Championship, he turned 10,000 dollars into more than a million dollars. He has won many trading competitions and is the only futures trader worldwide to trade live during his seminars with a one-million-dollar account. Williams has published a large number of books on this subject, most of which became best-sellers.

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was only a performance of 220 per

F2) All-time High for Silver in 2011

cent. Only very rarely has it been necessary to achieve more than 500 per cent for first place. Bit by bit, the short-lived star of the competition lost his lead and after several months was no longer to be found among the front runners. Later, he briefly re-appeared there once more, probably after pulling off a lucky trade, but then disappeared again.

TRADERS´: And you finished in third place! Great! Wolfram: Thank you, I was a bit surprised, too. At first, I was in René Wolfram went short too soon at the high and traded too large a position in silver futures. Such errors not only cause major losses but linger on in the mind of a trader. Source: www.tradesignalonline.com

fourth place, but when the accounts were checked they found out that a participant ahead of me had made payments to his account during the year, embellishing his performance.

remember telling one of my mates: ‘I bet this 500 per cent

This, of course, is not admissible. So I moved up to third

guy won’t finish among the first five.’

place.

TRADERS´: A risky bet. After all, that bloke simply could have stopped trading for the rest of the year, which would certainly have been enough for him to finish among the top five.

TRADERS´: What was the most important thing you have learned during the Robbins Cup competition?

Wolfram: True. But these people are incapable of doing

will always be people who briefly achieve huge returns

that. To win the Robbins Cup, the all-time annual average

using daring manoeuvres, but in the long term the

Wolfram: Defensive strategic trading clearly is more successful in the long run than you might think! There

Ingmar Koenigshofen (left) and René Wolfram at the CME in Chicago.

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People

will be successful on the stock market. Although I really

TRADERS´: Can you remember one of your trading mistakes?

traded defensively during the Robbins Cup competition,

Wolfram: Yes, of course. That’s something you never

I finished third. To me, that was gratifying confirmation

forget. It was at the all-time high of silver in April 2011

that my approach is really the right one. As is the case

(Figure 2). I went short, unfortunately too soon. But that

with any other trader, I start to have doubts every so

by itself wasn’t the big mistake. The mistake was the

often about whether this or that might not be improved

much too large position in silver futures, which cost a

upon or whether my performance is lagging behind that

lot of money. And my wife and I wanted to go away for

of others. The truth is that the whole thing is also a mental

the weekend enjoying ourselves, which, of course, didn’t

challenge.

work out so well. Emotionally, it takes time to really digest

strategist with an approach based on sound statistics

that kind of stuff. But most people will probably always

TRADERS´: While we are on the subject, what do you think about mental coaching?

refuse to make such an admission.

Wolfram: That’s certainly a good thing although I myself trading, even after years ‘on the job’, that you fall prey

TRADERS´: Thank you very much for such honest words. Yes, such a situation has caught some traders completely by surprise. Did you or do you have a coach?

to negative thought processes, causing you to make

Wolfram: I’ve never had a coach. It was always my goal to

mistakes. Mental coaching certainly makes a trader less

teach myself how to trade by attending seminars, reading

vulnerable to such influences. However, many traders

books and doing my own analyses. In hindsight, it would

think such coaching is a waste of money. Admittedly,

certainly have been easier with a coach.

haven’t tried it out yet. It happens time and again in

psychologist charge high hourly rates and the whole thing certainly won’t come cheap. But losses on the stock market caused by stupid mistakes aren’t cheap either.

TRADERS´: What typical errors can you think of that are made over and over again?

Moreover, most traders think topics like mental

Wolfram: Traders often have a pretty good sense of what

coaching or risk management are boring, but that’s

is happening in the markets. But you also have to be able

exactly where the problem is: These things are the most

to reflect on that. For instance, if someone is afraid of

important ones in trading. And there’s another problem:

buying a share, that may well be a good reason to enter

Many traders know trading approaches that work but

the market. I’ve never understood the way people wait

are simply incapable of implementing them on a regular

for a pullback in a stock to enter the market, but when a

basis. Here , too, an individual coach or coaching sessions

pullback does happen they are too scared to do anything.

can help.

Quite similar things happen in systematic trading, albeit

The winner, runner-up, and third-place finisher of the 2013 Robbins World Cup: Song Li (runnerup), Victoria Grimsley (winner), René Wolfram (3rd place), together with Chad Robbins of Robbins Trading.

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Trading has a poor image among the public, which I don’t think it deserves.

on a different level. Sooner or later,

F3) Power Candle for Gold

a drawdown will occur during which rules are suddenly adapted or trading is suspended. Nor will a trader rarely start trading a systematic approach during a drawdown – despite the fact that a drawdown actually is the best entry point.

TRADERS´: Can you explain to us one of your setups? Wolfram: I have a trading concept that is called “Power Candle” (Figure 3). This means that I want to see an impulse

candle

that

triggers

a

movement. This is an exceptionally big candle which starts a trend – This is the 60-minute-chart of April 2013 showing the crash of the precious metal. René Wolfram used the marked bearish power candle as an entry point for the swing trade. The example is a good illustration of how above-average-sized candles can generate signals for the beginning of a strong trend. Source: www.tradesignalonline.com

the initial spark, so to speak. The idea behind it is that a great deal of volume enters the market here in a short period of time, which suggests institutional trading. More often than not, this will go on for a while, which means that I can assume that the

F4) Winning Trade in the S&P

trend will continue. As an intraday setup I use this strategy for the S&P on the basis of five-minute candles, but it also works for periods of up to the monthly chart. If a power candle emerges and is completed, I will enter the market as soon as this candle is exceeded and I will simply hold the position until the day’s close. I work with an initial stop of 15 points or $750 and try to capture the intraday trend. The stop is never adjusted, which means that exit can be made only at the day’s close or at the initial stop. No further details In the S&P René Wolfram trades the power candle strategy primarily on a five-minute basis. On 9th April, such a candle started the intraday trend, generating a profit of $500 (ten points). Source: www.tradesignalonline.com

80

are necessary, it’s as trivial as can be. The hit ratio of 65 per cent is astonishingly good.

People

TRADERS´: Can you show us some sample trades?

positions in the S&P futures. This is usually followed by a

Wolfram: Sure. I have picked three trades (Figures 4, 5,

pause and an incredulous look on their faces, as if I were

and 6), including a losing trade (Figure 5).

from a different planet. You somehow feel like a freak.

TRADERS´: What tips can you give to follow when they start trading? Wolfram: Besides a professional

F5) Losing Trade in the S&P

approach, you especially need a strong capital base if you want to make a living as a trader. However, it’s difficult to build this up slowly, starting from an undercapitalised trading

account.

It’s

definitely

advantageous for traders to have a safety net like a regular job or property enabling you to generate regular income and to pay the bills. Back then I was lucky to have my family provide that safety net I was able to sort of rely on, giving me the emotional backing I needed to run risks in trading. Although I didn’t have to fall back on it in the end, it did significantly contribute to allowing

Figure 5 shows a losing trade of the power candle strategy on 12th March amounting to $500 or ten points. Source: www.tradesignalonline.com

me to pursue my trading career. Even today I generate a sizeable portion of extra income from newsletters, seminars, and lectures. That’s just

F6) Intraday Trend Fully Captured

important for my emotional stability and allows me to develop more steadily, automatically causing me to stay “on the ball”.

TRADERS´: What do you think about the way trading is perceived by the general public? Wolfram: It’s a pity that trading is just ignored by most people in Germany. I find this especially striking when we are over at friends in the evening who don’t know exactly what I do for a living. If I excuse myself for having to go home briefly to attend to some business, they sometimes ask: “What business?” I will tell them then that I need to close my open

For the trade of 3rd February, the same strategy generated 38 points or a profit of $1,900. Source: www.tradesignalonline.com

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This would also improve an

F7) Equity Curve Power Candle System 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 -2000

understanding of the stock market,

S&P Power-Candle Euqity (6 Monate)

which unfortunately is only a vision in Germany. Trading has a poor image among the general public, which I don’t think it deserves.

TRADERS´: What are your plans for the future? Wolfram: Most important to me is a good family life, which is why I 1

7

13 16 25 31 37 43 49 55 61 67 73 79 85 91 97 103 109 115 121

The graphic shows a 6-month equity curve, the system being applied in the 5-minute chart of the S&P. Although it is a trend strategy, the hit rate is around 65 per cent and the equity curve does not show much volatility. This suggests that the “initial spark” of the power candle is indeed of a high quality and that trends can easily be identified this way. Source: www.tradesignalonline.com

want to make more time for that. As regards trading, my goal is to again pursue my own interests more and attend fewer trading fairs and seminars. One idea of mine is to set up a small trading office in Frankfurt where other traders may share office space. Who knows

Had I told them instead that I had to turn off the sprinkler

how all that will pan out.

or feed the dog, this would have been completely normal.

TRADERS´: Should more people be in the know about trading?

TRADERS´: If you hadn’t become a trader, what then (ideally)? Wolfram: I used to play a lot of football, so such a career

Wolfram: I would be in favour of adding the subject

would have been a dream. A dream because I probably

“Business and Finance” to school curricula. Many people

wouldn’t have made it quite to the top. Realistically

lack the simplest basic knowledge to make their own

though, I would probably be self-employed in another

financial decisions. It would be good if everyone could

industry, probably as an entrepreneur. «

decide for himself at least on the basics without having to rely too much on others. After all, good trading principles are also helpful in normal life.

The interview was conducted by Mark Graenitz.

From left to right: Joel Robbins (Robbins Trading), Steven Silver (Vision Financial Markets), Song Li, Victoria Grimsley, Scott Warren (CME Group), René Wolfram, Jeff Bernacchi (CME Group), Chad and Chelsea Robbins (Robbins Trading).

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8 Ways a New Global Crisis Could Hit by 2015 » The global economy faces its greatest challenges since 2008. A crisis for the global economy is likely and not enough action is being taken to avoid it. Based on

Arturo Bris

statistics, the world could expect a financial crisis as soon

Arturo Bris is Professor of Finance at IMD and directs the IMD World Competitiveness Center. He was a keynote speaker at IMD’s Orchestrating Winning Performance program where he unveiled his predictions for the future.

as April 2015, ending in March 2016. The cause of crisis will come from eight possible scenarios: 1.

A Stock Market Bubble In the last year, stock markets have performed

three companies left with an AAA rating: ExxonMobil,

unrealistically well and at some point the situation will

Microsoft and Johnson & Johnson. If ratings are an

explode. In 2014, analysts were disappointed in the first

indicator of bankruptcy, there will be bankruptcies

quarter because earnings were not in line with market

across the board. If interest rates increased by two

expectations. This means that if markets were to revert

per cent, half of the corporate sector would be wiped

to a reasonable level with regards to earnings, there will

out.

be a stock market drop of between 30 to 35 per cent. 2.

6.

Almost everywhere, except in parts of Europe and

A severe crisis could be driven by growing Chinese

the US, there is increasing geopolitical tension.

shadow banking, a system which consists of

Events like the current crisis in Crimea, could trigger a market crash, even if there is no war.

loans mainly to government institutions whose performance is not well monitored and not open to

3.

7.

Increasing Poverty

competition. If this system collapses, it will negatively

Overall world poverty has increased and whenever

affect the global economy.

the poor become poorer, we can expect a social

Energy Crisis

conflict. The crusade against income inequality

The United States, as the world’s largest producer

could also further hinder innovation and growth by

of gas, could cause an energy crisis. If the US begins

reducing the benefits of innovation, threatening the

exporting to the rest of the world, Russia might feel

economy.

threatened, causing a geopolitical storm. The US

4.

War & Conflict

Banking in China

8.

Cash and Hyperinflation

would have control over energy prices and would exert

The surplus of cash that central banks and corporations

influence over countries like the UK, India and Japan.

are holding could end up damaging the economy.

Another Real Estate Bubble

The ECB is lending money to financial institutions

There is a risk of a property bubble forming in countries

that put it back into the ECB, which is a vicious circle

like Brazil, China, Canada or Germany. Prices are going

and today Google could afford to buy a majority stake

up because availability of credit is huge and buyers are

in Ireland and Microsoft could buy more than 50 per

pushing prices up without realising that they do not

cent of Singapore, which is immoral.

correspond to fundamental values. 5.

84

Ratings & Bankruptcy Corporate Crisis:

While many economies seem to be finally rebounding

“BBB as the New AA”

since the 2008 crisis, we shouldn’t be complacent. Too

Companies currently have too much debt and the new

often we do not learn from history and do not act when

norm is to have a BBB rating. In the US there are only

faced with a crisis we know is imminent. «

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