THE TRADERS’ MAGAZINE SINCE 1982 www.traders.

com NOVEMBER 2022

STRATEGY
DEVELOPMENT
Part 1: The optimizer contest 8

FILTERS ON THE
TEST BENCH
Using an indecision pattern
to filter trades 12

LONG-TERM MARKET
BREADTH ANALYSIS
Market internals tell a story 16

PULLBACK TRADING
Taking advantage of
retracements 22

ETF MARKETPLACE
REVIEW
$7.2 trillion AUM and
counting 28

INTERVIEW
Gregory Morris 38
NOVEMBER 2022
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 CONTENTS NOVEMBER 2022, VOLUME 40 NUMBER 12

FEATURE ARTICLE Join us here for a retrospective

8 Boost Your Strategy Development of the ETF industry, which has
The Traders’ MagazineTM Part 1: The Optimizer Contest changed the investment landscape
by René Koch, PhD for millions of investors, while the
Trading strategies usually involve mutual fund industry fortunes have
EDITORIAL
[email protected] adjustable parameters, and trading begun to slow.
Editor in Chief Jack K. Hutson strategy development involves 37 Algo Q&A
Production Manager Karen E. Wasserman optimizing those parameters to by Kevin J. Davey
find the best inputs and variables
Art Director Christine Morrison Got a question about system or algo
for the most profitable results. Here
Graphic Designer Wayne Shaw trading?
Webmaster Han J. Kim is an overview of some available
Contributing Editors John Ehlers, optimizer types, along with INTERVIEW
Anthony W. Warren, PhD. some insights into using current- 38 Gregory Morris
Contributing Writers Thomas Bulkowski, Martin Pring, generation software to help with by Leslie N. Masonson
Barbara Star, Markos Katsanos, Leslie N. Masonson, this very important task.
Karl Montevirgen Gregory Morris has a 50-year
12 Filters On The Test Bench investment career as a technical
OFFICE OF THE PUBLISHER by Andrea Unger analyst, a prolific developer of
Publisher Jack K. Hutson In this article, we analyze the indicators and trading systems,
Industrial Engineer Jason K. Hutson
effects of an indecision pattern on educational speaker, and an
Project Engineer Sean M. Moore
trend-following models and try to accomplished author of books
answer the long-standing question: on trend analysis, breadth, and
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Seattle, WA 98116-4499
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[email protected] discuss his indicator and systems
National Sales Manager Edward W. Schramm 16 Long-Term Market Breadth development using technical
[email protected] Analysis analysis, his rules-based money
by Kevin Luo management methodology, and
CIRCULATION Are market breadth measurements his blog at StockCharts.com titled
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“Unserious” thoughts on serious
WEBSITE
22 Pullback Trading topics in finance.
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by Azeez Mustapha
Staff members may be emailed using first initial 46 Explore Your Options
plus last name plus @traders.com A few charting tools can help put by Jay Kaeppel
price in context when classifying
Got a question about options?
Author­i­za­tion to pho­to­copy items for inter­nal or per­sonal
highs and lows. And having context
use, or the inter­nal or per­sonal use of spe­cific cli­ents, is grant- for when price is relatively high or 48 Futures For You
ed by Tech­ni­cal Anal­y­sis, Inc. for users reg­is­tered with the relatively low can help the trader to by Carley Garner
Cop­y­right Clear­ance Cen­ter (CCC) Transactional Reporting
Serv­ice, pro­vided that the base fee of $1.00 per copy, plus
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those organ­iz­ a­tions that have been granted a photocopy
license by CCC, a sep­a­rate sys­tem of pay­ment has been 50 The Savvy Technician
arranged. The fee code for users of the Transactional
26 How To Improve Any by Stella Osoba, CMT, Esq.
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The Traders’ Magazine™, is prepared from information DEPARTMENTS
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28 ETF Marketplace Review:
52 Traders’ Tips
Opinions expressed are subject to revision without noti- $7.2 Trillion AUM And Counting 57 Advertisers’ Index
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4 • November 2022 • Technical Analysis of Stocks & Commodities

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 The editors of S&C invite readers to submit their opinions and information on sub-
(5, A) lp/20
jects relating to technical analysis and this magazine. Email your correspondence (20 up through 35, A) symbols to
to [email protected]. All letters become the property of Technical Analysis, Inc. run and plot the Ehlers Loop.
Letter-writers must include their full name and address for verification. Letters
may be edited for length or clarity. The opinions expressed in this column do not The program will run until it has
necessarily represent those of the magazine.—Editor cycled through 16 symbols, or until
there is a blank cell. The macro
DRAWING EHLERS LOOPS USING sub/sublog4.asp) starts with ctrl+a and takes about 30
VISUAL BASIC There are two installations required seconds to run 16 symbols. The large
Editor, to run the VB code: red dot is the latest data point.
In the June and July 2022 issues in Note that the VB code in Excel
the articles “Ehlers Loops” and “Pairs 1. MetaStock EOD Downloader is 2021 uses a new command line:
Rotation With Ehlers Loops,” John the original source. The data may
Ehlers presents a charting technique be downloaded from MetaStock Set cht = ActiveSheet.Shapes.
he calls Ehlers Loops. I find that Ehlers to the folder C:\Metadata15\ AddChart2(Style:=240,
Loops provide an interesting and quite ehlersloop. XlChartType:=xlXYScatterLines,
different visual look at a security. 2. MS15XLS.DLL, which converts Left:=630, Top:=2900,
I would like to share a process I the MetaStock data to an Excel Width:=400, Height:=280,
developed for drawing Ehlers Loops spreadsheet. The DLL is available newlayout:=True).Chart
using Visual Basic. I have used Visual from Neil Meisenbacher (nmeis@
Basic for some time for technical gtgd.com). MS15XLS has been The macro will not run in earlier ver-
analysis. It is free, feature-rich, has developed as a Microsoft 64-bit sions of Excel/Visual Basic, but you
a plethora of help processes, and is Windows .NET DLL written in can revise the charting command to
easy to learn. the C# programming language run in earlier versions of Excel.
The Visual Basic (VB) code uses and requires the following envi- Visual Basic also has a “normaliza-
similar dimension statements as ronment: tion” feature. VB finds the highest
given in the article (hp, lp, hpa1, value (assigned +1) and the lowest
ssa1, hpb5, etc.). You will also need • Microsoft Windows “Pro” 11 value (assigned −1) in the range to
a copy of my “ehlersloop.xlsm” Excel 64-bit: (Microsoft Windows plot, with intermediate values pro-
file containing the sheet labeled [Version 10.0.22000.832]) portioned. All Ehlers Loops charts
“MASTER,” which is the last tab. • Microsoft .NET Framework are created to vary from −1 to +1 for
The file “ehlersloop.xlsm” can be 4.7 or later both the volume and the price data.
downloaded with the embedded VB • Microsoft Excel for Microsoft The chart pattern is not changed.
software to run a group of symbols. 365 MSO (Version 2206 Build The code works equally well with
[Editor’s note: Readers will find 16.0.15330.20260) 64-bit (with any symbol that has price and volume.
the “ehlersloop.xlsm” file discussed Microsoft Visual Basic for Ap- The spreadsheet includes sample
here available for download from plications [“VBA”] version 7.1 charts for some stocks and for some
the Traders.com website in the S&C or later). leveraged and inverse ETFs. If the
Article Code section. This is acces- user wishes to look at additional
sible through the pulldown menu at On the “MASTER” sheet (that is, charts, the easiest way is to copy the
the top of the Traders.com homepage tab) of the ehlersloop.xlsm Excel .xlsm file and change the symbols in
or from http://technical.traders.com/ file, the cells in column A, rows 1 cells (20 through 35, “A”). Be sure to
through 5 represent user variables add the new symbols to the Meta­
(/n). The following are the default Stock Downloader folder.
values and may be modified at the Bill Roberts
user discretion:
Editor: Bill Roberts is a retired
(1, A) days to backtest/0 aerospace engineer with an inter-
(2, A) days to load/250 est in technical analysis using Vi-
(3, A) days to plot/80 sual Basic. He may be reached at
(4, A) hp/80 [email protected].
6 • November 2022 • Technical Analysis of Stocks & Commodities
ERRATA: TRADING NATURAL GAS Strategy 1 Strategy 2 Strategy 3 Strategy 4 UNG(B&H)
USING UNG Entire Period: 9/24/2007 to 6/13/2022
In the September Annual return 7.44% 21.97% 9.33% 23.85% −17.23%
2022 issue in the Annual SD 26.76% 43.50% 49.50% 60.22% 43.54%
ar ticle “Trading Sub-Period 1: 9/24/2007 to 2/2/2015
Natural Gas Using Annual return 10.81% 38.53% 11.50% 39.23% −34.03%
UNG,” an error oc- Annual SD 23.04% 41.36% 38.89% 51.88% 41.43%
curred regarding the Sub-Period 2: 2/3/2015 to 6/13/2022
way a signal was Annual return 4.01% 5.42% 7.16% 8.50% −0.45%
stated to be calculated. The estimated Annual SD 30.06% 45.49% 58.29% 67.55% 45.50%
value for “this week’s return” should
Risk-Return performance of trading rules compared to buy & hold (B&H): 9/24/2007
be based on “last week’s signal” and to 6/13/2022
not on “this week’s signal,” as was Note: SD stands for standard deviation, and Annual Return is based on weekly
estimated in the article. We regret geometric compounding returns.
this error. The TLT instrument is bought for parking funds if not in the market.
Correcting for this error, the revised
results appear in the table shown here. results still suggest extremely good ing and holding UNG.
The authors note that the revised profitability when compared to buy-

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November 2022 • Technical Analysis of Stocks & Commodities • 7

 TRADING SYSTEM DEVELOPMENT

Clever Use Of Modern Optimizer Algorithms

Boost Your Strategy

Development
Part 1: The Optimizer Contest

Trading strategies usually involve adjustable pa- These parts work for individual instruments; addition-
rameters, and trading strategy development involves ally, there are some parts that work on the portfolio
optimizing those parameters to find the best inputs level and others that have a more global character.
and variables for the most profitable results. Here is All of these parts come with a number of adjustable
an overview of some available optimizer types, along parameters. Even with a comprehensive understanding
with some insights into using current-generation of the theory of price movements, it is often not possible
software to help with this very important task. to derive good parameter values analytically. Some

T
of the inevitable roadblocks may include nonlinearity,
here is constant debate about the usefulness dependencies among various parts, and non-normal
and benefit of optimization in the develop- distributions. All these make it necessary to search
ment of trading strategies. Many have the for good parameter values experimentally—that is,
opinion that “optimized” strategies do not using trial and error.
perform in real-time trading. In this series of ar- With the help of today’s modern PCs, it is easy
ticles, I’ll show recent developments in the field and to run a large number of such experiments. All you
demonstrate some practices that result in working need is capable development software with a software
strategies. component that can run a trading strategy with a set
of varying parameters, and record the results. Such a
A Long and winding road software component is called an optimizer.
The development of a rules-based trading strategy is Note on software: The results I will present at the
a tedious process. It takes some effort to collect ideas, end of this article were produced with the trading
implement them, and put them to work, often with the strategy development software Wealth-Lab 8 and its
result of unexpected or poor results in actual trading. extensions finantic.Optimizers and finantic.Score-
In this article, I’ll sketch a path for the development Cards. These software products are available at www.
of strategies that work profitably in real-time trading wealth-lab.com.
using modern optimizer algorithms and a few tricks
to avoid overoptimization. Modern optimization algorithms
simplify parameter testing
Anatomy of a trading strategy Searching for good parameter values through trial and
A rules-based trading strategy consists of the fol- error can be a daunting task. Since each component of
lowing parts: strategy development that I outlined above can come
with a number of adjustable parameters, the number
• Entry conditions • Exit conditions of possible values quickly adds up. This can require
• Entry filters • Exit filters a lot of computation.
LISA HANEY

• Risk management • Position sizing Here’s an example, albeit an extreme one. There is

by René Koch, PhD

November 2022 • Technical Analysis of Stocks & Commodities • 9
a publicly available trading strategy gorithm. While it has its applications, it
that was created by an Italian aficio- mainly serves as a lower benchmark.
nado several years ago. This strategy
is named “A Seventeen Liner” and Melder-Nead
has 21 parameters, all of which can The Melder-Nead optimizer is one
be made optimizable (see Figure 1). of the older optimizer algorithms. It
The usable ranges of these parameters performs “hill climbing” in a high-
were found by a few runs of a “random dimensional parameter space. For the
search” type of optimizer and observ- task at hand of optimizing parameters
ing parameter values that produce in the example “Seventeen Liner”
reasonable results. trading strategy, it does not behave
In this example, even if we were to reasonably.
use just three different values (small/
medium/large) for each of them, a Shrinking window
complete search of the parameter space The shrinking window optimizer uses
would require 321 runs of the strategy at randomized parameter values and
hand. Even if a single run takes just ten keeps honing in on the most profitable
seconds, the optimization would run for values as the optimization continues.
3,300 years! Clearly, this is not practi-
cal. However, with the appearance of Bayesian optimization
modern optimization algorithms, it is Bayesian optimization learns a model
now possible to put all this computing FIGURE 1: A LARGE NUMBER OF PARAM- based on the initial parameter sets and
power to work and make it produce ETERS TO EVALUATE. This is an example of a
scores. This model is used to sample
trading strategy with 21 optimizable parameters.
useful results. Trying to evaluate all the different possible param- new promising parameter candidates
eter values and combinations of parameter values that are evaluated and added to the
The optimizer contest would be an impossible task without the help of existing parameter sets. This process
Optimizer algorithms are used in the best modern optimizer algorithms. iterates several times. It can usually re-
many fields of research, development, duce the number of iterations required
and engineering and are a very active field of research. to reach a good solution compared to less sophisticated
Nonetheless, only a small fraction of research results finds methods.
its way into trading software. It is an interesting question
how well these optimizer algorithms work when it comes Grid search
to trading strategies. A simple grid search type of optimizer tries all combina-
To help find out, we can run a test to compare and illustrate tions of the provided parameters, driven by the number of
some of the types of optimizer algorithms available, and iterations. While it fares reasonably well in this contest,
see how well they seem to perform. For this test, I’ll use everything depends on the choice of parameter values:
the over-parametrized public trading strategy mentioned first, step, and last value.
earlier (“A Seventeen Liner”).
For optimizer comparison, I’ll allow each optimizer
1,000 iterations to find the parameter set with the best
possible profit. Then I’ll show the results.
In this article, I’ll sketch a
Types of optimizer algorithms path for the development of
Here’s a brief overview of optimizer algorithm types in
our “contest” in order from bad (that is, less sophisticated,
strategies that work profitably
less effective, older technology, slower, etc.) to good (more in real-time trading using
effective, more advanced, etc.): modern optimizer algorithms
and a few tricks to avoid
Random search overoptimization.
The random search optimizer picks parameter sets ran-
domly. With no further intelligence, it is a rather slow al-
10 • November 2022 • Technical Analysis of Stocks & Commodities
Particle swarm
The particle swarm optimizer is
initialized with a group of ran-
dom particles and then searches
for optima by updating gen-
erations. In every iteration, each
particle is updated by following
two “best” values. The first one
is the best solution found by the
specific particle so far. The other
“best” value is the global best
value obtained by any particle
in the population so far. This
algorithm gives very promising
results.

WWW.WEALTH-LAB.COM
Sequential model-based opti-
mization for general algorithm
configuration (SMAC) FIGURE 2: OPTIMIZERS, PROFIT VS. RUN NUMBER. This shows the different optimizer algorithm types
pitted against each other in terms of the target metric (profit) as the optimizer algorithms search for better
The SMAC optimizer uses and better parameter combinations. The less successful optimizers in the task of finding profitable parameter
Bayesian optimization in tandem values in the example trading strategy are in the lowest curves and the more successful optimizers in the
with a greedy local search on the study are in the upper curves.
top-performing solutions. The
SMAC optimizer constructs explicit regression models to general algorithm configuration (the SMAC optimizer).
describe the dependence of target algorithm performance And then in part 3, I will introduce some techniques to
on parameter settings. measure and avoid overoptimization.

And the winner is… René Koch studied physics, mathematics, and computer
The SMAC optimizer algorithm is the clear winner of science at University of Göttingen, Germany. He received
our contest in this study. It finds good parameter sets a doctorate in physics in the field of digital signal pro-
quickly. cessing (DSP). He headed his own company for 10 years
Figure 2 shows the development of the target metric developing DSP software for noise and vibration analy-
(profit) while the optimizer algorithms search for better sis. He currently develops financial software and offers
and better parameter combinations. It is obvious that technical analysis-related consulting services.
some algorithms do not work very well for the optimiza-
tion problem at hand (lowest curves), while others (upper Further reading
curves) set themselves clearly apart from the field of Koch, René [2004]. “Creating Your Own Trading Sys-
middle-of-the-road optimizer algorithms. tem,” Technical Analysis of Stocks & Commodities,
Volume 22: July.
Conclusions ‡Wealth-Lab.com
Considering the results of this example study, it becomes ‡See Editorial Resource Index
clear that modern optimizer algorithms can boost strategy
development tremendously because less iterations are
necessary to find a good set of parameters.
Readers may think, “That’s all well and good, but a With the appearance of modern
fancier optimizer will produce over-optimized strategies optimization algorithms, it is
even faster.” And this is true. If used naively, an optimizer now possible to put all this
will produce overoptimized strategies that will not perform computing power to work and
as expected in actual trading. make it produce useful results.
Next time in part 2, I will shed some light on the inner
workings of the sequential model-based optimization for
November 2022 • Technical Analysis of Stocks & Commodities • 11
 Using An Indecision Pattern To Filter Trades

Filters On The Test Bench

In this article, we analyze the effects of an indecision ing to theory, true trends often occur after a period of
pattern on trend-following models and try to answer market indecision. This idea is based on observation and
the long-standing question: Are the results of this model research, but does it hold true in practice?
repeatable or the result of chance?
“Indecision” patterns

A
by Andrea Unger To answer this question, we can start by analyzing one of
the most common patterns in our list. While our compila-
trading system consists of a set of rules. The tion of patterns contains over 300 different items, we’ll
more rules you have, the higher the risk of stick to the most common. The one we’ll choose from
overfitting. This can lead to systems that only the top of the list we will refer to as pattern 1.
look good on paper, worked in the past, but Pattern 1, shown in Figure 1, represents the daily inde-
didn’t stand the test of time. cision pattern. The conditions expressed by the pattern
Those who are familiar with the Unger Method know involve a market that is not moving in any particular
that one of the most significant steps in system develop- direction. If at the end of the session the distance between
ment is choosing filters to refine a basic trading model. start and finish is less than 50% of the whole excursion,
The process runs through a library of price patterns so the market is “indecisive.”
the trader can analyze the results of various configura- In our analysis, we will apply pattern 1 to an intraday
tions of a system. The trader can then choose the system approach, closing positions at the end of the session.
SAZHNIEVA OKSANA/SHUTTERSTOCK

with optimal performance. The choice is still made by a

human in order to follow a logical approach with com- The model
mon sense. To test this approach, we will use a basic model on
Indecision patterns are important in systematic trading, 15-minute charts, with orders placed within a time
especially among trend-following approaches. Accord- window delimited by a certain number of bars from
12 • November 2022 • Technical Analysis of Stocks & Commodities
 SYSTEM DEVELOPMENT

the beginning of the session. Before placing orders, we

choose the minimum and maximum values in the session
to determine entry levels.
Once the market opening time is known, we let some
PtnBase 1:
time pass with no action. After this, we calculate the

Range
highest high and lowest low so far and consider entering

Body
Body < 50% of Range
at breakout of these values. The orders are left pending Volatility Pattern (Indecision)
for a certain number of hours and then, if not filled, they
are canceled.
The purpose of this model is to verify the possible
benefit of applying an input filter based on indecision pat-
terns. Therefore, the positions do not include a stop-loss. Yesterday’s Daily Bar
However, they remain subject to the possibility of being FIGURE 1: DAILY INDECISION PATTERN. “Pattern 1” used for this analysis
reversed from long to short or vice versa and closing at is a daily indecision pattern. In this scenario, the market is not moving in
any particular direction. If at the end of the session the distance between
the end of the session. start and finish is less than 50% of the whole excursion, the market is
The code (in PowerLanguage for the MultiCharts considered “indecisive.”
platform) using pattern 1 as a filter is shown in Figure
2. The code provides for the possible inclusion of a
stop-loss by placing the “MyStop” input> 0. However,
as mentioned, it is not within the scope of this analysis
to evaluate its effects.
The “MyFactor” input serves to evaluate the impact of
the pattern immediately. The value of the ratio expressed
by the equation can vary from zero (extreme indecision)
to 1 (extreme directionality). Placing the input equal to 2
as a default will negate the effect of the filter, as all the
trades will be made possible. Placing it equal to 0.5 it
will replicate the above-mentioned “pattern 1,” filtering FIGURE 2: CODE SEGMENT FOR FILTERING TRADES USING THE DAILY
trades based on market indecision. INDECISION PATTERN. How does applying an input filter based on indeci-
sion patterns affect the trading model? This shows the coding for filtering
The markets tested trades using “pattern 1.” The code provides for the possible inclusion of a
The code will be run on four different markets, all plot- stop-loss by placing the “MyStop” input> 0, though the addition of stop-
losses was not evaluated here. The “MyFactor” input serves to evaluate the
ted with a 15-minute timeframe: impact of the pattern immediately. The value of the ratio expressed by the
equation can vary from zero (extreme indecision) to 1 (extreme directional-
• DAX futures, with a session from 8:00 am to 10:00 ity). Placing the input equal to 2 as a default will negate the effect of the
pm Frankfurt time (we refer to this as the “classic” filter, as all the trades will be made possible. Placing it equal to 0.5 it will
replicate “pattern 1,” filtering trades based on market indecision.
session, which was widened at the end of 2018 but
is still more significant)
• Crude oil futures, with a session from 6 pm to 5 characteristics. Among all the series, we chose those
pm New York time starting from the same price level of each instrument
• Gold futures, with a session from 6 pm to 5 pm at 01/01/2010 and ending at more or less the same level
New York time the market is trading today (so that they covered nearly
• Mini S&P 500 futures, with sessions from 5 pm to
4 pm Chicago time.

“Other” markets The purpose of this model is to

Because of the study that we intend to carry out, we did verify the possible benefit of
not stop here. For each market mentioned, we also cre- applying an input filter based
ated a series of random prices. To obtain such series, we on indecision patterns.
used proprietary software capable of generating random
series of time series, either pure or with specific trend
November 2022 • Technical Analysis of Stocks & Commodities • 13
 the same distance). DAX DAXRdm
Any series could have been used System System not System with System not System with
for this test. Still, these could have filtered indecision filter filtered indecision filter

raised the objection that different Net Profit 195625 142000 129175 −7725

types of final returns could affect the Max Drawdown −93175 −85750 −66500 −68075

test results, so we opted for a series Average Trade 48.36 63.96 26.36 −3.06

that, by imagining a buy & hold on Number of Trades 4045 2200 4900 2522

the instrument, led to very similar FIGURE 3: TEST RESULTS, DAX FUTURES. From these test results, we can see that the filter
decreases the total number of trades on the DAX, but the quality of the average trade was improved.
results to those achievable on real The filter fails on the randomized data series, suggesting that indecision patterns are effective.
instruments.
We will call these series: CL CLRdm
System System not System with System not System with
filtered indecision filter filtered indecision filter
DaxRdm Net Profit 148210 118300 36010 12180
CLRdm Max Drawdown −25320 −22220 −28550 −21550
GCRdm Average Trade 34.77 52.14 12.15 7.59
ESRdm Number of Trades 4263 2269 2964 1604
FIGURE 4: TEST RESULTS, CRUDE OIL FUTURES. Test results on the actual crude oil data series
where the extension “Rdm” means show a better average trade, whereas no improvement can be seen in the randomized data series,
“random.” confirming the validity of the same on the real market. It should be noted that given the lower number
of trades on the random sequence, the series in this case may have some different dynamics.
The results Gold GoldRdm
Let’s check the results of the systems System System not System with System not System with
starting from the DAX. We chose to filtered indecision filter filtered indecision filter
let trading start after 10 bars from the Net Profit 190070 230740 19580 29980

opening, and to stop the orders after Max Drawdown −34810 −32700 −45190 −26570

40 bars. The values shown in the table Average Trade 41.93 88.47 4.73 13.80

in Figure 3 reflect our findings. Number of Trades 4533 2608 4137 2172
From the results in Figure 3, we can FIGURE 5: TEST RESULTS, GOLD FUTURES. Running the same test on gold futures, results for
see how the filter obviously decreases both data series show an improvement using the indecision filter, with more improvement in the real
market data series.
the total number of trades. However,
the results on the DAX are encour- ES ESRdm
aging, as the quality of the average System System not System with System not System with
trade is improved significantly. This,
filtered indecision filter filtered indecision filter
Net Profit 80200 75925 57931 37562
combined with the failure of this filter
Max Drawdown −14688 −8600 −39451 −33488
on the randomized market, shows
Average Trade 36.92 65.06 32.33 38.68
that indecision patterns really are
Number of Trades 2172 1167 1792 971
effective. In real markets, the psychol-
FIGURE 6: TEST RESULTS, S&P 500 EMINI. Again here, the filter improves the results of real data,
ogy of traders causes certain trends, and has no effect on randomized data. The lack of effect on the computer-generated randomized data
including price movements following suggests that using this filter exploits a very real psychological bias that affects the markets.
market indecision.
Regardless, we move forward and have a look at the oil, where we begin placing orders after 50 bars from the
other markets under investigation. We start with crude opening, and they will be canceled after 84 bars from the
beginning of the session. The values shown in the table
in Figure 4 reflect our findings for crude oil.
In the case of crude oil, the improvements of the filter
In real markets, the psychology on the regular series are established, showing a better
of traders causes certain trends, average trade. Effects are notably absent for the random
including price movements series, confirming the validity of the same on the real
following market indecision. market. It should also be noted that in this case, the series
probably has different dynamics, as can be seen from the
lower number of trades on the random sequence.
14 • November 2022 • Technical Analysis of Stocks & Commodities
 ABLETREND Trusted Reliable Signals
Next we run the test on the gold
market. The results from the gold
for Volatile Markets Since 1994
future are shown in Figure 5.
In this case, we notice that both
Up Over 100% Since
series improve using the indecision Sweet Spot for Buying (SSb) SSb1 Signal in June 2021
filter even though the improvement on 1. AAer Testing Support Level
the real market is definitively much 2. Emerging Blue Bar or Up Candle
more significant!
Finally, let’s analyze a notori-
ously tricky market for breakout
techniques, as it mostly shows marked Sweet Spot Buy
mean-reverting behavior: the mini
June 2022

S&P 500. On this instrument, it is

advisable to limit the inputs to the Fresh Sweet Spot
last part of the day, and the bars for
Buy Signal End of June
2021
starting operations will be set at 70
and then terminate at 84. The values
shown in the table in Figure 6 reflect
our findings for the S&P emini con-
tract (ES).
Yet again, the filter improves the
results of real data, and has no effect
Fresh Sweet Spot Signals
on randomized data. Updates to Signals in Progress
*Access the New Resource from the Link Below
Conclusions
The comparison of results of a raw Traders Rave Over AbleTrend
strategy applied with or without an
indecision filter on an off-and-on
real-time/fictitious series shows the
ABLETREND 7.0 COLLECTED BY
effectiveness of this filter on real SINCE 1994

market quotations. Its lack of effect

on computer-generated data sug-
gests that this filter exploits a real
psychological bias that affects the
markets. Although the possibility of
overfitting is inherent to any code,
we feel it’s safe to say that the use
of these patterns keeps us reasonably
far from such risks.

Continued on page 62

TEST DRIVE THE LATEST SIGNALS

The more rules you THESE RESULTS ARE BASED ON SIMULATED OR HYPOTHETICAL PERFORMANCE RESULTS THAT HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE THE RESULTS
SHOWN IN AN ACTUAL PERFORMANCE RECORD, THESE RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, BECAUSE THESE TRADES HAVE NOT ACTUAL-
LY BEEN EXECUTED, THESE RESULTS MAY HAVE UNDER-OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF
have, the higher the LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT
OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THESE BEING

risk of overfitting. SHOWN. THE TESTIMONIAL MAY NOT BE REPRESENTATIVE OF THE EXPERIENCE OF OTHER CLIENTS AND THE TESTIMONIAL IS NO GUARANTEE OF FUTURE
PERFORMANCE OR SUCCESS. TECHNICAL ANALYSIS OF STOCKS & COMMODITIES LOGO AND AWARD ARE TRADEMARKS OF TECHNICAL ANALYSIS, INC.

November 2022 • Technical Analysis of Stocks & Commodities • 15

 Market Internals Tell A Story

Long-Term
Market Breadth Analysis
Are market breadth measurements an underused tool for builds the model based on analysis of the representation.
gaining the best picture of the stock market? Here’s a study The project involves the S&P 500 index and its compo-
to demonstrate why you should be using this tool. nent stocks as of January 1, 2022. The daily price data
period under study is from March 24, 2000 to June 30,
by Kevin Luo 2022. Here are the project steps:

T
he market breadth is a technical indicator. 1. Defining stock trend
It specifies how many stocks are participat- 2. Creating a single variable that represents the market
ing in a given market direction at a given breadth
time. On the other hand, a major stock 3. Analyzing and profiling the variable
index is the average price of its component 4. Designing and testing the forecasting model
stocks. Both market breadth and a stock 5. Drawing conclusions
index are representations of the stock mar-
ket; however, the index is the dominant one that attracts Step 1: Defining stock trend
the most attention. Is the market breadth under-tapped? Stock prices go up and down. It is one of the most im-
This article describes a project designed to formulate portant traits of the stock market. In technical analysis,
and test a forecasting model based on market breadth stock and index directions can be seen as ripples, waves,
BLUE WAVE: STRIZH/GOLD BULL: PRACHAYA
ROEKDEETHAWEESAB/SHUTTERSTOCK

analysis. It seeks to provide an answer to that question. and tides. A ripple is a small rise-and-fall cycle of the
Here’s what I found. noticeable price movements. A wave is a medium rise-
and-fall cycle that contains the ripples, while a tide is a
The project large cycle that holds the waves. The rise and fall of a
The project idea is straightforward. It first creates a cycle are also called uptrends and downtrends. This is
representation of the long-term market breadth, and then how price directions are described in indefinite ways.
16 • November 2022 • Technical Analysis of Stocks & Commodities
 INDICATORS

In Technical Analysis Of Stock

Trends (1948), Robert Edwards and
John Magee suggested using a single
trend measure to precisely express the
stock trends. That approach is behind
some of the popular methods of
identifying stock market corrections
and bull/bear markets.
Figure 1 is an example trend chart
for the S&P 500 index. The chart was
generated by an automated software
system that is capable of isolating
prices into price trends, based on this
method of using a variable to represent
market breadth. There are three lines
of the same price dataset on the
chart. Each contains the uptrends and
downtrends isolated by a specific trend

KEVIN LUO
measure. The price strings in green/
red are the uptrends/downtrends from FIGURE 1: TREND CHART. Here, the price dataset of the S&P 500 index from March 24, 2000 to
June 30, 2022 was isolated into uptrends and downtrends by 20%, 10%, and 5% trend measures.
the start point to the end point. The Three lines on the chart represent the respective trend categories. The price strings in green are
isolated trends are differentiated and the uptrends and price strings in red are the downtrends.
categorized as 20% trend, 10% trend,
and 5% trend. replaced by a long-term focused variable for long-term
In the project described in this article, the 20% trend analysis. In the project, the 20% uptrend count ratio
method was employed for identifying long-term price was used to replace the daily ratio. This way, the market
direction. With the isolated trends, the price direction breadth was turned into a long-term indicator. The new
of the index and its stocks at any given time becomes ratio, for example, is 80% when 80% of the stocks are in
known. In other words, during the data period, a stock a 20% uptrend on the day. This new variable that holds
can always be identified as being either in an uptrend all ratio values is labeled here as the uptrend count ratio,
or a downtrend. These statistics of trend identification or “UC.”
were used to create a variable for the long-term market Figure 2 was generated to demonstrate how the UC
breadth analysis. values are calculated in practice. The chart contains the
actual data of nine S&P 500 stocks and one ETF (SPY)
Step 2: Creating a single variable that for the three-week period starting at the bottom of the
represents the market breadth 2020 bear market. To put all stocks together in one chart,
The stock market may move up with all of its component the stock prices were converted to percentage figures,
stocks participating in the up move or just a few of its with the start prices set at 0% as of March 20, 2020. The
component stocks participating in the up move. This type stocks were still carrying their trend status though. On
of information cannot be discerned simply by looking at the chart, the UC values and the stocks were plotted in
the stock index level. However, this type of information bars and lines, respectively. In the footnote area, there is
can be obtained by looking at market breadth measures. an uptrend stock table sorted by date ID and symbols. It
Because such information holds important clues about
the market, market breadth analysis can provide some
unique insights for predicting market trends.
The market breadth is typically expressed by the daily Market breadth analysis
advance/decline ratio. For example, the ratio is 80% can provide some unique
when 80% of the stocks finish a trading session up. The insights for predicting
daily ratio is obviously a short-term direction indicator. market trends.
It does not help much in any long-term analysis. Within
the framework of the market breadth, the ratio can be
November 2022 • Technical Analysis of Stocks & Commodities • 17
 Market breadth specifies
how many stocks are
participating in a given
market direction at a
given time.

shows which stock was in the uptrend

for the first four days. For example,
on March 23, 2020 (day 1), three out
of ten stocks were in the uptrend.
Therefore, the UC value was 30%. On
day 2, XOM reversed to the uptrend
and was added to the uptrend table. FIGURE 2: UPTREND COUNT. The plotlines represent the stock prices in percentage figures for
nine S&P 500 stocks and plus SPY for the three-week period starting at the bottom of the 2020
The UC was then increased to 40%. bear market. The vertical bars are the uptrend count (UC) values. Each stock is identified as having
Note that the system uses high and uptrend or downtrend status. Every time a trend status changes, the UC value changes with it. In
low prices instead of close prices in the footnote area, part of the uptrend stock table is sorted by date ID and symbol. It tells which stock
the trend calculations. was in the uptrend on which date, and the total count.

Step 3: Analyzing and

profiling the UC line
Figure 3 displays the UC values for
the period under study in a line chart.
The S&P 500 index, a major index,
was chosen to represent the stock
market for comparison and reference.
It was also plotted on the chart in the
20% trend format. The market and
the index are interchangeable in this
process.
Here are three important observa-
tions about the large trends:

1. The market rises and falls with

the UC line proportionally.
2. The UC line makes steeper
upswings.
3. The above-mentioned patterns FIGURE 3: THE UPTREND COUNT LINE CHART. The chart is designed to show the relationship
are consistent. between the UC line and the market (the S&P 500 index). The observations indicate that the two
lines are proportionally related; however, the UC line rises and falls much faster. There is a strong
consistency of the observed patterns.
The overall review of the first two
observations points out a strong relationship between the speed. Therefore, it is a valid variable for predicting the
large upswings of the two lines. A strengthening stock market.
participation is typically followed by a strengthening A steep upswing of the UC line from the low range
market. The UC line has a significant lead in the upswing means a sharp increase of the bullish trend reversals
18 • November 2022 • Technical Analysis of Stocks & Commodities
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 among the stocks in a short period of
time. This can be related to the con-
cept that “stocks move together” often
discussed in technical analysis. What
is the consequence? The answer is tied
to the 20% trend profile of the S&P
500 stocks. According to the summary
statistics of the trend size analysis,
the average 20% uptrend continues
moving upward for nearly 40% after
the bullish reversal. Therefore, it is
reasonable to assume that the market
can be fired up when a large flock of
stocks are turning bullish together
and making the collaborative effort
to reach their targets.
The above-mentioned profile of the
UC line has already explained why the
UC patterns are consistent. Such con-
sistency is expected to remain as long FIGURE 4: BACKTESTING SIGNALS OF THE UC MODEL. Three signals generated by the model
are displayed on the chart, with the purple bars at the signal dates. The chart also shows the widely
as the related stock traits are stable. recognized bear markets in the gray shades as reference. The signal levels of the model are marked
The stronger pattern consistency leads with two gray horizontal lines, respectively.
to the higher quality of predictions.
Quality predictions obviously means
an increased level of confidence and competitiveness five times during the two bear markets. In the trend theory
for the trader. discussed by Edwards & Magee in their book, 20% trends
are referred to as the major trends. The recognized bull/
Step 4: Designing and testing the bear markets are simply too large to fit in the category.
forecasting model Could a UC model predict bear market reversals without
The findings from the market breadth analysis provide so many false signals?
a solid base for designing the model. The purpose of A basic forecasting model is a set of fixed rules that
the model is to signal bear market reversals. Is a bull or can be used repeatedly for generating predictions. In
bear market simply a 20% uptrend or 20% downtrend? this project, the model is independent and consists of a
Surprisingly, bull and bear markets are not what many two-step rule:
investors have perceived them to be.
During the period under study, there were three widely Step 1 of the rule requires the UC line to fall and cross
recognized bear markets, namely 2000, 2008, and the over the 19.95% level from the top range.
2020 bear market (see Figure 4). Note that the market Step 2 requires the UC line to rise and cross over the
was in its 20% downtrend at the end of study period. It 89.27% level from the bottom range.
is not included in the analysis because the trend was not
yet completed. The three bear markets are highlighted When the requirements are met in sequence, a signal
with the vertical gray shading in Figure 4. There are five is triggered. The signal for a bullish reversal tells that
20% uptrends (also called bear market rallies) located
inside the 2000 and 2008 bear markets.
No one likes seeing bull markets within a bear market
because it is confusing. Everyone would agree that the These statistics of trend
recognized bear markets look more like the falls of identification were used to
the tide. The unwanted bear market rallies indicate a create a variable for the long-
practical risk of using a 20% measure for the bull/bear term market breadth analysis.
market identification.
The method would have produced false bullish reversals
20 • November 2022 • Technical Analysis of Stocks & Commodities
the traits associated with a full bull market may return.
The signal levels calculated by the system are 19.95% and
89.27% and are based on the characteristics of the UC A strengthening
line. Because the UC and the index are proportionally stock participation is
related, it is significant when the falling UC line
reaches the extreme low of the 19.95% level. It raises
typically followed by a
an assumption that the bear has the upper hand, and strengthening market.
the market would be recognized as a bear market. The
rising UC line to the 89.27% level from the low range
reflects an exceptional shift in stock participation. As the analysis more useful. Like the different settings for the
the number of new uptrend stocks quickly multiplies, the RSI or MACD, the market breadth can also be analyzed
new energy refuels the lagging bull and drives it further with different ratios such as 10%-uptrend-count-ratio.
into a typical bull market. That makes the market breadth analysis even more useful
To find out how well the model works, backtesting was and marks a clear path to take market forecasting to the
conducted. In the test, the system scanned the entire UC next level.
and index lines and gave signals three times. Figure 4 Updated UC values are regularly posted in this
displays the signals with the vertical purple bars at the Facebook group: https://www.facebook.com/groups/
signal dates: May 30, 2003, August 5, 2009, and April aistocktrading.
28, 2020. The bars are located not far after each bear
market. From the respective bear market bottoms to the Kevin Luo is an independent technical analysis re-
signal dates, the market went up 25.36%, 50.38%, and searcher who focuses on automated price trend-related
30.64%, respectively. From the signal dates to the end analysis and generation of trading strategies. He and his
of the corresponding bull markets, the market climbed project partners developed an automated trend analysis
79.69%, 358.55%, and 89.20%, respectively. In the test, and backtesting system for high- and low-frequency
the model worked. There were no misses. There were trading. The charts shown in this article were created
no false signals. using custom charting software in R by Kevin Luo. Luo
may be reached via email at [email protected].
Step 5: Concluding the project
In the project, the market breadth analysis showed some Further reading
consistent observations that cannot be obtained from the Edwards, Robert, and John Magee [1948]. Technical
dominant analysis. The consistency led to the successful Analysis Of Stock Trends.
design of the forecasting model. Both market breadth and Luo, Kevin [2016]. “Falling In Love, With Trends,”
index analysis can be used to predict bullish reversals; Technical Analysis of Stocks & Commodities,
however, the signals of the UC model could reliably Volume 34: June.
serve more purposes. [2015]. “Gap Trading,” Technical Analysis of
Here is an example. Profitability of certain low- Stocks & Commodities, Volume 33: December.
frequency trading strategies, such as some swing trading [2015]. “MACD-Suitable Stocks,” Technical
strategies, depend on price patterns of the ripples (minor Analysis of Stocks & Commodities, Volume 33:
trends). Those strategies generally work better when the March.
rise of a ripple cycle is measured above the average in [2015]. “The RSI & Price Trends,” Technical
size. Such ideal price patterns are mostly located in the Analysis of Stocks & Commodities, Volume 33:
major uptrends of individual stocks in the bull market. June.
A UC model signal is an announcement of 89.27% [2016]. “Critical MACD Levels,” Technical
stocks in a major uptrend, where the ideal patterns are Analysis of Stocks & Commodities, Volume 34:
embedded. In such market environments, some trading October.
strategies do well. Depending on the algorithms of the Facebook group for updated uptrend count ratio values:
trading strategies, using the signals may lead to improved https://www.facebook.com/groups/aistocktrading
performance as measured by the percentage of profitable
trades, per-trade returns, or other measures.
The market breadth analysis sees what the dominant
index analysis does not see. Its distinct advantages make
November 2022 • Technical Analysis of Stocks & Commodities • 21
 Taking Advantage Of Retracements

Pullback Trading
A few charting tools can help put price in context when ties when they are most expensive, bringing more gain
classifying highs and lows. And having context for when to the seller. The higher the price sold, the greater the
price is relatively high or relatively low can help the gain to the seller. And when buying commodities, it is
trader to successfully trade pullbacks. Here’s an example best to purchase them when they are in the cheapest
strategy using the concept of pullback trading. condition. The cheaper the commodity, the lower the
cost of purchasing it. Whether the trader is buying or
by Azeez Mustapha selling these commodities, he can be profitable if he

T
understands when it’s best to buy or sell.
rading can be very complex if the trader has
not adequately defined his approach to the Charting tools provide context
market. An inability to read the meaning of
ZEDSPIDER/SHUTTERSTOCKS/COLLAGE: CHRISTINE MORRISON

for pullback trading

lines formed on the chart during trading will With the aid of the Fibonacci tool, the trader can get a
lead to inconsistency in trading. A rules-based better idea of when it is best to buy or sell. With the tool,
approach with an edge is the first step to long- swings can be classified into areas to sell and areas to buy.
term profitability. The Fibonacci tool is not a magical tool to tell exactly
DOLLAR BILLS: STAVKLEM/LITECOIN:

The market makes highs and lows during all sessions when to buy or sell. Instead, it provides a range of levels
and in all timeframes. With an understanding of how to where it may be safest when buying or selling.
classify the various highs and lows, the market becomes Moving averages are also helpful for providing con-
a little more straightforward for the trader to navigate. text for price. The moving average is a tool that helps
Traders know that generally, it is best to sell commodi- determine the direction of price. By removing some of
22 • November 2022 • Technical Analysis of Stocks & Commodities
 CRYPTOCURRENCY TRADING

TRADINGVIEW
FIGURE 1: LITECOIN/US DOLLAR. Here is an example trade using the pullback approach. Upon the cross of the moving averages, the trade was
entered in LTC/USD at 134.36 going short. The trade ran into profit instantly and reached the take-profit level. Profit was 366 pips.

the effects of noise in the market, the moving average enter the market after a proper retracement before the
can help determine general direction of price despite the next expansion. This means that after a bearish expan-
rough order of the candlesticks. Depending on the look- sion, the price is likely to rise against the direction of
back period of the moving average, it can help determine the bearish expansion for entries. This concept is called
trend for either the longer or shorter term. pullback trading.
The moving average is more powerful when it gives Similarly, if the market expands higher, the fib tool
you an entry alongside the direction. This is possible by would help the trader avoid the fear of missing out. It can
using two moving averages of a higher and lower look- help the trader to enter the market after a proper retrace-
back period and then using crosses of the two lines. The ment before the next expansion. This means that after a
cross of the moving averages tends to give good entries bullish expansion, the price is likely to drop against the
because it can confirm an immediate directional move direction of the bullish expansion for entries. Again, this
along with a longer-term directional move. Hence, the would be an example of trading pullbacks.
use of the moving averages aids in precision for entry.
The Fibonacci number is represented in percentages. Opening and managing trades
Using the Fibonacci tool is simple. When the market is in with the pullback strategy
a downtrend, the Fibonacci is anchored from the highest In this trading approach, the trader must spot obvious
to the lowest point of a given expansion. In an uptrend, expansions and note the direction. The trader should
the Fibonacci is anchored from the lowest point to the anchor the Fibonacci over the swing to grade the levels.
highest point of the expansion. The Fibonacci sequence Retracement should be 0.786, or 78.6%. Afterwards, the
divides the expansion into different levels. Levels above 9 moving average must cross the 21 moving average in
61.8%, or 0.618, are favorable for a selloff but unfavor- that direction for the second confirmation and entry.
able for going long in a downtrend. On an uptrend, areas
below 61.8%, or 0.618, are safer for buying and not as
safe for selling.
After expansion, the market will likely go through a A rules-based approach with
correction phase where it will retrace. The Fibonacci tool an edge is the first step to
will help pick the best areas to enter into a trade. long-term profitability.
If the market expands lower, the “fib” tool will help the
trader avoid the fear of missing out. It helps the trader to
November 2022 • Technical Analysis of Stocks & Commodities • 23
 FIGURE 2: COMPOUND/US DOLLAR. Here is another example trade using the pullback approach. This time, the trade was a buy to go long in COMP/
USD. After the setup criteria were met, the trade was entered at 193.23. Price then rallied until the take-profit level was hit. The profit in this example
trade was 233 pips.

The stop-loss would rest above the top of the retrace- Exit date: February 24, 2021
ment when going short. When going long, the stop-loss Entry price: 134.36
will rest beneath the retracement. The trade must be at Stop-loss: 143.54
breakeven, 50% profit. Take-profit: 97.53
Profit/loss: 366 pips
Some example trades
It’s important to look at screenshots of previous trades In this example trade, the market expanded to $97.54.
to give a clearer idea of what the trades look like, so I The Fib graded the expansion. The retracement went above
will present some here. In Figures 1–3, the pink shaded 0.5, or 50%, into 78.6%, or 0.786. Upon the cross of the
area shows the area of the stop-loss. The blue and green moving averages, the trade was entered. The trade ran
shaded areas are the areas where the profit would run. into profit instantly and reached the take-profit level.
The Fibonacci lines (the broken lines) are arranged hori-
zontally over the chart. The red wavy line is the moving Trade example 2 (Figure 2)
average period of 21. The blue wavy line is the moving Instrument: COM/USD (Compound/US dollar)
average period of 9. Order: Buy
Entry date: December 21, 2021.
Trade example 1 (Figure 1) Exit date: December 23, 2021.
Instrument: LTC/USD (Litecoin/US dollar) Entry price: 193.23
Order: Sell Stop-loss: 181.85
Entry date: February 10, 2021 Take-profit: 216.26
Profit/loss: 233 pips

This is a typical example of a buy with the strategy.

This means that after a bullish After the trade criteria were met, the trade was executed.
expansion, the price is likely to There was minimal drawdown from the point of entry. The
drop against the direction of the price rallied aggressively until the take-profit was hit.
bullish expansion for entries. This
concept is called pullback trading. Trade example 3 (Figure 3)
Instrument: COMP/USD (Compound/US dollar)
Order: Sell
24 • November 2022 • Technical Analysis of Stocks & Commodities
FIGURE 3: COMPOUND/US DOLLAR. Here is an example of an unsuccessful trade using the same pullback approach. A trade to sell short was entered
at 109.60 in COMP/USD. It resulted in a loss of 630 pips this time.

Entry date: February 26, 2022 trading and eases the trading process.
Exit date: February 26, 2022
Entry price: 109.60 Azeez Mustapha is an analyst at Instaforex Companies
Stop-loss: 115.94 Group and a blogger at Advfn.com, and as well as a
Take-profit: 93.41 freelance author for various trading publications. He
Profit/loss: −630 pips is a trading signals provider at some websites. He can
be reached via email at azeez.mustapha@analytics.
It is also important to see what an unsuccessful trade instaforex.com.
looks like, both to be able to recognize that they will
occur and to call to attention the importance of using of ‡TradingView
proper risk management when trading. Trading example ‡See Editorial Resource Index
3 shows an example of a loss using the strategy.
However, with trades having over two times the reward
to risk with this strategy, there is an edge to long-term
profitability provided proper risk management is in place.
Overleveraging should be avoided. A maximum of 2%
of the equity risk is enough for a trade.
The Market’s Compass
Final remarks
Successful traders are not traders who win every single
Navigating the waters
trade. Rather, they are traders who can manage a stream of global financial markets
of losses until their wins bury the losses. Even with a
plethora of confirmations on the chart, the trader must
never fall into the trap of overconfidence and excitement
with any one trade.
Setups will always repeat, and a good trader should
wait until a good setup is found. In addition, a good trader
will be able to discern setups that appear to be real but
are actually fake setups.
In conclusion, the trader should take care to stick to
his rules, almost like a robot. This leads to efficiency in themarketscompass.substack.com @Mkts_Compass

November 2022 • Technical Analysis of Stocks & Commodities • 25

 Be A Mechanic For Your Trading

How To Improve Any

Trading Strategy
Don’t wait for drawdowns to hit before you make the your car breaks down on the side of the highway before
effort to examine your profitability. Successful traders you change the oil? Of course not. You watch the fuel
will routinely and systematically do this. Here’s how you gauge and fill up with gas before it runs out. You change
can embrace this mindset and adopt these important your oil routinely even as your car is functioning nor-
concepts for improving your profitability. mally. Well, you should be doing the same with your
trading strategies—tinkering, adjusting, and improving
by Dave Mabe them when they’re doing well…especially when they’re

Y
doing well.
ou’ve done your research and you have a Here are steps you can take to improve any trading
trading strategy that’s performing well and strategy:
as expected. Sure, it could be improved, but
as long as it’s profitable, you can just sit back Stop taking the worst trades
and think about what to buy with your new Every strategy has within it some trades that perform
income stream. Inevitably though, the strategy better than others. Ask yourself, “Which subset of trades
goes through a drawdown. That’s okay; you predicted has the most edge and what subset has the least edge?”
this and you’re ready for it. But the drawdown continues This insight gives you a lot of flexibility to improve
until you can no longer ignore it. So you roll up your your strategy. Almost every strategy I’ve traded over the
sleeves and get back to work figuring out how to right years has contained poorly performing or even losing
WISE ANT/SHUTTERSTOCK

your trading ship. trades that I’ve eventually been able to understand how
This is how most traders approach strategies—they to recognize and remove from the system.
wait until something goes wrong before adjusting them… Removing the worst trades allows you to take fewer
which is exactly the wrong approach! Do you wait until trades overall and, often, make the same amount of total
26 • November 2022 • Technical Analysis of Stocks & Commodities
 TRADING METHODOLOGY

FIGURE 1: ELIMINATING THE WORST TRADES. The blue equity line FIGURE 2: INCREASING POSITION SIZE FOR THE BEST TRADES. The
represents skipping the worst half of the trades, with very little overall equity curve shows dramatic improvement when you can identify the trades
profit sacrificed. with the best edge and trade them with larger position size.

profit—which is a great improvement. that apply to older action. This theorem can serve as a
Figure 1 represents an example of a strategy where the guide when choosing from the hundreds of indicators
blue line represents skipping the worst half of the trades available to filter your trades.
but sacrificing very little overall profit. To give a concrete example, let’s say your model trades
stocks gapping on the current day and you’re looking to
Take your best trades with bigger size filter the model to avoid the poorest trades in the system.
Your system should be more stable now that you’ve Say you are considering the following indicators:
removed the worst subset of trades. The next step is
to identify the most profitable trades. No matter how • Position in previous 200-day range
big your account size is, it is always finite. You should • Position in previous 50-day range
be constantly analyzing ways to allocate your capital • Position in previous day’s range
more efficiently. Use larger size when your system has
maximum edge. All of these could potentially have some effect on your
Imagine having enough insight into your trading system model, but the recent action theorem states that the posi-
to be comfortable using double or triple your normal tion in previous day’s range is where you should focus
position size (or even more) for some subset of trades. your efforts first, since that action is more recent than
This underrated approach can have a dramatic impact the others. While this theorem isn’t foolproof, it serves
on your bottom line. as a good rule of thumb since it can be applied to any
Figure 2 represents an example of a strategy where I strategy and it makes intuitive sense—the older the data,
was able to identify the trades with the best edge and the more it has faded from traders’ recent memory and
trade them with triple the normal position size. A dra- is therefore less relevant to its performance.
matic improvement!
Continued on page 36
Apply the “recent action” theorem
If you’re unsure about what indicators to examine to
better filter your trades, there’s a good theorem I’ve de-
veloped that tends to work across almost all strategies While entries are important,
I’ve traded regardless of timeframe. I call it the recent typically the most room for
action theorem. improvement comes from
The recent action theorem posits that given the range improving your exits.
of filters you might look at, the ones that come from
more recent action filters are more valuable than those
November 2022 • Technical Analysis of Stocks & Commodities • 27
 ETFs Offer Many More Investing Choices Than Mutual Funds

ETF Marketplace Review:

$7.2 Trillion AUM
And Counting
The first ETF, SPDR S&P 500 ETF Trust, was born on comfort with mutual funds at that point, and mutual funds
January 22, 1993 and has grown to $358.4 billion in AUM offered wide choices with no hassles. But over the past
as of September 2, 2022. Its popularity is unrivaled. Join two decades, the groundswell for investing in ETFs has
us here for a retrospective of the ETF industry, which emerged as an amazing success story.
has changed the investment landscape for millions of Before focusing on the ETF revolution, I will first
investors, while the mutual fund industry fortunes have provide a brief synopsis of the mutual fund industry’s
begun to slow. huge impact on investors’ ability to participate in the
decades of positive stock market performance, reflecting
by Leslie N. Masonson the growth of the American economy.

O
ver the years there have been some watershed Mutual funds flourished over 70 years
events that have forever changed the financial During the 1920s and 1930s, the early days of equity
markets landscape. Two of the most signifi- open-end mutual funds, there were only a handful of
cant ones were the 1924 introduction of the fund families including MFS Massachusetts Investors
first mutual fund and the 1993 launch of the Fund (born in 1924), Putman Investors Fund (1925),
SWKSTOCK/SHUTTERSTOCK

first exchange-traded fund as viable investing Pioneer Fund and Century Shares (1928), Vanguard
vehicles for the masses. Individuals, financial advisors, Wellington Fund and CGM Mutual Fund (1929), Fidel-
and stock brokers were hesitant at first to jump on the ity Fund (1930), and Dodge & Cox Balance Fund (1931).
ETF band wagon, since they had more knowledge and These funds and others that came to market were sold
28 • November 2022 • Technical Analysis of Stocks & Commodities
 WHY TRADE ETFS?

by stock brokers directly to the public for commissions 1970s was only 5.9%. And worst of all, with two bear
(called front loads) of 5% to 8% on Class A shares. All markets during the decade of 2000, the market returned
these funds were actively managed with no index funds a CAGR of −1%. The market recovered in the 2010 to
available until Wells Fargo established the first index 2019 decade with a CAGR of 13.4%, which turned out
fund in 1971. to be one of the longest bull markets in history coupled
During the 1955 to 1964 period, there were approxi- with low inflation and falling interest rates.
mately 115 open-end mutual funds in existence according As of year-end 2021, the total mutual fund assets were
to The Journal Of Finance (May 1968, volume 23, issue 2). $27 trillion compared to $1 trillion in 1990. That surge
In those days, there was no internet, only landline phones demonstrated the investing public’s and institutional
and some phone booths in major cities, not smartphones interest in that investment product. Notably, during the
like we have today. And there was only black & white market crashes in 2002 and 2008, the net asset value
TV on 12" screens (in the early 1950s), rudimentary (NAV) of the funds fell, since the price of mutual funds
color TV on 18" screens (introduced in 1954 with 1% fell in conjunction with customer redemptions. On the
of US households having one by end of 1964 compared whole, the history of the mutual fund industry is one of
to 98% by 1966), and only four broadcast channels growth and innovation and it is still a bedrock of the US
with limited content. The communications technology investment markets.
revolution in all these areas that we are experiencing As of year-end 2021 there were 7,481 mutual funds
today was unimaginable back then, and it has resulted consisting of 2,930 domestic equity funds, 1,450 world
in a much greater participation in the markets by the equity funds, and 1,557 taxable bond funds. The remaining
average American. 1,544 funds were split among hybrid, municipal bond,
In 1974, John Bogle, former CEO and founder of The and money market funds. Interestingly, 2001 was the
Vanguard Group, offered an index of the S&P 500 to peak year for funds at 8,268. That year there were only
retail investors for the first time—called First Index 102 ETFs in the marketplace, not really a threat.
Investment Trust. Initially, with low AUM of $11 mil- The substantial ETF product offerings and rapid asset
lion, the slow start was called “Bogle’s folly” because it growth over the last two decades has had a dampening
appeared to offer limited appeal to the marketplace. Nev- influence on the mutual fund industry’s dominance, as
ertheless, Bogle did not pack it in but instead persevered previously mentioned. Mutual funds racked up significant
by having the last laugh, as Vanguard 500 Index Fund revenues over its more than 70-year existence; those were
Investor Shares (VFINX) currently has assets of $247 the highly prosperous years when the stockbrokers were
billion. Moreover, Vanguard 500 Index Admiral Shares vacationing on their yachts after taking in a bounty of
(VFIAX) has $808.8 billion. Thus, Bogle’s indexing idea commission dollars from the upfront load fees and other
and implementation turned out to be a trillion-dollar share class loads.
bonanza for Vanguard.
The stock market was booming in the 1950s, recover- ETFs’ slow start accelerates
ing from the end of World War II. That decade posted in last two decades
the highest compounded annual growth rate (CAGR) of In the years through early 2000, investors managed their
all decades thereafter at 19.5%. Interestingly, it was not investing and trading using mainly stocks, bonds, and
until the 1980s (CAGR of 17.3%) and the 1990s (CAGR mutual funds. Beginning in 2001 and counting forward,
of 18%) where the markets and mutual fund sales hit all- we find that the accessibility, convenience, low turnover,
time records. The mutual fund industry was raking in diversification, tax and operational efficiency, low expense
big dollars from 1944 through 1970 and then again from ratios, transparency, and flexibility with unparalleled
1982 to 1995 when the market returns were expanding investment options, plus the introduction of very low
dramatically, for those individuals with enough extra
cash to invest. Notably, the load funds took a nice slice
of the pie, with the entrance fee of the Class A shares.
Other share classes were also offered to meet the needs Over the past two decades,
of institutions and investors who wanted a lower load the groundswell for investing
upfront (such as Class C back-end load funds). in ETFs has emerged as an
Not unexpectedly, the markets took a breather during amazing success story.
the 1960s with a CAGR of only 7.7%, and then with the
inclusion of the 1973–74 recession, the CAGR for the
November 2022 • Technical Analysis of Stocks & Commodities • 29
 ($4.95) commission or zero-commission struc- Year ETF Milestones
ture have accelerated the movement away from 1993 S&P 500 Trust ETF introduced January 23
mutual funds to ETFs for all players. 1995 SPDR S&P Midcap 400 ETF available
According to the 9th annual Greenwich As- 1996 19 iShare international ETFs hit the market
sociates Institutional ETF Study 2019, there are 1998 Nine sector SPDRs ETFs available
ten ETF applications that are in use by asset 1999 Invesco QQQ Trust Series introduced
managers, insurers, consultants, and institutional 46 SPDR and iShare ETFs available
funds in ranked order of importance: 2000
Factor ETFs offered by iShares
Smart-beta ETF offered

• Tactical adjustments
Small-cap ETF debuts
24 various ETFs come to market
• Core allocation 2001 Vanguard Total Stock Market (VTI) available
• Rebalancing iShares MSCI ETF born in August (first international ETF)
• Portfolio completion 2002
Number of ETFs passes 100; valued at $1 billion

• International diversification
iShares Ibox $ Invest Grade Corp Bond Fund (LQD) becomes available
Alternative-weight ETFs available
• Liquidity management 2003
Barclay’s TIPS began trading
• Transition management 2004
Commodity ETF debuts (GLD)
• Risk management Vanguard brings 18 ETFs to market

• Interim beta
Sustainable ETFs hit market
2005
Rydex (now Invesco) launched first EuroCurrency ETF (FXE)
• Cash equitization 2006 ProShares leveraged, inverse, and short ETFs available
Direxion inverse and leveraged ETFs brought to market
ETFs have rapidly crossed milestones with
2008
Bear Stearns Current Yield — first actively managed ETF
100 ETFs hitting the market by 2001, then 1,000 2009 ETFs number 1,000, valued at $77 billion
available in 2011, 2,000 in 2019, and finally, 3,000
Schwab offers commission-free ETFs
2010 Vanguard S&P 500 ETF (VOO)
in September 2022. Thus, since 2001 the ETF
2013 Fidelity's first ETF comes to market (ONEQ)
marketplace has grown by 30 times while over
2015 First factor-based ETFs launched
this same time period, the mutual fund count has ETFs number 2,000
declined from 8,268 funds to 7,481, a decline of 2019 Major brokerage firm began offering zero commissions on stocks and ETFs
9.5%. Equity mutual funds and money market 2021 160 ETF issuers
mutual funds were the main decliners, while S&P 500 Trust ETF has $328 billion in AUM
world, hybrid, and taxable bond funds showed 2022 ETFs number 3,000, valued at $7 trillion
Single-stock ETFs offered on TSLA, AAPL, COIN, NKE , PFE, PPL, and others
small percentage increases. The number of ETF FIGURE 1: ETF MAJOR MILESTONES. There were many milestones during the ac-
sponsors has grown from a handful initially to celeration of the ETF marketplace over the past 30 years. In the first eight years since
257, with many of these offering only one or the time the first ETF was introduced, there were only 100 ETFs.
two ETFs.
Let’s review some history. The first ETF,
called the SPDR S&P 500 ETF Trust (SPY), debuted provides the data, showing that only about 100 ETFs
on January 22, 1993. Subsequently, the industry expe- came to market over the first eight years, and there was
rienced an explosive growth curve to reach 3,000 ETFs only one ETF born in three of those years—1993, 1995,
by September 2022, valued at $7.2 trillion (compared to and 1999. Other key ETF launches and milestones are
$1.0 billion in 2002). So the ETF universe began with provided for context.
one ETF and then added others rather slowly. Figure 1 When I reviewed the top 100 ETFs by AUM, I realized
that their dominance will be hard to overcome by any new
sponsor because of their early entry into the arena, their
solid name recognition, and their high trading volume.
The Millennial generation and Only five sponsors manage all of the top 100 ETFs based
the more recent generations on AUM (September 2, 2022 data). BlackRock cornered
probably have never heard of or the market by managing 84 of these ETFs, followed by
encountered mutual funds, and State Street (SSgA), which had ten, VanEck had four,
most likely will never use them. while Invesco and Vanguard had one each. There were
no actively managed ETFs in the top 50, and only three
in the top 100.
30 • November 2022 • Technical Analysis of Stocks & Commodities
BlackRock, Vanguard, and State Street AUM ($ in Total YTD* Dollar
are the big three ETF issuers
Issuer
billions) Funds Flows ($)

A more diverse picture emerges when we view the total BlackRock 2,293.5 398 94,846,654,637

AUM of the largest players coupled with the number Vanguard 1,991.0 82 134,555,047,512

of funds available and the year-to-date dollar flows. A State Street 974.4 139 7,883,476,926

much more useful and granular view of the top 22 issuers Invesco 380.7 238 22,211,216,594

is shown in Figure 2. Here, BlackRock again leads the Charles Schwab 265.6 28 21,960,108,050

pack with a total of 398 ETFs, and more importantly, First Trust 130.5 192 7,709,720,534
$2.2 trillion in AUM. Vanguard came in second with 82 JPMorgan Chase 83.5 46 9,987,570,729
ETFs valued at $1.99 trillion. Notice that on a year-to- ProShares 67.4 136 22,457,242,403
date basis, Vanguard pulled in $134.6 billion compared Dimensional Holdings 63.7 24 14,327,289,536
to $94.8 billion for BlackRock, basically about $40 World Gold Council 61.3 2 2,278,151,900
billion more than BlackRock. State Street (SSgA) came VanEck 53.2 64 2,181,566,134
up third in AUM with $974 billion followed by Invesco WisdomTree 52.6 77 7,791,101,488
with $380.7 billion. Mirae Asset Global Investments
41.0 96 4,114,079,545
Although Bogle for years was adamantly opposed to
Co. Ltd.
Fidelity 33.0 51 1,985,443,632
offering ETFs to the public for a number of reasons, Van-
Goldman Sachs 27.5 31 2,144,962,050
guard finally plowed ahead into the action when Bogle Rafferty Asset Management
was no longer in charge. The first one was Vanguard Total (Direxion Funds)
25.5 87 8,016,735,744

Stock Market ETF (VTI) with an inception date of May Allianz 23.1 28 (2,297,655,109)
24, 2001, followed by Vanguard Extended Market ETF Northern Trust 21.7 32 2,317,436,638
(VXF) in December 2001. It wasn’t until January 2004 Deutsche Bank 20.1 38 (1,326,301,980)
and later that year when Vanguard delivered another 18 Pacer Advisors 16.7 44 7,577,880,207
ETFs to the market. ARK 16.4 8 (499,732,225)
Notably, Fidelity was way down on the list at #14 with

ETFACTION.COM
American Century Investments 14.3 32 5,337,743,730
only $33 billion in AUM and 51 ETFs. This mediocre Total 6,883.7 2,969 392,490,039,534
showing resulted from their late entry into the market- FIGURE 2: LARGEST ETF ISSUERS BY AUM. BlackRock and Vanguard
place. That untimely decision reflected an obvious failure combined held $4.1 trillion in AUM. State Street was a respectable third at
to recognize the future potential growth and demand $974 billion. Surprisingly, both ProShares and Direxion made the list with
for ETFs. In September 2003, Fidelity began its foray their unique leveraged and inverse funds.
into ETFs with the Fidelity Nasdaq Composite Index
ETF (ONEQ), which has 1,001 holdings in its portfolio cessful to date. Interestingly, it performed 2.4 percentage
compared to 102 for QQQ (Invesco QQQ Trust). ONEQ points better than QQQ over five years, but its average
has amassed a respected $4.0 billion, the second largest daily trading volume of 185,600 is miniscule compared
AUM in their own 51 ETF grouping. to that of QQQ.
QQQ, on the other hand, has captured a huge $164.7
billion, clearly ruling the tech space with a portfolio 90% Proshares, Direxion, and Ark squeeze
smaller and more concentrated. Performance-wise, over into top 25
three and five years, QQQ has outpaced ONEQ by about One unexpected provider on this list was ProShares in
2.2 percentage points a year. Moreover, QQQ’s average the 8th AUM position with $67.4 billion and 136 ETFs.
daily trading volume of 47.2 million shares clearly domi- Year-to-date inflows were a solid $22.4 billion, putting
nates the 331,300 shares traded on ONEQ. Therefore, it in third place in the group for that metric. ProShares,
in a head-to-head comparison, QQQ is the winner for first offering ETFs in June 2006, is rather unique in its
interested tech-oriented investors and traders. ETF offerings, since in addition to over 40 specialized
Surprisingly, Fidelity’s next ETF entry did not appear ETFs, it also offers over 50 leveraged and inverse ETFs
for another decade, launched in October 2013, when their in the following categories: fixed income, commodity,
ten sector funds were introduced. That decade-long delay thematic, and currency ETFs. Active traders and insti-
was extremely costly, resulting in their not becoming tutional traders gravitate to these for short-term trades
one of the top five leaders in the ETF category. So far, and hedging.
the Fidelity MSCI Information Technology Index ETF Rafferty Asset Management provides the ETFs for
(FTEC), capturing AUM of $5.3 billion, is its most suc- Direxion, a competitor of ProShares. Direxion also of-
November 2022 • Technical Analysis of Stocks & Commodities • 31
 fers leveraged and inverse ETFs. With a Ticker Fund name Perf. YTD Perf. 3-Yrs Perf. 5-Yrs Perf. 10-Yrs
November 2008 start date, Direxion de- SPY SPDR S&P 500 ETF Trust −2.66% 14.89% 13.67% 13.63%
buted two years after ProShares. They held IVV iShares Core S&P 500 ETF −2.64% 14.91% 13.72% 13.69%
$25.5 billion in assets among its 88 ETFs, VOO Vanguard S&P 500 ETF −2.65% 14.92% 13.72% 13.69%
and accumulated inflows of $8.0 billion Vanguard Total Stock Market
VTI −5.02% 14.20% 13.16% 13.35%
year-to-date. But with the later start date, ETF
they lag behind ProShares by $42 billion QQQ Invesco QQQ Trust −10.80% 20.43% 18.83% 17.94%

in AUM. Of that amount, Direxion Daily VTV Vanguard Value ETF 4.18% 12.24% 10.95% 12.23%
Semiconductor Bull 3X Shares (SOXL) VEA Vanguard FTSE Developed
−14.59% 5.21% 3.15% 5.75%
Markets ETF
grabbed $5.4 billion, and Direxion Daily IEFA iShares Core MSCI EAFE ETF −15.50% 4.40% 2.76%
S&P 500 Biotech Bull 3X (LABU) gained Vanguard Total Bond Market
$1.2 billion. SOXL has declined 81.7% this BND ETF
−10.73% −1.46% 0.81% 1.52%

year (as of September 6, 2022) but has a AGG iShares Core U.S. Aggregate
−10.53% −1.46% 0.78% 1.52%
Bond ETF
10-year annual return of 37.81%. Likewise, VUG Vanguard Growth ETF −12.05% 16.80% 16.10% 14.99%
LABU has declined a huge 88.4%, adding Vanguard FTSE Emerging
to its dismal 5-year annual negative return VWO Markets ETF
−13.25% 4.25% 2.03% 2.86%

of −36.8%. Traders need to be especially IJR iShares Core S&P Small Cap
−1.24% 12.48% 10.71% 12.17%
careful not to hold this kind of leveraged
ETF
iShares Russell 1000 Growth
bullish ETFs in declining markets, as they IWF ETF
−9.48% 17.26% 16.93% 15.67%

can fall fast and hard. IEMG

iShares Core MSCI Emerging
−16.23% 3.84% 1.40%
The ETFs offered by ARK ETF Trust, Markets ETF
Vanguard Dividend
21st in AUM, have had a rough time in VIG Appreciation ETF
−0.20% 12.29% 13.46% 12.50%

2022, where their eight ETFs have taken IJH iShares Core S&P Mid−Cap
−1.12% 12.52% 10.44% 11.83%
a drubbing of 45–75%. Previously, these ETF

ETFs were considered market stars with

IWM iShares Russell 2000 ETF −7.17% 10.34% 8.90% 10.56%

spectacular 150%+ performance gains dur- GLD SPDR Gold Shares −2.33% 4.86% 5.87% 0.38%

ing the March 2020 through mid-February IWD

iShares Russell 1000 Value
0.66% 10.68% 9.16% 10.84%
ETF
2021 booming bear market rebound. Not VO Vanguard Mid−Cap ETF −6.04% 12.05% 11.16% 12.36%
surprisingly, current year-to-date flows Vanguard Total International
VXUS −14.25% 4.83% 2.86% 4.98%
have been negative at −$500 million. Stock ETF
Only two other issuers had negative cash VYM Vanguard High Dividend Yield
Index ETF
6.33% 11.82% 10.46% 11.59%
flows this year. They were Allianz and Vanguard Information
VGT −6.64% 22.38% 22.34% 19.30%
Deutsche, with major outflows of $2.2 Technology ETF
billion and $1.3 billion, respectively. Not EFA iShares MSCI EAFE ETF −14.77% 4.17% 2.63% 5.24%

a good showing. FIGURE 3: PERFORMANCE OF TOP AUM LEADERS. Here, VGT led the pack with a solid
21% average annual return over the 3-, 5-, and 10-year periods. VUG and QQQ were the next
Low annual expense ratios
best leaders, followed by S&P 500-related ETFs at around 14% annualized.

One of the major features of ETFs com-

pared to mutual funds is their lower expense ratios. Here expense ratio of all ETFs is 0.17%.
is a brief review of average current charges: Remember that in each category there can be a wide
range, and some of the well-known broad-based ETFs
Category expense ratio have expense ratios of 0.03% such as IVV, VOO, VTI,
Equities 0.18% BND, AGG and others. Amazingly, ETFAction.com
Fixed income 0.16% lists about 20 ETFs hitting the market in 2021 and 2022
Commodities 0.47% with 0.0% expense ratios including BKLC, BKAG, SFY,
Currencies 0.69% LQIG, and TSLL, among others. This is clearly an in-
Asset allocation 0.63% vestor’s dream, but due diligence is necessary to check
Alternatives 0.82% out all the details since we all know “there is no such
Leveraged 0.98% thing as a free lunch,” as Milton Freidman, the Nobel
Prize-winning economist stated many times. (However,
According to ETF Think Tank, the average weighted to note it, Paul Mallon, an American political journalist,
32 • November 2022 • Technical Analysis of Stocks & Commodities
first came up with the saying
“there’s no free lunch” in
1942.) In any event, check
out all the details of any
ETF you are considering to
make sure you are getting
what you expect.

Smart-beta ETFs
continue their
popularity
Smart-beta single-factor
and multiple-factor strate-
gies using ETFs have been
heavily promoted over the
past decade, and AUM has
mushroomed to billions
of dollars. According to
www.etf.com, there are FIGURE 4: PERFORMANCE COMPARISON OF SPY AND QQQ. QQQ almost doubled the performance of
1,204 ETFs in the smart- SPY during the 22-year period. But there were bumps along the way where SPY performed better, mostly in
beta category with AUM of bear markets, relatively speaking.
$1.5 trillion, and an average
annual expense ratio of 0.53%. “Smart beta” is known 19%, which was 400 to 500 basis points better than the
under different monikers including strategic beta, factor vast majority of the rest of the listing.
investing, fundamental indexing, and others. The factors Not surprisingly, fixed income ETFs had returns
evaluated and used in various ETFs include quality, value, ranging from −1.5% to +1.5% or less—not particularly
and momentum. Other factors that have been used that desirable for income investors looking for yield and price
do not offer much of a benefit include low volatility, size, appreciation. Of course, the low interest rate environment
and dividend yield. played a major role in that poor showing. Surprisingly,
The key determinant is for smart-beta ETF portfolios GLD had a rather weak performance over ten years at
to offer rules-based strategies that deliver potential 0.38%. Also, during the past ten years, emerging market
index-beating results with less risk than more traditional ETFs have been in the doldrums with about a 5% return
market-cap-weighted indexes. These specialized ETFs are for each of the three periods.
scattered among all asset classes including: equity, fixed Let’s look at the performance of two extremely popu-
income, currencies, commodities, and more. According lar ETFs—SPY and QQQ—on a chart (Figure 4). From
to ETFAction.com, the factor characteristic encompassed January 4, 1999 (date of QQQ inception) to September
717 ETFs valued at $795.4 billion with an average an- 2, 2022, QQQ gained an astounding 629.7% while the
nual expense ratio of 0.47%. Note that www.etf.com and SPY advanced only 387.5%. Note that QQQ substantially
ETFAction.com have different results, since they both outpaced SPY during the tech boom years of 1999 to
have their own ways of classifying ETFs. According to 2000 and from the March 2020 lows, but during more
ETFAction.com, the top five ETFs based on AUM are volatile down markets SPY performed relatively better.
VIG, VYM, SCHD, RSP, and USMV, and among the 48 Both of these ETFs are heavily traded due to their unique
coming to market in 2022 were: CGGO, CGU WINN, portfolio, small bid-to-ask spread, huge daily share
ACSC, ICAP, and GFGF. volume, liquidity, and increasing number of interested
traders and investors.
ETF performance Figure 5 provides the top 20 10-year ETF performers
Among the top 26 ETFs based on AUM, the five top excluding leveraged ETFs and ETNs. Clearly, semi-
performers are highlighted in Figure 3. Clearly, over conductor ETFs have been the leaders with four in the
the four timeframes shown, VGT, an information tech top 5. An annual return of 22% from XSD, SOXX, SMH,
play, provided superior returns of over 22% in two of and PSI have been similar for all four periods shown. In
the three periods. QQQ came in second place at around position #2 and #6 are QCLN and TAN at 22.3% and
November 2022 • Technical Analysis of Stocks & Commodities • 33
 Ticker Fund name Perf. YTD Perf. 3-Yrs Perf. 5-Yrs Perf. 10-Yrs erything.” Note that SOXL had a three-year
SPDR S&P Semiconductor annualized return of only 3.98% compared
XSD −31.20% 22.50% 22.11% 22.44%
ETF to about 17% to 22% for its technology
QCLN
First Trust Nasdaq Clean Edge
Green Energy Index Fund
−4.47% 44.91% 28.93% 22.30% competitors, so being strictly limited to
SOXX iShares Semiconductor ETF −33.26% 20.24% 20.43% 22.25% the technology slice of the spectrum did
SMH VanEck Semiconductor ETF −32.39% 21.49% 20.16% 21.95% not work out well recently.
Invesco Dynamic
ETF trading volume
PSI −35.46% 19.49% 17.26% 21.52%
Semiconductors ETF
TAN Invesco Solar ETF 13.58% 43.37% 32.54% 20.48% Speaking of trading volume, let’s review
VGT
Vanguard Information
−24.42% 17.49% 19.22% 17.98% the most heavily traded ETFs (Figure 6).
Technology ETF
Invesco S&P 500 Equal Weight SPY is fourth in ranking with 62.4 million
RYT
Technology ETF
−21.11% 12.95% 15.26% 17.55%
daily shares, while QQQ ranked seventh
XLK
Technology Select Sector
−22.55% 19.25% 19.45% 17.50% with 49.9 million shares. Believe it or not,
SPDR Fund
iShares U.S. Broker−Dealers & two triple leveraged ProShares held the top
IAI
Securities Exchanges ETF
−13.79% 14.71% 14.43% 17.15%
positions with TQQQ (3X bull) at 148.8
IHI
iShares U.S. Medical Devices
−21.74% 7.37% 13.35% 17.04% million shares and the SQQQ (3X bear) at
103.4 million shares. Moreover, two Direx-
ETF
First Trust NASDAQ−100
QTEC
Technology Sector Index Fund
−33.31% 9.76% 12.73% 17.01%
ion tech-related ETFs SOXS (3X bear) and
QQQ Invesco QQQ Trust −24.62% 16.71% 16.33% 16.85% SOXL (3X bull) were the third and fifth
IGM
iShares Expanded Tech Sector
−29.01% 12.33% 15.64% 16.83% ranked with 66.7 million shares and 60.3
ETF
million shares, respectively. There are a
few other Direxion and ProShares ETFs
IYW iShares U.S. Technology ETF −27.88% 17.88% 18.08% 16.76%

on this listing, as well as XLF and XLE,

IXN iShares Global Tech ETF −25.80% 16.33% 16.25% 16.37%
First Trust Technology
FXL
AlphaDEX Fund
−26.60% 12.70% 16.11% 16.25% the Financial and Energy Select SPDRs,
SMOG
VanEck Low Carbon Energy
−18.11% 27.58% 18.11% 16.22%
GDX (gold miner), SLV (silver), and a few
ETF China (FXI, KWEB) and international
Invesco DWA Technology
PTF
Momentum ETF
−28.03% 16.10% 19.79% 16.15% ETFs (EEM, EWZ, and EFA). It is surpris-
XNTK SPDR NYSE Technology ETF −35.34% 13.20% 13.22% 16.04% ing to see ARKK (ARK Innovation ETF)
FIGURE 5: TOP 20 TEN-YEAR PERFORMERS. Sixteen technology-related ETFs dominated still being actively traded after its huge
the list. Clean energy, solar, brokerage, and medical devices did well. decline this year while the other seven
ARK ETFs do not make the cut.
20.5%, respectively, in clean energy and solar energy.
Most of the other ETFs in the top 20 are technology Top-yielding ETFs
related, which indicates the pervasive development of Figure 7 provides the top-yielding ETFs. Receiving
technology in our lives and the unique companies of- a yield in the 10% to 16% range is certainly enticing
fering those type of products and services. in the current low-yield environment, but as expected,
As you can also see in Figure 5, the top 5-year per- there is no free lunch. Seventeen of these ETFs focus
former was TAN at 32.5%, and the top 3-year performer on international holdings, with a large emerging market
was QCLN at 44.9%. QQQ popped up at #13 on the list, tilt. Brazil, Latin America, Pakistan, Africa, and frontier
which is not unexpected. The only other two ETFs that market ETFs are among them. Investors in these ETFs
had top performance were IAI (brokerage business) and should make sure to review the details and risks (such as
IHI (medical devices) with a 10-year performance of the currency and country) in their individual fact sheets
17.2% and 17.0%, respectively. and prospectuses before investing in these. Investors
The top seven double or triple-leveraged ETFs (not looking for more reasonable yields can check the various
included in Figure 5) as of September 7, 2022 had 10- websites mentioned at the end of this article to find ETFs
year annualized returns of about 30–39%, and six were that meet their risk tolerance and risk parameters.
all technology related. Ranked fourth was CURE, a 3X
health-related play with a 31.9% annualized return. The Concluding remarks
top tech ETFs in order were SOXL, TQQQ, TECL, USD, ETFs have had substantial growth and wide acceptance
QLD, and ROM. Of course, with a down year, these ETFs by individuals, institutions, and financial advisors, as
have cratered 52% to 81%, so as they say, “timing is ev- demonstrated by their total AUM of $7 trillion (compared
34 • November 2022 • Technical Analysis of Stocks & Commodities
 Average Daily Avg Daily Ticker Fund Name Div. Yield
Ticker Fund Name
Volume Dollars SDIV Global X Superdividend ETF 16.34%
TQQQ ProShares UltraPro QQQ 148,820,336 $4,287 EWZ iShares MSCI Brazil ETF 15.04%
SQQQ ProShares UltraPro Short QQQ 103,418,176 $4,918 FLBR Franklin FTSE Brazil ETF 14.69%
Direxion Daily Semiconductor DVYE iShares Emerging Markets Dividend ETF 13.23%
SOXS 66,728,996 $353
Bear 3x Shares SEA U.S. Global Sea to Sky Cargo ETF 12.73%
SPY SPDR S&P 500 ETF Trust 62,396,684 $24,526 EEMD AAM S&P Emerging Markets High Dividend Value ETF 12.43%
Direxion Daily Semiconductor ILF iShares Latin America 40 ETF 12.36%
SOXL 60,297,464 $994
Bull 3x Shares
DEM WisdomTree Emerging Markets High Dividend Fund 11.75%
ProShares Ultra VIX Short−Term
UVXY 52,600,600 $643 BOAT SonicShares Global Shipping ETF 11.63%
Futures ETF
FLLA Franklin FTSE Latin America ETF 11.08%
QQQ Invesco QQQ Trust 49,983,672 $14,936
SDEM Global X MSCI SuperDividend Emerging Markets ETF 10.92%
Direxion Daily S&P Biotech Bull
LABU 48,671,072 $422 FBZ First Trust Brazil AlphaDEX Fund 10.41%
3X Shares
Financial Select Sector SPDR MORT VanEck Mortgage REIT Income ETF 10.41%
XLF 43,249,072 $1,400 REM iShares Mortgage Real Estate ETF 10.32%
Fund
SH ProShares Short S&P500 37,522,176 $590 KBWD Invesco KBW High Dividend Yield Financial ETF 10.25%
iShares iBoxx $ High Yield PAK Global X MSCI Pakistan ETF 10.09%
HYG 34,921,136 $2,647
Corporate Bond ETF ECOW Pacer Emerging Markets Cash Cows 100 ETF 9.94%
iShares MSCI Emerging Markets AFK VanEck Africa Index ETF 9.81%
EEM 34,912,356 $1,388
ETF BIZD VanEck BDC Income ETF 9.75%
FXI iShares China Large−Cap ETF 30,667,506 $976 FlexShares Morningstar Emerging Markets Factor Tilt
TLTE 9.45%
XLE Energy Select Sector SPDR Fund 28,971,710 $2,118 Index
PSQ ProShares Short QQQ 25,325,524 $339 First Trust Indxx Global Natural Resources Income
FTRI 9.39%
ARKK ARK Innovation ETF 25,123,352 $1,140 ETF
ProShares UltraPro Short RFEM First Trust Riverfront Dynamic Emerging Markets ETF 9.22%
SPXU 24,700,358 $438
S&P500 FM iShares MSCI Frontier and Select EM ETF 8.94%
EWZ iShares MSCI Brazil ETF 22,338,320 $628 IDV iShares International Select Dividend ETF 8.80%
SLV iShares Silver Trust 22,290,008 $408 FLN First Trust Latin America AlphaDEX Fund 8.76%
IWM iShares Russell 2000 ETF 22,061,358 $3,942 FIGURE 7: TOP-YIELDING ETFS. Emerging, frontier markets, and in-
GDX VanEck Gold Miners ETF 21,824,676 $587 ternational ETFs dominated the space with two Brazilian ETFs providing
EFA iShares MSCI EAFE ETF 20,014,068 $1,264 15% dividend yields. Keep in mind there are currency risks among other
iShares iBoxx $ Investment
LQD 18,033,898 $2,017 risks with international ETFs. A few real estate and REITs made the list
Grade Corporate Bond ETF
with yields of 10%.
Direxion Daily S&P 500 Bear 3x
SPXS 16,989,568 $403
Shares
KraneShares CSI China Internet
KWEB
ETF
16,962,670 $516 cant benefits.
FIGURE 6: TOP 25 ETFS BY AVERAGE DAILY TRADING VOLUME. The In a nutshell, the surge in assets for ETFs clearly shows
3X leveraged TQQQ (bull) and SQQQ (bear) were by far the most heavily the underlying demand over the last 20 years for ETFs
traded issues with over 100 million shares a day. The semiconductor ETFs relative to their precursors. Interestingly, money market
also had over 60 million share days. SPY came in 4th at 62.3 million shares,
mutual funds were introduced in 1979 and took a bite
and QQQ was 7th with 49.9 million shares.
out of the equity and bond assets especially during bear
market. By year-end 2021, money market funds still re-
to $102 billion in 2002). However, ETF penetration of tained $4.7 trillion, compared to $11.3 trillion invested
the investment landscape represents only 26.6% of the in for equity mutual funds.
$27 trillion in all mutual fund categories (such as equity, In March 2015, Robinhood Markets Inc. offered a
hybrid, bond, and money market). However, on a percent- groundbreaking no-commission structure with three
age basis since 2002, the dramatic shift to is shown by the major brokerage firms following suit in 2019. This has
ETFs asset growth on nearly 600% compared to 325% led to a substantial increase in trading volume among
for mutual funds. This trend is expected to continue and
accelerate, as the bellwether ETFs and the new entrants
gobble up the dollars that once went to active and index
equity mutual funds.
ETF penetration of the
The Millennial generation (those born between 1981 investment landscape
and 1996) and the more recent generations probably represents only 26.6%
have never heard of or encountered mutual funds and of the $27 trillion in all
most likely will never use them. Those from the Boomer mutual fund categories.
generation are clearly moving out of mutual funds into
ETFs at an increasing pace because they see the signifi-
November 2022 • Technical Analysis of Stocks & Commodities • 35
 all investors. Most likely, investors’ interest will be more
focused than ever on the heavily traded liquid ETFs
and everchanging ETF choices—think Bitcoin, crypto, In the years ahead, the
blockchain, ESG ETFs, leveraged and inverse ETFs, and
number of ETFs will no
even single-stock ETFs. In the years ahead, the number of
ETFs will no doubt surpass the number of equity mutual
doubt surpass the number
funds. They will have increased asset size. There will be of equity mutual funds.
an innovative lineup of both existing and newly designed
ETFs to meet the everchanging financial environment.
Current industry estimates put it at $12 trillion in ETF
assets by 2025. We’ll see if that aggressive forecast turns The Edge. He can be reached at lesmasonson@yahoo.
out to be accurate. com and at (561) 924 8084.

S&C Contributing Writer and ETF Columnist Leslie N. • www.ark-funds.com • www.direxion.com • www.etf.com •
Masonson is president of Cash Management Resources, www.etfreplay.com • www.etfscreen.com • ETFaction.com
a firm focusing on ETF strategies. He is an active NAS- • www.etftrends.com • www.etfguide.com • www.ici.org •
DAQ futures and ETF trader, and the author of six books www.proshares.com • www.seekingalpha.com
including Buy—Don’t Hold: Investing with ETFs Using
Relative Strength to Increase Returns with Less Risk, and
All About Market Timing, as well as Day Trading on

MABE/IMPROVE
Continued from page 27
Any single trade is irrelevant.
What’s important is what
exaMine your exits
If you’re like most traders, you pay closest attention to
works across a large number
your trade entries. While entries are important, typically, of trades.
the most room for improvement comes from improving
your exits. Are you using a stop-loss? Have you consid-
ered using a profit-taking target order? How long do you
allow your trades to play out before you exit? There’s suMMary
normally a lot of room to improve your trading system Successful traders don’t wait for drawdowns to improve
by fine-tuning these exit decisions. A poorly designed their strategies—they are routinely and systematically
exit strategy can easily turn what should be a profitable improving them. Once you develop this mindset, your
strategy into a losing one. trading will be far more robust.
The best trades in a system need enough time to play
out and become profitable, but most traders are impa- Dave Mabe is the CTO of Trade-Ideas (www.trade-ideas.
tient, and often: com), a tool that helps traders make more profitable trad-
ing decisions using AI, backtesting, and real-time alerts.
• They exit the trade too early He blogs at www.davemabe.com. He can be contacted at
• They use a stop that’s too tight [email protected] or on Twitter: @davemabe.
• They use a target that’s too near the entry price
further reading
Any single trade is irrelevant. What’s important is what Mabe, Dave [2008]. “Streamline Your Trading Routine,”
works across a large number of trades. Analyzing what Technical Analysis of StockS & commoditieS,
works in the aggregate will give you more confidence Volume 26: September.
and will improve your trading.
36 • November 2022 • Technical Analysis of Stocks & Commodities
 Algo Q&A
ALGORITHMIC TRADING
Have a question about system or algo trading? Kevin J. Davey has over
30 years of system trading experience. He is a full time trader, and also
teaches and consults via his Strategy Factory online workshop (https://
kjtradingsystems.com). He is the author of five bestselling trading books,
including “Building Winning Algorithmic Trading Systems” and his latest
book “Algo Trading Cheat Codes.” Send your questions or topic suggestions
to Kevin Davey at [email protected]. Selected questions will
appear in a future issue of S&C.
Kevin J. Davey

EVALUATING BACKTEST RESULTS 4. Should I use out-of-sample testing poor real-time performance. Correct
I just bought a new indicator package, and/or walkforward testing, or is answers will usually lead to profit (al-
and it performs great in a backtest. in-sample optimized testing good though random bad luck can obscure
But in live trading, it only loses money. enough? your results temporarily).
Can you help? 5. How many months or years back The DIY route is certainly a viable
Your situation is not so unusual. should my historical backtest one; in fact, that is how I developed
There are many indicators and strate- go? my approach to algo trading. The
gies out there being sold, and many of 6. Am I accounting for stock splits downside is that this approach was
them claim to provide the “holy grail” and dividends accurately if test- expensive for me—the market teaches
of trading. In ads and short demos, ing stocks, or rollovers if testing rules, but requires payment in the form
these indicators will appear to be the futures? of trading losses!
“be all and end all” solution for your 7. If my backtest yields $1,000 profit Another route is to find the solution
trading woes. per month, what should I expect from books, videos, workshops and
Unfortunately, when you put these to get in real time? other trading education. One road-
magic indicators to the test, they usu- block is that everyone claims to be an
ally fail. But why is that? The issue then becomes expert, but in reality, very few are. The
One big reason is that it is relatively charlatans may just teach you garbage
easy to show good performance with
not what you test, but and leave you worse off.
just about any indicator or strategy—if how you test it. Another problem with any educa-
you cherry pick when you use it. As tion is that it may not work for you. Just
the old saying goes, even a broken 8. How many tweaks or rule changes because someone else has had success
clock is right twice a day. should I do to improve my back- with an approach, it does not mean you
But when most indicators are put test? will too. You have to find a process to
to a rigorous historical backtest, they 9. Does my strategy or indicator building good indicators and strategies
fall apart. Yes, they will have good have to work on multiple markets that fits you—that is, your strengths
periods of performance, but by and to be a success? If so, how many and your abilities (think statistical
large they will create a decidedly markets? analysis, coding, math skills).
downward-sloping equity curve. Ultimately, whatever route you
The issue then becomes not what If you notice, these questions are choose, the proof is in the perfor-
you test, but how you test it. There pretty much independent of the spe- mance. If what you are doing is
are many questions that you have to cific indicator or strategy you use. leading to actual profits, keep doing
answer regarding testing: That is really the point: all indicators it! And if your process is leading to
or strategies should be subjected to losses, then obviously, a change may
1. How many rules should my indi- the same battery of tests. Only then be warranted.
cator or strategy have? can results be properly evaluated and In the end, then, the indicator or
2. Have I accounted for slippage and compared. strategy is not what will get you ahead
commissions accurately? How do you find answers to all in the trading race. Focusing on proper
3. Should I optimize, and how many these questions? One way is to do development fundamentals, however,
iterations and inputs should I it yourself, through trial and error. can get you there.
use? Wrong answers will usually lead to
November 2022 • Technical Analysis of Stocks & Commodities • 37
 INTERVIEW

Technician, Money Manager, Author, Educator, and Trading System

And Indicator Developer

A Conversation With
Gregory Morris
Gregory L. Morris has a distinguished 50-year investment career as a
technical analyst, a prolific developer of indicators and trading systems,
and an accomplished author of books on trend analysis, breadth, and
candlesticks. Currently, he serves as a senior advisor to McElhenny
Sheffield Capital Management, a registered investment advisory (RIA)
firm in Dallas, TX, while also enjoying semi-retirement.
Morris worked with N-Squared Computing from 1982–1993, produc-
ing over 15 technical analysis and charting software titles. From 1994 to
1996, he was president of G. Morris Corporation, providing products and
services for investors and traders; there, he developed over 450 indicators
and trading systems. From 1996 to 2002, he was CEO of MurphyMor-
ris.com, a provider of web-based market analysis tools, education, and
commentary, alongside partner John Murphy. MurphyMorris.com was
acquired by StockCharts.com, Inc. in October 2002. From December
2003 to May 2005 he served as a trustee and advisor to the MurphyMor-
ris ETF fund.
Morris was senior vice president, chief technical analyst, and chairman
of the investment committee for Stadion Money Management, LLC before I’ve learned from
retiring in December 2014 from full-time work. From 2006 to 2014, he experience and I have
oversaw a portfolio of $6.5 billion in assets. He stayed on as chairman no problem sharing that
of Stadion’s board of trustees until June 2021. experience with others.
Books by Morris include The Complete Guide To Market Breadth
Indicators and Candlestick Charting Explained followed by Candlestick
Charting Explained Workbook. In 2014 he authored Investing With The
Trend: A Rules-Based Approach To Money Management published by Wiley through Bloomberg Press. In 2011,
he produced Japanese Candlestick Pattern Recognition software for MetaStock. He writes a blog for StockCharts.
com titled “Dancing With The Trend.”
Morris has also authored numerous investment-related articles, spoken at seminars and worldwide events,
and has appeared on various business channels and in the financial media including Investor’s Business Daily,
Business Week, and Barron’s. He has educated institutional and individual clients on the merits of technical
analysis and why he utilizes a technical, rules-based trend-following model. He was a member of the National
Association Of Active Investment Managers (NAAIM) where he chaired the Wagner Paper Contest. Morris has
a BS degree in aerospace engineering from the University of Texas at Austin. From 1971 to 1977 he was a Navy
F-4 fighter pilot aboard the USS Independence, selected for and graduating from the Navy fighter weapons school
known as TOPGUN.
Stocks & Commodities Contributing Writer and ETF Columnist Leslie N. Masonson interviewed Gregory
Morris via email in mid-July 2022 to discuss his 50-year investment career, his indicator and systems develop-
ment using technical analysis, and his rules-based money management methodology.
WHO IS DANNY/SHUTTERSTOCK

Since your September scape has changed if at all? I use the Nasdaq Composite Index
2009 interview in this I don’t think it has changed in a for what I refer to as “the market.”
magazine, how do you manner that affects how people make The Dow Jones Industrials and
think the market land- decisions on investing. S&P 500 are highly correlated to
38 • November 2022 • Technical Analysis of Stocks & Commodities
the Nasdaq over very long periods systems instead of hiring
of time, but there are many shorter- someone with that skill,
term periods of a few months or so assuming there were I have always been a big
where that correlation does not exist. qualified individuals? believer in using market
I consider the Nasdaq a much better I got a degree in aero- breadth for trend following.
representation of “the market” than space engineering from
the other popular indexes. All of the the University of Texas
indicators I use in my rules-based and I did a large amount
trend model use Nasdaq data, both of programming in Fortran IV, so lished in September 2005? Many
price and breadth. programing indicators was quite investors have relied on this as a
easy for me. very useful reference guide.
At N-Squared Computing from I have always been a big believer
1982 to 1993 you worked with Norm Why spend many hours program- in using market breadth for trend
North jointly to develop 15 technical ming these diverse indicators and following. Breadth treats every
analysis, charting, and indicator then offer them for sale at a rela- stock in a market average equally,
packages. Who were the buyers of tively low price? whereas most market averages are
those packages? One can sell a few packages at a capitalization-based, which means
Selling products at that time, it high price, or one can sell hundreds the largest stocks in the index control
was difficult to assess the profession of packages at a low price. I chose the index. That is not the case with
of those who purchased them. Back the latter. breadth. For example, as markets
then, only Computer Asset Manage- begin the topping process, many in-
ment (which became MetaStock) run Are there any trading systems that vestors will move their money from
by Steve Achelis and TradeStation you developed that you’ve kept pri- risky stocks into what they perceive
and its predecessor (Omega Re- vate and used for your own trading to be safer stocks like large-cap blue-
search’s SystemWriter) that the Cruz and investing? If so, how have they chip stocks. This drives the market
brothers (Bill and Ralph) introduced performed during their use? averages higher because most indexes
were about the only technical analysis Not really. My money management are capitalization-weighted. Breadth
packages available. model that I created for Stadion in on the other hand begins to decline
We (N-Squared Computing) were 2007 was based on a number of at tops and diverges with price. This
the first software, I believe, to incor- new trend indicators and breadth almost always occurs at most large
porate Bollinger Bands. indicators. The model had rules and market peaks. However, it also occurs
I’m very sad to say that Norm North stops for selling. Everything was at some insignificant peaks also, not
passed away in 2021 at the age of designed to remove the human from unlike a lot of economic indicators.
89; he was a wonderful person and the process.
a great friend. Why did you break out the breadth
Based on your 50 years of market indicators into four categories:
Why did you release these indicators knowledge, which candle patterns differences, ratios, percentage, and
to the public instead of keeping them have you found to be the most reli- cumulative?
private for your own use? able in trending markets? Mainly for an organizational pro-
I have always felt that most inves- I have never traded with candle- cess. Those are four very different
tors can be given the absolute best sticks; only did the research. Candle methodologies.
indicator but the first time there is patterns are for the very short term;
a hiccup they will be searching for I’m not. In my book Candlestick Which breadth indicators did you
another one. It was very easy for me Charting Explained (third edition), find to be most consistent in pin-
to build indicator formulae in multiple all pattern performance data is avail- pointing market over- or under-
formats for most technical analysis able, the good and the bad. valuation?
software products. I thought it would Valuation is a fundamental ap-
make a good product, which it did. Why did you decide to write your proach that I never use. In my book
heavily researched 300-page com- I rank all the breadth indicators and
How and why did you learn to pendium The Complete Guide To I write that if I had to pick a single
program indicators and trading Market Breadth Indicators pub- breadth indicator to use it would
November 2022 • Technical Analysis of Stocks & Commodities • 39
 What interesting facts book I also introduced candle pat-
did you discover about tern filtering, a technique that also
Breadth treats every trend following that you involved stochastics.
stock in a market average did not know about prior
equally, whereas most to your in-depth analysis You have said: “I honestly do not
market averages are in your book? believe anyone knows what the
The book was the re- market will do tomorrow, this
capitalization-based. sult of many years being week, next month, next year, or any
a technical analyst who time in the future.” Given that no
always favored trend individual knows the future, why
be the McClellan summation index following. However, I’d like to do you think market guests on the
created by Sherman and Marion emphasize this: Trend following is financial networks are asked for
McClellan. not market timing! Market timing their forecasts?
involves guesswork for tops and bot- I think many viewers like to hear
You are a strong proponent of “in- toms; trend following never gets out the talking heads make their guesses
vesting with the trend,” which is also at the top or in at the bottoms. on the market; then if their investment
the title of your book published in doesn’t work out, they can blame it on
2014. How long did it take to write How does your 1992 book Candle- them. Most people would do better if
that book and perform the research stick Charting Explained and its they turned off the television and the
and testing? 1995 and 2005 revisions differ from internet and just relied on a simple
Being so involved with the markets Steve Nison’s well-known books on system or process. Carl Sandburg
led me to realize I wasn’t a very good candlesticks? said an expert is a damn fool a long
trader or investor, but the good news They are two completely different way from home.
is I learned from my shortcomings. I approaches to the subject. Mine was
realized I needed to create a model more of a research project. I kept the What advice would you give to
that removed me from the decision- same pattern-naming convention as inexperienced long-term investors
making process. The model, or a in his books but that was about it. I on the best way to handle their
somewhat modified version of it, imagine his book will appeal to some investments?
was successfully managing a large and my book will appeal to others. First, don’t think of yourself as a
amount of money in 2011 and that My book got underway when Probus long-term investor; keep your mind
model is still in use today. Publishing called and asked me to open.
write a book about the software that Second, find an advisor with an
Why did you decide to write a book Norm North and I developed called accredited track record and with an
on that subject, given that there were CandlePower. The software automat- investment process that appeals to
at least five books already published ically identified candlesticks. I had you. Consider also the risk they take
on it, including two best-sellers learned about candlesticks when I at- to achieve those results. You must be
by Michael Covel and three Wiley tended an MTA (Market Technicians sure you are comfortable with their
books written by Andrew Abraham, Association, now known as CMT process. Don’t just base your selection
Ray Barros, and Kedrick Brown, Association) convention in Phoenix on their past performance.
respectively? in 1988. A large contingent of Japa-
To conclude that my book is nese traders were in attendance and Should investors look for advi-
solely about trend following would told us about the concept of zhútái, sors that blend fundamental and
be shortchanging it. My book is a Chinese word that translates into technical analysis into their client
totally different than the others you “candlesticks.” portfolio recommendations?
mentioned. My book can be broken The 2005 third edition of my book I honestly see no value in funda-
down into three sections: the first was greatly enhanced with lots of data mental analysis. It is widely used
part is a critique on modern finance; showing which patterns worked well because it is easy to sell. Tell a client
the second part shows that markets and when, and also, which patterns that earnings estimates for next year
do trend; and third, I discuss why to were unreliable. I have no interest are high and the company is introduc-
create a rules-based trend-following in selling someone on candlesticks; ing new products that can change the
model. I just provided the research. In the world. Wow, sounds great, doesn’t it?
40 • November 2022 • Technical Analysis of Stocks & Commodities
Total sales nonsense. Stick to unemo- information from Wall Street and the Can you explain how you set up your
tional technical analysis. media. Turn off the television and stop trend model within the scale of 0 to
Almost all fundamental ratios reading opinion from the “experts” 100 and the color-coded zones?
involve price—price/earnings, price/ on the internet. As the market bottoms and begins
book, price/sales, etc. Technical to climb, the indicators slowly start
analysis is the analysis of price. Price Before putting any dollars at risk, giving buy signals. Each indicator
is what you pay when you buy and it’s a good idea for traders and inves- has a number of points assigned to
what you get when you sell, and price tors to look at a chart to determine it so when all nine indicators are in-
is what determines if you had a profit the trend or trading range. Isn’t dicating buy, the total points are 100.
or a loss. Period. this a good reason for investors to The point assignment to indicators
gain a solid knowledge of technical is based on how well an indicator
Most financial advisors don’t use analysis? works when isolated. The red level
technical analysis when making buy Knowing technical analysis cer- from 0–30 means things are begin-
and sell decisions for their clients’ tainly worked for me. I want to ning, and we can only invest 20% of
portfolios. Given the value of tech- stress that technical analysis is much assets, and the stop level is at 1.25%.
nical analysis, aren’t they keeping more than charts. I rarely looked at That is extremely tight, but we know
their heads buried in the sand? charts but I did focus on technical sometimes we will be wrong and we
Personally, I don’t care what anyone indicators. aren’t going to stay wrong. Orange
thinks about technical analysis or goes from 31–50 and stops are at
other types of analysis; most financial At Stadion Money Management Inc. 1.75%. Yellow is 51–80 with stops
advisors won’t/can’t show you an ac- (previously known as PMFM) you at 3%. Green is 81–100 with stops
credited track record. were chief market strategist. What at 6%.
were your responsibilities?
What are the most common mis- Initially I wore a number of dif- Can you explain how you use
takes that professionals make in ferent hats. My first priority was to weight-of-the-evidence to deter-
managing investments for them- create a rules-based trend-following mine when to go into cash and when
selves and their clients? model, which took over a year and to reenter the market?
Most do not have a system or a was launched on February 9, 2007. Going into cash or cash equiva-
model. Many spend all their time (If you spend hundreds and hundreds lents is very easy; we use trailing
acquiring new clients and don’t spend of hours creating something, it is stop-losses. Weight of the evidence
enough time on their current clients’ very easy to remember the exact tells us the stop level and asset com-
portfolio performance. launch date.) A young man working mitment level. My model has four
And also, investors must realize in the portfolio department, Will stages with each stage designed to set
that the people we call stockbrokers McGough, was exceptionally help- asset allocation levels and stop-loss
at brokerage firms are not money ful in developing the model. Before percentages.
managers; they are salespeople. It that, I ran the portfolio management
is the firm that is actually the stock- department, and for a few years I was What factors or indicators did you
broker. the chief investment officer. After use in your proprietary timing
that I decided to travel to help sell model?
Is there too much information avail- our product. Most of the large money First and foremost, it is not a timing
able today for investors and traders managers at Wells Fargo, Merrill model; it is a trend-following model.
to sift through compared to a decade Lynch, UBS, etc. did not want to In the model, I used price and breadth
or two ago? Especially information hear from a salesman; they wanted indicators, many of which are quite
on the internet in the form of online to talk to a portfolio manager. At the popular but probably using different
advice, forecasts, and hype? time, I was about the only one who parameters. Breadth is particularly
Most people cannot discern ob- had a lot of stage presence so I trav- valuable at topping formations; it
servable information from action- eled extensively for about five years. tends to lead price in a decline. I
able information. Most information Finally, I said I had enough, as the think this is because when the up
is only observable, which means it travel was exhausting. I retired from markets begin to wane, many want
doesn’t actually cause you to take Stadion on December 31, 2014. to move into what they perceive to
action. There is very little actionable be less risky stocks like large-caps
November 2022 • Technical Analysis of Stocks & Commodities • 41
 agement firms, especially What is your current business re-
with newer clients, who lationship with MSCM?
All of the indicators I use tend to be weak holders. I am a senior advisor to the firm.
in my rules-based trend However, once a newer
model use Nasdaq data, client lives through a se- Why did you start writing your blog
rious market decline and “Dancing With The Trend,” found
both price and breadth.
sees that we were able to at StockCharts.com? What did you
keep them mostly out of want to offer readers?
the decline, they come to The “Dancing With The Trend”
and blue-chips. This causes those appreciate what we do. Then they start blog began when Chip Anderson, the
capitalization indexes to rise. Breadth to relax a little because they have seen founder and majority owner of Stock-
treats every stock equally so when firsthand that our investing approach Charts.com, invited me to contribute.
this happens, breadth indicators tend and model do what we designed them He had seen me give a presentation
to decline. I do not use breadth when to do—we try to participate in the up at an investment conference in New
determining when to buy. markets and try to avoid most of the York City he had attended, and he
The other important part of the down markets. thought I had enough ideas to write
model is a set of rules to follow that about. I wrote about 200 articles in
cover areas that cannot be built into Your son Grant Morris, who is a the blog prior to my son contribut-
an indicator. For example, never trade Chartered Financial Analyst (CFA) ing; now we both write the entries
in the first hour of the market, as the and Certified Financial Planner for the blog.
volatility is too high; I call it ama- (CFP), and who contributes to your I would encourage anyone inter-
teur hour. We don’t trade in the last blog at StockCharts.com, works ested in the markets to read the blog.
hour also because we want to ensure for McElhenny Sheffield Capital It is free to read at https://stockcharts.
adequate time for execution. When Management (MSCM) providing com/articles/dancing.
you are sometimes trading hundreds tactical investment strategies and
of millions of dollars, execution is technical analysis insights on the Which of your blog entries would
very important. markets. Did your career inspire you say would be most valuable to
his path? new investors and traders?
The model purchased only ETFs, I’m sure that had a lot to do with Without trying to itemize them, I’d
not individual stocks. Why did you it. He and I worked on a new trend- say the ones that deal with investors’
decide to go that route? following model after I had retired shortcomings, and those on how to be
Yes, my model only uses ETFs from money management and while reasonably successful at investing.
for the investment vehicle. ETFs are he was working in consulting. Once I like to tell people I have expertise
easy to trade and offer some level of the strategy was built and we were in what not to do as an investor. In
diversification in the process. That’s using it for our own accounts, he other words, I’ve learned from experi-
important. ETFs are widely available started to get inquiries from his ence and I have no problem sharing
and do not carry the immediate risk friends and coworkers about man- that experience with others. There
that a single stock carries. For ex- aging investments for them. He saw are no secret formulae, no magic
ample, if you want to buy technology, that as an opportunity to provide a tricks. It takes a solid understanding
the technology ETF would be much service that was in demand and not of the fact that markets do trend and
safer to own that trying to pick indi- readily available—that is, providing a rules-based trend-following model
vidual technology stocks. Remember, institutional asset management capa- will provide a reasonable return over
our goal is making money over the bilities directly to investors. time without assuming the horrible
long term without undue risk. MSCM manages money for in- risk of buy & hold. I have often said
dividual investors and institutional there are many ways to be successful
Did the assets under management clients and recently launched an ETF, in the markets; you just need to find
(AUM) at Stadion Money Manage- the McElhenny Sheffield Managed a method you believe in and then
ment decline during years when the Risk ETF (ticker MSMR), that is stick with it.
firm’s portfolios underperformed partially based on the trend-following
their benchmarks? model we developed together. And staying with it can be hard
That happens with all money man- for some.
42 • November 2022 • Technical Analysis of Stocks & Commodities
 Yes. Here’s part of a longer story approach that reduces
I used to tell to help explain what the number of whipsaws
discipline can mean: experienced in volatile Breadth is particularly
My wife and I were out driving and market periods? valuable at topping
we stopped at a gas station. I went Whipsaws are the bag- formations; it tends to
in and bought a candy bar. When I gage of trend following.
lead price in a decline.
got back in the car with it she said, One has to learn to accept
“You just don’t have any discipline.” the frustration of occa-
I replied, “That’s not true because sional whipsaws in order
you don’t know how many of these to not experience the devastation of gies also have a fairly low correlation
I really wanted.” a bear market. My worst year since with each other, so allocating to both
2007 in real trading was 2011; I was models improves performance. That
That’s funny. So what trading soft- down 13.4%. In the last half of the blended approach is also what their
ware and charting platforms are year 2011, we had three large whip- MSMR ETF is based on.
you using currently? saws. It was almost like the market So I think that speaks to the value
Currently, I only use Microsoft knew when we sold and when we of using sector rotation.
Excel because my entire model is in got back in. We were down 5% in
it. I would always highly recommend 2008. If you have to choose between Have you had any personal experi-
MetaStock (which I used for years) frustration and devastation, the wise ence trading leveraged ETFs?
and StockCharts.com. would choose frustration. I personally have never had an
interest in using leveraged or inverse
For short-term traders, what mov- What does your research show products. Leverage can make a bad
ing averages and two or three about the value of using relative investment much worse. I realize that
indicators would you recommend strength or sector rotation? they offer some benefits, but you have
be placed on a chart? Looking at relative strength among to deal with the losing investments,
Each investor/trader needs to de- similar issues would be important in and I prefer not to use leverage or
cide what works best for himself. I the issue-selection process. use inverse funds. Maybe I’m just
can’t tell them that. As for sector rotation, my son uses getting too old for that stuff. My
At one point I had decided that a sector rotation strategy in certain son has a strategy using trend fol-
when I used moving averages, I would areas of his money management. The lowing and that uses leverage only
always use arithmetic averages up to MSCM firm uses a momentum-based on the long side that has delivered
64 days and exponential averages for sector rotation strategy in addition to significant returns.
65 days or greater. Traders need to their trend-following strategy. The
make decisions like that or else they sector rotation strategy evaluates Is the market becoming more dif-
will stumble along. a selection of sector and industry ficult to assess? Somehow, it always
ETFs based on MSCM’s proprietary feels like the latest market seems
Do candlesticks and candle patterns momentum system and invests in different than past markets, at least
offer more valuable information the top-ranked positions. It is 100% when you’re in the middle of it.
than bar charts, based on your rules-based to take out the emotional The absolute beauty of a rules-
research? decision-making, and it is fully tac- based trend-following model is that it
The individual candlestick is tical in that it can be completely doesn’t care what the market does; it
simply more visually appealing. It defensive (that is, having zero stock just follows it like an obedient dog. I
doesn’t add any new information if market exposure) at times toward the don’t have to listen to the news, read
the bar chart shows the open price. goal of avoiding bear markets. It has reports, or do anything about deciding
Candle patterns, when properly used, performed well and delivered simi- what the market is doing or going to
can give an investor an early warn- lar results to their trend-following do. No one knows the future, includ-
ing of change. But I never made an strategy. Both strategies have beaten ing the talking heads on TV.
investment decision based solely on the S&P 500 over long time periods
a candle pattern. and with much lower volatility and Do you believe that the “meme”
smaller drawdowns. stock craze will negatively impact
Have you found any reasonable The trend and momentum strate- how those participants trade or
November 2022 • Technical Analysis of Stocks & Commodities • 43
 to make that I think are dents, and so on. Only recently have
misleading. For example, I completely stopped doing speaking
Market timing involves they will comment that engagements. For me, they are hard
guesswork for tops and there is “cash on the to turn down because I really enjoy
bottoms; trend following sidelines.” The second- giving presentations. But it’s the travel
never gets out at the top ary marketplace requires and hotel inconvenience that got old.
or in at the bottoms. a buyer for every sale. Time to retire.
No cash can go on the
sidelines. That does not Are you focusing your efforts
invest in the future, as they prob- mean some investors have anywhere else these days besides
ably were speculators with no plan not sold out and are holding cash; it MSCM and the “Dancing With The
or rules, and just invested based on means that one cannot go to cash Trend” blog?
their emotions and hearsay? without finding a buyer. Amateur golf! My wife, Laura, also
Most investors forget that the Another is when they say the a golfer, and I travel all over the coun-
most important thing they need to market is declining because there try playing golf in nice weather. We
always consider is risk. The world of are more sellers than buyers. Just as leave Texas each summer for north
finance wants you to think that risk with the previous example, that is Georgia and Colorado. In January
is volatility as defined by standard impossible, as stock doesn’t go into and February we go to Phoenix, AZ.
deviation. I think the mere mention a closet; stock has to change hands. I like to say that Laura is the athlete
of “standard deviation” implies you They really should say there is more in the family and I’m the athletic
believe the markets are random, “selling enthusiasm than buying.” supporter.
which they are not. I think standard
deviation is a horrible measure of risk. You have achieved an extensive body Is there another book in your
Loss of capital tends to be easier to of work and managed various job future?
understand. responsibilities at once. How did No new book in my current plans.
When I gave presentations, I would you do it? I am interested in getting the rights
lead into the subject of risk with this I just worked very hard and put back from Wiley for my book Invest-
story: Let’s play a game. It will cost in long hours working seven days a ing With The Trend, and then I would
you $10 to play. You can play as week. Working on something you put a lot of the content into an Amazon
many times as you want, and if you love to do makes it easy. Also, I grew book or maybe two books.
win you will receive $1 million. The up sort of poor and already had a
mathematical odds of winning are 1 job beginning in 5th grade. At many Greg, thank you for providing
time out of 6 and there are honestly points over the years I had more than your valuable insights, knowledge,
no tricks. How many people want one job at a time. My parents built a and market technical analysis
to play? Everyone raises their hand. strong work ethic into me. perspective to our readers.
Then I say the game is Russian Rou-
lette. How many want to play now? You have made many contributions Leslie N. Masonson is president of
No one does. When they found out to the field of technical analysis. Cash Management Resources, a fi-
what the risk of the game was, they Over the years, you’ve written nancial consulting firm that focuses
were no longer interested. As a side notable books, you write for Stock- on ETF strategies. He is an active
note to that story, the actual odds are Charts.com, you’ve done work for ETF and Nasdaq futures trader,
5 times out of 6 but I preferred to use Stadion, and you’ve programmed and the author of Buy—Don’t Hold:
the 1 out of 6 as more reasonable for numerous technical indicators and Investing with ETFs Using Relative
the story since I didn’t define what trading systems. You’ve also con- Strength To Increase Returns With
“winning” was. tributed articles to this magazine. At Less Risk; and All About Market
this point, have you decided to start Timing, as well as Day Trading On
What are some things you would like enjoying more leisure time? The Edge. He can be reached at
to share with our readers that you For decades I traveled all over the [email protected] or 561
think they might like to know? world giving speeches to investors, 824-8084.
I can think of a number of com- advisors, advisors’ clients, interna-
ments that the financial media tends tional groups, professors, grad stu- Continued on page 62
44 • November 2022 • Technical Analysis of Stocks & Commodities
 MARKET RAP
THE WORLD OF RETAIL TRADING
Emilio Tomasini is an adjunct professor of corporate finance at the
University of Bologna in Italy and is a professional trader. He has au-
dited over 5,000 accounts of traders during 13 years of a real-money
trading competition, giving him unique insights into what helps a retail
trader to succeed. He has expertise in technical analysis and trading
Emilio Tomasini
system design. In this column, he shares his sometimes “unserious”
thoughts on serious topics in finance. In his writings, he hopes to help the retail trader better understand the leap
from unprofitable to profitable trader, firmly believing that the right answers can come only if the right questions
are asked. At his website at www.emiliotomasini.com, he offers some of his expertise in a free video course.

A KILLER OF TRADING SUCCESS? Why allow enough cushion to they do, you can lose your feel for
Nobody talks about it, but one of cover slippage and commissions the current market action. Rushing
the keys to trading success is this: but not also reserve some room for back in to the market at such times
avoiding mistakes. A “mistake” is not mistakes? is almost always a mistake.
some misjudgment about the future The possibility for mistakes to Discretionary traders also should
direction of the market. Rather, a occur are the reason why a savvy allow for the possibility that a wrong
“mistake” has to do with something systematic trader will never start to lot size or price could inadvertently
that went wrong in your trading trade a system in its full capacity be entered if you are manually typ-
process. And that is outside of the with the maximum lot size. Instead, ing in your order on your brokerage’s
realm of forecasting market direction a good systematic trader will always platform. And discretionary traders
or other types of judgments you may start at the lowest possible level. And should also allow for the possibil-
need to make. that’s only after paper trading it for ity that you may need to exit your
To look at this more closely, let’s months. Mistakes make the differ- position early if something in life
start from the perspective of the sys- ence between hell and heaven and comes up and you can’t continue to
tematic trader, since the concept will be in front of your screen to monitor
be easier to grasp from within that The truth is that your position in real time, forcing an
context. When you gauge the profit- early exit.
ability of a system, you are taught to
your trading must be With fundamentally based traders,
take into account commissions and profitable enough to a type of mistake that can occur is
slippage, right? So you figure out an cover mistakes that selecting the wrong stock simply
approximate number for the market will inevitably occur. because you failed to check some
you’re trading and plug in that num- particular fundamental metrics or
ber. If the average net trade is wide you must do everything you can to you missed some recent corporate
enough to cover that number, you prevent them. news headlines.
proceed with trading the system. It’s the same for discretionary Mistakes can occur in the trading
However, you failed to take into trading. Say the market is booming process no matter what type of trader
consideration something more im- or collapsing and for some reason you are.
portant for your trading account: the you were not sitting in front of your All of these types of things are not
possibility of a mistake to occur. In screen in that magical moment, so “technical” mistakes per se. They
systematic trading, there are many you lost part of the trading day. And don’t have to do with any error you
types of mistakes that could be then when you make it back to your may have made in your market analy-
made. Maybe you forgot to start up screen, you are naturally pushed to sis or market judgment or how you
your system on Monday morning or satisfy your desire for action without designed your system or how you put
maybe you started it later than the thinking simply because you feel bad together your trading process. Rather,
market open. Or maybe the server that you missed out on a great move. they relate to your being human and
went down. Or maybe for unknown As a discretionary trader, of course not a machine.
technical reasons you cannot place an your goal is to always be in front of Things come up in life that are
order, and that order is what makes the the screen during market hours, but
difference by the end of the month. in life, distractions happen, and when Continued on page 62
November 2022 • Technical Analysis of Stocks & Commodities • 45
 Explore Your Options
GOT A QUESTION ABOUT OPTIONS?
Jay Kaeppel has over three decades of experience in the options markets. He
was a head trader for a CTA firm, an options trading software developer,
and was a portfolio manager for an investment management firm. He is
presently Senior Research Analyst for Sentimentrader.com. He is the author
of several books, including The Four Biggest Mistakes In Option Trading;
The Option Trader’s Guide To Probability, Volatility, And Timing; and
Seasonal Stock Market Trends. Send your questions or topic suggestions
to Jay Kaeppel at [email protected]. Selected questions will appear
in a future issue of S&C.
Jay Kaeppel

THE DOUBLE CALENDAR SPREAD consider the following trade: • Buy 1 IBM Dec16 2022 115 call
I am interested in neutral strategies, @ $2.72
but I am concerned about getting as- • Buy 1 IBM Dec16 2022 140 call • Sell 1 IBM Oct 21 2022 115 call
signed on short options if I trade but- @ $1.92 @ $1.23
terflies, condors, or credit spreads. • Sell 1 IBM Oct 21 2022 140 call
Is there an alternative? @ $0.90 Let’s assume we enter a limit order
One viable alternative is the
“double calendar spread.” This strat-
egy involves holding an out-of-the-
money call calendar spread and an
out-of-the-money put calendar spread
simultaneously. As with most option
strategies, certain factors can improve
or worsen the odds of success, so it is
essential to understand them.
The primary factors when looking
for an opportunity to use a double
calendar are:

AIQ TRADINGEXPERT
• A trading range
• Low implied volatility at the time FIGURE 1: TRADING RANGE. To use the double calendar spread strategy effectively, begin by
of entry looking for a stock in a trading range, such as seen here in IBM stock.
• Liquid options (with a reasonable
bid/ask spread)

To illustrate the strategy and to

highlight the importance of these fac-
tors, let’s consider an example trade
using options on IBM stock.

Example: IBM
In Figure 1, we see that International
Business Machines (IBM) has es-
tablished a trading range between
OPTIONSANALYSIS.COM

$114.56 and $152.84. In Figure 2, we

note that implied options volatility
is relatively low. Thus, the first two
factors we look for are in place. FIGURE 2: LOW IMPLIED VOLATILITY. When considering the double calendar spread strategy,
With IBM trading at 127.61, let’s look also for an options implied volatility (IV) that is low.
46 • November 2022 • Technical Analysis of Stocks & Commodities
 Explore Your Options
to buy and sell each option and that
we are filled at the midpoint of the
bid/ask spread. The particulars for
this position appear in Figure 3 and
the risk curves (that is, the expected
profit/loss as of a given date at a
given price for IBM shares) appear
in Figure 4.

Things to note
FIGURE 3: TRADE PARTICULARS, DOUBLE CALENDAR SPREAD. The double calendar spread
• The cost to enter this trade is the strategy involves holding an out-of-the-money call calendar spread and an out-of-the-money put
difference between the cost of the calendar spread simultaneously. An example of entering a double calendar spread is shown here,
December call and put purchased where a limit order is placed to buy and sell each option. Note the vega values (which tells you how
much in dollars an option or combined position is expected to gain or lose in value if implied volatility
and the premium collected for rises or falls one full percentage point).
selling the October call and put.
For a 1-lot, the net cost is $289.
This also represents the maxi-
mum risk.
• This is a “neutral” trade with a
delta of −0.05.
• Barring a change in implied vola-
tility (more on this in a moment),
the breakeven points for this trade
are $123.90 on the downside and
$131.86 on the upside.

There are two ways for this trade

to make money: FIGURE 4: RISK CURVES, DOUBLE CALENDAR SPREAD. Shown here are the risk curves for the
example double calendar spread trade on IBM shares. The risk curves show the expected profit &
loss in dollars as of a given date at a given price for the example stock.
• The passage of time, that is, time
decay. Note the “theta” value in
Figure 3 of $1.98. This means that differences in bid/ask spreads, we
if IBM shares remain unchanged, would exit the trade at a loss. With The “double calendar
the trade will earn $1.98 of profit each subsequent equity curve line— spread” strategy
with the passage of one day due blue, green, and black—the profit involves holding an
solely to time decay. potential drifts higher as a function
• And increase in implied volatil- of time decay.
out-of-the-money call
ity. One piece of good news is that this calendar spread and
trade can earn a profit even if IBM an out-of-the-money
The effect of time decay shares drift higher towards resistance put calendar spread
To understand the effect of time or lower towards support. simultaneously.
decay, compare the red equity
curve line (representing the day of The effect of increased options (which we are short). Vega
entry) to the black equity curve line implied volatility tells you how much in dollars an op-
(representing the day of November The best scenario would be for tion or combined position is expected
options expiration). Because of the implied volatility to rise during the to gain or lose in value if IV rises or
differences in bid/ask prices, the red life of this trade. Note the “vega” falls one full percentage point. If IV
line is entirely below zero. This is so values for each option in Figure 3. rises after we enter the trade, we will
because if we entered this trade—and The longer-term December options gain more on the long December op-
then immediately changed our mind (which we are long) have higher vega
and decided to exit—because of the values than the short-term October Continued on page 49
November 2022 • Technical Analysis of Stocks & Commodities • 47
 Futures For You
INSIDE THE FUTURES WORLD
Want to find out how the futures markets really work? Carley Garner is
the senior strategist for DeCarley Trading, a division of Zaner, where she
also works as a broker. She has written five books on futures and options
trading, with the latest being Trading Commodity Options...With Creativ-
ity (July 2020), as well as A Trader’s First Book On Commodities (third
edition, October 2017) and Higher Probability Commodity Trading (July
2016). Garner also authors widely distributed e-newsletters; for a free
subscription, visit www.DeCarleyTrading.com. To submit a question, email
her at [email protected] or via www.DeCarleyTrading.com.
Selected questions will appear in a future issue of S&C.
Carley Garner

WHAT IS THE APPROPRIATE not appropriate. Further, such a trader trader. As you can imagine, using the
ACCOUNT SIZE FOR A BEGINNING should focus on using micro futures maximum leverage available by using
COMMODITY TRADER? and options in the stock indices and nearly all of the available risk capital
The only person that can answer that crude oil, or micro futures in gold as margin, requires perfect timing of
question is the trader himself because and currencies. Perhaps mini grains both entry and exit which is a nearly
any money put into a commodity (corn, soybeans, and wheat) might impossible feat. With these circum-
trading account should be risk capital. also be reasonable. Higher margined, stances in mind, a more reasonable
Risk capital is money that can be lost and higher risk, products such as way to participate in hogs would be
without altering the lifestyle of the natural gas, silver, or copper futures to purchase calls or puts, or vertical
trader should something go wrong. and options should be avoided. call and puts spreads in which risk is
That said, some brokerages have Similarly, a minimally funded limited to the entry price and the room
minimum funding requirements for trader might be best served to focus on for error is ample. Keep in mind, that
new accounts. I’ve seen minimum limited risk option spreads in markets although option buyers are working
standards as low as $1,000 and as that don’t offer micro counterparts as against time value erosion they don’t
high as six figures. Further, some have to worry about premature stop-
brokerages restrict traders with ac- outs and margin calls.
count sizes under a specific threshold The appropriate A hog trader with $25,000 in avail-
from practicing certain strategies account size for a able risk capital would likely be better
such as option selling, or option trader should primarily off constructing a more aggressive
spread trading. Thus, even if a trader be set by the amount of approach in which the proceeds of a
meets a brokerage’s minimum fund- risk capital available. sold option could pay for a long verti-
ing requirement, they might not have cal spread, or maybe even trading a
access to all products and strategies. futures contract outright is preferable
In essence, some brokerages maintain opposed to attempting to trade large depending on the trader’s conviction
various minimums depending on the and leveraged futures contracts with and personality as well as the market
style of trading that will take place little room for error. An example circumstances.
in the account. might be a trader wishing to speculate On the other hand, traders with
The appropriate account size for a on the price of lean hogs; he could ample risk capital might determine
trader should primarily be set by the buy or sell a futures contract with an appropriate funding amount based
amount of risk capital available. Once a current margin at the time of this on the desired strategy to be traded
the trader’s overall risk capital thresh- writing of $1,925. Technically, the rather than the other way around. For
old is determined, the next step is to trader has the green light to execute instance, a wealthy individual with
determine which trading approach the position because he has $2,000 risk capital well into the six figures
might be appropriate. For instance, in his trading account. Yet, there might not want to allocate all of that
if a trader is comfortable opening is very little leeway to withstand a risk capital to a commodity trading
an account with $2,000 knowing drawdown because a margin call account but she might deem a par-
that he could lose it all, strategies would be triggered rather quickly if ticular strategy to require $100,000 to
involving unlimited option risk are the position went slightly against the properly allow it to work as intended.
48 • November 2022 • Technical Analysis of Stocks & Commodities
 Futures For You
If so, traders should fund the account the trader’s natural comfort zone.
according to the strategy, not the risk Trading is a mental game; the worse Trading is a mental
capital. thing a green trader can do is put game; the worse thing
In conclusion, it is easier for a trader themselves in a stressful situation a green trader can do
to add funds to a commodity trading such as a large drawdown or mar- is put themselves in a
account as she becomes more com- gin call. Discomfort almost always
stressful situation such
fortable with speculating in the arena breeds poor decision-making, and
than to scale back should she discover eventually panic (which is the cost-
as a large drawdown or
her risk tolerance for commodity liest mistake traders tend to make). margin call.
trading is not as high as anticipated. As a rule of thumb, it is generally a
Thus, while traders want to fund the good idea to utilize 25% or less of thing I’ve learned over the years, it
account with enough money to have an account’s available margin and is leverage can sneak up and bite us
“options” in strategy and markets, leave 75% or more in excess margin when we least expect it.
they also don’t want to overfund the to act as a rainy day fund and buffer
account enticing risk-taking beyond against a margin call. If there is one

Explore Your Options

KAEPPEL/OPTIONS
Continued from page 47

tions than we will lose on the short

October options.
By entering a calendar spread when
overall IV is low, we increase our
chances of gaining from an increase
in IV—and reduce the amount we
might lose if IV falls during the life
of the trade. Figure 5 displays the
risk curves assuming a 30% increase
in implied volatility to illustrate this
idea fully. FIGURE 5: RISK CURVES AFTER A 30% INCREASE IN IMPLIED VOLATILITY. Entering a
Compare the risk curves in Figure calendar spread when overall IV is low increases the chances of gaining from an increase in IV
(and reduces the amount the trader might lose if IV falls during the life of the trade). Compare to
5 to those in Figure 4 and note that the risk curves shown in Figure 4 and you can see here that if IV were to increase, the expected P/L
everything has shifted further into curves would shift further into profitable territory, and the breakeven levels would also increase.
profitable territory. Also, note that
the upside breakeven increases from the opposite—that is, the risk curves strategy work are: 1) placing the trade
$131.86 to $151.30 and the downside shift to lower ground, and the range as favorably as possible, 2) having
breakeven decreases from $123.90 of profitability narrows. patience—to give time decay time
to $103.77 (i.e., the range of profit- to work in your favor, and 3) having
ability increases from $8.00 to $47). REGARDING ASSIGNMENT perhaps a bit of luck so that the stock
Though not illustrated, note that if IV If by chance IBM shares reach $115 remains within a profitable range and/
declines instead of rises, the effect is or $140 and assignment on the short or IV rising (and not falling) after
option occurs, a trader can exercise trade entry.
the long December $115 put (or long
The best scenario December 140 call) to offset the as- ‡AIQ TradingExpert;
would be for implied signment. ‡OptionsAnalysis.com
volatility to rise during ‡See Editorial Resource Index
the life of this trade. SUMMARY
The key ingredients in making this
November 2022 • Technical Analysis of Stocks & Commodities • 49
 The Savvy Technician
CHARTING THE MARKETS
Stella Osoba, CMT, Esq., is an attorney, trader, and financial writer in New York,
NY, and is also the Senior Editor, Trading and Investing, for Investopedia.com. Her
work in financial litigation involving regulatory bodies and large multinational
corporations led to an interest in the financial markets, then technical analysis
and the psychological aspects of market behavior. She earned a CMT charter
in 2013 and was a director-at-large on the board of the CMT Association for
four years. This column will focus on recognizing and applying technical chart
patterns to trading with flexibility and astuteness for better decision-making in
trading. She can be reached at [email protected]. Stella Osoba

CULTIVATE THE ART so offers us a feeling of self-control. productive to analyze chart patterns
OF PERCEPTION Apophenia seems to be associated when the markets are closed—when
What we see is not always what is with the right hemisphere of the brain, there is less risk of the rapid fluc-
there. What is there is not always what which is the creative side, while logic tuations of price overwhelming the
we see. The visual illusion is a well- and analytical thought are associated brain and leading to illusions. Such
known psychological phenomena. with the left hemisphere of the brain. illusions can deceive us into making
Because our visual system operates This may be why it can be more bad trading decisions.
without any conscious control from
us, illusions, when they occur, reflect
errors that are caused by the neural
networks that mediate our visual
perception. Sometimes these visual
illusions are better termed visual
deceptions, because we can be de-
ceived into believing that what is in
fact a misperception caused by our
biological processes is real.
As technicians, this is one cognitive
bias that we would be well-advised
to be particularly aware of. We are
constantly looking for patterns to aid
us in interpreting likely future price
behavior, but when we attach our-
selves too rigidly to patterns we have
observed, we run the risk of missing
those that do exist. Apophenia is a
cognitive bias. It refers to the human
fallibility of finding patterns where
they do not exist. The less control we
feel we have, the more likely we are
to perceive patterns because doing

As technicians, this
STOCKCHARTS.COM

is one cognitive bias

that we would be
well-advised to be
FIGURE 1: DOWNTREND. On this weekly chart of the S&P 500 index, we see a downtrend
particularly aware of. line connecting the price highs. Compare to the daily timeframe in Figure 2 to see whether
there may also be a different story unfolding that’s not noticeable in the weekly resolution.
50 • November 2022 • Technical Analysis of Stocks & Commodities
 The Savvy Technician

FIGURE 3: FIBONACCI RETRACEMENT. On this daily chart of the S&P

500 index, a Fibonacci retracement—meaning price retraced 61.8% of its
high—may have ended on September 1, 2022.

FIGURE 2: PRICE REVERSAL DEVELOPING? When we change to a daily It can be more productive to analyze
price chart, we can see that this could be the beginnings of an inverse head
& shoulders pattern, which is a price reversal pattern. The neckline is shown chart patterns when the markets are
in purple. The on-balance volume line is in the panel below volume. If price
rises up to the neckline, look for a rise in the on-balance volume.
closed.

The lesson here is that while we pattern—an inverse head & shoulders Final words
must master the use of technical pattern. The purple line shows the I will conclude by pointing to the
analysis to recognize chart patterns, neckline. In the panel below volume observations made at the start of
it is wise to maintain a level of flex- is the on-balance volume line. With this article. What we see might not
ibility in our analysis. Once we have inverse head & shoulders patterns, be what is there, and what is there
spotted a pattern, knowing that it volume is extremely important. Price might not be what we see. In order to
may be superseded by another one must break through the neckline on protect our fragile right hemisphere
is wise. increased volume for the pattern to be brains from taking over our logical
Figure 1 is a weekly chart of the complete. Look therefore for a rise in left hemisphere brains, it is essential
S&P 500 index. It clearly shows a the on-balance volume if price rises that we subject our analysis to rigid
downtrend line, connecting the price up to the neckline. controls and checks.
highs. According to Dow theory, a Lastly, Figure 3 is another daily One pattern is never enough. We
trend is in effect until it is broken. If chart of the S&P 500 index showing must always do more. And remember
we were to look more closely at price Fibonacci retracements, drawn from that especially in an environment
action by studying the daily charts, we the June 17, 2022 low to the August when rapid market moves are hap-
can see that there may be a different 16, 2022 high. The current retrace- pening frequently, flexibility has to
story that is unfolding. ment may have ended on September continue to be our super power.
Figure 2 is a daily price chart of the 1, 2022. The Fibonacci retracement
S&P 500 index. It shows the down- shows that this would mean it retraced
trend line but also shows what might 61.8% of its high.
be the beginnings of a price reversal
November 2022 • Technical Analysis of Stocks & Commodities • 51
 The focus of Trad- • 
Traders.com  S&C Magazine 
ers’ Tips this month is Traders’ Tips
John Ehlers’ article in
the October 2022 is- At Traders.com you can also right-click on any
sue, “Recurring Phase chart to open it in a new tab or window and view
Of Cycle Analysis.” the chart at a much larger size.
Here, we present the
November 2022 Trad- The Traders’ Tips section is provided to help readers
ers’ Tips code with implement a selected technique from an article in this
possible implementations in various software. issue or another recent issue. The entries here are
The code for the following Traders’ Tips selections contributed by software developers or programmers
is posted here: for software that is capable of customization.

Sxy = 0;
Syy = 0;

F TRADESTATION: NOVEMBER 2022 TRADERS’ TIPS CODE for Count = 1 to Period

In his article in the October 2022 issue of S&C, “Recurring begin
X = Signal[count - 1];
Phase Of Cycle Analysis,” author John Ehlers explains how Y = Cosine(360*(count - 1) / Period);
cycle analysis for technical analysis has advanced a long way Sx = Sx + X;
over the years. In earlier years, cycle analysis was primitive Sy = Sy + Y;
Sxx = Sxx + X*X;
and limited. In his October 2022 article, Ehlers illustrates a Sxy = Sxy + X*Y;
phasor as a two-dimensional vector, pinned at the origin, as Syy = Syy + Y*Y;
a means for cycle analysis. (An animated graphic depicting end;
a phasor and its angle as it progresses can be seen on the if (Period*Sxx - Sx*Sx > 0)
author’s website.) In the course of a cycle, rotation starts at and (Period*Syy - Sy*Sy > 0) then
−180 degrees and advances to +180 degrees. Buy and sell Real = (Period*Sxy - Sx*Sy) / SquareRoot(
(Period*Sxx - Sx*Sx)*(Period*Syy - Sy*Sy));
signals can be observed when the phase angle crosses −90
and +90 degrees. Note that the study contains commented- // Correlate with a Negative Sine wave having a
out code if one wishes to observe the “frequency derived // fixed period
Sx = 0;
from rate change of phase” or the “trend state variable.” In Sy = 0;
that case, the phasor indicator plots should be commented Sxx = 0;
out before uncommenting either section. Sxy = 0;
Syy = 0;
Indicator: Phasor Analysis
// TASC NOV 2022
// Phasor Analysis
// (C) 2013-2022 John F. Ehlers

inputs:
Period(28);

variables:
Signal(0),
Count(0),
Sx(0),
Sy(0),
Sxx(0),
Sxy(0),
Syy(0),
X(0),
Y(0),
Real(0),
Imag(0),
Angle(0),
DerivedPeriod(0);

Signal = Close;
//Correlate with Cosine wave having a fixed period
Sx = 0;
Sy = 0;
Sxx = 0; FIGURE 1: TRADESTATION. This shows a TradeStation daily chart of Raytheon Technologies (symbol
RTX) with the indicator applied.

52 • November 2022 • Technical Analysis of Stocks & Commodities

for count = 1 to Period
begin
X = Signal[count - 1];
Y = -Sine(360*(count - 1) / Period);
Sx = Sx + X;
Sy = Sy + Y;
Sxx = Sxx + X*X;
Sxy = Sxy + X*Y;
Syy = Syy + Y*Y;
end;

if (Period*Sxx - Sx*Sx > 0)

and (Period*Syy - Sy*Sy > 0) then

Imag = (Period*Sxy - Sx*Sy) /

SquareRoot((Period*Sxx - Sx*Sx)*(Period*Syy -
Sy*Sy));
FIGURE 2: WEALTH-LAB. This chart demonstrates example trades taken by the sample trading sys-
// Compute the angle as an arctangent function and tem, applied to a chart of Raytheon stock (RTX) in Wealth-Lab 8.
// resolve ambiguity
if Real <> 0 then
Angle = 90 - Arctangent(Imag / Real);

if Real < 0 then

Angle = Angle - 180;
F WEALTH-LAB: NOVEMBER 2022 TRADERS’ TIPS CODE
// Compensate for angle wraparound The group of phasor indicators from John Ehlers’ article in
If AbsValue(Angle[1]) - AbsValue(Angle - 360) < Angle -
Angle[1] and Angle > 90 and Angle[1] < -90 then the October 2022 issue of S&C, “Recurring Phase Of Cycle
Angle = Angle - 360; Analysis,” has now been added to Wealth-Lab 8, making them
available to any tools and extensions automatically. With the
// Angle cannot go backwards
if Angle < Angle[1] and ((Angle > -135 and Angle[1] < phasor trend indicator, creating a trading system by using
135) or (Angle < -90 and Angle[1] < -90)) then Wealth-Lab’s building blocks feature is hands-down the easiest
Angle = Angle[1]; way to set it up. Thus, we are not providing any code here. A
// Phasor Indicator simple rule that could be used in a system is a cross above or
Plot1(Angle, "Angle"); below the TrendState indicator. This rule is demonstrated in
Plot2(0, "Ref"); Figure 2 on a sample chart.
Plot4(90, "90");
—Gene Geren (Eugene)
Plot8(-90, "-90");
Wealth-Lab team
{ www.wealth-lab.com
//Frequency derived from rate-change of phase
Vars: DeltaAngle(0), AvgPeriod(0);
DeltaAngle = Angle - Angle[1];
If DeltaAngle <= 0 Then DeltaAngle = DeltaAngle[1];
If DeltaAngle <> 0 Then DerivedPeriod = 360 / DeltaAngle;
If DerivedPeriod > 60 Then DerivedPeriod = 60;
Plot9(DerivedPeriod, "", red, 4, 4); F NINJATRADER: NOVEMBER 2022 TRADERS’ TIPS CODE
} The phasor analysis indicator as presented in John Ehlers’
{ article in the October 2022 issue of S&C, “Recurring Phase
//Trend State Variable
Vars: State(0); Of Cycle Analysis,” is available for download at the following
State = 0; links for NinjaTrader 8 and NinjaTrader 7:
If Angle - Angle[1] <= 6 Then Begin
If Angle >= 90 or Angle <= -90 Then State = 1; NinjaTrader 8: ninjatrader.com/SC/November2022SCNT8.zip
If Angle > -90 and Angle < 90 Then State = -1; NinjaTrader 7: ninjatrader.com/SC/November2022SCNT7.zip
End;
Plot10(State, "", red, 4, 4); Once the file is downloaded, you can import the indicator
}
into NinjaTrader 8 from within the control center by select-
A sample chart is shown in Figure 1. ing Tools → Import → NinjaScript Add-On and then select-
This article is for informational purposes. No type of ing the downloaded file for NinjaTrader 8. To import into
trading or investment recommendation, advice, or strategy NinjaTrader 7, from within the control center window, select
is being made, given, or in any manner provided by TradeS- the menu File → Utilities → Import NinjaScript and select
tation Securities or its affiliates. the downloaded file.
—John Robinson You can review the indicator source code in NinjaTrader
TradeStation Securities, Inc. 8 by selecting the menu New → NinjaScript Editor → In-
www.TradeStation.com dicators folder from within the control center window and
selecting the PhasorAnalysis file. You can review the indica-

November 2022 • Technical Analysis of Stocks & Commodities • 53

 tor’s source code in NinjaTrader 7 by selecting
the menu Tools → Edit NinjaScript → Indicator
from within the control center window and se-
lecting the PhasorAnalysis file.
NinjaScript uses compiled DLLs that run na-
tive, not interpreted, which provides you with
the highest performance possible.
A sample chart displaying the indicator is
shown in Figure 3.
—Emily Christoph
NinjaTrader, LLC
www.ninjatrader.com

F TRADINGVIEW: NOVEMBER 2022 TRADERS’

TIPS CODE
Here is the TradingView Pine Script code imple-
menting the phasor analysis technique described
in John Ehlers’ article in the October 2022 issue of
S&C, “Recurring Phase Of Cycle Analysis.”
// TASC Issue: November 2022 - Vol. 40, Issue 12
// Article: Recurring Phase Of Cycle Analysis
// Using Phasor Analysis To Identify Market FIGURE 3: NINJATRADER. The phasor analysis(28) indicator set to the “phasor” plot type displayed on
Trend a daily Raytheon (RTX) chart from April 2021 to March 2022.
// Article By: John Ehlers
// Language: TradingView's Pine Script™ v5
    float angle = 0.0
// Provided By: PineCoders, for tradingview.com
    float prevAngle = nz(angle[1])
    angle := if real == 0.0
// As representatives of TradingView members, we sincerely
        prevAngle
// congratulate John Ehlers on his "100th TASC article". The
    else
// immense amount of contributed technical wisdom that Ehlers
        90.0 - math.todegrees(math.atan(imag / real))
// has graciously provided to so many TASC readers has, is,
    if real < 0.0
// and will continue to be a treasured mathemagical blessing.
        angle -= 180.0
//
    float temp = math.abs(prevAngle) - math.abs(angle - 360.0)
// WE HONOR & THANK YOU,
    if -90.0 > prevAngle
// "PineCoders"
     and temp < angle - prevAngle
     and 90.0 < angle
//@version=5
        angle -= 360.0
indicator(title='TASC 2022.11 Phasor Analysis', overlay=false)
    if angle < prevAngle
     and ((angle > -135.0 and prevAngle < 135)
Phasor (float Signal = close, int Period = 28) =>
     or (angle < -90.0 and prevAngle < -90.0))
    var float angFreq = 2.0 * math.pi / Period
        angle := prevAngle
    float Sx = 0.0, float Sxx = 0.0
    angle
    float rSxy = 0.0, float iSxy = 0.0
    float rSyy = 0.0, float iSyy = 0.0
Analysis (float Angle) =>
    float rSy = 0.0, float iSy = 0.0
    float deltaAngle = Angle - nz(Angle[1])
    for i=0 to Period-1
    if deltaAngle <= 0.0
        float tmp = angFreq * i
        deltaAngle := nz(deltaAngle[1])
        float X = Signal[i]
    float derivedPeriod = if deltaAngle == 0.0
        float Yr = math.cos(tmp)
        0.0
        float Yi = -math.sin(tmp)
    else
        Sx += X, Sxx += X * X
        math.min(60.0, 360.0 / deltaAngle)
        rSxy += X * Yr, iSxy += X * Yi
    int state = 0
        rSyy += Yr * Yr, iSyy += Yi * Yi
    if deltaAngle <= 6.0
        rSy += Yr, iSy += Yi
        state := Angle > -90.0 and Angle < 90.0 ? -1 : 1
    float varianceX = Period * Sxx - Sx * Sx
    [derivedPeriod, state]
    float varianceYr = Period * rSyy - rSy * rSy
    float varianceYi = Period * iSyy - iSy * iSy
string grp1 = 'Angle Parameters'
    float covarianceXYr = Period * rSxy - Sx * rSy
string grp2 = 'Indicator Choices'
    float covarianceXYi = Period * iSxy - Sx * iSy
Signal = input.source(close, 'Source', group=grp1)
    float rDenominator = varianceX * varianceYr
Period = input.int (28, 'Period', group=grp1, minval=5)
    float iDenominator = varianceX * varianceYi
ThresholdUpper = input.int( 90, 'Upper Threshold', 1, 179)
    float real = nz(covarianceXYr / math.sqrt(rDenominator))
ThresholdLower = input.int(-90, 'Lower Threshold', -179, -1)
    float imag = nz(covarianceXYi / math.sqrt(iDenominator))

54 • November 2022 • Technical Analysis of Stocks & Commodities

Indy = input.string('Angle', 'Indicator Mode',
group=grp2,
                         options=['Angle','Period','State'])
ChangeRate = input.int(6, 'Change Rate (degrees)',
minval=2,
tooltip='Intended for use with the State mode',
group=grp2)

float phAngle = Phasor(Signal, Period)

[dPeriod, Trend] = Analysis(phAngle)

// Phasor Color Wizardry

var seventeenTwelfths = 17.0 / 12.0
var seventeenSixths = 17.0 / 6.0
colorValue = phAngle * seventeenSixths
colorAngle = color.rgb(phAngle > 90.0 ? 255 :
phAngle <-90.0 ?
   0.0 : seventeenTwelfths * phAngle + 127.5,
phAngle < 0.0 ?
  phAngle > -90.0 ? 255 : colorValue + 510 :
phAngle > 90.0 ?
      0.0 : 255 - colorValue, phAngle > 0.0 ? phAngle
< 90.0 ? FIGURE 4: TRADINGVIEW. The chart shows John Ehlers’ phasor analysis trend indicator on a chart
0.0 : colorValue - 255 : phAngle < -90.0 ? 255 : of the S&P 500 index.
-colorValue)

plot(Indy=='Angle' ? phAngle : na, 'Angle', colo-

rAngle, 3)
plot(Indy=='Period' ? dPeriod : na, 'DerivPeriod',
#FFFF00)
plot(Indy=='State' ? Trend : na, 'TrendState',
linewidth=2,
  color = Trend > 0 ? #00FF00 : Trend < 0 ?
#FF0000 : #888800)

hline( 0, 'ZeroLine', #FFFFFF)

hline(Indy=='Angle' ? ThresholdUpper : na, 'Upper
Threshold',
                              #FF00FF, hline.style_dotted, 2)
hline(Indy=='Angle' ? ThresholdLower : na, 'Lower
Threshold',
                              #0055FF, hline.style_dotted, 2)

The indicator is available on Trad-

ingView in the PineCodersTASC account at
https://www.tradingview.com/u/PineCoders
TASC/#published-scripts.
An example chart is shown in Figure 4. FIGURE 5: NEUROSHELL TRADER. This NeuroShell Trader chart demonstrates the phasor indicator,
—PineCoders, for TradingView cycle periods and trend state.
www.TradingView.com
3. Select the appropriate External DLL Call
indicator.
4. Set up the parameters to match your DLL.
F NEUROSHELL TRADER: NOVEMBER 2022
5. Select the finished button.
TRADERS’ TIPS CODE
The cycle analysis technique presented in John Users of NeuroShell Trader can go to the STOCKS &
Ehlers’ article in the October 2022 issue of S&C, “Recur- COMMODITIES section of the NeuroShell Trader free
ring Phase Of Cycle Analysis,” can be easily implemented technical support website to download a copy of this or any
in NeuroShell Trader using NeuroShell Trader’s ability to previous Traders’ Tips.
call external dynamic linked libraries (DLLs). DLLs can be —Ward Systems Group, Inc.
written in C, C++, or Power Basic. [email protected]
After moving the code given in the article to your pre- www.neuroshell.com
ferred compiler and creating a DLL, you can insert the re-
sulting indicator as follows:
F THE ZORRO PROJECT: NOVEMBER 2022
1. Select new indicator from the insert menu. TRADERS’ TIPS CODE
2. Choose the External Program & Library Calls In his article in the October 2022 issue, titled
category. “Recurring Phase Of Cycle Analysis,” John Ehlers presents
November 2022 • Technical Analysis of Stocks & Commodities • 55
 Angle = 0;
if(Real != 0) Angle = 90 - 180/PI*atan(Imag/Real);
if(Real < 0) Angle -= 180;
//compensate for angle wraparound
vars Angles = series(Angle,2);
if(abs(Angles[1]) - abs(Angle - 360) < Angle -
Angles[1] && Angle > 90 && Angles[1] < -90)
Angle -= 360;
//angle cannot go backwards
if(Angle < Angles[1] && ((Angle > -135 &&
Angles[1] < 135) || (Angle < -90 && Angles[1] < -9)))
Angle = Angles[1];
Angles[0] = Angle;
//Frequency derived from rate-change of phase
DerivedPeriod = 0;
vars DeltaAngles = series(Angle - Angles[1],2);
if(DeltaAngles[0] <= 0) DeltaAngles[0] = DeltaAn-
gles[1];
if(DeltaAngles[0] != 0) DerivedPeriod = 360 /
DeltaAngles[0];
if(DerivedPeriod > 60) DerivedPeriod = 60;
//Trend State Variable
State = 0;
if(Angle - Angles[1] <= 6) {
if(Angle >= 90 || Angle <= -90) State = 1;
if(Angle > -90 && Angle < 90) State = -1;
}
return Angle;
}
FIGURE 6: ZORRO PROJECT. This replicates the chart of RTX shown in Ehlers’ October 2022 article.
The phasor function returns its parameters in
a function for cycle analysis of price curves. the three global variables angle, state, and DerivedPeriod.
Zorro platform already contains several cycle analysis For reproducing Ehlers’ chart from his article, we can ap-
functions that are also based on algorithms by Ehlers; how- ply the function to a chart of Raytheon (symbol RTX) from
ever, they are slightly different. For comparing the functions, April 2021 to July 2022 as follows:
users can simply replace the phasor function in this code void run()
given here with Zorro’s native DominantPhase function. {
The function provided here is a straightforward conver- set(PLOTNOW,LOGFILE);
BarPeriod = 1440;
sion of Ehlers’ EasyLanguage code from his October 2022 StartDate = 20210401;
article to the C language: EndDate = 20220701;
assetAdd("RTX","YAHOO:RTX");
var Angle, State, DerivedPeriod; asset("RTX");
phasor(seriesC(),28);
var phasor(vars Signals,int Period) plot("Phase",Angle,NEW,RED);
{ plot("DerivedPeriod",DerivedPeriod,NEW,RED);
//Correlate with Cosine wave having a fixed period plot("State",State,NEW,RED);
var Sx = 0, Sy = 0, Sxx = 0, Sxy = 0, Syy = 0; }
int count;
for(count = 1; count <= Period; count++) {
var X = Signals[count - 1];
The chart in Figure 6 replicates the chart of RTX shown
var Y = cos(2*PI*(count - 1) / Period); in Ehlers’ October 2022 article.
Sx += X; Sy += Y; The phasor indicator can be downloaded from the 2022
Sxx += X*X; Sxy += X*Y; Syy += Y*Y;
}
script repository on https://financial-hacker.com. The Zor-
var Real = 0, Imag = 0; ro software can be downloaded from https://zorro-project.
if((Period*Sxx - Sx*Sx > 0) && (Period*Syy - Sy*Sy > 0)) com.
Real = (Period*Sxy - Sx*Sy) / sqrt((Period*Sxx - —Petra Volkova
Sx*Sx)*(Period*Syy - Sy*Sy));
//Correlate with a Negative Sine wave having a fixed period
The Zorro Project by oP group Germany
Sx = Sy = Sxx = Sxy = Syy = 0; https://zorro-project.com
for(count = 1; count <= Period; count++) {
var X = Signals[count - 1];
var Y = -sin(2*PI*(count - 1) / Period);
Sx += X; Sy += Y; F EXCEL: NOVEMBER 2022 TRADERS’ TIPS CODE
Sxx += X*X; Sxy += X*Y; Syy += Y*Y;
}
In his article in the October 2022 issue of S&C, “Recurring
if((Period*Sxx - Sx*Sx > 0) && (Period*Syy - Sy*Sy > 0)) Phase Of Cycle Analysis,” John Ehlers reviews the evolution of
Imag = (Period*Sxy - Sx*Sy) / sqrt((Period*Sxx - the study of market cycles. Then he presents a simple approach
Sx*Sx)*(Period*Syy - Sy*Sy));
//Compute the angle as an arctangent function and resolve
ambiguity Continued on page 61
56 • November 2022 • Technical Analysis of Stocks & Commodities
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November 2022 • Technical Analysis of Stocks & Commodities • 57

 FUTURES LIQUIDITY

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

Trading Liquidity: Futures

Contracts to
Effective
Commodity Futures Exchange % Margin Trade for Equal Relative Contract Liquidity
% Margin
Dollar Profit
S&P 500 E-Mini (Dec ’22) CME 6 14.7 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
Ultra T-Bond (Dec ’22) CBOT 5.2 6.5 2 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>>
10-Year T-Note (Dec ’22) CBOT 1.8 6.7 6 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
30-Year T-Bond (Dec ’22) CBOT 3.3 6.2 3 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
5-Year T-Note (Dec ’22) CBOT 1.4 7.9 9 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••>
Ultra 10-Year T-Note (Dec ’22) CBOT 2.6 6.8 4 ••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••
Russell 2000 E-Mini (Dec ’22) CME 3.6 7.6 2 •••••••••••••••••••••••••••••••••••••••••••••••••••••
Soybean (Nov ’22) CBOT 3.4 8 3 ••••••••••••••••••••••••••••••••••••••••••••
2-Year T-Note (Dec ’22) CBOT 0.6 7.1 11 ••••••••••••••••••••••••••••••••••••••••
Crude Oil WTI (Nov ’22) NYMEX 12.1 7.9 2 •••••••••••••••••••••••••••••••••••••••
Nasdaq 100 E-Mini (Dec ’22) CME 7.3 15.1 2 •••••••••••••••••••••••••••••••••••••
Corn (Dec ’22) CBOT 8.3 15 10 ••••••••••••••••••••••••••••••••
Soybean Meal (Dec ’22) CBOT 1.2 3.7 2 •••••••••••••••••••••••••••••••
Euro FX (Dec ’22) CME 2.4 8.7 5 ••••••••••••••••••••••••••
3-Month Eurodollar (Dec ’22) CME 0.3 7.1 16 •••••••••••••••••••••••
Gold (Dec ’22) COMEX 3.8 13.6 4 •••••••••••••••••••••
3-Month SOFR (Mar ’23) CME 0.3 7.1 16 •••••••••••••••
30-Day Fed Funds (Oct ’22) CBOT 0.2 6.5 14 ••••••••••••
Japanese Yen (Dec ’22) CME 3.5 8.3 5 •••••••••••
Natural Gas (Nov ’22) NYMEX 19.4 24.4 3 •••••••••••
Gasoline RBOB (Nov ’22) NYMEX 12 13.5 2 •••••••••
S&P 500 VIX (Oct ’22) CFE 38 23.6 4 •••••••••
ULSD NY Harbor (Nov ’22) NYMEX 11.2 13.8 2 •••••••••
British Pound (Dec ’22) CME 3.7 11.1 8 ••••••••
Silver (Dec ’22) COMEX 9 13.8 3 ••••••••
Wheat (Dec ’22) CBOT 8.5 12.8 6 ••••••••
Coffee (Dec ’22) ICE/US 11.8 20.1 4 •••••••
Sugar #11 (Mar ’23) ICE/US 7.5 15.4 19 •••••••
Cotton #2 (Dec ’22) ICE/US 11.2 14.2 5 ••••••
High Grade Copper (Dec ’22) COMEX 6.7 12.8 4 ••••••
Dow Futures Mini (Dec ’22) CBOT 9 23.4 3 •••••
Live Cattle (Dec ’22) CME 3 6.7 7 ••••• CBOT Chicago Board of Trade, Division of CME
Crude Oil Brent (F) (Dec ’22) NYMEX 10.6 13.2 3 •••• CFE CBOE Futures Exchange
Australian Dollar (Dec ’22) CME 3.1 12.9 12 ••• CME Chicago Mercantile Exchange
Hard Red Wheat (Dec ’22) KCBT 8 14.1 7 ••• COMEX Commodity Exchange, Inc. CME Group
Lean Hogs (Dec ’22) CME 6.1 11.1 11 ••• ICE-EU Intercontinental Exchange-Futures - Europe
U.S. Dollar Index (Dec ’22) ICE/US 1.8 8.4 7 ••• ICE-US Intercontinental Exchange-Futures - US
Canadian Dollar (Dec ’22) CME 1.8 12.6 17 •• KCBT Kansas City Board of Trade
Cocoa (Dec ’22) ICE/US 7 19.4 22 •• MGEX Minneapolis Grain Exchange
Canola (Nov ’22) ICE/CA 9.2 19.2 23 • NYMEX New York Mercantile Exchange

Ethanol Chicago (Sep ’22) NYMEX 4.5 6.7 4 •
2211
Feeder Cattle (Nov ’22) CME 3.7 9.1 5 •
Trading Liquidity: Futures is a reference chart for speculators. It compares markets “Relative Contract Liquidity” places commodities in descending order according to
according to their per-contract potential for profit and how easily contracts can be bought how easily all of their contracts can be traded. Commodities at the top of the list are easi-
or sold (i.e., trading liquidity). Each is a proportional measure and is meaningful only est to buy and sell; commodities at the bottom of the list are the most difficult. “Relative
when compared to others in the same column. Contract Liquidity” is the number of contracts to trade times total open interest times a
The number in the “Contracts to Trade for Equal Dollar Profit” column shows how volume factor, which is the greater of:
many contracts of one commodity must be traded to obtain the same potential return In volume
as another commodity. Contracts to Trade = (Tick $ value) x (3-year Maximum Price 1 or exp –2
In 5000
Excursion).

58 • November 2022 • Technical Analysis of Stocks & Commodities

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Whether you choose to turn a
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of the iceberg when it comes to all the avail-
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Websites such as TraderPlanet (traderplanet. 10. Market AstroPhysics and Chaos MicroMedia
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investing book. In addition, Amazon.com and received. This is not an editorial rating or ranking. For more information on specific products and ser-
BarnesandNoble.com, among other websites, vices, try checking store.Traders.com for archived S&C product reviews.
can help you home in on a subject and suggest
other related and popular material. the Traders’ Resource database at our website. information on products and services in other
Beginning traders should be sure to read the Good reading! categories, such as brokerages, data services,
writings of Robert Edwards and John Magee, courses and seminars, newsletters, consultants,
Jack Schwager, J. Welles Wilder, Martin Pring, TRADERS’ RESOURCE AT TRADERS.COM software, trading systems, and more. All you
Perry Kaufman, and Edwin LeFévre to start Traders’ Resource is available at our website, have to do is click on the Traders’ Resource
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November 2022 • Technical Analysis of Stocks & Commodities • 59

 TRADING ON MOMENTUM

Trading After The Fed Speaks

Daytrading The FOMC Release

Here’s an approach you can use to Trading the three-wave so that whichever one is filled first is
daytrade major economic news or pattern then traded in the direction following
report releases using ETFs. For this trading technique, it is best to the release announcement. The three
trade with a leveraged ETF that moves waves include the initial knee-jerk
by Ken Calhoun in the direction of the market (such reaction, the secondary countertrend,

W
as TQQQ) or an inverse ETF such as and finally the third major move. This
henever economic reports SQQQ, as seen in Figure 1. I like to set pattern consistently occurs following
are released or interest buy-stop orders for both instruments FOMC and other major economic
rates are changed by the report releases (such as release of the
Federal Open Markets CPI or PPI report).
Committee (FOMC), markets often This pattern
provide excellent daytrading oppor- consistently occurs Step-by-step action plan
tunities. The most important pattern following FOMC and Here’s how you can start using this
to learn is the three-wave reaction other major economic strategy:
that consistently occurs immediately report releases.
after the release is made public. Step 1: Set buy-stop orders for both

eSIGNAL

FIGURE 1: CLASSIC THREE-WAVE DAYTRADING PATTERN. The three waves in this pattern include an initial knee-jerk reaction, a secondary
countertrend, and a third major move. This pattern often appears in the market following a major economic news release or an announcement by the
Fed of a change in interest rates.
60 • November 2022 • Technical Analysis of Stocks & Commodities
 TQQQ and SQQQ at $0.30 above way to capitalize on market volatility.
the current price right before the It is worth noting that wave 1, wave 2, It is worth noting
economic release. and wave 3 may all have very differ- that wave 1, wave 2,
ent durations of time, varying from and wave 3 may all
Step 2: Trail your stop at $0.30 several minutes to half an hour. have very different
below your entry. durations of time.
Trade management tips
Step 3: As soon as price starts to Because of the volatility of this play, I
reverse back down, close your initial have found it is smart to use automatic Ken Calhoun moderates a popular
position either automatically with one-triggers-the-other (OTO) orders. live trading room for active traders.
the trailing stop or manually. This lets me set an automatic trail- He is the founder of TradeMastery.
ing stop so that I don’t have to react com, an interactive webinar site
Step 4: Repeat during wave 2, and quickly to manually close the posi- for active traders, and is a UCLA
again during wave 3. tion. Experienced traders will want alumnus.
to trade back and forth using SQQQ
Why this technique works and TQQQ in each of the three waves,
This is a pattern that I have daytraded depending on the direction.
for many years and it’s an excellent

TIPS the user controls.

Continued from page 56 To download this spreadsheet: The spreadsheet file for
this Traders’ Tip can be downloaded from www.traders.com
in the Traders’ Tips area. To successfully download it, fol-
to phasor analysis of price action. The code in the article’s low these steps:
sidebar computes the correlation of price action relative to a
28-bar cycle and translates that into an instantaneous phase • Right-click on the link to the Excel file, then
angle for each price bar. • Select “save target as” to place a copy of the spreadsheet
With that instantaneous angle in hand, we can compute an file on your hard drive.
instantaneous cycle period (frequency).
And finally, using the phase angle, we derive a trend indi- —Ron McAllister
Excel and VBA programmer
cator that can show us periods when we should be long (+1),
[email protected]
short or out (−1), or cycling (0).
It is worth your time to play with the correlation period in

FIGURE 7: EXCEL. This chart implements the trend indicator described in John Ehlers’ article in the October 2022 issue of S&C. The indicator suggests long (+1), short or
out (−1), or cycling (0). Settings can be adjusted in the user controls.

November 2022 • Technical Analysis of Stocks & Commodities • 61

 UNGER/FILTERS proach to trading (more information can be found at
Continued from page 15 https://autc.pro/tasc).

Further reading
Andrea Unger is a full-time professional trader, president Unger, Andrea [2021]. The Successful Trader’s Guide To
of The Unger Academy, and author of The Unger Method. Money Management: Proven Strategies, Applications,
He is a four-time World Trading Champion (2008, 2009, And Management Techniques, Wiley Trading.
2010, and 2012), an honorary member of SIAT (Italian [2021]. The Unger Method: The Winning Strategy
Society of Technical Analysis, a branch of IFTA), and Of The 4-Time World Trading Champion, The Boss
speaks throughout Europe, America, Australia, and Books.
Asia. He may be reached at Andrea@UngerAcademy.
com. The Unger Academy provides services to traders,
including individuals, to help them improve their ap-

INTERVIEW 3d ed., McGraw-Hill. Hartle, Thom [1994]. “It’s All In

Continued from page 44 [2006]. Candlestick Charting The Family: Sherman, Marian,
Explained: Timeless Techniques And Tom McClellan,” interview,
For Trading Stocks And Futures, Technical Analysis of StockS &
Further reading McGraw-Hill. commoditieS, Volume 12: June.
Morris, Gregory L. [2013]. Investing [2005]. The Complete Guide Morris, Greg, and Grant Morris,
With The Trend: A Rules-Based To Market Breadth Indicators, “Dancing With The Trend” blog,
Approach To Money Manage- McGraw-Hill. https://stockcharts.com/articles/
ment, Wiley. Gopalakrishnan, Jayanthi [2009]. dancing
[2011]. Candlestick Charting “The Danger Zone With Gregory
Explained Workbook: Step-By- Morris,” interview, Technical
Step Exercises And Tests To Help Analysis of StockS & commodi-
You Master Candlestick Charting, tieS, Volume 27: September.

MARKET RAP
TOMASINI/MARKET RAP istic. Markets are by nature out of
Continued from page 45 your control. The trading industry
Nobody talks about mistakes. The likes to push the
truth is that your trading must be need to have a sense
unavoidable. Some of these things profitable enough to cover mistakes
of control over the
can interrupt your trading process that will inevitably occur. I hope you
through no fault of your own. And will keep this little bit of realism in
markets, but that is
that can sometimes affect your profit- mind when you are busy making your unrealistic. Markets
ability in the end. calculations for how much to allow are by nature out of
The trading industry likes to push in your system for “commissions and your control.
the need to have a sense of control slippage.”
over the markets, but that is unreal-
62 • November 2022 • Technical Analysis of Stocks & Commodities
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