ASIA PACIFIC’S PREEMINENT TRADING MAGAZINE

VOLUME 2 ISSUE 1

www.traders-journal.com

Picking a Trading
Timeframe
Before You Make a Trade
Identifying the Trend
Randomness of Financial
Markets
The Thought Demons of Traders
SG$8.80 / A$13.80 / HK$68 / RM$19.80

Trading Tools:
Applying Options
Statistical Analysis
MACD ISSN 1793-2149

Integrated Pitchfork Analysis

6 Steps to Money Management MICA (P) 352/05/2005
 CONTENTS
TECHNICAL ANALYSIS
22 Random Not Random BOOK REVIEW

8 Moving Average
Convergence Divergence
– Part One
34 Trading, Sex, and Dying
by Juel Anderson

Bill Wormald, author,

explores the geometric
structure of World markets.
Price Headley, founder
of BigTrends.com, details

26
Jason Sidney, Managing Integrated Pitchfork
Director of Market Insight some of the lessons learned
Pty Ltd, explains some
Analysis from the book, ‘Trading,
practical applications of the Dr Mircea Dologa, MD, Sex, and Dying’ by Juel
popular MACD indicator. commodity trading Anderson
advisor, explains in
practical terms Integrated

10 Goodman’s Swing Count

System - Part One
Pitchfork Analysis.
36 BOOKS FOR TRADERS

31
“You Can Figure the Finding the Right Trend
Markets, but You Can’t
and Direction BOOK SERIALISATION
Figure the Human Race”
– Charles B. Goodman
38 Trading in the Eye of the
Storm

16 Forecasting S&P500 with

Technical Analysis

Ron Schelling, private

trader, explains how a
combination of the RSI
The 2nd Part of the excerpt
and multiple time frames
from Daniel Gramza’s book
can help us clearly identify
Will Slatyer, author and the trend.
former commodities
merchant and futures
broker, explains a unique
41 SLIPSIDE

way of analysing the S&P

500 Index.

4 The TRADER’S Journal VOLUME 2 ISSUE 1

PSYCHOLOGY Trading, explains one of FOREIGN EXCHANGE
the most important parts

42 Trading psychology
in fables, quotes and
proverbs
of developing a trading
system – the time frame. 65 Foreign Exchange: Behind
the scenes
Noble DraKoln, author,

52 Statistical Analysis futures investor, broker,

and analyst, provides a
for Intuitive Traders:
more detailed look at
Preparing for Chance the working of the forex
market.

MONEY MANAGEMENT

Simon Vine, former

options trader and author,
67 Money and Risk
Management – In Just 6
Steps!
provides an interesting
insight to the way our Jafli, author and private
Brett N. Steenbarger, trader, explains his 6 steps
mind works in the market.
Ph.D, Clinical Professor of to incorporating Money
Psychiatry and Behavioral Management successfully.
TRADING SYSTEM Sciences and author,
DEVELOPMENT explains how we can use
Derivatives
Statistical Analysis to

45 Before You Make a Trade:

10 Critical Questions
provide us an edge.
69 Applying a Trading Edge

56 Trading the Euro:

Box it, Squeeze it, Love it,
Leave it
John F. Carter, trader,
explains his favourite
setups to trade the Euro
successfully.
Nick Katiforis, private
Jim Wyckoff, former MARKET OBSERVATIONS client advisor and author,
financial journalist and explores the basics of
technical analyst, outlines
some useful tips to
consider before any trade.
61 QQQQ: Is risk getting
higher for investors?
trading options.

72
Paolo Pezzutti, private ECONOMIC CALENDAR
trader, details his own

48 Picking a Trading
Timeframe
opinion on the QQQQ

John Forman, author

of The Essentials of 74 UPCOMING EVENTS

VOLUME 2 ISSUE 1 The TRADER’S Journal 5

 To Research and Educate FROM THE EDITOR
“In addition, losing traders tend to be disorganized and impatient.
They want action now.” Dr Van Tharp.
Welcome back to the latest issue of the Trader’s Journal. Thank you for your comments to
us about what you are enjoying with the publication and what you would like improved
The Trader’s Journal is published by and changed. Thanks to you and your candid feedback, we are confident that each
DPR International Pte Ltd Issue is only going to get better. A reminder that our primary focus here at the Trader’s
Journal is to educate you. It can be easily argued that it is the educated trader that will
EDITORIAL
[email protected]
survive in the markets and we want to be a large part of your education. I like what Dr
Van Tharp says above. Many traders don’t fare well in the markets and he can attribute
Managing Editor : Dickson Yap some of this to impatience and wanting action and results now. It can be too easy to
[email protected] start trading and want to see your account balance grow from day 1. For the more
Editor : Stuart McPhee experience trader, they know how foolish this can be. Successful trading requires many
[email protected] personal attributes and patience is one of them. It is important to set realistic goals, and
Contributing Writers
then call upon your discipline and focus to enable you to commit to achieving them.
Bill Wormald Brett N. Steenbarger Many market commentators and professionals are now looking towards 2006 and what
Daniel M. Gramza Jafli Yusop may possibly transpire. Of interest will be inflation in the US, the price of oil after it has
Jason Sidney Jim Wyckoff moved more than 30% during 2005, and its impact on consumers. On a positive note,
John Carter John Forman
consumer confidence in the US surged in December 2005 to the highest level since
Michael Duane Archer Mircea Dologa
August, before Hurricane Katrina hit the Gulf Coast.
Nick Katiforis Noble Drakoln
Paolo Pezzutti Price Headley As always, to help you along the path of trading well, we have compiled a number of
Ron Schelling Simon Vine quality articles written by leading educators, authors and traders for our third Issue. Of
Will Slayter interest is our interesting article discussing trading psychology using fables, quotes and
SINGAPORE proverbs. In the area of developing a trading system, Jim Wyckoff outlines some very
24 Raffles Place useful tips to consider before you open any trade, and another article covers an often
Clifford Centre #27-06 underestimated factor – the time frame.
Singapore 048621
Tel : (65) 9788 8141 Fax : (65) 6312 8091 In the technical analysis area, we look at Integrated Pitchfork Analysis in practical
Advertising : [email protected] terms as well as identifying the trend. In addition, we have a follow up article about
Circulation : [email protected] the geometry of financial markets and answering the question about markets being
random, as well as a solid introduction to the popular indicator, the Moving Average
AUSTRALIA
Convergence Divergence (MACD).
P O Box 4026
Ringwood Vic 3134 Our regular futures and options expert, Nick Katiforis, goes back to the basics for us with
Australia our extensive introductory article on options, and how we can apply some of the basic
Tel : (613) 8802 0593 Fax : (613) 9870 1738 trading principles to real life examples. Every issue, Nick will continue to develop our
Advertising: [email protected] knowledge on trading options most effectively.
Circulation : [email protected]
Again, we have been able to gather a highly qualified group of contributors to the
WEBSITE
www.traders-journal.com
Trader’s Journal and all of them make a valuable contribution to enable us to continue
to provide you a healthy balance of material. We are always very grateful for their
contributions.
copyright@2005-2006 DPR International Pte Ltd. All rights re-
served. No part of this publication may be reproduced, stored in a retrieval Again, I am very excited to be introducing this, the fourth issue of the Trader’s Journal
system or transmitted, in any form or by any means, electronic, mechanical,
photocopying, recording, or otherwise, without the prior written permission and I trust it will become a vital part of your education and your personal development
of the copyright holder. into a successful trader. Let me leave you with a thought from American author Dr Van
This publication is designed to provide accurate and authoritative informa- Tharp, who stresses the importance of focussing on the right things. When we start
tion in regard to the subject matter covered. It is sold with the understand- trading, we naturally move towards the unimportant things and focus on the wrong
ing that the authors and the publisher are not engaged in rendering legal,
accounting, or other professional service. If legal advice or other expert as- areas. Those who are able to, from an early stage, focus on the right areas to trading well
sistance is required, the services of a competent professional person should like the mindset, and risk management will have a far greater chance of success. In an
be sought. environment where success is difficult enough to achieve as it is, why not do everything
In commodity trading, as in stock, and mutual fund trading, there can be no
assurance of profit. Losses can and do occur. As with any investment, you you can to increase those chances. I hope you enjoy this issue of the Trader’s Journal.
should carefully consider your suitability to trade and your ability to bear the
financial risk of losing your entire investment. It should not be assured that
the methods, techniques, or indicators presented in this magazine will be
profitable or that they will not result in losses. Past results are not necessarily
indicative of future results. Examples in this magazine are for educational
purposes only. This is not a solicitation for any order to buy and sell.
Stuart McPhee
The information contained herein has been obtained from sources believed “Everyone will flock to a talk on high probability entry signals, Editor
to be reliable, but cannot be guaranteed as to accuracy of completeness, and and less than 1 percent will learn anything significant. However,
is subject to change without notice. The risk of using any trading method
rests with the user. talks featuring the most important keys to making real money
will have few people in attendance.” Dr Van Tharp.
 TECHNICAL ANALYSIS

Moving Average
Convergence Divergence
– Part One

Jason Sidney, Managing Director of Market Insight Pty Ltd, explains

some practical applications of the popular MACD indicator.
The Moving Average Convergence the shorter exponential moving Traders will sometimes vary the
Divergence indicator, commonly average (EMA) is continually calculation period of the MACD
referred to as MACD, is a trend converging toward and diverging indicator depending on the market
following indicator that measures away from the longer EMA. and their trading strategy. Some
the difference between two moving technicians choose time frames for
averages of prices. MACD (shown The formula used when calculating their indicators based on a specific
in red in the chart below the price the MACD indicator is as follows: number series like the famous and
plot), is the difference between a well known Fibonacci number series.
1. Calculate a 12 day EMA of
26 day and a 12 day exponential This number series is calculated
closing prices
moving average. A 9 day by starting with the number one
exponential moving average called 2. Calculate a 26 day EMA of and simply adding each number
the ‘signal’ line (shown in dashed closing prices to the previous number as follows:
blue on the chart), is plotted on 0,1,1,2,3,5,8,13,21,34,55,89,144
top of the MACD to show buy and 3. Subtract the 26 day from the and so on. Based on the Fibonacci
sell opportunities. 12 day EMA and plot their number series, the equivalent time
difference – this then becomes frames for the MACD indicator
The moving averages used are the fast MACD line would be 13, 34 and 8.
exponentially weighted, which
gives more weight to the more 4. Calculate a 9 day EMA of the The histogram is another
recent data. The name of the fast line and this then becomes interesting aspect to this indicator.
indicator comes from the fact that the slow signal line When first viewed the histogram
8 The TRADER’S Journal VOLUME 2 ISSUE 1
is often mistaken for volume as it and sell signals.
looks very similar to volume spikes
The basic MACD
seen on charts. The histogram is
trading rule is to sell
actually displaying the difference
when the fast MACD
between the two MACD lines. To
line falls below the
prove this to yourself, have a close
slow 9 day signal line
look at the MACD lines and you
and to buy when the
will notice when the two lines
fast MACD line rises
further apart, the histogram will
above the slow 9 day
become quite large and when the
signal line. Ideally the
two lines get very close together the
buy signal generated
histogram will become very small. signal can be confirmed as a strong
by the lines should be
You will also notice a centre or occurring below the histogram, signal when both lines cross above
zero line running through the and sell signals should occur above the zero line of the histogram. As
middle of the histogram. When the histogram. When the MACD long as both lines then remain above
the histogram spikes are above this lines cross producing the buy or sell the histogram the up trend is said
zero line it means the fast MACD signals, the histogram will confirm to strong and likely to continue.
line is above the slow signal line this by crossing above or below the
During the uptrend the MACD
and when the histogram spikes are zero line. A second and very useful
lines will often cross above and
below the zero line it means the way the histogram can be used to
below each other, but as long as
fast MACD line is below the slow confirm the buy or sell signal from
they are both still holding above
signal line. The histogram is also the MACD lines is to wait for both
the histogram the up trend is still
used to act as a filter to the buy lines to cross through the zero line
intact and likely to continue. It’s not
and sell signals generated when the of the histogram. By doing this
until they cross back down through
two moving averages cross over and it will add further weight to the
the zero line of the histogram that
there are two ways the histogram significance of the buy or sell signal
it would suggest that the up trend
can be used to confirm these buy and suggest a higher probability
is over. This can be valuable
and sell signals. trade.
information when trying to let
The other powerful and important your profits run in a trade and is
The MACD indicator is most
aspect to this indicator which is of extreme value for people who
effective in strongly trending
not often explained or taught is try to trade or capture intermediate
markets and therefore should only
how it can be used to measure the moves.
be used in markets that are trending
strength of the trend and give the
well, as ranging markets will tend
trader the ability to let their profits Jason Sidney is the managing director of
to produce whipsaws or false buy Market Insight Pty Ltd. Market Insight is
run. This is achieved
by again comparing an educational company that teaches
analysis techniques for financial markets.
the MACD lines to
Market Insight Pty Ltd produces a free
the histogram and newsletter that promotes these techniques
is another reason and how they are applied to financial
why the buy signal markets. To subscribe to this newsletter,
should occur below simply visit the Market Insight website.
the histogram and
Jason can be reached at
the sell signal above
[email protected]
the histogram. or via his website
As previously www.marketinsight.com.au
mentioned the buy
VOLUME 2 ISSUE 1 The TRADER’S Journal 9
 TECHNICAL ANALYSIS

Goodman’s Swing Count

System - Part One

“You can figure the markets, but

you can’t figure the human race”
– Charles B. Goodman

Introduction and Overview

A. Historical Perspective
The Principles of Goodman’s Swing Count System were informally set
forth in a series of annotated commodity charts from the late 1940’s
to the early 1970’s. These trading studies simply titled ‘My System’
were the work of Charles B. Goodman and were never published.
I met Charles Goodman at the Denver, Colorado offices of Peavey and
Company (later, Gelderman) in the fall of 1971. It was the occasion
of my maiden voyage in the great sea of commodity trading (later,
futures). In 1971 silver prices were finally forging ahead to the $2.00/
ounce level. A 10-cent limit move in soybeans elicited a full afternoon
of post-mortems by traders and brokers alike.
10 The TRADER’S Journal VOLUME 2 ISSUE 1
The Peavey office, managed by buzzed once for standing reports, trading secrets. To the best of my
the late and great Pete Rednor twice for opinions and three times knowledge he shared this information
employed eight brokers (later, for ‘hot news’, the squawk boxes on his work with no one else in such
account representatives). The and Pete Rednor’s authoritative detail.
broker for both Mr. Goodman and voice booming, ‘Merc!, Merc!”.
Charlie and I spent hundreds
me was the colorful - and patient What a spectacular scene it was!
of hours together analyzing the
- Ken Malo. Brokers, resident No wonder that this author, then a
trade studies from My System.
professional traders - including 21-year old trading Newbie would
We also analyzed hundreds of
Mr. Goodman and the Feldman soon make commodity futures and
other commodity, currency and
brothers, Stu and Reef - and a regular currency trading his life’s work.
securities charts. Charlie was
contingent of retail customers drew
But nothing made a greater happy with My System being
inspiration from a Trans-Lux ticker
impression on me than the work ‘organized’ in his mind. But as a
that wormed its way across a long,
of Charles B. Goodman. He new generation technical analyst,
narrow library table in the back of
instilled first, some very simple I was anxious to see it formalized
the office. Most impressive was a
ideas: “Avoid volatile markets when on paper and eventually in source
large clacker board quote system
at all possible” - “Trade only high code on a computer. (To be honest
covering almost the entire front
percentage short term ‘ducks’ ” this created a small amount of
office wall. This electro-mechanical
- “Sit on your hands, Dad, sit on friction between the two of us
quotation behemoth made loud
your hands”. It didn’t take long for - Charlie was dead set against
clacking sounds (thus its name)
me to adopt the ultra-conservative formalized systems and believed
each time an individual price
‘Belgian Dentist’ style of trading, strongly in the psychological and
flipped over to reveal an updated
that is - “Avoiding losing trades money management elements of
quote. Green and red lights flashed,
is more important than finding trading.) Notwithstanding, by
denoting daily new highs and lows.
winning trades” 1979 I was finally ready and able
Pete, apart from being an excellent
to formally state the principles of
office manager was also a fine The Belgian Dentist approach
My System. Because of its equal
showman using the various stimuli carried with me when I developed
concern for price measurements
to encourage trading activity! my famous AI trading system in
(parameters) and price levels
the 1980’s - Jonathan’s Wave. Even
Almost everyone made frequent interacting together (matrices) I
though it generated 48% annual
reference to Charlie’s huge bar originally renamed My System
returns with a zero expectation
charts posted on 2 ½ by 4-foot ‘ParaMatrix’. My first investment
of a 50% drawdown (according
sheets of graph paper, mounted on management company in the mid-
to Managed Account Reports) it
heavy particle board and displayed 1970’s was ParaMatrix Investment
drove the brokers berserk because
on large easels. No one ever really Management and I acted as both
it could easily go a full month
knew what the numerous right- a registered Investment Advisor
without making a single trade!
hand brackets ( ]) of varying (SEC) and Commodity Trading
lengths scattered throughout Charlie’s trading advice, I am Advisor (CFTC).
each chart meant. But there was certain, allowed me to survive
Contrary to ongoing speculation,
always a great deal of speculation! the financial Baptism of Fire that
only two copies of my original
The present work finally reveals destroys most commodity and
1979 ‘Principles of ParaMatrix’
the meaning of those mysterious currency trading Newbies in a
ever existed. I possess both of them.
trading hieroglyphics. matter of months, if not weeks.
Charlie’s original My System trade
The quiet chatter of the tickertape, Mr. Goodman was to be my one studies were mistakenly destroyed
the load clacking of the quote and only trading mentor. Over the shortly after his death in 1984.
board, the constant ringing of the decade that followed he entrusted What remains of them are the
telephones. The news ticker that to me many, if not most of his 200 or so examples I copied into
VOLUME 2 ISSUE 1 The TRADER’S Journal 11
 Principles of ParaMatrix. intended as an introduction to the well-grounded ideas of GSCS to
CommTools Analytic Suite GSCS populate.
The present work, Goodman’s
software. That software is intended
Swing Count System (GSCS), is The publication of this brief work
as a supplemental tool only for
a reorganized re-issue of Principles and the GSCS software, I hope and
doing Goodman chart analysis.
of ParaMatrix with updated charts pray, would meet with Charlie’s
and a simplified nomenclature GSCS trade opportunities are wishes. His work in extracting an
that I am sure Charlie would as frequent today (perhaps more objective and almost geometrically
have appreciated; “Keep it simple, frequent) than they were 40 or precise (ala Spinoza) trading system
Dad!” he would always advise. I’ve 50 years ago. I believe the system’s out of a simple trading rule (the
also expanded on Charlie’s ideas by foundations have well stood the ‘50% rule’) is most remarkable. It
‘filling in’ some less formed ideas test of time. Patterns today are no has certainly earned him the right
such as his market notation, or different than they were decades ago to be included in the elite group
calculus as he referred to it, and a - nor are the twin human emotions of early scientific traders including
method for charting which I have - Fear and Greed - that create them. Taylor, Elliot, Gann and Pugh.
dubbed Goodman Charting. GSCS is an excellent method for Conforming to the spirit of the
finding support and resistance original My System, I’ve attempted
Two of Charlie’s less well-defined ideas
areas that no other method spots, to keep theoretical discussions
are NOT included in this work: 1)
and for locating potential turning and formulations to a necessary
Dependent/Scaled Interfacing and 2)
points in any market. One of its minimum. Trade studies in Part 3 of
Time-Based (cyclical) measurements.
best suits - it can easily integrate this article must still be considered
There are also a number of intra-
into other trading techniques and the crux of GSCS, even though I
swing formations I have not discussed.
methodologies. am pleased with the formalization
Nor does this include instruction on
Goodman charts or his notational I would never recommend or advise of most relevant principles in Part
calculus. anyone to use a 100% mechanical 2. The trader weary of theoretical
trading system, GSCS or any other! discussions and intrigue will find
My own direction in futures and all the concepts and principles
currencies turned in the 1980’s to Is it really a ‘system’? Depending delineated in the trade study
artificial intelligence (Jonathan’s upon your perspective GSCS is examples. Nevertheless, those who
Wave) and in the 1990’s and between 70% and 90% mechanical. invest time in the theory of GSCS
today, artificial life and cellular The program available from will undoubtedly discover an area
automata (The Trend Machine). CommTools, Inc (www.commtools. for further exploration where many
In spite of, or perhaps because of com) represents the kernel idea of new and fresh ideas are waiting to
these complicated ‘cutting edge’ mechanizing perhaps 80% of the be mined.
computer efforts I continue to view system. I now believe attempting
In Mr. Goodman’s worldly absence,
Goodman’s Swing Count System to completely code Charlie’s work
the responsibility for this work and
(GSCS) in a very positive light. To would be inadvisable.
its contents is solely mine, for better
this day, the first thing I do when I
Mr. Goodman passed away in or for worse.
see any chart is a quick Goodman
1984. It was always his desire to
analysis! B. Theoretical Overview and
share with others - although as is
GSCS is a natural ‘system’ for usually the case with true genius Definitions
pursuing the conservative Belgian - few wanted to listen. These The cornerstone of GSCS is the
Dentist approach to trading, even days we are ever more bombarded old ‘50 Percent Retracement and
without the aid of a computer. This ever more cryptic and computer- Measured Move’ rule. This rule,
article, in fact, could be used to dependent software programs and familiar to most traders is almost
make Goodman analysis without ‘black-boxes’. Perhaps now is the as old as the organized markets
a computer at all! But it is in fact time for the simple yet theoretically themselves. It has been traced to the
12 The TRADER’S Journal VOLUME 2 ISSUE 1
 In 1975 a well-know Chicago
grain floor trader, Eugene Nofri,
published The Congestion Phase
System. This small but power-
packed volume detailed a short
term trading method using simple
but effective ‘congestion phases’.
While not precisely a work on THE
RULE it touched - from a different
angle - some of Charlie’s ideas.
[I mention Nofri’s work also because
Charlie was especially taken by its
simplicity and because it can work
well in conjunction with GCSC.
The idea of melding GCSC with a
congestion phase approach ought
Figure 1 - The 50 Percent Retracement and Measured Move Rule to produce a method of finding
those high percentage ‘ducks’ that
the Belgian Dentist so much loves!
Charlie also felt that Hadady’s
work on Contrary Opinion was
a natural ‘fit’ especially since the
GCSC support and resistance
points seldom lie where anyone
else thinks they should.]
Still, in the end, it was left for
Charles B. Goodman, the great
grain trader from Eads, Colorado to
extract all the logical consequences
from THE RULE and transform it
into a robust, almost geometrically
precise system.
The logic of THE RULE is quite
Figure 2 - A Congestion Phase simple. At a 50% retracement,
both buyers and sellers of the
times when insiders manipulated describe THE RULE. Nevertheless, previous trend (Up or Down) are
railroad stocks in the 19th Century. must reading for anyone interested ceteris paribus ‘in balance’. Half of
in this area of market methodology. each holds profits and half of each
The first systematic description of
Edward L. Dobson wrote The holds losses.
THE RULE was given in Burton
Pugh’s The Great Wheat Secret. This Trading Rule That Can Make You The equilibrium is a tenuous
book was originally published in Rich in 1978. This is a good work one, indeed. The distribution of
1933. In 1973, Charles L. Lindsay with some nice examples. But none buyers and sellers over the initial
published Trident. This book of these, in my humble opinion, price trend or swing is obviously
did much - some say too much! even scratch the surface, relative to not perfectly even: Some buyers
- to quantify and mathematically Goodman’s work. hold more contracts than other
VOLUME 2 ISSUE 1 The TRADER’S Journal 13
 markets and the currency markets
are very close to a zero-sum game’.
It is only commissions, pips and
slippage that keep them from
being zero-sum. At the 50% point
it doesn’t take much to shift the
balance of power for that particular
swing matrix.
THE RULE also states the final
(3rd) swing of the move - back in
the direction of the initial swing
- will equal the value of the initial
swing. The logic of this idea, called
the ‘measured move’ is seen in the
following diagram.
As we have alluded to examples of
Figure 4 - The Measured Move and ‘Unwinding’
THE RULE occur at ALL price
levels or matrices and many are
being ‘worked’ simultaneously in
any given ongoing market. This
is a critical point. In modern
terminology it would be said that
price movements are ‘recursive’.
Simply stated this means that
without labeling you could not
really tell the difference between
a 10-minute chart and a daily or
weekly chart - they all exhibit the
same behavior and operate under
the same principles of Parameter
and Matrix.

Michael Duane Archer has been an active

commodity futures and FOREX trader for
over thirty years. Mike has also worked
Figure 3 - A Market Tug of War
in various registered advisory capacities,
notably as a CTA (Commodity Trading
buyers. They have also different takes all of this into account - Advisor) and as an Investment Advisor.
propensities for taking profits or especially they buyers and sellers He is currently CEO of CommTools, Inc.,
losses. Nor does it account for the at other price swing levels, called a corporation focusing on nonlinear
buyers and sellers who have entered matrices. solutions to trend forecasting, with a
the market before the initial swing special emphasis on cellular automata
Nevertheless, the 50% retracement models.
or during the reaction swing. Not
point IS often a powerful and
all of the buyers and sellers from He can be reached at [email protected]
very real point of equilibrium and
the original swing may be in the or via his website www.fxpraxis.com
certainly a ‘known and defined
market any longer.
hot spot’ of which one should be
Remarkably, GCSC eventually aware. Remember both the futures
14 The TRADER’S Journal VOLUME 2 ISSUE 1
 TECHNICAL ANALYSIS

Forecasting S&P500 with

Technical Analysis
Will Slatyer, author and former commodities merchant and futures
broker, explains a unique way of analysing the S&P 500 Index.

“I expect to continue to learn something every

year as long as I live. Observations and keen
comparisons of past market movements will reveal
what commodities are going to do in the future,
because the future is but a repetition of the past.”
– W.D. Gann 1942

Market Analysis be sure that all the questions have number of otherwise independent
A reasonably competent investor been answered, or even that all the and partially separate individuals
must have some resources to right questions have been asked. can form a crowd, provided that
analyse the relevant stock index The technician believes that all participants have a common
representing the overall market in factors, known and unknown, cause, such as gaining wealth from
which they invest. Most investors are come together in the market place the stock-market. The technical
fundamental analysts who use their and that the action of the market analyst examines price movements
basic knowledge of the financial itself is the best indication of its that illustrate the behaviour of the
factors of stocks to estimate future true course. crowd, and can use techniques to
price movement. They should also forecast likely crowd behaviour.
The direction of financial markets
have some basic understanding of
are determined by thousands of The basic premise of technical
technical analysis.
people world wide - by dealers and analysis is that when the crowd
The technical analyst contends computer cowboys, conservative or the cumulative number of
that even if a fundamentalist can bankers and aggressive fund buyers, acting on their individual
reason the correct answers to all the managers, as well as individual assessments of the market, exceed
questions involved in the stock- investors, and corporate treasurers. or are more aggressive than the
market equation, he/she cannot Together they make up a crowd. Any total number of sellers, the price
16 The TRADER’S Journal VOLUME 2 ISSUE 1
will rise. Greed and aspirations Accordingly stocks or an index the MACD of Rate of Change
of more astute buyers will show fund can be held while the market (ROC) will confirm or deny that
in the price movement, possibly trends in a favourable direction, the markets are in sync. This is the
before the basis of their action but risk management must be basis of the MARS trading system
becomes public. The crowd gains triggered when the major trends but lack of space does not allow a
confidence. Alternatively when the change. Risk management can full explanation here.
sum of sellers, acting on their views indicate either quitting investments
and fears, overcomes the number or hedging with options or futures. In practical terms a BUY signal
of buyers, prices will retreat. Investment trading action can be will be on a price breakout with
recommended on major changes indicators in sync. and MARS will
The more efficient the market, recommend quitting of stocks or
which become apparent in monthly
the more all known factors will cover of risk once a stop-profit/
time-frames, as indicated by trend-
be reflected in the market price loss signals a change of direction.
following technical analysis.
movement. The technician attempts The MARS formula indicates that
to use what has happened, in the Most investors like to feel cover be taken within the month at
past and what is happening now in comfortable if the positions can a forecast stop level. A competent
the market, as guides to what will be held for long periods. Forecasts technical analyst should be able to
happen in the future. can provide some comfort so it is reproduce the main features of the
worthwhile using technical analysis MARS System on computerised
To do this he/she follows the basic
to provide a credible forecast. I use software. Action on these signals
premises:-
techniques to provide analysis of is illustrated in the accompanying
– the market price movements trends, cycles and Elliot Wave chart S&P500 Table 1.
follow trends most of the time patterns.
In the 51 year period 1954-2005
– the market price movements will Analysis of Trends the MARS system would have
react or rally as prices enter into recommended action in the market
There are a number of methods
the price zones which previously 26 times for a gain of 1832.70
used to display price movements.
saw active trading points, if one could also have
In practice I use computerised
– the market price movements Candlestick Charts, with moving shorted the S&P500. In more
form recognizable patterns or average overlays together with early conventional terms one would
chart formations following and confirming indicators. have bought on the Bull signal and
which, the next movements will quit on the Bull/Neutral signal,
I used to be a proponent of moving 18 times in 51 years for an overall
take a predictable path
averages. In practice simple moving
return of 1397.75 points. This
Recognition of trends, support and average crossover signals in monthly
compares favourably with the “Buy
resistance zones and patterns is time frames can prove as slow as
and Hold” strategy which would
made possible by the use of charts following subjective cues of market
have endured the uncomfortable
which are a visual record of price fundamentals.
Bear markets while returning a
movements. Modern traders have
I use the momentum indicator maximum 1530.15 points. Average
access to computerised on-line
MACD on Price, with fast percentage gain for each surge was
charting patterns and employ both
parameters as the key indicator 30%, greatly assisted by the 125%
fundamental and technical analysis
to signal changes of trend. Once rise from 1995 to 1998. Research
to work the markets.
the MACD signal is in place, of the Dow Jones Industrial
I follow the simple concept that the trend is confirmed by a price Average since 1929 suggests that
markets tend to trend most of breakout based on pivot point the bull market 1990/99 was an
the time and that major trends parameters. Any strategist needs unusual occurrence, assisted by an
will persist until new knowledge confirmation of intelligence signals unfettered US dollar money supply.
triggers a major change of direction. so the supporting indicator of Readers will note from the table
VOLUME 2 ISSUE 1 The TRADER’S Journal 17
 that the MARS System suggested to the fickle nature of crowds. Long troughs and peaks produce cycles
quitting the S&P500 in April 2005, cyclical phases occur when the that do not necessarily occur in
and has not yet recommended re- crowd is comfortable holding stocks a standard cyclical pattern. My
entry. and adding to their portfolios. crowd explanation and practical
Sudden events can spook the experience have shown that a
The MARS trend following system,
crowd often commencing a bear pattern of an average cycle can be
with technical improvements, has
phase that tends to be short lived determined with the occurrence
provided consistent profitable
because the stock-broking industry of quarter, half, single and double
risk management to a number of
has convinced investors that the cycles. There is a method of arriving
companies and individuals over
market basically continues to rise. at the average length of a cycle
decades. I have found that investors
At certain times, possibly only once from trough to peak, and peak to
and risk managers had more
a century, the stock market defies trough.
confidence in the recommended
the stock broking industry so that
signals if they were accompanied Table 2 tabulates MACD cycles that
a bear phase is prolonged. Many
with some forecasts. Forecasting assist my cyclical forecasting. The
conservative investors in the crowd
is an art not the science of exact cycle estimates are very subjective
then question the stock-broking
signals, but a relatively good track and no doubt some mathematical
logic and are reluctant to fully
record has been attained by using genius can program a better way of
invest. Subsequent bull phases can
cyclical timing. estimation, but my rough method
be shortened.
allows reasonable time forecasting.
Analysis of Cycles Cyclical patterns were explained
Actions of the investing crowd are in my book “The Speculative At the London IFTA Conference
basically cyclical. Unfortunately for Strategist” (Will Slatyer; McGraw- in 2002 I suggested that a trough
analysts the cycles are irregular due Hill; New York; 1996). MACD would occur in October 2002
18 The TRADER’S Journal VOLUME 2 ISSUE 1
(actual signal September 2002) but the estimated speed of the S&P500 2006.
that the subsequent rise might not which, in all the market’s history,
In the 1930s an American Ralf
herald a major new Bull market. In only rose above 10 points/month
Nelson Elliot formulated the Wave
November 2005 the Bull phase had or 5% in the 1987 crash. By mid
Theory which bears his name, and
lasted 38 months, which exceeded 1998, the speed was above 50
which can be used to forecast the
the average Bull cycle phase of 24 points/month which indicated
likely course of trend movement.
months (due September 2004) and high risk for a high speed reversal
The simple theory that bull markets
is heading for a double cycle phase and a sharp correction occurred in form five wave patterns followed
of 48 months (due September August 1998. After the correction, by a bear correction of three waves,
2006). It should be born in mind the speed of the rise had slowed so has been made complicated by a
that previous long runs that were that the overall rise from Nov’1990 number of corollaries to explain
registered as a double cycle did not to Dec’1999 peak was only 11.5 or the minor exceptions to basic
reach the 48 month target Oct’62 0.7%. My 1999 lectures forecast theory. Further studies on Elliot’s
- Feb’66 (40months) July’84 - another major turning point which theories are essential for the serious
Aug’87 (37 months). Accordingly in fact proved less serious in the analyst, but I believe that the
a peak end 2005-early 2006 S&P500 than occurred in the investor can make use of the Wave
would not surprise. All that such
NASDAQ (as the Tech. Crash). Theory by simply recognizing the
a forecast means is that investors
The speed of the current Bull phase current wave on a long term chart.
should be cautious in believing
in November 2005 was 12.8pts/ The circled numbers on the Chart
the born-again optimists that the
mo or 1% per month after the 1 represent an estimation of Elliot
current Bull phase is a return to the
correction March-August 2004. Wave Cycle phases which can be
standard Bull market.
This is compatible with a possible used for forecasting the likely target
On the far right of the Table 2 is peak December 2005 - February in time and price.
VOLUME 2 ISSUE 1 The TRADER’S Journal 19
 Elliot Wave theory can be explained reasonable forecast target for wave becomes a target point. There
to some extent by crowd psychology two is 0.382 or 0.5 times wave might be some minor corrective
rationale. one. action around the target but once
the point has been exceeded, the
The first impulse wave is born If the correction continues past
crowd gathers confidence that the
following a long trend move in the half way point of wave one,
major trend is indeed now up.
the other direction. The crowd the major low point of wave one
More long positions are added.
is slow to recognize that a trend becomes a target for those now
Buyers become more aggressive
is reversing, and often simply acts committed to a falling market.
than sellers, and the trend gains
uncomfortable that momentum is Many in the crowd, having lost
strength. The crowd should be
changing. Following a downtrend, money in the last move, will want
able to sustain a rise 1.618 times
some astute traders notice the to add to short positions once prices
the length of wave one. In most
slowing momentum and commence move below the low. However this
stock and financial futures markets,
to take profits. This often leads to low point might be particularly
wave three is the dominant wave
the triggering of stop loss signals attractive to risk managers and
of the trend. In some commodity
of other investors, which in turn market professionals who believe
markets wave five is the longest.
causes the crowd to start to shift its that it was a major trend turning
position. Some in the crowd use point. Buyers start to slow the Wave three often dies of exhaustion,
the stop losses as signals to reverse down move and then it is reversed and profit-taking and minor loss-
position, and in general the crowd above the previous low at a level taking can cause the turn. If the
starts to relate to the signs of a rising maybe around 0.8 times wave one. crowd is particularly smug, the
market. This is the psychology of This causes the crowd to scramble corrective wave four might only be
the first impulse wave. for cover. Stop losses, reverses short-lived, because waiting in the
and fresh buying can cause an wings have been those looking for a
Not all the crowd is convinced explosion upwards that shows up correction to add to long positions.
that the major movement has on the charts as a “double bottom” These buyers calm the nerves of the
reversed. There were investors or “W” shape. Corrective wave crowd, and even encourage further
looking to sell who were waiting two has finished and impulse wave “me too” buying to stimulate the
for a rally such as this to enter the three has started. last impulse wave five. Wave five
market. These investors often risk can start confidently but fade fast
managers, sell the market on the The high point of wave two then
once it has exceeded the wave three
first sign of weakness in wave one.
The market weakens further and
triggers sell signals of short term
speculators. The crowd has not yet
gained enough confidence to hold
long positions in the face of what
looks like professional selling for
the resumption of the downtrend.
The crowd quits longs, and some
even reverse positions. This is my
explanation of the thinking behind
corrective wave two.
A fundamental factor might enter
the market to cut wave two short.
It might have been this factor that
bullish insiders knew would cause
the major trend to change. A
20 The TRADER’S Journal VOLUME 2 ISSUE 1
major high. In many ways five is the longest time frame of which I recommended quitting stocks in
the easiest wave to pick because the can gather data and estimate my April 2005 and have not received
length of previous waves can give waves as per Table 3 sufficient intelligence to confidently
good targets to those who have recommend re-entry into the
I have made the major assumption
studied Elliot. Even knowing that market. Those investors who are still
that the stock market peak in
the market is in its last stages of a in the market are currently enjoying
March 2000 completed the a surge forecast by less conservative
trend can allow for caution, if one
twentieth century unlimited bull analysts. I simply suggest that all
is not simply part of the amorphous
market. This means that a major investors be cautious in case my
crowd.
correction could be seen to as low less than optimistic forecast proves
Waves four and five often follow as S&P500 568 by the end of the correct. Simple technical analysis
the same nervous sentiment as present decade. This correction such as the above outlined methods
waves one and two, except they are will take three waves of which can make assist investors to make
topping formations in a bull market. one (Wave A) has been completed correct decisions.
If wave three has been consistent, in October 2002 at 768.65.
the crowd’s confidence has grown, Currently the market is enjoying Will Slatyer has been analysing
as has the size of the crowd, because a recovery wave (Wave B) which, commodities and financial markets since
late starters have joined. If the size if my simple estimate is correct 1965, as a commodities merchant, futures
of the crowd of buyers becomes too will finish end 2005-early 2006 broker, merchant banker and market risk
large, the number of sellers tends at around the 1300 level. I stress consultant. He is founding member of the
to become scarce. The scarcity of that this is a forecast at the time of Australian Technical Analysts Assn. and
sellers can cause a sharp move at the writing and could well have been Aust. Professional Technical Analysts Assn.
and has lectured throughout Australia,
top of wave three known as a “blow adjusted by the time this article is
England, USA, Japan, New Zealand,
out” top. Sellers suddenly abound read. The wise analyst continually
Indonesia and Malaysia. He is the author
and the market reverses sharply to reviews market intelligence as it of five books, the most recent of which is
commence corrective wave four. comes to hand and adjusts forecasts “The Speculative Strategist” published by
accordingly. McGraw-Hill, New York in 1996. Mr. Slatyer
Elliot Waves of near term charts
now lives in Sydney, Australia where he
can be fractals of Waves identified My simple techniques simply consults, researches climatic and cultural
in longer term time-frames. The suggest that in November 2005, cycles, and trading systems.
actions in the near term can help there were better opportunities
identify the surges and reactions in elsewhere in the world than to
the longer term. I commence with invest in US S&P500 stocks. I
VOLUME 2 ISSUE 1 The TRADER’S Journal 21
 TECHNICAL ANALYSIS

Random Not Random

Bill Wormald,
author, explores the
geometric structure of
World markets.
In my last article I asked Trader’s charts world wide, that computers paddock. If you think about it, the
Journal readers a question that and the benefits they offer in field is a historical map temporarily
has been debated for decades terms of trading automation displaying clues that can help us
by fundamental and technical have encroached on the financial to recreate its recent past. In this
analysts and a wide range of market industry to a greater extent than case there is no time to hesitate,
participants in between. Are many traders appear to realise. the rains will eventually wash away
financial markets truly random, or these tracks along with the evidence
are they dominated by the major With an almost microscopic analysis of our tractor and like a fading
players to the point where very of a typical liquid chart we can see photograph the picture in the soil
little of the trading activity that clear evidence of triangular shaped will be gone.
occurs on a day to day basis can trading models influencing the ebb
and flow of apparently random Of course this is not so with
be considered to be random? The
price bars every day. Again this is financial data!
main thrust of the argument is
derived from the question: To what not to suggest that a sinister tone There are probably thousands of
extent does computer intervention exists deep within the structure of dedicated data collectors worldwide
influence a typical financial chart, financial markets, a useful analogy who will happily supply accurate
from the tiniest junior mining might be that a walk across a sandy (and not so accurate) historical
company to major banks and beach is going to leave visible financial data for a reasonable
resource companies? Well it isn’t footprints that can be tracked by price. From pork bellies and steel
possible to offer a definitive answer anyone with sufficient motivation. companies to gold, diamonds, oil
or any concrete evidence other When a farmer ploughs a field it is and wool, the seemingly neurotic
than the often obvious recurring zigzags of past price activity of these
reasonable to expect to see tracks in
geometric shapes and patterns instruments have been faithfully
the soil, it is undeniable that they
found in almost any financial chart immortalised in this data and we
will exist, we don’t need to look,
in existence. can dream away our lives searching
it is obvious. We could reverse
for exciting, tradeable shapes and
Shares, commodities, currencies, engineer the activities of the farmer
patterns on our computer screens,
bonds and their derivatives all by carefully analysing the tracks in
but what then has this to do with
appear to display these constantly the soil and quite readily deduce
our farmer?
recurring lines and patterns some information about the size of
in their charts and almost any the tractor and its trailing plough. If we can easily find evidence of
technical analyst will tell you so. It We could see in which direction past activity in the tracks made by a
is my belief, based on an extreme the tractor had travelled and how farmer and his tractor in a roughly
analysis of literally thousands of it had navigated the corners of the ploughed pasture, can we also find
22 The TRADER’S Journal VOLUME 2 ISSUE 1
such evidence on a financial chart programming whether learned or Speculatively this could possibly
in the high tech computer driven genetic, anything that appears to be the result of common trader
world of high finance? be counter intuitive is likely to be methods or software tools or
discarded. perhaps it could also be at least partly
The answer is of course yes and
explained by a major programmed
furthermore some of the information It would of course take the rest of my
exposure to derivatives trading,
found is not only useful, it is very life to analyse every chart in existence
where an excess in one market
exciting, almost heart stopping at but the information suggested here
could be compensated for in the
times and inspires dreams of fast has been painstakingly acquired
others by computer intervention.
cars and tropical islands. The most by the author’s analysis of literally
significant difference between our thousands of randomly chosen Locating Trends and Triangles
farmer and high tech finance is (mainly) share and index charts
These articles are for anyone who
that the farmer will approximate from New York to Europe and
can recognise a triangle shape and
his route and it may or may not Sydney to Japan. You have to be
I suspect that is almost everyone.
be exactly the same route used last very sad and boring to go into
A few years ago bored and looking
time. this much detailed research but
for trouble, I “sampled” (a term
as anyone who had to know the
Financial markets also appear to borrowed from the audio industry),
answer will tell you, “I had to know
conform to a route in a way but it the outer shape of a typical trend on
the answer!”
is perhaps more accurate to call it my computer screen with the aid
a grid or maybe an algorithm. The Are we talking about the Holy of almost clear tracing paper and a
sharp pencil. I simply drew straight
computer is more accurate by far, Grail of financial markets?
even though it can still deviate on edge lines across the highs and lows
Probably not, but I think the of a trend on my computer monitor
its journey to a certain extent, the reader will agree it is certainly a
overall route appears to be enclosed and when these lines were extended
large step in the right direction and they formed a simple triangle shape
by strictly pre defined boundaries. the closest thing yet that I have
You can slide erratically down a ski on the tracing paper simply because
found that resembles a market map the lines were narrowing.
run in a bob sled but the icy walls of any description, a participant is
will prevent you from going off certainly disadvantaged if unaware That is not too surprising as
course. that such a map exists. Could this triangles have been analysed by
be the secret to the Stock Market? technical analysts for decades as
But! If indeed these invisible but
Is there a secret at all? just one of many useful trading
predictable trend boundaries
patterns.
actually do exist and furthermore Readers will of course have to
if we have the appropriate skills to draw their own conclusions from What was very surprising however
track them and their influence on these words but the information was that I found I could use my
world financial charts, why then provided here will almost certainly tracing paper triangle as a template,
are we not all billionaires? add a major new dimension and to enclose the majority of other
level of understanding to any trends on the same chart directly
At least a part of the reason lies
current analysis method. on my computer monitor and they
in the fact that very few people
seemed to fit almost perfectly. (I
seem to be aware of this fixed and If the market does as suggested
should emphasise that in reality
recurring geometric framework follow a regular and recurring
from this point it took me almost
that is clearly evident on thousands pathway or programmed grid /
five years to decide on the perfect
of charts and indices world wide algorithm even though it appears
shape) !
and those that are aren’t saying to be entirely random, then those
much. Another reason may be that people who are unaware of this As you might expect I began
individuals prefer to function in will always be at a significant enclosing trends on many different
accordance with their own personal disadvantage. share charts with a similar time
VOLUME 2 ISSUE 1 The TRADER’S Journal 23
 scale, to see if I could also make contact with one of the descending to form what has become known
them fit and to my amazement they resistance lines. to Trends and Tripwires followers
all seemed to fit almost perfectly as a “Wormald Triangle” (for
If this is indeed so and the new book
also. The beauty of a triangle shape unbelievably egotistical reasons).
Trends and Tripwires 2 presents an
is that it can be slid up or down This triangle represents the outer
argument in favour of this very
on the computer screen or printed boundaries (the pizza shape) of
scenario, then each trend should the algorithm and more recently
chart and enclose tiny short term
be enclosed by a similar shaped it has evolved further to become
trends as well as much longer term
triangle which represents the the “Wormald Grid” (the pizza
and wider examples. I soon came
outer boundaries of this proposed with the skinny slices marked but
to the conclusion that every trend
algorithm. Furthermore each still attached). The thrust of this
is a triangle and not just any old
trend will also display a cascade of article will be concerned with the
triangle but the same one, over and
price bars separated by fixed ratios triangular outer boundaries as this
over again with the only difference
and these slices should align with is much easier to grasp and apply.
being in the size of the shape.
the support and resistance lines
Immediately I suspected some
kind of computer interference and
represented by the algorithm. If Almost Every Trend is a
the word algorithm sounds too Triangle
with a computing background I set
complicated then think of it as the
about trying to reverse engineer the The following charts have all
last slice of a particularly popular
effects of this possible “program” or been enclosed in the “Wormald
pizza that had to be divided between
algorithm with an intense analysis Triangle” the outer boundaries of
four people and each receives a
of world chart geometry without our shape, to illustrate how we can
skinny but not quite equal slice.
really knowing if it actually envelope each and every segment
Before it was divided, the last slice
existed. of a trend in this standard way.
of pizza represents the outer shape
Notice that because the shape is
It is perfectly reasonable to or boundaries of the algorithm
fixed and recurring, the upper line
ask how geometry of all things and the skinny slices represent the
of the triangle is always relative
could possibly be of any value in layers or the ratios within. If we
to the lower line by around 10
examining a supposedly random now extend this analogy to imagine
degrees. It is not even necessary to
share chart. Just for arguments’ a pizza shaped paddock enclosing identify the charts for this exercise
sake let us employ a little lateral some pretty confused sheep all as I could have featured almost any
thinking and suppose that every running around and receiving liquid financial chart world wide.
trend is constructed from a electric shocks from the fences then The advantage of this approach is
similarly spaced grid enclosed in an I hope the scenario becomes a little that a break of the outer boundaries
overall triangle shape and that this clearer. warns of an imminent change in
has occurred not by sinister means short term trend direction.
Once I had discovered initially
but simply because the dominant
only the outer boundaries of this
players use such an algorithm in Bill Wormald is the author of “Trends and
remarkable triangular shape and
their automated trading software. Tripwires” (Wright Books 2001) and the
felt that it was quite reliable and
If this is so then this standard forthcoming “Random Not Random” and
trustworthy, I printed this onto a
shape will soon impose itself by contributes regularly to quality technical
standard transparency and within analysis publications. A Western Australia
brute force on financial share data
a very short time it was found to based educator and speaker on technical
at every level originating with the
be indispensable in my work. I analysis, he is also the web master for
intraday chart. It appears to do
have now reached the point where www.trendsandtripwires.com and can be
this by brick walling price data
it is not possible to analyse a chart reached at [email protected]
automatically, supporting prices
properly without one.
by buying when in contact with
one of its rising support lines and The shape has been improved and
resisting prices by selling when in tweaked endlessly over the years
24 The TRADER’S Journal VOLUME 2 ISSUE 1
 TECHNICAL ANALYSIS

Integrated Pitchfork
Analysis

We firmly believe that a trader’s consistency must

pass through a full comprehension of the context of
Dr Mircea Dologa, MD, the market. No action can be taken before we know
exactly: where are we now, what phase are we in, and
commodity trading advisor, especially, where are we going.
explains in practical terms We couldn’t agree more with Charles H. Dow, when
he said more than 100 years ago “To know values is
Integrated Pitchfork Analysis. to comprehend the meaning of the movements of the
market”.
William P. Hamilton, the illuminator
of “The Stock Market Barometer”, and
the Charles H. Dow’s faithful successor
as editor of “The Wall Street Journal”,
enjoyed quoting one of America’s
greatest financiers, “If I had 50% of all
the knowledge that is reflected in the
movements of stocks (securities), I am
confident that I would be far better
equipped than any other man on Wall
Street”.
In order to have a global view of the
Figure 1 – The pitchfork is a very ergonomic and prolific tool, showing the patterns market, and then act locally, we tried to
of directional movements in direct synergy with slant or horizontal trendlines create a synergy between the features of
(here shown only daily floor pivots), thus creating, through their intersections, the pitchfork and “other tools”.
the energy clusters.
26 The TRADER’S Journal VOLUME 2 ISSUE 1
1. Andrews’ Pitchfork the middle of the P01-P02 swing. – wave 4 never overlaps the wave
In the beginning of 1960s, Dr The ensuing upper (U-MLH) and 1, in stock market. However, it’s
Alan H. Andrews created a 60 lower (L-MLH) median lines are allowed a minor spike overlap
page course, based on the work of constructed by drawing parallels to of approximately 17%, when
Roger W. Babson, which mainly median line, from the P01 and P02 trading commodities.
followed the Action and Reaction pivots. The further parallel lines
– wave 2 can never retrace more
Newtonian Principle. to U-MLH and L-MLH, are the
than 100% of wave 1.
warning lines, especially needed in
If we had to synthesize Dr Alan H. high volatile markets. The trend – alternation principle is the
Andrews’ course, in just few lines, lines drawn from P0 to P01, or from guardian of the sanctuary,
we could say: P0 to P02, are named the trigger voiding any wave structure
trend lines and are predominant in which doesn’t comply with
– the median line attracts in
the movement of the market price the established rules mainly
a “magnet” like manner the
outside of the pitchfork main area. regarding the architecture of
market price.
Their breakout engenders low risk corrective waves, and that of the
– the nearing of the price towards high probability trades. impulsive waves.
the median lines, creates
at a time, one of the three 2. Elliot Wave Principle – in order to control the lengths of
movements: reversal, violent It’s not really known if Ralph Nelson the extensions and retracements
piercing or narrow range. The Elliott, was familiar with Dow’s of all these impulsive and
latter, will prepare the next price Theory, which explains the three corrective waves, the Fibonacci
outburst. market movements: the primary ratios are the privileged tools.
trend (tide), secondary reactions
It’s not author’s intention to Once again, our intention is not to
(waves) and minor fluctuations
exhaust here, Dr Alan H. Andrews’ exhaust Elliott’s work in a few lines.
(ripples). It can be clearly observed
course. We’ll try to expose first, After this brief synopsis of his waves’
that Elliott Wave Principle has
the morphology of the pitchfork, composition and function, we’ll go
some roots in Dow’s Theory:
and then later in the article, its through further explanations, while
indispensable dynamics. – market moves in waves are we’ll present the specific market
organized in impulsive and movements.
The geometrical structure of the
corrective patterns.
pitchfork is based on three pivots 3. Market’s Context
P0, P01 and P02 (ensuing highs or – the five waves of the impulsive As we have already emphasized,
lows), chosen in such a way that pattern are in the direction of
the context comprehension of the
the constructed formation, ideally the market, where the waves
current market is one of the vital
describes the market ( Figure 1). Be 1, 3, 5 are impulsive, and the
points in trading life. It will provide
aware that the intersections of the waves 2 and 4, correct them.
a basis for market analysis defining
median lines and other important
– the three waves, named A, B and the exact location at a given
trend lines, are creating the energy
C, of the corrective pattern are moment and the market outlook.
clusters, which are predominant
in the opposite direction of the Moreover, it builds the frame-work
in projecting the levels where
market. The wave B, corrects the of a disciplined thinking. The dual
the market price is susceptible to
wave A. The wave C, ensues the facets of the context, will be revealed
reverse or, on the contrary, to break
direction of the wave A move. by doing the pre-open preparation
through, with huge bars, at the
which begins at the end of day’s
high speed of a freight train. Elliott Wave Principle is governed
market, and it will be concluded
by strict rules and guides:
Once we found the optimal three by a last check-up, within the 60
pivots, we draw the median line – wave 3, can never be the shortest minutes of the pre-open. Before
(ML) from the anchor (P0) through wave of the impulsive pattern. studying the multiple time frames
VOLUME 2 ISSUE 1 The TRADER’S Journal 27
 charts (first facet), like weekly, teacher said: “…market movement The synergy between the pitchfork
daily and the specific operational is a combination of trend, which is and “other tools” defines the
time frame (60-min, 30-min, 15- a function of fundamental values Integrated Pitchfork Analysis,
min or 5-min, for index trading), and considerations and the gut- giving a real edge to the trader. It
the trader will concentrate on raw human emotions. Simply put, shows a detailed description of how
inter-market analysis (second facet fundamentals are the father-of-trends the market behaves and where it is
of the context). The ensuing day’s and emotions the mother-of-daily going. From the multitude of the
development will really not only fluctuations” “other tools” used, we’ll show on this
depend on the fundamentals of the chart: Elliot waves and Fibonacci
“just closed” market, but also on the The study of the presented weekly, ratios (primary and minor waves
“contiguous” markets. For instance, daily and 60-min charts witnesses projections & retracements),
if you are trading European indexes a trending bias. The pre-close of multiple time frames floor pivots
like the DAX, FTSE or CAC40, the 5-min chart, reveals an up- (daily, weekly and monthly), energy
the “contiguous” markets conditions sloping pitchfork (Figure 2) with clusters and Stochastics.
are: how the S&P 500 closed before a wave three in progress. We can
Observing the pre-close pitchfork
Nikkei 225 opened; what was say that the marked is in an overall in Figure 2, the following
Nikkei’s 225 afternoon behaviour up-sloping trend and the price is corroborating factors instigate the
and how it closed; is Crude Oil continuing the impulsive pattern, trader for an imminent long entry,
price cruising along or attaining toward the termination of its last after the opening:
extremes (once again); is the US wave (W5).
– a very steep up-sloping median
dollar still battling the Euro; what
are the BUND’s (German Bonds) 4. Preparing for the Morning line.
fluctuations. Trade – a triple mirror bar pattern at the
Once we got out of the way, the last reversal zone (4082 level).
Like they say … “always trade where
dual facets of the context, let’s
the sun rises … while the others – a zoom and re-test of the warning
concentrate on detecting our
sleep”. line n° 3 (4084.5 level).
morning low risk high probability
Larry Williams, a great trader and trades. – the huge up-sloping bar, having

Figure 2 – The Integrated Pitchfork Analysis frame-work.

28 The TRADER’S Journal VOLUME 2 ISSUE 1

 Figure 3 – The “three pawns technique” is the basement Figure 4 – The market shoots straight up, right through
of consistent trading. It consists of a progressive order of the opening. In only fifteen minutes (out of 11 hours daily
entering the market, as soon as it is propitious, with trading time), it already travelled more than 20% of the
three types of orders: trade entry (long here), stop loss daily trading range.
order and profit target order.
the high speed of a freight train, saved energy to reach the upper phenomenon” – an opening below
closing in its upper quarter. warning lines (WL-01 or WL- the prior day’s close, followed by a
02). If it fails to attain these market counter move filling of the
– a “holy grail” pullback leaning
levels, it will be a great proof of just opened gap.
on our weighted moving
market up-sloping failure, and
average. For aggressive traders, there is a
an excellent opportunity for a
possible long trade opportunity
– an overbought Stochastics, just low risk high probability short
of entering at 4088.5 level (one
after the inception of wave 3. trade.
tick above previous day’s close) with
– the traditional wave three 1.618 5. Execution of the Morning a stop loss at 4087 level (opening
of W1 limit, wasn’t yet reached. Trade bar’s low). We have rather chosen a
The pre-close high at 4090, more conservative trade.
The ideal pre-arranged entry for
represents only a 1.500 Fib
the morning trade (Figure 3) is at The first target of two trading
ratio. Judging after the steep
4090.5 level, one tick above the units (out of three), is chosen at the
slope of the median line, and
high of the day’s huge last bar (close) multi-level cluster around 4100
the steamed momentum, we can
level with a stop loss two ticks level, due to: floor pivot cluster
expect an up-sloping morning
under the day’s close (4087 level). (daily R1, weekly and monthly),
market reaching at least 2.618 of
We will try to play with market’s W3 extension of 2.618*W1 and
W1 at 4103 level while topping
money, as soon as possible. We will because 4100 level is a whole, easily
the upper median line, or even
enter a break-even stop with an memorized value. Once the exit
the upper warning lines.
ensuing cancellation of the already level is defined, the trader will enter
We used the primary W1, the existing stop loss. Its value is one immediately a pre-arranged order.
minor wave w1 and w5 of W3 Average True Range bar - ATR(21) There is no second target. We’ll
and the prior trend correction – having a size of 4-6 points, on this let the market come to us and be
Fibonacci ratios, to better pinpoint particular time frame. This value trailed out, for the remaining one
the termination level of wave 3. will only guide us, in the process of trading unit.
hiding behind an ongoing bar’s low.
– a strict pitchfork observance will As we have expected, the pre-open
Its location will probably be around
imply that the price projection steamed momentum catapulted
4095 level (4090.5 +5 points).
of the ongoing steep slope the price, in only 15 minutes, right
market move, will have enough The market opens through an “Oops through the target n° 1. We were
VOLUME 2 ISSUE 1 The TRADER’S Journal 29
 Figure 5 – The high steamed market is continuing its Figure 6 – The role of Integrated Pitchfork Analysis is clearly stated
move behind the W3 extension of 2.618 of W1. here; the market’s high steamed momentum was suddenly
stopped at the energy cluster formed by: pitchfork’s warning line
n° 2 and the multi-levels Elliott waves extensions.

exited with the two trading units at Let’s talk a moment about money consistently lose money. This can
the 4100 level. The remaining one and risk management. We have only be accomplished through
unit is waiting to be trailed out. expressly chosen a very tight stop the use of risk control and money
loss of 3.5 points (75 euros), management. Most of the novices
This high momentum market can hardly understand that the
instead of the usual six to eight
(Figure 6), was halted at the 4108.50 points, because of the omnipresent business of trading is the only
level, which coincides with a multi- risk of the high steamed market business where the losses are
levels cluster: the W3 extension of momentum. The reward will planned and it is quite normal to
3.00 of W1, the correction of the come to 9.5 points per trading lose money, as long as you have
prior trend of a 1.382 Fib ratio and unit, against a risk of 3.5 points, and you master the most adequate
an elongated w5 minor wave of W3 giving a reward / risk (R/R) ratio tool(s) to your kind of market.
( 9.00 of w5). We can clearly see of 2.7. One should never trade this For today’s trade the tool was the
here that the use of the pitchfork is volatile futures market using an Integrated Pitchfork Analysis.
predominant in establishing energy R/R ratio below 2, because of the
clusters. The advance of wave three omnipresent risk due to the high Dr Mircea Dologa is a commodity trading
stopped exactly at the warning line advisor who founded a new teaching
leverage. Why should you take a
n°2 concept, for young and experienced traders
high risk ? There is always another at www.pitchforktrader.com He can be
Before stopping completely, trade ! reached at [email protected]
ensuing a reversal, the market Concerning the P&L statement,
formed a trading range (not seen the total number of trade points
here), with a “last gasp” move to is 29.5: 19 points for the first two
4110.5 . The upper median line trading units, and 10.5 points for
served again, as a strong overhead the third trailed out unit, an overall Please note that the ‘Copyright
resistance, causing the reversal of amount of 737.50 euros. © 2005 by Thomas N. Bulkowski.
the over-extended wave three (3.25 All rights reserved’ on the article
of W1). Conclusion titled “Trading Partial Declines
and Rises” by Tom Bulkowski
Every trader should have only in Issue 2 was unintentionally
6. Money and Risk one “credo”: in this business you omitted.
Management only make money if you don’t
30 The TRADER’S Journal VOLUME 2 ISSUE 1
TECHNICAL ANALYSIS

Finding the Right Trend

and Direction

Ron Schelling, private trader,

explains how a combination of
the RSI and multiple time frames
can help us clearly identify the
trend.
The question is always, “what is the trend”. Can
we define the trend with moving averages or certain
indicators? No matter what you take to measure the
trend, by knowing the tradable trend should be the
basis for your trading approach. Combining this
approach on the same chart with multiple time frames
allows you to determine in what direction you should
take the next trade.

The key to profitable trading is to have a valid method

of determining the right direction and tradable trend
by using different time frames on one chart. Late
Robert Krausz introduced the TrendFinder strategy
in which used the multiple time frame approach in
variable ways.
VOLUME 2 ISSUE 1 The TRADER’S Journal 31
 Meanwhile several standard software programs using – at point C the close is above the previous weekly
this now in their basic software and since then multiple high, the trend is Up again
time frame strategies are becoming more popular.
The multiple time frame analyses is based on the
First we must select the two time frames we are going concept that every time period has it’s own trend and
to use, like daily bars as the bars we trade and weekly also it’s own support and resistance levels. The trend,
bars which we use as the trend. Of course this can support and resistance levels of, for example a daily
be done with all kind of variations, for example bar, is different then those of the weekly bar. In this
intraday 1 minute bars and 5 minute bars or any other case the weekly bars takes the noise out of the daily
combination. bars. Of course you can also use this as intraday or
any other usable time frames.
Lets look at a basic set up.
The next question in this strategy is if
there is anything which can confirm the
signal from the above time frame strategy?
Let’s look to the Relative Strength Index,
not to be confused with a relative strength
comparison of a stock to a market index or
group of other stocks.
The RSI is a ratio - the numerator is a
moving average of the up closing prices
divided by a moving average of the down
closing prices. Then the number is
normalized to a value between 1 and 100.
Readings above 50 indicate that the average
net difference in closing prices is positive.
A downward force is indicated when the
reading is below the 50 level because the
Figure 1 – EUR/YEN average net difference in closing prices is

Her are the rules:

– the trend can be only Up or Down
– the trend is Up when the daily bar
closes above the previous weekly (blue)
high, so the daily bar change from red
to green on this chart
– the trend is Down when the daily bar
closes below the previous weekly (blue)
low, so the daily bar change from green
to red on this chart
– at point A the close is above the previous
weekly high, the trend is Up
– at point B the close is below the previous Figure 2 – EUR/YEN
weekly low, the trend is Down

32 The TRADER’S Journal VOLUME 2 ISSUE 1

negative. It is not important to look at peaks or
bottoms of the RSI at this time.
Looking at the next chart we see the same YEN
against the EURO but now we have added the
RSI to it at the bottom of the chart.
At point A the close was higher the previous
weekly high so the trend was up, while at the same
time the RSI reading was above 50 confirming
the strength. At point B the close was below the
previous weekly low and almost confirmed by
the RSI reading below 50, actually it was the next
day. At point C see we got a change to up trend
again because the close was above the previous
weekly high and the RSI reading above 50 was
Figure 4 – AUD/USD
confirming this signal.
Now let’s have a look to another sample, the Singapore Figure 4 is the Australian Dollar/US Dollar using 3
Dollar (Figure 3). This chart shows daily bars (red) hour bars and daily bars. The daily bars are based on
and weekly bars around them (blue). At the point A a 15 hour time frame, so therefore we see intraday bars
the new down trend was confirmed by the RSI reading per trading day. On October 31 we see the intraday 3
while at point B the up trend got confirmation from hour bar closing below the previous daily low and the
the RSI as well. Around point C the net result was 3 hour RSI below the 50 level, so a first indication to
actually zero after getting first a down trend followed close all long positions and take a first step for a short
by a quick trend change to a new up trend. At point position.
D we got a nice downtrend signal again with clear
At the close of October 31 we see for the first time that
confirmation by the RSI.
both RSI indicators, the one on the 3 hour bars and
Of course many combinations are possible including the one on the daily bars, are both below the 50 RSI
intraday, like 1 minute bars and 5 minute bars of 1 level, so the trend has fully changed to down here.
hour/5 hour bars.
Of course you can use another indicator for
confirmation instead of the RSI, like the
standard MACD or Ergodic Candlestick
Oscillator. Also you can add several
indicators to on the bars itself to get even a
more clear picture.
Think about the Swing on the bar highs
and lows or moving averages, however the
combination of RSI and multiple time
frames is very simple and useful.

Ron Schelling is an independent trader in the

Netherlands, trading commodities and Forex since
1983.

Ron can be reached at [email protected] or via his

website www.2hedge.com
Figure 3 – SGD/USD

VOLUME 2 ISSUE 1 The TRADER’S Journal 33

 BOOK REVIEW

Trading, Sex, and Dying

by Juel Anderson

Price Headley, founder of BigTrends.com, details some of the lessons

learned from the book, ‘Trading, Sex, and Dying’ by Juel Anderson
I first read ‘Trading, Sex & Dying’ & Dying is “The Heart of a playing style. The same analogy
by Juel Anderson because I was Gambler”, and this phrase may get can be used for trading. Though we
intrigued by the title. The title more directly to the book’s primary don’t have the luxury of reading the
takes the word “Poker” and crosses contents. Anderson details the non-verbal cues of our opponents,
it out and replaces it with the word characteristics that make up 13 traders will tend to show their style
“Trading”. So right away I’m in certain stocks. Is the stock a
distinct personality types. As a
expecting this to be a book about good trending play or is it full of
poker player sitting at a table, you
the similarities between poker and noise? Do breakouts hold or do
make your returns not so much by
trading. But it proves to offer much they tend to reverse? Are big traders
the cards you draw but by sizing and institutions jumping into the
more than that.
up your opponents’ strengths and stock, evidenced by higher volumes
The subtitle for Trading, Sex weaknesses, plus their dominant
34 The TRADER’S Journal VOLUME 2 ISSUE 1
on rallies? Is the stock prone to traders, which tends to cluster most the excitement or lack thereof in a
volatile movements or a slow & individuals to sell near the lows or market, which may cause them to
steady climb or decline? These buy near the highs, as in the tech jump on uptrends too late or get
questions may help define the boom in early-2000. out of slow stocks just before they
types of players who are attracted break out again.
The 13 dominant personality traits
to various stocks.
may be of most interest to many The Reflective – They may
One particular section on gambling readers. The author particularly get tense and nervous in a new
early in the book hooked me with applies his experience in sales to the situation. Reflective are more at
the logical extension to trading aspects of selling to each personality risk of not pulling the trigger due
(substitute “trading” for gambling” type. This certainly applies to to too much introspection.
in the quote below): “Gambling poker, as the player must sell his
All in all, this book is a very
is difficult. In some respects, it’s good or bad hand to get the most
interesting read for both traders as
the most difficult of all endeavors. out of his cards. Certainly traders
well as those in sales professions.
To succeed takes enormous may not have to worry so much
The description of the 13
conviction and commitment. Most about talking up their position,
personality types is worth it alone.
individuals don’t succeed because though some analysts and brokers
The introduction by renowned
of the inability to know themselves have developed a reputation for
options trader David Caplan is
and/or the inability to control their this.
also extensive and eye opening. I
own actions. In gambling, the only Several personality types that you bet you’ll be glad you read this
asset you have is yourself. ...the may recognize in yourself or other book. I know I’m glad to add this
self-developed habits or traits that traders you know include: knowledge from Trading, Sex &
undermine the very structure you’re Dying to my understanding of
dependent on.... In gambling, The Adventurer – Always trading psychology.
you set the guidelines and make looking for action and adventure,
the rules. In effect, you become when at times it might be wise to Price Headley is the founder of BigTrends.
God. When you’re God, it’s easy wait. Adventurers need to be in the com, which provides investors with specific
to change the rules. You simply say, game, and are prone to overtrading. real-time stock and options strategies
‘Well they don’t really apply to me.’ Adventurers do not fear much, and investment education to profit from
“ This hit home with me, as it is so but this can also lead to a lack of significant market trends.
easy to avoid the self-discipline you discipline.
Price has appeared on CNBC, Fox News,
need to win at trading. Your mind The Aggressive – Ego is a CNNfn, Bloomberg Television and a
will play tricks on you if you don’t variety of print and online financial news
powerful factor for Aggressive,
have a systematic process for entry, outlets, including The Wall Street Journal,
who value winning very highly.
Barron’s, Forbes, Investor’s Business Daily,
exit and money management. Discipline is strength, though USA Today, and Bloomberg Personal.
Anderson notes that “at any given Aggressive may overreact in the He speaks regularly to investment
heat of battle. Position sizing is a audiences nationwide. He is a graduate
time the behavior of 90 percent is
likely problem, as Aggressive want of Duke University and a member of the
working to create an advantage for
to win big now, and this impatience Market Technicians Association. He is
10 percent.” This is reminiscent also a chartered financial analyst (CFA)
can prove costly.
of the fact that the majority of charterholder and a chartered market
day traders went belly up in recent The Emotional – Here the technician (CMT) charterholder.
years, or that you often hear strong feelings can prove to be
He can be reached at [email protected]
statistics on most futures or options barriers in the Emotional mind. or via his website www.bigtrends.com
traders losing, or at least only a Internal self-talk may prove to be
small minority only really making excessively critical as Emotional
it big. I believe this is often due to feel even small situations more
the emotional reactions of most intensely. Emotional may feed off
VOLUME 2 ISSUE 1 The TRADER’S Journal 35
 BOOKS FOR TRADERS
Commitments of Traders : The currency/foreign Date Published : 2000
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Strategies for Tracking the market is by far By Cornelius Lucas
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36 The TRADER’S Journal VOLUME 2 ISSUE 1
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VOLUME 2 ISSUE 1 The TRADER’S Journal 37
 BOOK SERIALISATION

Trading in the Eye of the

Storm
The 2nd Part of the excerpt from Daniel Gramza’s book

Techniques to Deal with Fear

Samurai warriors were without a them to completely focus, react
doubt some of the fiercest fighters and stay in the present moment.
who ever existed. The key to the They fought without hesitation
samurai’s incredible fighting ability and with complete confidence.
was the complete elimination This is exactly the mindset of the
of their fear of death and their successful trader.
complete focus on being in the
present moment. They did this Here are ways to deal with fear
by entirely de-energizing their fear and eliminate it from your trading
of death. If a person in a fighting experience.
situation is distracted by thoughts
of being hurt or dying, he will be Face Your Fears
the loser. Samurai warriors were The first step in controlling fear is
unencumbered by these fears. They to face it. If you are not willing to
were courageous in the face of the face your fear, then fear, not you
unknown. They were empowered will control your life. When you are
by a lack of fear, and this allowed afraid, use deep centered breathing
38 The TRADER’S Journal VOLUME 2 ISSUE 1
(discussed in the relaxation Identify the Thought Choice realistic about the next trade and its
section), acknowledge the fear, and Our fears are created by our thought outcome. He can now move aside
face it head-on. Tell yourself, “I am choices. In order to eliminate our the interference caused by fear and
stronger than my fear, I control my fears, we must change the thought confidently deal with any future
fear, and I can overcome my fear.” choices that create them. For outcome.
You will become more comfortable example, if a trader fears losing
money, he is unconsciously saying
Eliminate Self-Sabotage
in the presence of a fear by
to himself, “ I choose to experience Every trader has a level of comfort
decreasing your sensitivity to it. As
the fear of losing money.” and familiarity with trading. To
you repeatedly face your fear you
go beyond this level of comfort
will realize that your energy in the That same trader can choose not usually requires taking a risk. This
fear will decrease. to feed energy to this fear choice is when fear, as an unconscious
Courage is moving ahead even and make a different, conscious, act of self-sabotage, can creep in.
though you’re afraid. There is a choice. He can say, “I choose not This fear is actually misguided self-
wonderful true story of Ishi, the to fear losing money and I accept preservation, intended to protect
last living member of a Native that losing money is a part of the the trader from the fear and anxiety
American tribe. Ishi and his tribe trading business.” he may experience if leaves his level
believed trains were monsters that Until you identify your fear thought of comfort and risks the possibility
ate people. One day, Ishi found choice, you cannot change it, and of things not going his way. A
himself in the position of having to you keep the fear alive. Allow trader may fear that he would
take a journey by train. When he yourself the freedom to make this suffer embarrassment and personal
boarded the train, he was asked by a new choice without judgment. devastation if he tried his best and
person who understood the beliefs Exercise your positive, conscious failed. Fear as self-sabotage becomes
of his tribe, how he could step on thought choice whenever the old the traders excuse to maintain his
the train. Ishi responded, “Since fear choice returns. Each time you level of comfort and the status quo.
I was little, I was taught to always do this, you drain the energy from The easiest way to protect himself
be more curious then afraid”. Use the old fear and you create the is not to try.
fear as an opportunity to learn and change you are striving for.
progress. He can also self-sabotage his
Acceptance of Risk trading by initiating a trade that
Acceptance of Responsibility It is very important that the trader does not meet his trading strategy
A critical element in dealing with completely and honestly accept the requirements. This way, if the trade
fear is to accept that you alone are risks involved in trading. Trading doesn’t work, he can tell himself
responsible for the creation and is a business of percentages. Not that it wasn’t his best effort because
intensity of your fear. You must every trade will make money. If a it wasn’t his main strategy. He
realize that you are responsible trader cannot accept the risk, he unconsciously has protected his
for your thought choices and the cannot fully commit himself to the comfort zone and his false mental
amount of energy you feed them. trade. If he cannot fully commit perceptions.
This recognition alone can put himself, taking the next trade can The bottom line with self-sabotage
fear in perspective, diminish the be a frightening experience. He
is that the trader is linking his self-
energy in the fear, and prepare you will lose confidence and become
worth to trading. If the trader
for the acceptance of new thought frustrated and locked in a cycle of
doesn’t meet his own expectations
choices. fear and doubt.
of what being a successful trader
Accepting responsibility for your On the other hand, if the trader means, his self-esteem will suffer.
thought choices puts you in control has complete acceptance of the To avoid this blow to his ego, the
of your fear, not the other way risk and all possible results, then he trader trades carelessly, doesn’t give
around. can be optimistic, committed and it his all, and then uses the excuse
VOLUME 2 ISSUE 1 The TRADER’S Journal 39
 that he didn’t really fail because he Fear Lead Up trader from one of the things that
wasn’t really trying. It is possible to stop fear before can destroy a trading business, or
it gets started by identifying the any business for that matter - the
This trader doesn’t realize that
conditions that immediately surprise event. A well-planned
a trading decision outcome has
trading strategy, including capital
nothing to do with his self-worth, precede the fear, and by changing
allocation parameters, and defined
but is merely a profitable or your reaction to the fear-producing
entry, exit and risk management
unprofitable business decision. situation.
criteria will allow the trader to
The first step in eliminating self- For example, a trader has a solid, trade without fear, knowing he is
sabotage is to recognize it. The well-researched trading strategy. prepared for any potential event.
trader must ask himself: Do I The trade entry and profit or loss exit
select trades that imply illusions is completely established before the Daniel M. Gramza is President of Gramza
of grandeur? Do I select trades trade is entered. However, once the Capital Management, Inc. and DMG
trade is initiated, the trader watches Advisors, LLC. He is a trader, consultant
with total disregard for my trading
every little price movement of the to domestic and international clients and
strategy? Do I feel that the trade an advisor to the St. Croix hedge funds.
is too much to handle and I just market. Eventually, the trader gets
He is completing a new book titled “The
want to get it over with? A “yes” emotionally involved with each Handbook of Japanese Candle Trading
would indicate poor trade selection price move, becomes afraid, and Strategies”. Mr. Gramza has appeared on
and lack of a risk management feels a sense of urgency to exit the CNN’s “Moneyline” program, Reuters TV,
exit, both of which imply a total trade. The result is that the trader Bloomberg TV and WCIU-TV. Mr. Gramza
disregard for his trading strategy. exits the trade before either its profit develops and presents worldwide public
or loss price objective is reached. and private courses on Essential Mental
Secondly, the trader must re-center Techniques for Traders, Japanese Candle
He never gave his well-researched
himself with deep breathing and Analysis, Market Profile, technical analysis,
trading strategy a chance to work
focus on the strict application of options and options trading strategies,
for him. security and futures industry fundamentals
his trading strategy.
and operations.
The trader’s lead up to fear was his
Reality Check watching every movement of the He has presented courses to traders from
As a trader, if your greatest fear market. In order to de-energize his over 30 exchanges, 400 institutions, and
came true, what is the worst that fear, he changes the fear-producing 35 countries. Mr. Gramza is an instructor
can happen? Your honest answer conditions: once he has entered a for the Chicago Mercantile Exchange
Education Center, the Chicago Mercantile
can help you examine and deplete trade with the appropriate profit
Exchange \ DePaul University Certificate
the energy of your fear. and loss orders in place, he does
Program, The Chicago Board of Trade and
not continually look at that market. the Chicago Stock Exchange. He was a
Visualization Instead, he periodically checks the member of the Chicago Rice and Cotton
Visualization is a powerful tool that trade. This change eliminates his Exchange and an adjunct faculty member
allows a trader to identify, examine, anxiety associated with every price of the Illinois Institute of Technology’s
experience and de-energize a fear. change, and gives his trade and his Master program in Financial Markets and
It allows you to mentally envision trading strategy an opportunity to Trading.
solutions to your fears in a non- work for him. Daniel can be reached at dmgramza@att.
threatening way. Visualization will net
reduce your anxiety and prepare Trading Plan
you if you’re faced with the fear A solid trading plan is crucial for
producing situation again. There any trading business. It provides the
are a number of visualization trader with strategies for trading in
techniques that can assist in this any market condition, and a solid
process and are explored in the foundation for a successful trading
Visualization Section of the book. business. It can also protect a
40 The TRADER’S Journal VOLUME 2 ISSUE 1
SLIPSIDE
One day a stockbroker was riding in his limousine when he saw a
guy eating grass. He told the driver to stop. He got out and asked
him, “Why are you eating grass?” The man replied, “I’m so poor, I
can’t afford a thing to eat.” So the stockbroker said, “Poor guy, come
back to my house.” The guy then said, “But I have a wife and three
Once there was a millionaire, who collected kids.” The stockbroker told him to bring them along. When they
live alligators. He kept them in the pool in were all in the car, the poor man said, “Thanks for taking us back to
back of his mansion. The millionaire also your house, it is so kind of you.” The stockbroker said, “You’re going
had a beautiful daughter who was single. to love it there, the grass is a foot tall!”
One day he decides to throw a huge party,
and during the party he announces, “My Two old friends met one day after many years. One attended college,
dear guests... I have a proposition to every and now was very successful. The other had not attended college
man here. I will give one million dollars and never had much ambition. The successful one said, “How has
or my daughter’s hand in marriage to the everything been going with you?” “Well, one day I opened the Bible
man who can swim across this pool full of at random, and dropped my finger on a word and it was oil. So, I
alligators and emerge unharmed!” As soon as invested in oil, and boy, did the oil wells gush. Then another day I
he finished his last word, there was the sound dropped my finger on another word and it was gold. So, I invested
of a large SPLASH!! There was one guy in the in gold and those mines really produced. Now, I’m as rich as
pool swimming with all he could... the crowd Rockefeller.” The successful friend was so impressed that he rushed
cheered him on as he kept stroking. Finally, to his hotel, grabbed a Gideon Bible, flipped it open, and dropped
he made it to the other side unharmed. The his finger on a page. He opened his eyes and his finger rested on the
millionaire was impressed. He said, “My words, “Chapter Eleven.”
boy that was incredible! Fantastic! I didn’t
think it could be done! Well I must keep my
end of the bargain...which do you want, Two stock brokers are in a bank, when, suddenly, armed
my daughters hand in marriage or the one robbers burst in, waving guns and yelling for everyone
million dollars?” The guy says, “Listen, I don’t to freeze. While several of the robbers take the money
want your money! And I don’t want to marry from the tellers, others line the customers, including the
your daughter! I want the person who pushed two stock brokers, up against a wall, and proceed to take
me in the water!!!” their wallets, watches, and other valuables. While this is
going on, one of the stock brokers jams something into
the other stockbroker’s hand. Without looking down,
the second stockbroker whispers: “What is this?” The
first stockbroker : “It’s the $100 I owe you!”

A young stockbroker decided to get his first tailor made suit. A stockbroker was filling out
So he went to the finest tailor in town and got measured a job application when he
for a suit. A week later he went in for his first fitting. He put came to the question: “Have
on the suit and he looked stunning, he felt that in this suit you ever been arrested?” He
he can do business. As he was preening himself in front answered no to the question.
of the mirror he reached down to put his hands in the The next question, intended
pockets and to his surprise he noticed that there were no for those who answered the
pockets. He mentioned this to the tailor who asked him, preceding question with a
“Didn’t you tell me you are a stockbroker?” The young man yes, was “why?” Nevertheless,
answered, “Yes, I did.” To this the tailor said, “Who ever heard the stockbroker answered it
of a stockbroker with his hands in his own pockets?” “Never got caught.”

VOLUME 2 ISSUE 1 The TRADER’S Journal 41

 PSYCHOLOGY

Trading psychology
in fables, quotes
and proverbs

Simon Vine, former options trader and author, provides an

interesting insight to the way our mind works in the market.
Once a wise man bought a bird at killed me, you would have found Enticing ideas flow from various
a market. He was about to enter it and become a rich man!” At this sources – as well as talking to
his house when the bird opened point, the wise man became very consultants and brokers, traders talk
its wings, stared at him and spoke angry and attempted to climb the to each other and read numerous
in a human voice. “Don’t panic”, tree to grab the bird. But, being old, publications. Informational
it said. “I’m a very cultured bird. he slipped from the tree and fell to pollution has led to an ongoing
The wise man of the birds, so to the ground. The bird hopped onto need to weed out various opinions
speak. Tell me, if I teach you three his head and said in a strict tone, before making a decision.
valuable truths, will you set me “Wise man, you seemed to have
One of the easiest types of opinion
free?” The wise man contemplated listened to and appreciated my
to transfer is the expectation of a
for a second and agreed. advice, but you failed your very first
major ‘inevitable’ market move.
exam miserably! Stop and think for
“The first one is, never believe Very often, technical analysis1
a moment: What are the chances
nonsense, particularly if common results in predictions of a technical
of a bird swallowing a diamond?
sense tells you that something can’t breakthrough or the end of a
And, at your age, did you really
be true. Secondly, soberly evaluate trend. However, in reality, markets
think you could still climb trees?
your abilities. Never undertake fluctuate within ranges 70% of the
Finally, you started having second
anything if your chances of success time and trend only the remaining
thoughts about the good deed as
are slim. And thirdly, never regret 30%.
greed consumed you!” Having said
the good deeds you have done.”
that, the bird flew away. Addiction to ‘inevitable resolutions’
Having heard this, the wise man and belief in miracles are inherent in
let the bird go. No sooner had it The bird’s first lesson human nature. Within the past 30
perched on the branch of a tree then This story demonstrates several years, investors have lost huge sums
it started teasing him. “Yesterday truisms that traders and investors of money on fads such as emerging
I swallowed a diamond! Had you nevertheless find hard to learn. markets in the 80s, biotech in the
42 The TRADER’S Journal VOLUME 2 ISSUE 1
early 90s and TMT over the past
three years. In other words, greed
and fear block common sense with
frightening regularity.
Clearly, most investors possess the
same information and consider
similar risks. As a result, they
simultaneously “jump on the
trend”. If a prediction does not
materialise immediately, the
“weaker hands” soon start doubting
their own actions. This explains
why historical graphs exhibit over-
extensions on market edges, as well
as immediate sharp reversals.
Floor traders track and bully those Source: Bloomberg, L.P.
expecting a miracle. When at the
critical technical level2 they sense a within the range, in the direction this amount of risk. To determine
decline in trading volumes of new the unfortunate miracle-seekers the best comfortable position, the
orders and an increase in recently so fervently hoped for just a few reader may try the following rule-
opened positions, they know that moments earlier. The moral of the of-thumb: determine the smallest
exchange clients are anticipating story is that once an investor senses position one would hold under any
high reward-to-risk trades. In other the desire to believe in miracles circumstances, given the expected
words, short-term traders suddenly (such as high risk-reward trades), level of risk, and then take a
identify a technical level – points they should make a U-turn. position one-half that size. The
that if not broken, would force the gains will not be extraordinary, but
The bird’s second lesson you will stay in the game.
market back into a certain range.
However, once broken, the market According to one rather coarse
French proverb: “One must have The bird’s third lesson
would then start to trend away.
the stomach, and to make sure it is Of course, the original wise man
Beyond the technical level, traders
his.” It is common for investors to story was not made up solely for
establish a trade stop-out level and
forget that their financial resources traders. After all, try and find
give the order to close a position
are finite and invest in just one idea. a trader who would perform a
once that technical level is crossed.
The pain of those who held their good deed free of charge! Rather,
A few times a day, once enough stops Individual Retirement Annuities the third lesson highlights the
have built up at what is considered in Enron stock exemplifies one importance of the ability to control
a key level, floor traders force the possible outcome of such behavior. your greed: “It is better to be out
market through it. By doing so Always leave yourself a chance to of the position wishing you were
they “squeeze” clients through the return to the market. in, than in one wishing you were
stop-levels and earn a few points as out.” Subconscious realisation of
the market goes through the stops. When an investor takes on a large excessive risk leads to uncontrolled
After triggering the stops, they position, the first significant move fear or the loss of faith in one’s
re-establish their own positions in the market can throw them out judgment and ability to succeed.
and the market returns sharply to of it – they simply cannot handle As a result, the holder of a position
1
Technical analysis – a method of forecasting based on the history of price behavior. Paul Tudor Jones once said, “To be a great trader you have to
be a great price historian.”
2
Technical level – the price level a specific asset should have difficulty breaking; such a level is determined through technical analysis.

VOLUME 2 ISSUE 1 The TRADER’S Journal 43

 becomes uncomfortable with it. At alone in the market, once the move difficult to force yourself to take on
that point, bereft of psychological has been confirmed, the winner a new position, as the losing streak
comfort, they are highly unlikely to ends up with a position secured has exhausted you. The skill of
succeed. at an advantageous price and can being able to forget rids your mind
then build up its size with less fear, of euphoria as well as panic. Release
Therefore, when implementing
despite the residual possibility of the worries of your past – even the
chosen strategies, investors should most recent ones. “Focus on your
the breakthrough proving itself
never forget ‘the rule of the pyramid’ consequent steps”, was another
false. “The trend becomes your
used by floor traders: the smallest piece of advice from Tudor Jones.
friend”, and exhausting efforts
portion of the position comes at
at the beginning start to pay off. Finally, markets always outsmart
the worst price, and the largest one,
Therefore, don’t be afraid to panic, even the smartest investors.
at the best. For example, however
just pick the right moments to do Remember: “Those of us who
advantageous a price may be, an
so. were lucky were born smart, but
investor should buy only a fraction
of the position. Should the market According to a classic saying on those who were smart chose to
stick to a downward trend, they will Wall Street: “Trees do not grow to be born lucky.” The winners only
still be able to buy a larger piece at the skies.” This proverb became rarely explain how they made
a better price. Of course, this rule popular at the beginning of the money, whereas losers have much
works best when the market stays last century, and it reminds people to account for. But then again,
in range. That is, the rule applies that nothing lasts forever, even if everybody has a natural right to
over 70% of the time, as the market the trend seems endless. When it is make dumb mistakes, ones that
tends to be range-bound. were undoubtedly made well before
unclear about what to do with either
our time. That is why proverbs
However, what happens if the a profitable or losing position, the
dealing with standard situations
range is broken? By that time, investor should heed a poker oldie:
serve as useful reminders.
an investor has bought (or sold) “When in doubt, do a half.” Any
at two or three different levels, discussion of discipline and greed is
Simon Vine is responsible for developing
and the range breakout is causing never complete without two more
equity, FI and FX derivative operations at
substantial losses. When the market proverbs: “Bulls make money, bears Alfa Bank CIS-wide. Prior to Alfa Bank,
switches from being range-bound make money, pigs get slaughtered.” Simon Vine was positioned in New York,
to trending, the rule is: “When you Quite explicitly, this is a reminder USA. He was Senior Director in charge
panic, panic first.” If the market to remain levelheaded and follow a of derivatives at American Express Bank,
appears to be on the threshold of plan. The second is an action plan ran the Foreign Exchange and Precious
championed by Will Rogers: “If I Metals Options Group for Union Bank of
a new trend, the investor must
Switzerland (UBS), and was FX options
order their broker to follow it and buy and the market goes up, I sell.
trader with Societe Generale. Simon holds
double the position in the opposite If it goes down, I sell as well.” an MBA from Columbia Business School
direction. (US) and a BA from Institute for Finance
The tale of the bird also warns
and Economics (Moscow, USSR.)
Although somewhat dramatic, such against repeating previous
a depiction is entirely appropriate. mistakes. However, we often fail to Simon Vine is also author of Options
Any range breakout results in prices avoid them and chastise ourselves Trading Strategies and Risk Management
that have not been seen in a long afterwards. Nowadays, everybody (Wiley, 2005). He can be reached at
tries to memorise as much as [email protected]
time. At that moment, the reasons
underlying the market’s changed possible, and the necessity to purge
behavior are still unknown, while your mind of superfluous thought
the whole trading community is neglected. Imagine that you have
continues to hope that comfortable been losing money for the first four
levels will return. Although it is days of a week. By Friday, you are
initially intimidating to stand worn out and distressed. It is surely
44 The TRADER’S Journal VOLUME 2 ISSUE 1
TRADING SYSTEM DEVELOPMENT

Before You Make a Trade:

10 Critical Questions

Jim Wyckoff, former financial journalist and technical analyst,

outlines some useful tips to consider before any trade.
A “Trading Checklist” of prioritized criteria not only will help
you decide when to execute a trade, but will also help you
identify potential winning trades. What kind of stuff should
a trader put on a Trading Checklist? That depends on the
individual trader. Each trader should have his or her own set
of criteria, or rules, that helps determine a market to trade and
the direction to trade it--including when to get in and out.
VOLUME 2 ISSUE 1 The TRADER’S Journal 45
 Below are my Top 10 rules profit potential should be at set my sell stop just below a support
on my trading checklist. least $3,000. Anything less is not level that’s not too far below the
worth making the trade. Now, any market. And if the trend does not
1. Are shorter-term and eventual profit that is made may develop and the market turns back
longer-term charts in not always attain that three-to-one south, I’m stopped out for a loss
agreement on price trend? risk-reward ratio, but the point here that’s not too painful. Another way
I’ve told readers for years that this is is there should be the “potential” to enter a market that is trending
my No. 1 trading rule. If the weekly, for a profit three times greater than (preferably just beginning to trend)
monthly and daily (and sometimes your capital at risk in the trade. is to wait for a minor pullback in
intra-day) bar charts are not in an uptrend or an upside correction
4. Has there been a price in a downtrend. Markets don’t go
agreement on price trend, I’ll likely
pass on a trade. I’m usually a trend “breakout” from a trading straight up or straight down, and
range? there are minor corrections in a
trader, and the “trend must be my
trend that offer good entry points.
friend” before I make a trade. One of my favorite trading “set-
The key is to try to determine if it
ups” is when prices have been
2. Is this potential trade within is indeed just a correction and not
in a trading range--between key
the end of the trend.
my financial risk tolerance? support and resistance levels--
To be a successful trader, I not for an extended period of time 6. Is there a support or
only have to have winning trades, (the longer, the better). This type
of trading range is also called a
resistance level nearby, at
but I must survive the more
congestion zone, or a basing area which I can set a protective
numerous losing trades I am likely
to encounter. If I see a potentially when at historically lower price stop when I enter the trade?
profitable trading “set-up,” but the levels. If the price breaks out of a This is my exit strategy, and is one
market is too volatile, I’ll likely pass range (above the key resistance or of the most important factors in
on the trade because of the potential below the key support), I like to trading futures. On when to get
for a big drawdown or even a margin enter the market--long on an upside out of a market, I have a simple,
call from my broker. An example is breakout or short on a downside yet very effective method: Upon
the energy markets a couple years breakout. A safer method would entering a trade, if I place a sell stop
ago. They were highly volatile. be to make sure there is follow- below the market if I’m long (buy
through strength or weakness the stop if I’m short), I know right away
Certainly, there were some big
next trading session--in order to approximately how much money I
moves (and trading opportunities
avoid a false breakout. The trade- could lose in any given trade. I will
for some) in the energies--both up
off there is that I could be missing never trade straight futures without
and down. However, when a 75-
out on some of the price move by employing stops. Neither should
cent, or more, daily move in crude
waiting an extra trading session. you. Thus, I will never be in a trade
oil is a “routine” trading session,
and have a losing position and not
that market is too volatile for my 5. Is there a potentially good know where my exit point is going
risk tolerance--at least when trading
entry point if the trade looks to be.
straight futures.
good?
7. Do “fundamental” market
3. What is the potential risk- Entry points in trades most times
factors raise any warning
reward ratio of the trade? should be based on some type of
support or resistance levels in a flags?
My risk-reward ratio in a futures
trade should be at least three to one market. If I see a potential set-up I base the majority of my trading
for a long-side trade, I will wait for decisions on technical indicators
on maximum profit
the market to push up through a and chart analysis--and also on
potential. In other words, if my risk resistance level and begin a fledgling market psychology. However, I do
of loss is $1,000, my maximum uptrend. Then, if I do go long, I’ll not ignore fundamentals that could
46 The TRADER’S Journal VOLUME 2 ISSUE 1
impact the markets I’m trading. or open interest figures, but will opinions in the marketplace.
Neither should you. There are U.S. instead use them in conjunction This notion of “going against the
government economic reports that with other technical signals, or to grain” of popular market opinion
sometimes have a significant impact help confirm signals. As a general is difficult to undertake, especially
on markets. Associations also rule, volume should increase as when there is a steady drumbeat
release reports that impact futures a trend develops. In an uptrend, of fundamental information that
markets. Even private analysts’ volume should be heavier on up- seems to corroborate the popular
estimates can move markets. I make days and lighter on down-days opinion. If you’ve read books on
it a priority to know, in advance, within the trend. In a downtrend, trading markets, most will tell you
the release of any scheduled reports volume should be heavier on to have a trading plan and stick
or forecasts that have the potential down-days and lighter on up-days. with it throughout the trade. A
to move the market for which I’m Changes in open interest also can main reason for this trading tenet
thinking about trading. I don’t like be used to help confirm other is to keep you from being swayed
surprises when I am in the middle technical signals. Open interest or influenced by the opinions of
of a trade. can help the trader gauge how others while you are in the middle
much new money is flowing into of a trade. Popular opinion is many
8. What do computer- a market, or if money is flowing
times not the right opinion when it
generated indicators show? out of a market. This is helpful
comes to market direction.
(RSI, DMI, Stochastics, etc.) when looking at a trending market.
Some traders use the Directional Another general trading rule is Jim Wyckoff has been involved with the
Movement Indicator (DMI) as a that if volume and open interest stock, financial and futures markets for
complete trading system. Also, some are increasing, then the trend will more than 20 years. He was born and
traders use the Relative Strength probably continue in its present raised in Iowa, where he still resides.
Index (RSI), Slow Stochastics or direction--either up or down. And Wyckoff became a financial journalist with
other computer generated technical if volume and open interest are Futures World News for many years, cutting
declining, this can be interpreted his teeth as a reporter on the futures
indicators solely for determining
as a warning signal that the current trading floors in Chicago and New York,
entry and exit points. I do neither
trend may be about to end. where he covered every futures market
and here’s why: I consider these traded in the United States at one time or
computer-generated technical
indicators to be secondary, yet still
10. What is the prevailing another.

important, trading tools. I will use general opinion of the market? Not long after he began his career in
financial journalism, he began studying
these “secondary tools” to help (Possible contrary thinking.)
technical analysis. By studying chart
me confirm or reject ideas that When I was working on the patterns and other technical indicators, he
are based on my “primary tools”- trading floors of the major futures realized this approach to analyzing and
-which are basic chart patterns, exchanges, traders would many trading markets could level the playing
support and resistance levels, trend times “fade” (or trade against) the field between “professional insiders” in the
lines, and fundamental analysis. featured articles on commodities markets and individual traders.
in the major newspapers, such His extensive studies of technical analysis
9. Do volume and open interest as the Wall Street Journal. They and knowledge of markets led to several
provide any clues? figured that if the general financial positions, including chief technical analyst
Most veteran futures traders agree press had picked up on a market at several well-known companies. He says
that volume and open interest (such as a drought driving grain his mission is not just to generate profits
are also “secondary” technical prices higher), then that uptrend for traders but to also provide them with
indicators that help confirm other must be about over. Contrary educational and insightful information
technical signals on the charts. In opinion in the trading business is because, in the fascinating business of
other words, traders won’t base their defined as going (trading) against trading, one never stops learning.
trading decisions solely on volume the popular or most widely held
VOLUME 2 ISSUE 1 The TRADER’S Journal 47
 TRADING SYSTEM DEVELOPMENT

Picking a Trading
Timeframe

John Forman, author of The Essentials of Trading, explains one of the

most important parts of developing a trading system – the time frame.
One of the most important parts of of the spectrum any given trader It is common in the markets these
being an effective trader is knowing falls in. Effective trading can be days to label trading timeframes.
the parameters with which you done in essentially any time frame. For example, scalpers are those
are operating. These parameters One must know, however, how in an out of trades very quickly,
including things like available much time can realistically be put with holding periods measured
capital, personal risk tolerance, into it before exploring what and in minutes. Day traders will
market knowledge, and time how they will trade. have a slightly longer-term time
availability. This last one, time, horizon than scalpers, but are out
Trading requires two types of time.
could be the most important of all of all positions by the end of the
One can be referred to as research
when developing an operational day. Swing traders generally have
time, those hours dedicated to
trading plan. It can go a long way position holding periods in the 1-
developing and testing trading
in determining what and how you 3 day range. Beyond that scope
systems, learning about the
trade. are the so-called position traders.
markets, etc. The other type of
These folks hold trades ranging
time could be described as market
How much time do I have to from days to weeks, and even
time. That is the time dedicated to
trade? sometimes months.
market analysis, trade execution,
This question should be one of and position management. Most Clearly, the amount of available
the first ones any trader asks her/ people will (or at least should) time one has will determine which
himself. For some, the answer will spend a considerable amount of trading timeframe in which he
be a lot. For others, it will be very time on the former. How much or she can operate. Scalping and
little. Many trades fall in between. time gets spent on the latter is a day trading requires dedicated,
It does not really matter which area function of the trader’s timeframe. oftentimes uninterrupted periods
48 The TRADER’S Journal VOLUME 2 ISSUE 1
focused on the market. Someone therefore taking on more risk than foreign exchange (forex) market
who is frequently in and out, often you originally intended. That’s is 24-hour, but even forex has
distracted by phone calls and/or not generally a good idea. Going its periods of relative quiet, low
email, or in any other way unable the other way, long-term to short- volume times during the day. Most
to stay locked in to the price action term, is more acceptable because it commodities (aside from gold and
is unlikely to trade in these short usually means tightening up risk- the energy products), are bound
timeframes successfully. Swing wise. by their local exchange hours, so
trading does not demand quite so short-term trading them when your
much market fixation, but still can When do I have time to trade? available hours don’t match their
be something of a challenge for Once you have figured out what open times can be a challenge. The
the average person working in an kind of time you can dedicate to major stock index futures and fixed
office environment, depending on trading, you have to take inventory income instruments (like T-Bonds)
their work requirements. Longer- of exactly where in the day that trade globally, but even they tend
term position trading, though, is time occurs. Do you have a few to have their most significant action
generally something anyone can do hours free in the morning? Can during their country’s primary
without much trouble. you look at the markets over your business day.
lunch break? Are you only able to
Keep in mind, a trader can operate The point is, you need to match up
think about trading in the evening,
in multiple time frames. The your trading time frame with your
or maybe only on the weekends?
author, for example, has times of time availability. You might have
Maybe your time is even shorter
year where anything but position a 6-hour block each day when you
trading is out of the question than that, and you can only look at could do something like day trade,
because of his inability to monitor the markets once or twice a month. but it may not make sense to do
the markets consistently. At on the The answer to this question can so given what time of day that is.
times, though, he has the freedom be important in determining what The longer-term position trading
to swing trade. Actually, he could you trade. is usually not a problem in this
even day trade or scalp at times, but For example, if you are someone respect, but swing-trading can be,
he chooses not to operate in those who can only trade in the evenings, depending on the market.
time frames because he really does what could you effectively trade?
not want to spend that much time Most like, day trading stocks is
Does my timeframe match my
in front of the screens. out of the question, at least in your risk profile?
own country. Perhaps other stock We all have our own risk tolerance
One quick note before moving on
markets would be available. The when it comes to trading. Some
- while operating in multiple time
people take more risk, while others
frames for your trading is fine, it
take less. Each trader needs to be
is not recommended
able to match up his or her ability
to switch those
and/or desire to take risks with the
timeframes intra-
time frame in which he or she is
trade. At least you
operating. Interestingly, it is the
should avoid making
shorter-term timeframes which
a short-term trade in
offer the best flexibility in this
to a longer-term one.
regard.
That is something
which tends to lead Consider the example of USD/
to disaster. Why? JPY, the exchange rate between the
Because it probably US Dollar and the Japanese Yen
means widening (quote in Yen per Dollar). On the
out your stops, and daily chart shown in Figure 1 we
Figure 1 – JPY/USD Daily Chart

VOLUME 2 ISSUE 1 The TRADER’S Journal 49

 can see that the swings which take
place over the course of a handful
of trading period is generally
somewhere in the 1.5 to 2.5 point
range (at least over the time period
of the chart).
If we look at the weekly chart in
Figure 2, though, the swings are
bigger. The market often moves 4-
5 points and more over the same
sort of handful of trading periods.
This is significant because a trader
operating in the timeframe of the Figure 2 – JPY/USD Weekly Chart
daily chart (like maybe a swing 2005 to writing a book. During situation. It doesn’t have to have a
trader) will generally be taking a that spell, I pretty much stayed negative impact on your returns. I
smaller per-trade risk in terms of out of the markets because I just was able to make over 200% on my
points than would the longer-term couldn’t give trading the focus I stock trades in 2004 even though
trader operating in the weekly normally do. I took two significant breaks from
timeframe. For a trader with deep
the market and only had maybe a
pockets, this is probably irrelevant. There is no shame in taking
dozen positions over the course of
The smaller trader, however, some time off. In fact, a lot of
the year. I don’t say this to brag, but
could find that the risk in terms successful traders make a habit of
rather to demonstrate the fact that
of account/portfolio exposure it. Trading when you are off your
position traders do not necessarily
is overly large. Fortunately, the game for any reason, can lead to
give up the big gain potential the
advent of things such as mini poor performance. Active traders
short-term traders supposedly have.
contracts and other innovations can suffer from burn-out, and even
Do what’s right for you and you’ll
which have lowered the required longer-term traders can find their
already be well ahead in the game.
minimum trade size in recent years interest and focus waning at points.
has widened the opportunities for When that happens, step back and
John Forman, author of The Essentials
the smaller trader. This makes it take a break. You could very well
of Trading, is a nearly 20-year veteran of
a lot easier for those with lower trade better when you resume. the markets. He has traded just about
account balances to trade longer- everything, has worked as an analyst in the
Conclusion foreign exchange, fixed income, and energy
term where the stops have to be
All the attention in the media markets, and has published literally dozens
wider.
seems to be on the day-trading of articles on market analysis and trading
phenomenon, especially in light of methods. John currently works as content
Should I even be trading?
all those who left their jobs in the editor for Trade2Win, a trader support web
It is worth pointing out that site with over 40,000 members, where he
late 1990s to trade full-time. Just
sometimes trading is not the best interacts regularly with active traders from
because it’s sexy, or popular to do,
idea regardless of how much time across the globe. He brings this wealth of
doesn’t mean it’s the right thing for experience and know-how to you in this
you have, when that is during the
you. Sound like something your book.
day, and your risk position. We
parents would have said to you? It
all go through periods when we John can be reached at
applies, though.
are distracted by external things. [email protected] or via his
Maybe it’s exams at school. Perhaps Make your own decision as to website www.andurilonline.com
it’s work, or family stuff. In my the time frame that makes the
case, I dedicated a large amount of most sense given your particular
50 The TRADER’S Journal VOLUME 2 ISSUE 1
Do you have a
TRADING EDGE?
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 TRADING SYSTEM DEVELOPMENT

Statistical Analysis
for Intuitive Traders:
Preparing for Chance

Dans les champs de l’observation le hasard ne favorise que les esprits préparés.
In the field of observation, chance favors only the prepared mind.
– Louis Pasteur

Brett N. Steenbarger, Ph.D, Clinical Professor of Psychiatry and

Behavioral Sciences and author, explains how we can use Statistical
Analysis to provide us an edge.
Like many research scientists, and found that the bacteria did not have missed. They knew that
Pasteur realized that great grow in the mold. In the 1980s, their chance observations were
discoveries often come through Michael Marletta won a McArthur significant, because they came to the
accident. The German physicist “genius” award for discovering the situation prepared with a lifetime
Roentgen, for example, stumbled role of nitric oxide in the immune of prior observations. Knowing
across x-rays in 1895 when he was system—a finding he and his what to expect in nature helped
experimenting with filling cathode partner stumbled upon when a them identify the unexpected.
ray tubes with gases and passing research subject donated urine
Can traders benefit from such
electricity through them. Thirty- samples during a bout with the
preparation as well? And, if so, what
one years earlier, the chemist flu.
kind of preparation might be best?
Friedrich August Kekule identified These were matters of seeming In this article, I will make the case
the ring structure of benzene after chance, and yet the vast majority that the majority of traders, even
dreaming of a snake chasing its tail, of people could not have taken including intuitive, discretionary
forming a circle. In 1928, Alexander advantage of them. As Pasteur ones, can benefit from knowledge of
Fleming discovered penicillin when recognized, it was the preparation the market’s historical tendencies.
he accidentally left a mold culture of these scientists that allowed Such knowledge can help us know
exposed to staphylococci bacteria them to see what others might what to expect in markets, but—
52 The TRADER’S Journal VOLUME 2 ISSUE 1
just as important—can alert us to the ground for a possible double The Importance of Mental
the unexpected. play. The pitcher operates in a Flexibility
discretionary mode: he can accept
Statistical Analyses and the The key to making historical
the signal from the catcher or can
analyses work for discretionary
Intuitive Trader wave it off if he feels that a different
traders is mental flexibility. If the
Quantitative traders identify what pitch might be better. Suppose,
market forecast gets you locked
to expect in markets by conducting however, the team collected statistics
into one way of viewing market
statistical analyses. Such traders that showed that the current batter
action, it will be easy to miss
collect a database of market behavior was much more likely to strike out
developments that contradict your
and identify what typically happens or hit a ground ball on a sinker
position. Historical analysis provides
after particular market occurrences. pitch than a straight fast ball.
a hypothesis only; current market
For instance, after an unusually Clearly, such data might influence
action will either support or refute
strong day in the market, I might the pitcher’s decision making. He
the hypothesis. Remaining open to
go back ten years and examine all might start with a sinker and see
current data is an important part
similar strong days and see what how the batter responds, using
of being a good scientist. Your job
happened the next day. I can then that information to help him select
is to test hypotheses, not become
compare those occurrences with the second pitch. His approach
blinded by them!
the market’s normal behavior to remains discretionary, but now it
see if there is any directional edge is informed by data that provide a Once again an analogy might
following the strong day. possible edge. be helpful. Many traders trade
economic numbers. In trading
Let’s say, for instance, that the Similarly, a trader might use
the release of statistics, it helps
average one-day change in the S&P discretionary judgment to fade
to know how markets usually
500 Index was .02%, with a ratio an early market rise that seemed
respond to the data. For instance,
of up to down days of 11:10. After to run out of steam. Suppose,
evidence of unexpected strength in
very strong days, however, the however, that the trader also
the economy normally might be
average next-day change is .15%, received information that the odds
welcomed by the stock market, and
with a ratio of up to down days of of the market’s returning to its
our hypothesis would be to look
9-5. Statistical tests, performed average trading price were close
for evidence of market strength
either on the price change data to 90%, given the low volume of
if the numbers come out strong.
or the up/down ratios, could tell the early rise. Armed with the
Suppose, however, that the numbers
us the likelihood of obtaining statistical knowledge, the trader
are very strong and bonds sell off
this difference by chance alone. might gain additional confidence
due to fears of inflation. Stocks
Many times, the market proves to in his trade idea and might
start higher, but then size comes in
be efficient and the analysis will even trade it more aggressively.
and initiates selling, hitting bids.
show nothing more than random Conversely, if he had the statistical
We might say to ourselves, “This
differences. Other times, however, information and then saw that the
shouldn’t be happening!” Our
a distinct edge will emerge from early rise was unusually strong with
prepared minds have enabled us to
the data. rising volume, he might—like the
appreciate that something unusual
research scientists—take advantage
How could a trader use such is occurring, providing us with
of the unexpected and jump on
information? Perhaps an analogy a potential opportunity to profit
board the strength. Knowing what
will be instructive: from the recognition.
to expect based on precedent—and
A baseball pitcher is facing a batter then seeing if the market actually I know from my statistical studies
with no outs in the inning. The follows its historical tendencies— that markets tend to revert back
bases are loaded, and the pitcher helps prepare the minds of to their volume-weighted average
knows he must get the hitter to discretionary traders for a variety of prices, especially under conditions
either strike out or hit the ball on market scenarios. of relatively low momentum. This
VOLUME 2 ISSUE 1 The TRADER’S Journal 53
 allows me to wait for markets to to break the rules with unorthodox upward market, the NYSE TICK
move outside their value regions— moves. The greatest jazz musicians spends significantly more time
price ranges in which two-thirds not only play beautiful music, above zero than below it, as traders
of all volume has transpired—and but provide it with their own and investors are willing to pursue
then decide if I will trade the move interpretation and style—often stocks at their offering prices.
or fade it. If there aren’t signs of improvised moment by moment. Weak markets tend to stay below
broad, significant momentum to Across all performance domains, the zero line, signifying that traders
the move, I can fade the move and experts first learn the rules; then are aggressive in hitting bids.
potentially profit from the “false they learn to move beyond them.
The market’s statistical tendencies While the NYSE TICK can be used
breakout”. Should the momentum
can be thought of as its rules: as an intraday measure of the bullish
look strong, I can wait for the first
patterns that are followed by good and bearish leanings of traders, I use
pullback and attempt to ride the
traders and sometimes overridden it for slightly longer-term analysis.
breakout. Mean reversion is my
by great ones. The Adjusted NYSE TICK that
hypothesis, but does not become
I post daily on my website is the
a full-fledged trade idea until it is
Short-Term Market Sentiment: sum of all TICK readings during
validated by current market action. the day (values calculated every
Mental flexibility keeps me open to Example of a Market Rule
ten seconds), statistically adjusted
such action. One of my trading rules is that
to create a zero mean. As you
market sentiment doesn’t turn
Perhaps the masters of integrating might guess, the Adjusted TICK,
on a dime. A market must stop
mental flexibility with a statistical as a measure of trader sentiment,
going up before bullish traders
perspective are poker players. correlates quite well with daily
turn bearish; neutral sentiment will
Good poker players know the odds price movement. The Adjusted
not change until price direction
associated with their hands, and TICK’s correlation with daily price
is established. When sentiment
they will use these odds to help change in the S&P 500 exchange
is highly bullish or bearish in a
them decide whether to hold or traded fund (SPY) is .75, meaning
market that is making new highs
fold. The best players, however, also that well over half of all variance
or lows, that momentum normally
look for clues in the current action will persist in the short run before in price changes during a day can
to help them decide whether to go the majority can be proven wrong. be attributed to short-term trader
with the odds or bluff. Reading A nice example of this principle sentiment.
the strengths and weaknesses of can be found in the NYSE TICK, We can test our market rule that
opponents—and especially picking one of the shortest-term measures strong sentiment exerts persistent
up on their “tells”—provides the of sentiment available. short-term effects on price
validation that expert poker players movement by examining occasions
The NYSE TICK measures the
need before acting upon the when sentiment is at bullish and
number of New York Stock
hypotheses of odds. bearish extremes. For the purpose
Exchange issues that are trading
on up ticks (they have just traded of our analysis, we’re looking at
Research suggests that elite
higher) minus those that are trading days in which the Adjusted
performers across a variety of fields
trading on downticks (their last TICK either exceeded +600 or fell
are more flexible in their decision-
price movement is lower). Another below -600. These are the occasions
making than non-experts. A
way of framing the TICK is that in which the Adjusted TICK is
good physician can make correct
it is unusually strong when many more than one standard deviation
diagnoses, but great physicians
stocks, simultaneously, are trading above or below its zero mean.
know when cases are unique and
might require additional tests. at their offering prices. Conversely, Since July 2003 (N = 527 trading
Chess grandmasters intensively the TICK is very weak when days) we have had 72 occasions
study tournament games and many stocks are trading at their in which the Adjusted TICK was
acquire the ability to know when bid prices concurrently. In an unusually strong and 74 occasions
54 The TRADER’S Journal VOLUME 2 ISSUE 1
 Strong TICK Days All Other Days
Next Day SPY .08% (45 up/ 27 down) .04% (289 up/ 246 down)
Conclusion
Three Day SPY .31% (50 up/ 22 down) .09% (308 up/ 227 down)
It would be misleading for me to
suggest that robust statistical edges
Weak TICK Days All Other Days
occur every day in the markets.
Next Day SPY -.13% (34 up/ 40 down) .07% (316 up/ 217 down)
While markets are not perfectly
Three Day SPY .11% (42 up/ 31 down) .12% (300 up/ 233 down) efficient, as behavioral finance
research has found, neither are
in which it was unusually weak. reverse.
they so inefficient as to routinely
The accompanying Tables display
These statistical tendencies, which leave nickels lying on sidewalks.
what the SPY did following the
I track on a different free site (www. The most promising statistical
strong and weak days, looking one
traderfeed.blogspot.com), provide analyses utilize data that have not
and three days out.
guidelines for discretionary traders, been picked over: either unique
The strong Adjusted TICK preparing their minds for both the measures or common measures
days were followed by modestly expected and unexpected. Let’s that are assessed at unusual time
greater strength the next day that say the market showed unusually frames. When you do find an
expanded over the next two days. positive sentiment during a edge, it allows you to pursue your
The average gain three days after price rise yesterday and closed trade ideas with greater confidence
a strong daily TICK reading was two points below its high for the and can keep you out of bad trades.
more than three times the average day. The market opens a point Most important, in the spirit of
seen on other days, with winning lower today, as the trader reads Pasteur, the market “rules” defined
occasions outnumbering losers by the Adjusted TICK values in real by historical tendencies prepare
better than 2:1. Weak Adjusted time. Once the net TICK value for you to capitalize on those occasions
TICK days, however, tended to the day turns positive, the trader when markets break those rules. It
be followed by price weakness assumes a continuation of positive is very difficult to appreciate the
the next day, with losing sessions sentiment and buys the market, unexpected if you don’t first know
outnumbering winning ones and benefiting from the high odds that what to expect!
an average price loss across all the market will take out yesterday’s
occasions. Interestingly, however, high. Should the Adjusted TICK Brett N. Steenbarger, Ph.D. is Associate
the weakness tended to be reversed readings today never turn positive, Clinical Professor of Psychiatry and
by the third day out, so that there however, the trader can avoid the Behavioral Sciences at SUNY Upstate
was little difference between the long trade and perhaps, instead, Medical University in Syracuse, NY and
author of The Psychology of Trading (Wiley,
weak TICK days and all other days sell the market for a move back to
2003). As Director of Trader Development
at a three-day horizon. yesterday’s average price (a different for Kingstree Trading, LLC in Chicago, he
rule and tendency). has mentored numerous professional
This suggests something that I have
traders and coordinated a training
observed in other research: price Knowing the market’s tendencies
program for traders.
persistency is not symmetrical. provides the trader with well-
Bearish developments tend to grounded trade ideas, but also An active trader of the stock indexes,
reverse more quickly than bullish prepares the trader’s mind for those Brett utilizes statistically-based pattern
ones. This reflects the fact that bull “chance” occasions in which the recognition for intraday trading. Brett does
market swings tend to last longer market acts counter to its history. not offer commercial services to traders,
but maintains an archive of articles and
than bear moves. After a strong Once again, mental flexibility—
a trading blog at www.brettsteenbarger.
daily Adjusted TICK reading, a keeping an eye on those real- com.
trader can expect price firmness time Adjusted TICK readings
over the next several days. After a and adjusting one’s trading Brett can be reached via his website www.
weak reading, however, the trader accordingly—is the key to making brettsteenbarger.com
can only expect follow through maximum use of the statistical
weakness the next day before prices analyses.
VOLUME 2 ISSUE 1 The TRADER’S Journal 55
 TRADING SYSTEM DEVELOPMENT

Trading the Euro: Box

it, Squeeze it, Love it,
Leave it

John F. Carter, trader, explains his favourite

setups to trade the Euro successfully.
Trading is the most deceptive profession in the world. focused on the Emini S&Ps and the Mini-Sized Dow,
A person cannot walk into an airport, jump into a there are plenty of times when these indices are dead
747, and take off down the runway without any prior in the water. On days when the indices are trading in
training. Yet people will routinely open an account a narrow range, I look to the currencies for my next
and start trading without any guidance whatsoever. setup. My two favorite setups in the currencies are
For me, the biggest difference in my trading occurred what I call the Box Play and Squeeze Play. I execute
when I learned to ignore my brain and just focus on these primarily on the EURUSD, but they work on all
a handful of good setups. Once I learned the setups, currency pairs. Let’s take a look.
the next challenge was to have the discipline to follow
them the same way, each and every time. No thinking, I like to focus part of my trading day on scalp plays,
no hemming, no hawing. I did this by recording my where I’m jumping in and out of the market with a
trading activity and grading myself on how well I little piece here, and a little piece there. However,
executed each setup . . . instead of how much money I I also like to focus a part of my time on catching
was making or losing. Whereas focusing on the P&L potentially bigger intraday moves, as well as multi-
automatically encourages the bad habits that plague day and multi-week moves. What I’ll do is focus on
many traders, a setup-based approach encourages scalp plays in one account, and use a second account
habits that can push a trader into the realm of for swing plays. The Box Play and Squeeze Play are
consistent profitability. Which setups do I like? diverse setups that can be used for both scalp plays
Although I spend a large amount of my trading day and swing trades. For intraday trades, I use 5 and 15
56 The TRADER’S Journal VOLUME 2 ISSUE 1
minute charts. For swing trades, I use 60 minute and 3. As the market action progresses, I will take a
daily charts. horizontal line and start marking highs and lows. I
will usually have to adjust this horizontal line a few
Box Plays: Measuring the Move Before it Occurs times as the market action develops. Once I get
The one thing a trader soon learns about the markets two tests of one of the lines, I have a potential box
is that they will never move straight up or straight play developing.
down forever. A market can definitely rip higher for
long time, but at some point it will have to rest and 4. At this point I am watching to see if I get another
consolidate, and sometimes it will even come back test on the opposite side of the box. Let’s assume
down to earth and reverse all of those spectacular in this example that I do, and now I have two tests
gains. Just as a runner can only sprint for a limited of the highs, and two tests of the lows. The width
amount of time before their body gives out, a market of the box is 20 ticks.
can only move so far before it needs to pause, take
a rest, and build up its energy reserves for the next 5. Now that I have my box, I place two orders. I place
major move. a buy stop order 1 tick above the high end of the
box. I place a sell stop order 1 tick below the low
For Box Plays, what I’m looking for is a market that of the box. Whichever way the market breaks, I am
is taking a rest before its next spurt higher or lower. I sitting there with my order waiting to get filled.
want to see a period of horizontal consolidation with
at least two tests of the highs and two tests of the lows. 6. My buy stop is hit. I place a limit sell order 20 ticks
Once I get these two tests, then I’m looking to buy a (the width of the box) away from my entry point. I
breakout of the box, or sell a breakdown of the box. leave my sell stop in place, as this now becomes my
My target on these trades is the width of the box. stop loss order on this trade. This represents a risk
These plays can be done on all time frames, though reward ratio a little over 1:1.
my preference for day trading is 5 and 15 minute time
7. I stay in my play until my stop or my target is hit.
frames. For swing trades, a trader can look to the 60
minute and daily charts. I trade these as both swing I do not trail stops.
and intraday plays, with each time frame independent 8. Note that all times listed are Eastern.
of itself (meaning I could have a 60 minute box play
going and a 5 minute box play going at the same time,
with different parameters and in different directions).
Also, since the Euro actively trades around the clock,
these box plays can be setup at anytime. I like to try
to get some sleep each night, but on those nights when
I get shafted by the wait staff (i.e., I order decaf coffee
after dinner but they give me caffeinated, so I end up
lying in bed staring at the ceiling), I can at least get up
and check if a box play is forming overnight.

TRADING RULES FOR BUYS (SELLS ARE REVERSED)

1. Set up a 24 hour chart so the overnight activity can
be accounted for in this indicator setup.
2. I like to set up a simple bar chart on the time
frame I want to play, without any other indicators
or “junk” cluttering up the screen. I will search Figure 1 EURUSD Forex — December 2004
through various time frames to see where box plays
are currently setting up.
VOLUME 2 ISSUE 1 The TRADER’S Journal 57
 1. This is a daily chart of the EURUSD. This is an 1. On August 3 The Euro formed a box on the 15
example of a swing trade and a bigger example of minute charts. The first high was marked here at
the “power of the box.” On May 20 and May 21 point #1.
we form the lows at 1.1620.
2. A few hours later we get a potential low for the box,
2. On May 27 the market loses steam from its vault and I initially draw a horizontal line at the lows
higher and sells off, forming the highs of the box here.
312 pips later (a little over 3 cents).
3. The market bounces and we get a retest of the
3. On June 4 and June 5 the market retests the lows of highs.
the box.
4. Then the Euro sells off nicely and we get a retest
4. And on June 16 there is a retest of the highs of the of the lows. Since this low pushed a little lower
box. Once this happens, I place my orders. I use a than the low at point #2, I go ahead and move my
buy stop at 1.1933 and a sell stop at 1.1619. horizontal line down to reflect this low. Once I
have these lines setup, I place my orders. I use a
5. My sell stop is hit at 1.1619. Since the width of the buy stop at 1.2062 (one pip above the highs) and a
box is 312 pips, I calculate my target accordingly, sell stop at 1.2042 (one pip below the lows).
and I place a buy limit order at 1.1307. My stop is
my original buy stop order at 1.1933. 5. My sell stop is hit at 1.2042. Since the width of the
box is 18 pips, I calculate my target and I place a
6. The market moves down nicely, and then shoots limit buy order at 1.2024. My stop is my original
back higher. Anyone using a trailing stop for this buy stop order at 1.2062.
trade would have been stopped out for a small gain.
The reason I keep my stop wider, and the reason I do 6. My target is hit and I’m out for a gain of 18 pips,
or $180.00 per contract. I don’t have to remember
not trail it, is that I know this is a high probability
to cancel my open buy stop because my execution
play, and I want to give this setup “room to move”
software does it for me automatically. Now, if I
in order to give it a chance to work out. My target
could just automatically remember to compliment
is hit nearly 2 weeks later for a gain of 312 pips, or
my wife’s choice of clothing each and every day, I
$3,120.00 per contract.
will be good to go.

Figure 2 EURUSD Forex — December 2004 Figure 3 EURUSD Forex — December 2004

58 The TRADER’S Journal VOLUME 2 ISSUE 1

1. On this 15 minute chart of the EURUSD we get a volatility and signals that the market is taking a
first test of the highs at 1.2347. Once the market breather, building up steam for its next move. The
sells off from this level, I draw a horizontal line trade signal occurs when the Bollinger Bands then
across the high. move back outside the Keltner Channels. I use a 12
period Momentum Oscillator to determine whether to
2. The market sells off and pushes as low as 1.2323.
go long or short. If it is above zero when this happens,
I start off drawing a line at this level. Later I move
I go long, if it is below zero, I go short. These are all
this line back up to 1.2331 because the rest of the
canned studies that come with most charting packages.
price support tests were much close to this level
For the parameters, I just use the default settings on
than the “wayward tick.”
TradeStation. I also took an extra step and turned all
3. Here we get another test near the highs. of these into an indicator which makes it easier to read
on the chart.
4. And here we get another test near the lows. Once
the 4 price tests are complete, I place a buy stop TRADING RULES FOR BUYS (SELLS ARE REVERSED)
order at 1.2348, and a sell stop order at 1.2330.
1. Set up a 24 hour chart so the overnight activity can
Although this box isn’t perfect, there is no doubt
be accounted for in this indicator setup.
that we have a nice horizontal channel in place.
2. The “heads up” on this setup is the first black dot.
5. My buy stop order is hit. Since the width of the
This is not a trade signal, but a “heads up” that a
box is 16 pips, I place a sell limit order for my target
trade signal is setting up.
at 1.2364. My sell stop remains in place as my stop
on this play. 3. The signal on the indicator is the first gray dot after
a series of black dots. (This will be shown in detail
6. My target is hit, and I’m out for 16 pips, a gain
in the charts that follow).
of $160.00 per contract. I could have also used
the low of the “wayward tick” in my calculations 4. Once the first gray dot appears after a series of
and this would have been a more profitable trade. black dots, I go long if the histogram is above zero.
The bottom line is that when it comes down to a Once the signal fires, I just place a market order.
few ticks, it is not a big deal where you place your This is a momentum play and I don’t want to be
horizontal line, as long as it is crystal clear that a box messing around with limit orders that may not get
is in place. As one of my former mentors hammered filled (remember the whole thing about weenies
into me, “Don’t be a weenie for a teenie.” and teenies).
I always enjoy the act of opening and giving presents 5. I base my stops on the time frames I’m using. For
over the holidays. I find that I enjoy that feeling almost 5 minute charts, I use a 20 pip stop. A 15 minute
as much as discovering a new “box” to open up in the chart gets a 25 pip stop, 60 minute chart a 30
Euro. With this play, Christmas seems to happen a pip stop and a daily chart a 50 pip stop. One pip
few times each week instead of just once a year. Let’s equals 1/100th of a cent and equates to $10.00 on
take a look at the next setup. a regular sized contract, and $1.00 on the minis.
Squeeze Plays: Jumping on the Train Just as it is 6. My target is based purely on the momentum of the
Leaving the Station trade. Once the momentum signal starts to weaken
The Squeeze Play takes advantage of “quiet periods” (rolls over), I get out of the trade at the market.
in the market when the volatility has decreased 7. I don’t trail stops. I treat this position like my
significantly, and the market is building up energy marriage—I may want to try to change something
for its next major move higher or lower. These quiet
about the trade but in the end I’ve learned its best
periods are identified when the Bollinger Bands
to just leave it alone.
narrow in width to the point they are trading inside
the Keltner Channels. This marks a period of reduced 8. Note that all times listed are Eastern.
VOLUME 2 ISSUE 1 The TRADER’S Journal 59
 1. On this 5 minute chart of the Euro Currency we
go into “black dot territory” a little before 10:00
a.m. and 25 minutes later we get our first gray dot
(Point A). The histogram is above zero so I go long
at the markets, and I’m filled at 1.2054. I place a
stop at 1.2034.
2. The market rallies steadily for the next 90 minutes
and starts to lose momentum just before 12:00
noon (Point B). I exit at the market and am filled
at 1.2153 for a gain of +119 pips, or $1190 per
contract.
Box Plays and Squeeze Plays show me when the
markets go into quiet mode. The only reason markets
go into quiet mode is because they are building up
Figure 4 } EURUSD Forex — September 2004 energy for their next major move. I like to be on the
alert for this move, and of course on the alert for the
1. On August 23 I woke up to see the Euro had just direction of the move. Both of these setups help me to
fired off a squeeze. This is marketed by the first take advantage of these ebbs and flows in the market.
gray dot after the series of 3 black dots. Since the In parting, I can’t emphasize enough how important
histogram was below zero, I went in and shorted at it is for a trader to find a market that fits their own
the market, getting filled at 1.2252. I placed a 30 personality if they hope to be successful. If you find
pip stop at 1.2282. that you are only happy if you are buying breakouts
2. The market sells off considerably and the and selling breakdowns, then the Euro is probably
momentum on the histogram never lets up. I stay your market of choice. This market breaks and trends
in the trade all day, exiting at 4:00 p.m. when the well, while the Emini S&Ps tend to suck in traders
momentum begins to slow. I exit at the market with false breakouts and breakdowns. In other words,
and am filled at 1.2146 for a gain of 106 pips, a if you are buying breakouts in the S&Ps and getting
gain of $1060 per contract. killed, then give the Euro a try.

John F. Carter grew up the son of Morgan Stanley stockbroker,

and was introduced into trading as a sophomore in high school,
and has been trading actively for the past 19 years. He studied
international finance at the University of Cambridge in England
before graduating from the University of Texas at Austin. John
has been a full time trader since 1996. In 1999, tired of talking to
his goldfish while trading alone in his office, he launched www.
tradethemarkets.com to post his trading ideas.
Today he and the Trade the Markets team have a following of
over 10,000 people. John publishes separate daily newsletters for
futures/single stock futures, options and equities trading, and,
more recently, forex. He’s a Commodity Trading Advisor with
Razor Trading, manages a futures and a forex fund, and McGraw
Hill tapped him to write a book entitled Mastering the Trade, due
out in January, 2006. To keep his sanity, John relies on physical
activity after the close to deal with the financial swings he and his
subscribers encounter. He clears his head running, water skiing,
Figure 5 EURUSD Forex — September 2004 golfing and practicing Tae Kwon Do.

He can be reached at [email protected].

60 The TRADER’S Journal VOLUME 2 ISSUE 1
MARKET OBSERVATIONS

QQQQ: Is risk getting

higher for investors?
e s istance levels and d
g i ts r ispl
ays
stin sho
te rt-te
Q is rm w
Q eakn
QQ ess.

Paolo Pezzutti, private trader, details his own opinion on the QQQQ
A little bit of history
Prices after the March 2000 high at about $120,
moved very quickly to the downside, starting a
2-year downtrend and printing a new relative
low only in October 2002 at about $20. The
downtrend burned an enormous part of the
capitalization, dividing prices by 6. During the
past 3 years, prices managed to double reaching
the $40 level in November 2005. QQQQ has
been recovering from the end of the 1990s
bubble, printing an uptrend that gave back
FIGURE 1: QQQQ MONTHLY. QQQQ recovered only partially the internet partially the heavy losses suffered between 2000
“bubble” crash. Graphic provided by: TradeStation. and 2002. Not too bad indeed, but probably
not enough for many investors badly hit after
the year 2000.
VOLUME 2 ISSUE 1 The TRADER’S Journal 61
 Volatility
Markets tend to move
fast from periods of price
consolidation to new levels
of price equilibrium. They
oscillate from periods
of low volatility to high
volatility and back again.
After periods of extremely
low volatility, volatility
increases. Prices move
sharply.
In Figure 2, you can
see the weekly chart of
QQQQ and the historical
volatility plot.
FIGURE 2: QQQQ WEEKLY. QQQQ printed a declining volatility during the last three years’ uptrend.
Volatility is close to its Graphic provided by: TradeStation.
lowest levels in six years. a reaction to the impulsive action to the downside,
Since 2002, the decline of volatility has been fast. sustained by low interest rates that provided liquidity
My view is that a directional impulse, most of the and helped corporate profits. There might be an
time, brings volatility in the direction of the trend. ongoing structural change in the market, providing a
I tend to interpret the last three years’ movement as lower-volatility environment than in the past. I believe
however, that high-volatility is due to be back.
Trading range and reaction phases can be long,
when you conduct your analysis at the weekly
or monthly level, and there is no doubt that
volatility is cyclical. The market, however, is not
providing for the moment signs of increasing
volatility.

Technical Analysis
Let’s see analyze now the technical conditions
using a simple, but useful indicator.
In Figure 3, you can see the moving average
convergence/divergence (MACD) indicator
applied to the monthly chart of QQQQ. It
calculates two exponential moving averages
(EMAs). The difference between these two
averages is plotted as the MACD (blue line).
This value is averaged and then plotted as the
MACDAvg (red line). The difference between
MACD and MACD average is plotted as the
MACDDiff (red histogram).
FIGURE 3: QQQQ WEEKLY. The MACD indicator displays multiple negative
divergences. Graphic provided by: TradeStation.
Since 2004, prices have been moving within a
slightly converging channel. Note that the MACD
62 The TRADER’S Journal VOLUME 2 ISSUE 1
To advertise to the readers of
The Trader’s Journal

Call Dickson Yap at (65) 9788 8141

or email at [email protected]
 indicating an ongoing consolidation at these levels.
The test of this resistance is not easy, because QQQQ
is arriving at these levels after an 8-month up leg and a
20% advance of prices. The divergence is present for
another indicator, the Bollinger %b (close), which can
be used to tell us where we are within the Bollinger
Bands (%b= (last close-Upper Band)/(Upper Band-
Lower Band).
If you look at Figure 5, you can see that the recent
December high is printed in coincidence with a
negative divergence of %b.

Assessment
Divergences alone cannot state the end of a trend. You
can have many false signals before you have a correct
FIGURE 4 QQQQ DAILY. MACD is decreasing. The MacDiff is indication. They are, however, a useful tool for traders
negative, indicating the current weakness. Graphic provided by: to assess the risk of entering long positions when they
TradeStation.
occur. Looking at the volatility situation, my view is
that most of the time, a directional impulse brings
volatility in the direction of the trend, although the
market is not showing signs of increasing volatility,
but it appears only to be more “news-driven” than in
the past months. In summary, I believe it is becoming
increasingly risky to open new long positions at
these levels. There are elements to believe that the
risk of entering long positions is getting higher. I
understand also that technically the uptrend is still
intact and ongoing. It is difficult not to participate in
the current up phase. Trying to spot lower-risk entry
points during this correction/consolidation phase is an
option. For example, should prices develop a trading
range in the next weeks very close to the resistance
level, without managing to correct significantly, this
would increase greatly the market chance to reach new
highs, extending the current ongoing up leg. At the
same time, should QQQQ start a deeper correction,
it will be difficult to see a new leg of the uptrend to
FIGURE 5: QQQQ DAILY. Bollinger %b (close) indicator displays develop soon.
a negative divergence in this time frame. Graphic provided by:
TradeStation.
Paolo Pezzutti is a private trader based in Rome (Italy)
printed two negative divergences in coincidence with and is a Commander in the Italian Navy, specializing in
the January 2004, December 2004 and December telecommunications and command & control systems. He has
2005 tops (points A, B and C). At present, prices are contributed to Technical Analysis of Stocks and Commodities
testing the higher trend line and momentum is low. publications.

At the daily level, in Figure 4, these divergences are not Paolo can be reached at [email protected]
evident. MACD is decreasing. MACDiff is negative

64 The TRADER’S Journal VOLUME 2 ISSUE 1

FOREIGN EXCHANGE

Foreign Exchange:
Behind the scenes

Noble DraKoln, author, futures investor, broker, and analyst, provides a

more detailed look at the working of the forex market.
Foreign exchange (forex) trading on volume, open interest, and the is their legal requirement to make
is definitely the most exciting new positions (long or short) that the this same information available free
opportunity in the investment major players i.e. banks, financial to the public.
world today. Active traders institutions, and international
conglomerates hold. This inability Once a week the Commodities
worldwide have discovered this
to have a full picture of the OTC Futures Trading Commission
form of speculation over the past
market makes it exceptionally (CFTC) issues what is known
few years. Once the domain of only
difficult for speculators to properly as the Commitment of Traders
international banks, new rules allow
analyze the speed and force that report. This insiders report details
skilled speculators the opportunity
may drive a particular currency. the exact positions (long and short)
to participate.
of the major players, as well as the
Numbers vary, but the forex In order to resolve the lack of total amount that their positions
market’s notional value reaches in information provided in the OTC increase or decrease from week to
the trillions daily. Far more than market the speculator needs to turn week.
the stock market and bond market only to their futures forex exchange
traded counterparts for guidance. Why this information is valuable
combined. In this brief article I will
In the futures forex market there is two fold. First, it gives the OTC
cover a simple way to determine
are multiple contracts that expire in forex trader an idea as to the general
what currencies are on the move
various months. The month closest sentiment of the major players.
and in which direction they may
to the OTC market moves in tight Second, over time it shows the
be headed.
relationship to it. While the OTC gradual shift in momentum from
The forex market is divided into two market has little to no information weak to strong or strong to weak.
separate arenas. There is the over- about their participants, the With these two helpful pieces of
the-counter (OTC) forex market government keeps highly detailed information an OTC forex trader
and the futures forex market. Since records on the futures forex market. can determine what position he
the OTC market is not centralized it What makes their constant fact wants to take, based on the major
is impossible to obtain information gathering even more impressive players, as well as when the ride
VOLUME 2 ISSUE 1 The TRADER’S Journal 65
 Euro FX – Chicago Mercantile Exchange Futures Only Positions as of 12/06/05

Figure 1 - Example of a Commitment of Traders Report from the CFTC

may be coming to an end, so he In the above example the an advantage for yourself that over
won’t be left holding his position at Commercials have a long position 90% of “spot forex” only speculators
the top, or bottom, of the market. of over 100,000 contracts. This simply don’t know how to do.
could mean one of two things,
There are a myriad of other ways to As speculators we want every
either they have had a change of
trade the Commitment of Traders competitive advantage available to
heart in the overall downtrend of
report, in both the OTC forex market us. In the spot market while the
the marketplace or they simply rewards are great, high leverage,
as well as the futures forex market.
want to protect themselves just in high volatility, and short trading
With diligence and the willingness
case the market spikes up on its periods make it difficult for the
to trade both forex arenas, with
and against each other, every way down. The second instance is average speculator to get ahead. By
speculator should have a fulfilling what is most likely occurring. using the “commitment of traders
trading experience. Current and This strategy of combining spot report” you are capable of getting a
historical Commitments of Traders forex with a futures contract can complete snapshot of the players in
data are available on the Internet a particular currency, which gives
just as easily work for the average
at the Commodities Futures you the ability to strategize your
speculators. What you do is simple,
Trading Commission’s website: spot forex trading for the long run.
once you are capable of defining the
http://www.cftc.gov. long term direction of the trend, you
Noble DraKoln, noble@liverpoolgroup.
One of the little known secrets of can setup a forex option, or a forex com, is the author of the best-selling
“spot forex” trading is the concept futures contract to follow along books Forex for Small Speculators, Futures
of hedging. Hedging is defined as with the long term direction (the for Small Speculators, and Single Stock
the ability to protect yourself from Commitment of Traders Report can Futures, For Small Speculators. He has
losses. There is an inter-relationship help you determine that). When been a futures investor, broker, and analyst
you trade spot forex positions, you for almost 11 years. You can subscribe
between spot forex, futures forex,
to his free monthly newsletter at www.
and option forex. Each one is only focus on the counter trends,
liverpoolgroup.com ,open a demo forex
designed as a type of “insurance” the moves that go against the long account at www.liverpoolgroupfx.com , or
for the other. The Commitment of term trend. By doing this you are purchase his seminars on CD titles at www.
Traders Report sheds light on what capable of holding on to profitable smallspeculators.com
the “Commercials” also known as trades for much longer, as well as
banks, governments, and major still being able to profit from trades
corporations are doing to protect that go against you. By utilizing
themselves. this strategy you are able to create
66 The TRADER’S Journal VOLUME 2 ISSUE 1
MONEY MANAGEMENT

Money and Risk

Management –
In Just 6 Steps!
Jafli, author and private
trader, explains his 6 steps
to incorporating Money
Management successfully.
Most people give very little attention you set aside your money for of them still lose money! Good
to money & risk management children’s education, emergency trading means you lose only a small
aspects when it comes to stock fund, etc. You should not, must amount of money.
trading. And to those who do, it is not, borrow money from anybody
First and foremost, you need to
only treated as an after-thought. (banks included!) just because you
know your risk tolerance. In
have that burning ambition to bring
In most cases, huge emphasis is other words, you must identify
in huge rewards from trading.
given to analysis and techniques of where your stress point is. How
assessing trading opportunities. Don’t have enough money? Start much money can you afford to lose
saving. If you cannot even do this, without losing your sleep? How
The following is a summary of 6
then you’re not ready for trading. much money are you willing to lose
steps money & risk management
Period. in a single trade? These are some
strategies that have served me well
of the questions that you need to
over the years. They had saved Never do a Hail Mary and dump ask yourself in order to determine
me from being poor while at the everything that you have in one your risk threshold.
same time gave me space to fine- single trade, no matter how much
tune and modify my trading you love THAT stock! Don’t be a Risk can be controlled and
approaches and got back what Rambo in the stock market! Those minimized to a level that is
I’ve lost in the market. Now I’m who do not bother about money comfortable to you.
not saying they are the only ones management are the ones who
available in the market. It’s just STEP 3 – WHEN TO BUY
would dump all their money in
that they are the ones that have one single trade. Don’t put all your When do you jump into a trade?
been useful and profitable to me. The simple answer is that it depends
eggs in one basket.
And just what are the 6 STEPS? on the trading plan that you follow.
Well, read on! STEP 2 – RISKY BUSINESS There is no right or wrong answer.
Trading success depends on how Whether or not you make money
STEP 1 – TRADING BULLETS out of it will only be known after
you manage risk. It’s NOT based
No money, no trade! No argument you have sold your shares. It is not
on how you choose your stock.
there! You need to set aside some uncommon that a sell signal to me
money just for trading purposes. Every Tom, Dick & Harry talks may be a buy signal for you and
Just like what you would do when about risk control. But most we both still earn profits from our
VOLUME 2 ISSUE 1 The TRADER’S Journal 67
 own trading systems. Anytime is is the mistake of not letting your approach. If it bombs out, that’s
a good time to buy as long as the profits run. OK as I’ve already planned for it.
conditions are in accordance with I consider that as “service charge”
Stocks do their own thing, not
your trading system. by Mr. Market for giving me such
what we think they should do.
“advisory” service!
There are as many trading systems
Suppress the urge to be “right” –
or plans as there are the traders Ultimately, your intended or actual
focus on the need to be disciplined
themselves. Within the technical position size would depend on the
when executing your trading plan.
analysis fraternity alone, there level of risk that you’re prepared to
Lose your opinion – not your
are the trend followers, breakout take.
money!
traders, momentum chasing players,
day traders etc. Some traders Most importantly, choose a stop STEP 6 – RISK REWARD RATIO
would buy on price weaknesses, that you would definitely act on! The purpose of using risk reward
uptrend breakouts and rebounds. ratio is to assess whether the
The trend followers would join in STEP 5 – POSITION SIZE intended trade is worth taking the
when they feel it is safe to hop on- It’s inevitable that you’re going to risk. This analysis tool is useful
board the moving trend train. lose money from time to time in when you have already identified
this business. Everybody does! But a sell price target for a particular
Many traders spend considerable what separates the pros from the stock that you want to trade.
amount of time in deciding when boys is that the pros minimize their
to enter a trade. My view is that Let’s use an example to calculate
losses and maximize their profits.
setting exit conditions is MORE the risk reward ratio. Suppose you
The retail crowd would do exactly
IMPORTANT than entry have set your entry price at $7.00.
the opposite – let the losses run and
conditions! Why? It’s the exit Your stop loss is set at $6.34. And
cut their profits short!
price that determines your overall you have made up your mind that
risk and profit! It is for this reason If you’re still new in the stock you want to sell this stock once it
that I spend more time defining the market and lack trading experience, hits $10.00 (your sell price target).
it is absolutely important for you to The calculation of the risk reward
exit conditions for each of the trade
know how to control ratio would be as follows:
that I intend to take rather than the
entry conditions. and minimize risk Risk Reward Ratio = (Sell Price – Entry Price)/(Entry Price – Stop Loss)
effectively whilst you = (10 – 7)/(7 –6.34) = 4.55
STEP 4 – STOP LOSS (EXIT go over the learning
CONDITION) curve.
Stocks that have ratios greater than
In property, the most important And just how do you minimize the 2 are potential trading candidates.
thing to remember is location, risk? One way is by simply reducing Better trading candidates are
location, and location. In the your position size, which is the those that have ratios greater than
stock market, its stop loss, stop number of shares that you intend 3.
loss & stop loss! Identify stop loss to buy. Don’t bite more than you
Risk reward ratio can also be used
conditions before you enter trade. can chew. Fact is, the traders who
as screening criteria for trading
This is your insurance if you’re win are those who minimize risk.
candidates.
wrong about the trade. And those who don’t? They pay
the price and get wiped out.
The ultimate role of stop loss is to Jafli is an author as well as a private trader.
protect capital and later, to protect In fact, it’s a good idea to trade in He’s a Staff Engineer currently working for
small position sizes when you’re a large American semiconductor company
profit as the trade progresses.
in Malaysia.
new in trading. I also keep my
Not cutting losses is actually one of position size small whenever I Jafli can be reached at http://www.
the biggest mistakes that traders want to test out a new trading lowrisktrade.com/tradesafe.htm.
make. Coming a close second
68 The TRADER’S Journal VOLUME 2 ISSUE 1
DERIVATIVES

Applying a Trading Edge

Last issue I spoke briefly about the benefits
Nick Katiforis, private of trading options and how the traders that
client advisor and make money trading them understand and
consistently apply an “edge” to their trading
author, explores the of options. I then went on to explain some
of the key concepts of trading options using
basics of trading examples. This issue I want to continue the
options. theme of finding out what that “edge” is and
how to use it to your advantage when trading.
The first principle to give you an edge is that
of limited risk.

PRINCIPLE ONE
Limited Risk
Buying options offers unlimited profit
potential for a limited risk. When buying
options your total risk is the amount you pay
for the option plus brokerage. You cannot
lose any more than what you paid for the
option no matter how far the market goes
against you.
High leverage and limited risk is what attracts
the majority of option buyers. In comparison
to share trading, the extra leverage means
your profit potential is magnified, with the
loss potential limited to the price paid for the
option.

The Benefits of Limited Risk

The major benefit of having limited risk is that
it gives you the ability to stick with a trade no
matter how far the market goes against you, or
how volatile the market becomes. There is no
margin to pay as is the case with futures and
you cannot be stopped out of your position
on a minor correction.
You can hold your position in the market
knowing that your maximum loss can be
no more than what you paid for the option.
VOLUME 2 ISSUE 1 The TRADER’S Journal 69
 You can then wait patiently for the The limited risk in this example is Can I Sell my Option Before
market to resume moving in your the $1000, which is the premium Expiry?
favour once again. (cost) of the option. June refers to
Of course you do not have to hold
the month of expiry of the option.
Trading Tip The 530 is the exercise price, (price the option to its expiry date. At
that the buyer of the option has the any time you can sell your option
Options that are purchased with
right to buy gold at if he wishes to in the market to lock in a profit or
an exercise price reasonably near
exercise his right). a loss.
to where the market is currently
trading have a greater probability How much your option will be
If the price of gold finishes below
of becoming profitable. This is worth will be a function of the
$530 when the option expires
because the market does not need to (June) it will have no value and amount of time remaining in the
move in your favour as far for you the amount lost will be the $1000 life of the option (the more time
to make a profit. The downside is initially paid for the option. to expiry, the more the option will
that because they do have a better be worth), the current price of the
chance of being profitable these The unlimited profit potential in underlying commodity, and how
options will cost more to buy. this example refers to the possibility volatile the underlying market is
of the price of gold moving above (the more volatile, the higher will
Example $540 before or at the expiry of the be the price of the option).
- Buying a Gold Call Option option. Every $1 increase above
Let’s now look at an example of $540 (our breakeven point) will be Trading Tip
an extra $100 in profit. The higher Use the limited risk advantage
buying a call option to see how this
the price above $540 the more gained by buying options when
principle of limited risk applies in
profit you will earn. option volatility is low and the
the commodity markets.
Four Months Later … technical pattern or trend of the
You have a view that the price of market suggest a large move is
gold will rise to $550 over the next Your forecast is correct. The current likely to occur.
four months. You don’t wish to price of gold is $580. The call
risk too much money in case your option you originally bought for A Real Life Example
forecast is wrong. It is currently $1000 is now worth $5,000 Let’s look at an example of a trade
mid January. Gold is trading at that I recommended to my clients
How did I come to this figure? I
$510 per ounce. (Please note that in December 2005 that benefited
took the current price of gold (in
all figures are in US Dollars and from the limited risk advantage of
this example $580), less the exercise
exclude brokerage) options.
price (530) which left me with a
Strategy - Buy 1 June 06 Gold Call profit of $50. As mentioned earlier I recommended buying a February
Option with an exercise price of 530 each $1 move in gold is worth Gold Call Option with an exercise
$100 therefore $100 x $50 move price of 490. The premium paid
• Premium (cost) of option is in gold = $5,000. for this option was US$850.
$1000
Less the premium paid for the
By buying an option in gold my
• Every $1 increase in the price option ($1000), this would leave
clients were able to participate in
of gold above the exercise price a profit of $4,000 per option
the gold bull market following the
(530) at expiry is equal to $100 contract.
gap move on the 16th December,
in profit.
When you consider that in 1980 knowing that the maximum risk
• Your breakeven point will gold made a high of $875, you can they faced was $850 which was
therefore be at $540 at expiry see why people are attracted to the the premium paid for the option.
to make up for the cost of commodity markets by the leverage There were a few minor pullbacks
purchasing the option ($1000). offered by options. along the way but because we held
70 The TRADER’S Journal VOLUME 2 ISSUE 1
the option we were able to stay with Many of these markets you would Limited Risk Summary
the trade and managed to capture a probably not even consider trading • Buying put and call options gives
good portion of the move in gold. futures with because of high margin you unlimited profit potential
We were stopped out of the move costs as well as the high probability with limited risk.
when the market pulled back and of being stopped out on a normal
triggered our stop of $523 (you can market fluctuation. Buying • Buying options offers you high
place stops on options using the options however gives you staying leverage with limited risk.
underlying market price). By that power without the unlimited risk • Buying options with ample
stage however we had made four associated with futures. time left to expiry gives you
times the initial premium that we the ability to stick with a trade
The extreme volatility exhibited in
had paid. through a minor correction with
the Coffee market in October 1999
limited risk to take advantage
Trading Tip meant that using futures to profit
of a longer-term trend in the
Take advantage of medium to from the upward trend that began
market.
long-term trends in the market by in October would have been very
buying options with three or more expensive due to the high margin • Buying options incurs no
months left to expiry. If you are not requirements at the time. The margin.
prepared to risk the whole amount potential rewards however are very
• At any time up to the expiry of
paid for the option, then set exit attractive; a move from the low of
the option that you bought you
points either at a pre-determined 80 to the high 140 for one contract
can sell the option in the market
price level or alternatively if the would be worth US$22,500.
to exit the trade.
option loses half its value. The probability of being stopped
• Buying options in potentially
If you have ever traded futures you out of a move like this if you were volatile markets, eg currency
will know how frustrating it can trading futures would be high. The markets, can provide the
be to have correctly picked the wider the stop, the higher the risk potential for large gains with
direction of the market, only to see you would need to be prepared to limited risk.
it briefly turn around and take out take in order to stay in the trade.
Next issue I will examine option
your stop loss, before continuing in Holding long-dated options on the time decay of options – what it is,
the original direction once again, other hand would have allowed how to minimise the impact on
this time without you in the trade. you to stay in the trade despite the bought options and how to use to
Trading options can help you to volatility, without incurring any gain a trading edge.
avoid this situation. additional risk above what you paid
Nick is the author of the much acclaimed
You never know when a good move for the option.
“Professional Options Strategies for Private
will take place. There are indicators Traders”. He is a former floor trader at the
Trading Tip Sydney Futures Exchange and currently
that can help you, but most of the
Buy ‘cheap’ options with an exercise works as a Private Client Adviser with
time what is needed is patience.
price a long way from the current Tricom Futures and Forex in Melbourne,
This means giving your trade the
market price and with limited Australia. Nick also publishes the Weekly
appropriate amount of time to ‘Option Wizz’ Commodity Newsletter,
time to expiry only if you expect a
work in your favour. available at his website.
sharp immediate rally or decline to
Limited Risk in Volatile Markets occur. If the move does take place Nick can be reached at info@nickkatiforis.
The limited risk characteristics of as expected these options offer the com or via his website www.nickkatiforis.
buying options are also particularly greatest leverage. If not, then be com
useful in trading volatile markets, prepared to lose the majority of the
which have the potential for premium. In options as well as in
explosive moves and large profits. life, you get what you pay for.
VOLUME 2 ISSUE 1 The TRADER’S Journal 71
 ECONOMIC CALENDAR
JANUARY 2006
Monday Tuesday Wednesday Thursday Friday

2 3 4 5 6
Holiday: New Year’s Day EU – 3rd qtr GDP data UK – Consumer credit data for Nov US – Retail sales data for Dec
– PPI data for DecUS US – Factory order data for Nov
All Markets Closed – Minutes for Dec 13 FOMC EU – CPI data for Dec
meeting – Consumer credit data for Nov
– ISM Mfg data for Dec

9 10 11 12 13
US – Consumer credit data for Nov US – Wholesale trade data for Nov UK – BOE MPC begins two-day US – Trade balance data for Nov US – PPI data for Dec
– Wholesale inventories data meeting – Import and export prices – Retail sales data for Dec
for Nov AU – Unemployment data for Dec for Dec EU – PPI data for Dec
AU – Trade balance data for Nov EU – Trade balance data for Nov UK – BOE MPC ends two-day – CPI data for Dec
meeting to set interest rates
EU – ECB meets to set interest
rates

16 17 18 19 20
EU – Retail sales data for Nov US – CPI data for Dec JN – BOJ begins two-day
US – Industrial production for Dec monetary policy meeting
US – Housing starts data for Dec
– Philadelphia Fed survey
for Jan

23 24 25 26 27
EU – Finance ministers hold AU – 4th qtr CPI data JN – Minutes from Dec 15-16 BOJ US – Durable goods data for Dec US – New homes sales data
meeting US – Consumer confidence data monetary policy meeting for Dec
US – Leading indicators for Dec for Jan EU – Unemployment data for Oct – GDP (advance) for Q4
US – Chicago Fed national activity – University of Michigan
index for Dec consumer sentiment index
– Existing home sales data (final) for Jan
for Dec

30 31
US – Personal income for Dec US – FOMC meets to set interest
rates
– Chicago PMI report for Jan
UK – Consumer credit data for Dec
EU – Unemployment data for Dec

Legend
BoE = Bank of England BoJ = Bank of Japan CPI = Consumer price index CPM = Chicago Purchasing Managers
ECB = European Central Bank EU = European Union FOMC = Federal Open Market Committee GDP = Gross Domestic Product
MPC = Monetary Policy Committee NAPM = National Association of Purchasing Managers PPI = Producer price index

72 The TRADER’S Journal VOLUME 2 ISSUE 1

FEBRUARY 2006
Monday Tuesday Wednesday Thursday Friday

1 2 3
US – ISM Mfg data for Jan EU – ECB meets to set interest US – Factory order data for Dec
rates

6 7 8 9 10
US – Consumer credit data for Dec JN – BOJ begins two-day UK – BOE MPC ends two-day US – Trade balance data for Dec
monetary policy meeting meeting to set interest rates
UK – BOE MPC begins two-day US – Wholesale trade data for Dec
meeting

13 14 15 16 17
US – Retail sales data for Jan US – Industrial production for Jan US – Housing starts data for Jan US – PPI data for Jan
– Import and export prices
for Jan
– Philadelphia Fed survey
for Feb

20 21 22 23 24
US – Leading indicators for Jan US – CPI data for Jan US – Durable goods data for Jan

27 28
US – New homes sales data US – Consumer confidence data
for Jan for Feb
– Existing home sales data
for Jan
– GDP Q4p
– Chicago PMI report for Feb

Economic release Release time ( EST) Economic release Release time ( EST) Economic release Release time ( EST)
GDP 8.30am Housing starts 8.30am Construction spending 10 am
CPI 8.30am Production & capacity CPM report 10 am
ECI 8.30am utilization 9.15am Report on business 10 am
PPI 8.30am Leading indicators 10 am on-manufacturing
Employment 8.30am Consumer confidence 10 am report on business 10 am
Personal income 8.30am Uni of Mic consumer New home sales 10 am
Business inventories 8.30am sentiment 10 am Chicago Fed national
Durable goods 8.30am Wholesale inventories 10 am activity index 10 am
Retail sales 8.30am Philadelphia Fed survey 10 am Federal budget 2 pm
Trade balance 8.30am Existing home sales 10 am Consumer credit 3 pm

The information on this page is subject to change. The Trader’s Journal is not responsible for the accuracy of calendar dates beyond press time.
VOLUME 2 ISSUE 1 The TRADER’S Journal 73
 UPCOMING EVENTS

1st – 4th February 2006 1st March – 2nd March 2006 31st March – 1st April 2006
The World Money Show Derivatives & Securities World Forex Trading Expo
The World Money Show, now in its This two day exhibition will showcase The Forex Trading Expo in Ft
second year, attracted over 10,600 the latest business enhancing Lauderdale to learn ways you can
high-net-worth investors, traders, technologies and services plus confidently trade foreign currency
and financial advisors with over giving you the opportunity to and achieve the success you’ve been
250 free workshops and nearly 300 meet with over 900 professionals working toward ! Compare trading
exhibits. You will find highlights from who work in derivatives, securities, systems, software programs, charting
the event including streaming video, risk management and alternative services, brokers, advisory services
and much more! investments. and more.
Venue : The Gaylord Palms Venue : The Forum Messe Venue : Ft. Lauderdale
Resort Orlando, Florida Frankfurt, Germany Organiser : Intershow
Organiser : Intershow Organiser : FOW
24th March – 25th March 2006
18th – 21st February 2006 15th March – 18th March 2006 7th Annual Technical Analysis
Traders Expo 31st Annual International Expo in Paris
This is the largest and most important Futures Industry Conference The expo is run by professional
event of the year for active traders and Futures industry professionals attend Technical Analysts and Traders who
as usual they’ve got some fantastic the International Futures Industry work on the markets throughout the
sessions planned to help you become Conference to exchange ideas, share year. Their lives revolve around stocks,
a more successful trader. If you have information, discuss trends and futures, options or forex, and in order
time to attend just one event each network with peers. Boca has been to pass on their knowledge, they
year to improve your trading, this is the showcase for innovation. The have helped us to create this expo -
the one. place to introduce new products and dedicated to TA and Trading.
Venue : Marriott Marquis express new ideas. The venue to seek
Venue : Espace Pierre Cardin;
Hotel, New York convergence of the industry
Paris - France
Organiser : Intershow Venue : Boca Raton Resort Organiser : Salon AT
& Club, Boca Raton,
Florida
Organiser : FIA

Note : Timing of events can be subject to change.

74 The TRADER’S Journal VOLUME 2 ISSUE 1