THE OFFICIAL MAGAZINE OF TECHNICAL ANALYSIS
TRADERSWORLD www.tradersworld.com | May/June/July 2012
Trading
Issue #51
Where Traders Go Wrong
Dynamic Cycles
Diversification Identifying Holy Grail? High Profit Candlestick Patterns
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The Critical Nature of Volume
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Tops and Bottoms
Cup with Handle Pattern
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Contents
High Profit Candlestick Patterns Enhancing Market Trend Returns The Fry-pan bottom By Stephen W. Bigalow 78
May/June/July 2012 Issue #51 Moving Ahead: Trading Dynamic Cycles By Lars von Thienen
Why Trade the Cup with Handle Pattern? By Dale Glazier 82 6
The Quest for the Hole in One Golf Ball By Ron Jaenisch 22 The Polarity Factor System By Daniele Prandelli
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THE PHASES OF A TRADING CAREER By Adrienne Toghraie
36
Diversification The Holy Grail? By Kevin J. Davey Know When to Hold‘em, Know When to Fold‘em!” By Joe Krutsinger, CTA
THE 1:1 STOCK TIME EQUILIBRIUM ANALYSIS & THE LAW of VIBRATION By Dave Franklin
88
How To Make Short Term Trading Your Long Term Investment Strategy Trading, the Operational Mainframe of Successful Commercial Enterprise By Steve Selengut 95
43 Gold / Mining Stock Index Divergences – Leading Indicator? By Robert Miner 101 49
NAKEDSWAN TRADING By Efrem Hoffman
Where Traders Go Wrong Five Reasons Why Traders Fail By Bennett McDowell
55
Don’t Be Fooled By Brady Preston
Identifying Tops and Bottoms Using the Sweet Pea Deep Dip Triple Oscillator Divergence Concept By Jan Arps 115
58
The Critical Nature of Volume By Jeffrey A. Killing
124
129 135
NOTES ON GAP THEORY Part 2 from “Novy Principles of Market Flow By Leonard Novy
63
Elliott Wave Outlook S&P and Gold By Peter Goodburn
The Price of Certainty BY Joel Rensink
67
The EUR / USD and Gold By Jaime Johnson
The Vibrational Positioning Sequence (VPS) A Market Forecasting Model based on the Law of Vibrations By Anthony Scelfo with Thomas Hart 72
Power Cycle Day Trading Course Review 144 The Ivy Bridge Sonata By Larry Jacobs 146 Traders Book Library
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Moving Ahead: Trading Dynamic Cycles
“Think like your car’s navigation system” By Lars von Thienen
T
raditional cycle approaches must take two crucial success factors into consideration: First, which cycle detection algorithm is used plays a decisive role. Which dominant cycle should be used to forecast or adjust technical indicators? If the wrong cycle is detected on the “left side” of the chart, every trading and forecasting approach will fail on the more important “right side” of the chart. However, current “cycle” detection engines are not developed to adequately deal with the features of financial time series. The algorithms currently being used to detect cycles in financial markets derive from the domain of frequency analysis toolsets like Fourier, DFT, Wavelets or MESA. All of these algorithms have shortcomings in the detection of financial market cycles. Secondly, even if the right cycles are detected, financial market cycles are not “static”. Despite the dynamic nature of the cycles that drive markets, traditional approaches project cycles as theoretically static single or composite waves into the future. Dominant cycles continuously vary over time in terms of length, amplitude and phase offset based on their inner core parameter. This means that the length component of a dominant cycle with a length of 80 days may easily vary between 76 and 84 days – but it remains a dominant cycle of “80” days nonetheless. However, you will not know whether a cycle has contracted or expanded if you only follow a simplistic static projection.
Most cycle approaches will fail Hence, most of the current cycle systems will fail in the long term due to one of the two issues discussed above. If you want to trade cycles successfully, you have to accept the fact that there is no cycle detection algorithm out there that can adequately deal with the characteristics of financial data. What is even more relevant for every trading approach is the fact that cycles have a dynamic nature and will not stay static over time. These facts are not new. However, I have not found any tool or approach that is able to deal with these two key problems. Traditional approaches to financial market cycles have not advanced much since Hurst and the mathematics of Digital Signal Processing – variations have certainly been introduced, but no real progress has been made in this field for quite some time.
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A new cycle approach is born With that said, I developed my “own approach” to cycles. This project started 15 years ago. To keep the story short: I am an engineer and know every pro and con about signal processing algorithms and developed a tweaked cycle analysis engine that can deal with the unique features of financial time series data. It outperforms any existing “traditional” algorithm. Furthermore, I developed a trading approach that can deal with the fact that dominant cycles “morph” over time and have to be continuously monitored in terms of their current phase and length. Over the last 15 years, my research work has resulted in a dynamic cycle toolset which is now, by and large able to automatically track dominant cycles. In 2010 – following extensive “internal” discussions – I decided to publish my knowledge for a small community. I found Wave59 – for many reasons – to be the right “homebase” for this. My main intention was to give the “cycles train” a push into the next dimension of cycle analysis for financial markets. I will explain and illustrate this dynamic approach to trade cycles in financial markets with the following example.
The Dynamic Cycles Approach This article introduces a dynamic approach for building tradable forecasts. This is only one of my techniques – complex in the backyard – but simple, beautiful and powerful on the price chart. Every time a new bar appears on the chart, we will reassess the state of the current dominant cycle – as our carrier wave for price movements – in terms of wavelength, amplitude and phase offset. The integrated cycle’s detection algorithm will perform this completely automatically. Subsequently, we will update this cycle by plotting it into the future. However, we will only focus on the next expected turning point – that’s what we are interested in. I refer to this turning point as ETA – Expected Time of Arrival. We are not interested in projecting the complete static cycle into the future. We are interested in monitoring the next ETA point based on the detected dominant carrier wave. As we move forward in time, every bar signifies an update on the next expected turning point. This dynamic forecast based on the actual state of the dominant cycle provides information about the next turning point in terms of time and direction. We will obtain realtime information about when to expect the next major turning point in the market while we continuously reassess the parameter of the dominant carrier wave. This information is updated every time a new bar appears. It is difficult to do this manually, so I automated all tasks required to perform this operation. The outcome is the “Dynamic Cycle Explorer”. This tool automatically performs all of these steps. We can therefore fully focus on trade evaluation instead of manual cycle research. The difference between many cycle researchers’ approach and mine should be evident by now. I do not apply a framework with static cycles and try to make the market fit into it. One often reads about the significance of the 4-year or 28-day cycle and how these “static” cycles can be applied to the actual market situation. This is no longer a promising approach. I have seen too many “static” cycle frameworks fail on the right side of the chart. I have successfully used this dynamic model that determines which cycles are active at a given point in time for over 10 years now in my own trading. 9
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You use this method to be “prepared” for important turning points in the market. ETA points should not be traded blindly. When used in combination with other tools, you will have very powerful setups to trade in the market, which show up in advance. Charts say more than a thousand words. Let’s look at this dynamic cycles approach in action.
The dominant carrier wave on the price chart – October 2010 I will use a “dynamic intermarket cycles-within-cycles approach” example to demonstrate the power of this approach. Let’s start in October 2010 with the long-term perspective on the weekly chart of the S&P 500 index. The dynamic cycle explorer is attached to the chart. The indicator detects the dominant cycle and checks possible length and phase shifts for this carrier wave at every bar. The example is based on the pure standard settings of this fully automated indicator – there is no way to back optimize or curve-fit this tool. You would have arrived at precisely the same situation if you had attached it to the chart on your own on the given day. The dominant carrier wave is plotted as a green theoretical cycle at the bottom of the chart and automatically extended into the future. If we look at the past, we can see that the detected cycle fits nicely to the peaks and valleys of the price history. See Chart 1: Weekly S&P 500 with dominant cycle and ETA projection (8 October 2010) What we are interested in is the next ETA point, represented by the dotted blue line, the word ETA and the short purple line: The next major top is expected to arrive around 29 April 2011. We are thus in an upswing that is expected to last for the next 6 months from now on.
Chart 1: Weekly S&P 500 with dominate cycle and ETA projection (8 October 2010) 10
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That’s the picture the current cycle analysis gives us – the long-term carrier wave that will guide us to time our trades on the daily chart. We will now monitor the ETA point week by week to check whether the projection will change or not. We do not use this one-time analysis as a fixed projection that cannot be modified. Instead, we update this projection every week once we obtain the next bar. This means that we will follow the main dominant cycle and check whether the length or phase of the cycle has changed, which might lead to an adjusted ETA projection. I compare this type of analysis with the Garmin navigation in your car. It provides you with the current estimated time of arrival at your destination. This arrival time is continuously updated in real time based on the given traffic conditions. This is precisely what we will do with the dominant cycle: We will check its current status at every bar and adjust our ETA projection if needed. So, if we move forward in time, our ETA point will become more and more accurate from bar to bar.
The peak is detected in advance - May 2011 As we move forward in time, the next chart illustrates the state of the cycle in mid-May. The blue ETA projection and the purple line have not moved since October 2010. As the updated current dominant cycle projection indicates, the length and phase has slightly shifted as we progress toward 29 April 2011. The peak is now projected for mid-May as denoted by the updated dominant cycle and the blue dot for the current bar. The core cycle is still the same as in October 2010 – only the phase and length have slightly shifted and the dynamic
Chart 2: Updated cycle projection in May 2011 with shifted cycle peak 11
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explorer was able to detect and has followed the “inner” vibration of this dominant cycle. The indicator setup has not changed at all throughout the entire time. See Chart 2: Updated cycle projection in May 2011 with shifted cycle peak In general it seems that the market already peaked in the original projection for 29 April. The updated dominant cycle is now also at the current peak projection. The highlighted box on the chart with the red arrow confirms this based on the original projection from October and the current state of the dominant cycle in mid-May. This is a high valid signal that the dominant cycle remained stable and that we can determine the peak of the carrier wave which we have been following now since October 2010. The uptrend has evidently come to an end. And we can see this before the price moves. Now, since we have reached the peak, we want to find out when the next estimated time of arrival (ETA) for the expected low will be. This point is again highlighted by the blue dotted line - dated 27 January 2012. If you compare this projection to that of October, you will see that the projected low has shifted from 20 to 27 January. This is our approach – we are only interested in the next ETA, not the full static cycle projection. Finally, we can see it: The peak occurs in mid-May 2011 and we expect a downward trend until the beginning of 2012. At this point in the cycle analysis, we again move forward bar by bar and follow the carrier wave to detect shifts in the length or phase of the dominant cycle.
Following the vibration of the dominant cycle – September 2011 For the period from the peak in May until October 2011, we are able to follow the transformation of the active dominant cycle using the dynamic cycle explorer: As we progress bar by bar from October on, we see that the cycle contracts and that the phase slightly shifts, with the result that the projected ETA moves closer and closer to the current day. (Please watch a short video to view the non-interrupted dynamic behavior bar by bar at: www.whentotrade. com/twmag) The next chart presents the state of the cycle on 2 September 2011. We observe that the next ETA was updated based on the current state of the dominant cycle. The next ETA on the long-term chart is now expected to be 7 October 2011 instead of January 2012. Compare the last two cycle projections from May and September – you can see that it is still the same general dominant carrier wave: Three peaks and two valleys aligned to price behavior – and the next valley is expected to occur in October instead of January. This is the power of the dynamic approach – it analyzes the active dominant cycle with reference to current price behavior and vibration – it does not “curve-fit” the static cycle to the past! If we only considered our static projection from May, we would still be expecting a low in January 2012. As we are continuously monitoring the dominant cycle, we now know that this dominant cycle’s dip is expected to arrive earlier. See Chart 3: Dynamic shift of the expected dip projection with updated ETA (2 September 2011) If we look at the actual analysis of 2 September more closely we can see that we have already entered the cyclical trough period, which will last until mid-October. If you are familiar with cycle analysis, you know that an expected turning point will never occur precisely on 13
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the day/week of a sine wave peak or low. We should therefore be prepared for a possible upswing from this point on since we have moved into the bottom of the cycle. This juncture is interesting because the price already dropped 3 weeks ago. The main question at this point is: Has the cycle now perhaps reached the bottom?
Cycles within cycles – Sentiment in September 2011 To answer this question, we apply the cycles within cycles approach. To time the trade, we have to move to the next lower timeframe. To determine whether the bottom has already been reached, we have to analyze the dominant daily carrier wave. And to add an extra bonus to the cycles approach, I will use sentiment cycles on the daily timeframe instead of the daily S&P 500 to analyze our position in the market. Markets are driven by emotions. Therefore, if we are able to analyze the current sentiment cycle, we have the source and leading information for price behavior. The Volatility Index (VIX) is a useful measurement for the sentiment of the market. Hence, to determine whether we are approaching or are already in a major low on 2 September 2011, we apply our cyclic work to the VIX on 2 September See Chart 4: Daily S&P 500 with VIX and actual dominant sentiment cycle (2 September 2011). The major market peak which we identified correctly using the weekly cycle analysis is represented by the small box on the upper S&P chart. We are short since May. We now attach the same indicator to the daily chart of the VIX (bottom chart). We apply the same standard
Chart 3: Dynamic shift of the expected dip projection with updated ETA (2 September 2011) 15
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settings, i.e., nothing special again. Simply drag the dynamic cycle explorer onto the chart. The algorithm detects and plots the current dominant carrier wave right onto the chart. The main swings of the detected cycle are marked with the numbers 1 to 5 on the VIX and S&P chart. You can see that we have a vice-versa correlation of the sentiment cycle: A sentiment cycle’s peak corresponds to a market low and vice-versa. This confirms that the automatically detected dominant cycle in the VIX is valid with regard to the market’s major turning points. On 2 September 2011 – the date we shifted our attention away from the long-term cycle projection to determine whether the dip had already occurred – we clearly see that the actual turning point No. 5 occurs with an expected low in the sentiment index taking shape now (=market high). The next ETA projection is expected to occur during a period of high sentiment reading, topping on 1 October 2011 (Point 6). What does this mean with regard to our main question: Should we establish a long trade because the long-term cycle is forming a low right now? The answer is quite simple: The daily chart reveals that price has increased
Chart 4: Daily S&P 500 with VIX and actual dominant sentiment cycle (2 September 2011) 16
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since the major low in August (Point 4). However, we know based on this current low sentiment cycle that the market has reached a daily peak at Point 5! Not a good time to place a long trade, because we expect the market to move down into the projected Point 6 as shown by the sentiment cycle ETA for 1 October 2011. In addition, we can get a clear message now by combining long- and short-term dominant cycle analysis: If you only looked at the daily chart, you would go short now. However, based on your knowledge about the longer-term cycle, you know that we expect a major market low to take shape during this time – not the long-term situation we would necessarily like to place short trades in (only allowed in the aggressive mode)! So, the long-term analysis protects us from placing a short trade here. On the other hand, if you only used the long-term projection, you would probably want to go long now. In this case, the short-term analysis prevents us from going long now in the current situation of the market sentiment. Support now comes from the cycles-within-cycles approach: We know from the long-term cycle that we can expect a low to take shape over the next few weeks into the beginning of
Chart 5: Daily S&P 500 & VIX with updated cycle (4 October 2011) 18
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October. The current short-term cycle projects the next market low to begin forming around 1 October. Here we have it: A fit of the long- and short-term projection, an expected major low around 1 October 2011. This is the timing on the daily timeframe now. Do not go long on 2 September 2011. Wait until the beginning of October before establishing the next major long position.
Current sentiment cycle fits into the long-term wave – October 2011 Again, let’s move forward in time and track the dominant carrier sentiment wave day by day from 2 September onward. The next chart illustrates the situation on 4 October. The same dominant cycle is still active as the indicator demonstrates. Again only a slight shift took place, as indicated by Points 1-5 and the ETA mark with the blue line, which have not moved since our original analysis. The current cycle peak should have been reached as the analysis of 4 October shows. See Chart 5: Daily S&P 500 & VIX with updated cycle (4 October 2011) We can observe that price dropped during the time sentiment on the VIX moved up into our ETA window. Just like it was projected by the identified dominant carrier wave. And now as we approach the projected ETA, our current cycle analysis confirms that we reached a high on the sentiment index on 4 October (=market low) . Thus, based on the projection and the current state of the cycle, we have a picture-perfect and valid sentiment cycle whose peak is now projected for 4 October 2011. The market has dropped to a level that is even lower than the previous low back in August – hence, the sentiment projection of 2 September protected us from going long too early. A closely monitored, aggressive short trade would have given us additional profit during the sentiment ride. Now we have our cycles within cycles alignment – it could not be more clear: The longterm weekly sentiment cycle projection ETA reveals a low on 7 October (see Chart 3). The short-term daily sentiment cycle projection ETA confirms this low on 4 October (Chart 4 & 5).
Chart 6: Daily S&P chart with identified market peak and market low updated to today 19
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We have a picture perfect cycle within cycles alignment. The only difference is that we would not have been able to detect this cycle alignment with traditional static cycle projection tools! We need the dynamic component which gives it that extra something. Furthermore, with the dynamic component we are now able to view the formation of the cycles in advance bar by bar and can prepare. We have it in now: A major low on 4 October 2011 demonstrated by the cycles. Bear in mind: Not even price can give us this information for 4 October. No technical indicator, no trend line, no tool whatsoever would have indicated a major low based on price alone. The dynamic cycles, however, have. Let’s move forward in time to see how this juncture plays out. The following chart shows the outcome on the right chart. See Chart 6: Daily S&P chart with identified market peak and market low updated to today The projected low for 4-7 October 2011 occurred right on time. Up to this day as I am writing these lines, the market has moved up as projected by the long-term carrier wave. The blue line on the right chart presents the trade summary of the example outlined here. We commenced with the running upswing in October, identified the major peak as projected in May and successfully fine-tuned the market low with the cycles within cycles approach in combination with the sentiment cycle in October. The complete example is based on the standard dynamic cycle explorer. No optimization or curve-fitting has been undertaken. And I am not cherry picking one specific situation here. A pure analysis of what the cycles within cycles approach showed us concerning the long-term perspective from October 2010 up to today. This approach can be applied to any symbol on any timeframe. Even though this approach may look simple, discipline in dealing with moving projections and validating auto-detected cycles is required for it to be successful. With regard to intra-day trading, the dynamic cycles approach is more complicated than for daily charts. Why? Because there are a lot of interfering cycles active during the same time on intra-day timeframes like 5, 10 or 30 minutes, which makes it difficult to detect the single most active carrier wave. Dominant cycles jump over from one carrier wave to the next – they do not shift smoothly as they do on the daily charts. This is the area where additional research is necessary. I hope that this article is an eye-opener to the fact that cycles breathe over time and don’t stay fixed. If you accustom yourself with this fact and are able to develop or use tools that can convert this notion into tradable visual plots via optimized algorithms, cycle projections of this type will propel you onto the next level of trading and forecasting. In addition, try to detect and use dominant cycles on sentiment indicators like the VIX to identify major turning points in the market instead of solely focusing on the major index alone.
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ELWAVE® is a registered trademark of Prognosis Software Development, Netherlands. NinjaTrader®, Kinetick® and ZenFire® are trademarks owned by their respective owners. All trademarks are the property ofMay/June/July their respective 2012 owners. There is risk of loss in trading. 21 www.tradersworld.com
The Quest for the Hole in One Golf Ball By Ron Jaenisch (First in a series)
S
elf-Actualization is being all that one can be. Albert Maslow developed the concept and those educated in the 1960’s and 1970’s typically came across it in their university studies. Richard Bandler and John Grinder (world renowned for NLP) were college professors who decided to take Maslow’s concept to the next level when they wrote “The Structure of Magic”. The idea was that when someone is very talented at something, the outstanding behavior could be modeled and the behavior could be duplicated by anyone who would take the time to learn the model. This is what traders do when they learn techniques that others have used successfully. Richard Bandler, was a Psychology professor at the time. He decided to model Virginia Satir and Milton Erickson. Virginia was a family therapist and Milton was a hypnotist. Both were renowned in their field for being excellent. Richard and John later went on to develop a technique known as Neuro Linguistic Programming. Richard later used his modeling skills to land a multi-million dollar contract with the United States Army. Richard took on the task that every infantry man needs to know. To hit the target, when shooting a rifle. He convinced the Army that he could do it quicker and better than what the army had been doing for years. The US Army realized that they could do better after several years of occupying West Berlin. During that time period the only uniformed German gun toting force allowed in Berlin was the Berlin police department. The Berlin police sharp shooters consistently beat the competition that the United States, England and France could provide, every year. This was very embarrassing to the United States Army. As a result Richard Bandler was hired to improve the marksmanship skills of the U. S. Army. He noted that it is normal for a Sargent to shout demoralizing statements at recruits that were learning how to shoot, (something the Berlin police did not do) He also noticed that the difficulty of the targets, were the same for new as well as seasoned marksmen. He found these two factors were the main contributors to the US Military’s in-ability to “grow’ their own great marksmen, quickly and easily. As a result there were the two main changes made by the US Army in order to follow the model of the Berlin Police department. The first was, that prior to shooting the new recruits would think about successes they had in various areas in their lives and bring that positive attitude to the shooting range. The new recruits would be told to aim at a target that was much closer than the normal target for experienced marksman. The target would then be moved further away as they improved, until it was at the same distance that experienced marksman was accustomed to. As traders we can incorporate these concepts into what we do, by having small weekly or
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Target and Learn One of the Most Trusted Trading Systems of All Time!
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Everything that you need to trade with the Andrews and Babson techniques. We start with the basics and quickly get into very advanced techniques. This is done with over 25 videos (bite size-15-20 minutes each) over a period of three weeks. In the mail you also receive an extensive color manual. Two of the videos have Dr. Andrews teaching a seminar. Many of the techniques in the advanced course are not available elsewhere and may have been learned at the kitchen table with Alan Andrews.
To keep things running smothery you are invited to be in a private email group where other Andrews Babson students ask questions and get answers. Every week several examples are sent to the private group members. Often examples that are sent out are trades that someone in the group has made. The intent is to show examples. Some course members in the email forum have over 10 year’s experience with the methods. Our PT3 software as a gift to you, plus over twenty videos that are only seen by course members. You are also able to attend a special live free get together held once a year. In our discussion group over 30% of the focus is upon intraday charts because of the quick learning factor. You see the results quickly. Credit Cards accepted at http://www.andrewscourse.com/products/default.htm For those that would like to pay over time, this is available. A product is held for you until you are finished paying at the price you locked in when you ordered. This includes limited edition products. Contract
[email protected] for details.
The massive expanded course
This contains the ORE indicator and many other publicly unknown indicators, is also available. This is the store house of the written insights, newsletters and documents that we have been able to amass over the years. There are a limited number of copies that will be published. In addition to the three massive volumes there are also a large number of videos, only offered with this course, where we interpret what Andrews wrote and give our insights. As a bonus we include over special 25 videos They cover what we have discovered in the written material and the application. The videos cover material not covered in the Advanced Course Videos. The price varies depending upon how many copies are left. For example the first purchaser will have paid a lot less than the final 100th purchaser etc. At any time a trading firm that sees the value in the indicator may purchase all remaining copies of the course. Click buttons below for online videos... Video of Original works before we copied it.
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Video ....Part of what you get.
monthly goals that increase as we achieve them. In addition, having a supportive self-concept mindset is useful. This is accomplished by reviewing on an almost daily basis, prior successes for new traders. This alone however, does not quickly lead us to the hole in one golf ball. For this much more is needed. In my quest for this mysterious golf ball I ran across the works of Alan Andrews and collected nearly one thousand pages of his writings from various sources.
His writings were over a period of several decades and had a change of focus from time to time. Professor Alan Hall Andrews wrote a weekly course newsletter. In March of 1974 he wrote
It was easy to jump to the conclusion that the “ORE” method was a hole in one golf ball, if it could do what he claims it could. Shortly after this was written, the ORE method was never written about again in his weekly course letter. Tests were conducted in real time on S&P 500 data and it appeared to be a useful tool for finding significant market reversals. The above chart was sent out to the public prior to Thanksgiving 2011. As you can see in the above sixty minute chart the ORE indicator came in at various points that were very 24
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close to the reversal area. Even what was labeled as a “Jaenisch Reversal Line” was actually an ORE, but in a greater time frame. The Ore indicator was used in Corn and Sugar recently and the corresponding charts were posted on the web (viewable at on the forecast page on Andrewscourse.com) If the ORE indicator found these turning points, could it find all? Historical studies show that this is an excellent indicator that finds many golden trading opportunities that are with the longer term trend, depending upon the time frame that one is focusing upon. And like a golf club, it is limited in use to specific terrain and objectives. Perhaps it is best to think of this indicator as a type of golf club. When we observe someone playing golf, we can tell if they are using a putter, wood or iron. If we get very close, we can tell more exactly what type of club it is. With a basic understanding of the type of club that is used for different terrain, we can know what the golfer is trying to accomplish and the terrain they are in, by the type of club they are using. My friend Alan Andrews wrote about various trading techniques over the years that dealt with various types of trading terrain. As a result the quest for the hole in one golf ball changed to the quest to understand and recognize the terrain and which type of technique is used for the various terrains. The Andrews techniques are typically labeled as setups in trading circles. As will be shown in future articles, in this series, when using Andrews’s techniques it is necessary to be able to
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recognize the setup that the market has prepared for the trader in order to know which tools to use. This is similar to Golf, where it is necessary to use the proper tool for the terrain the ball is in. One of the set ups, are commonly referred to as prices not having made the median line. To deal with this, traders used what is commonly referred to as Hagopian’s rule. This results in using a break out for an entry. But is this the optimal tool? Much has been written about this concept over the years. Most of what is found on the web is from the original rules of Mr. Hagopian. In the next article in this series, Hagopian’s rule will be explained and the reader will be shown what Alan Andrews taught at one of his seminars in the 1980’s. This approach results in a lower risk and less drawdown according to historical studies. Think of it as a new type of golf club. In yet another future article, an amazing, hole in one golf ball like track record and approach of Professor Andrews will be discussed. He would mail out written instructions on Thursday to his students that they read to their brokers on Monday morning, as orders for the week. This was to turn 5K into 50K in a few months. In order to write that article the modeling techniques of NLP are brought into play. Ron Jaenisch, the author has been trading for over ten years and was personally taught by Professor Alan Andrews. He offers a course that is available through his website www. andrewscourse.com. He can be reached at
[email protected]
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The Polarity Factor System Forecasting Directional Turning Points & Trading Them with Limited Risk By Daniele Prandelli What is trading? How is it possible to gain by trading? Why is it that so few people seem to be able to trade successfully? There are many answers given to these questions, and yet, for many, trading profitably remains an unachieved dream? Why it is so hard to make money if we know the answers? My answer to this question is one word: reality! Awareness of reality! What is reality? Everyone perceives his own reality, and every point of perception sees a different reality. So, we know that there are different realities for different people. But the FACTS do not have a point of view. The FACTS are stubborn, and we can begin to understand that what we think we KNOW is not necessarily what actually IS. To KNOW and to BE are two very different things. To KNOW is relative, while to BE is absolute. What I want to do now, is show my point of view of the process to arrive at what IS, to arrive at the actual FACTS, rather than my perception of the FACTS. Looking at my point of view, I see the trading as a speculative activity, where the trader tries to take advantage of the swings of different markets, stocks, commodities etc… The market can go up or down, so we can BUY or SELL, and in consequence, we theoretically have a 50% probability of being successful in any trade. But please, can you tell me why, paradoxically, statistically only 1 of 20 is able to make consistent profits? You can see that there is a variable that destroys this system, somehow destroying the equilibrium. And what exactly is this variable? Well, it is YOU who are this variable. It is really quite hard to accept, isn’t it? I used to spend a lot of time studying, then when I had losing trades, I would cry and hate the world because it seemed it was always against me, but in the end I came to understand that it was only myself that I had to blame for my losses. My hurry, my greed, my agitation, and my distortion of the truth (another big theme, maybe for next time…). And this is the key for people who have studied a lot but are still unable to make profits. After you have studied books and systems, you then have to begin to study yourself! Trading systems alone are not the only elements of the game. Although my trading Blog has produced consistent profits with precise strategies for over a year, I can bet that that a number of my subscribers are still not able to make profits even using the same indications that I trade by myself. This is because they simply don’t know themselves! They are not able to control their hope and fear, and they hurry. To control yourself, you have to know yourself! So, I tried to address the issue of what determines successful trading. My Blog demonstrates that it is possible to make good and consistent profits from trading, and I hope that the point of view that I present will help to explain why people are still not able to do profits. 27
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A COMPENDIUM OF ASTRO-ECONOMIC INFLUENCES PRACTICALLY APPLIED! TO 110 YEAR ANALYSIS OF THE DOW JONES INDUSTRIAL AVERAGES
BY RICHARD SCOTT TWO NEW FINANCIAL ASTROLOGY COURSES & TIME PROJECTION TOOLS! This new course provides a direct and accessible doorway into the practical application of astro-economic theory for trading. The difficulty that confronts most astro researchers is that there is too much contradictory material available, which takes years to organize into a tradable methodology. Richard Scott spent 8 years doing this research, by hand, watching the markets day after day, studying each change, and then tracking down every influence and lead that he could find which would demonstrate to him the cause behind market movements. He compiled 110 years of Dow Jones Industrial Average data, and, with his ephemeris in hand, tracked down every instance of every influence. This course presents the results of that labor, summarized, simplified, and clearly explained so that any trader can begin tracking and trading planetary influences in the markets in a matter of weeks rather than years. It further teaches how to determine the ongoing energetic background environment that the market is traveling through at all times. This environment is defined by the summation of the underlying planetary energies at any time. Any projection you have from any system can now be cross-checked with the Planetary Energy Background, and you can affirm whether a turn will likely be a top or a bottom, or a trend will go up or down. This is very simple to understand and to apply to your future charts, giving you an ongoing read on the energetic forces behind the market! VOLUME 1 TEXT 240P. - VOLUME 2 CHARTS 230P. 250 IMAGES - BLACK SUEDE HARDCOVERS
TECHNICAL ANALYSIS & TIME PROJECTION THE HARMONY OF MATHEMATICS & NATURE BY CATALIN PLAPCIANU ONE OF THE MOST POWERFUL & ACCURATE ASTRO-TIME PROJECTION TOOLS EVER DEVELOPED!
The Time Projection Technique presented in this course develops a new type of planetary time projection, through the projecting of pairs or groups of planetary relationships into the future. The result of these combinations is the projection of highly accurate future turning points with a false signal ratio of only 2 out of 10, or better. The time projections are highly accurate, generally occurring within a day of the actual signal, even from points 30 years in the past. Specics of the projections can dene major turns, vs. intermediate turns, vs. minor turns, and some combinations give very accurate projections of polarity, whether a turn will be a bottom or a top. Using overlapping projections of multiple planetary congurations serve as conrmations of important turning points, ltering out errors to less than even one false signal in ten. The course also presents a detailed introduction to astrology, two different systems to project price, and a means to mathematically determine the SPEED of the market. There are numerous trading examples given for long, intermediate and intraday trading. See our website for more details!
BLACK SUEDE HARDCOVER 264 PAGES WITH 200 CHARTS & DIAGRAMS & PROGRAMED TIME TOOL
SACRED SCIENCE INSTITUTE Ө
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EMAIL:
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To know yourself, you have to work privately, deep within yourself, since no one else can teach you to know yourself. If you think you are ready to know yourself and to be able to keep your fear and hurry under control, then you can begin to ask the question: how can I make money in trading? If you know yourself and if you do not have a distortion of the truth, you can follow a clear strategy in the market, and learn how to make money. The details of the methods I use to trade the regular swings in the market are documented on my Private Blog, where every day I give my personal analysis and strategy that I use to take my positions. The techniques I use to make forecasts and the strategies I use in my trading, primarily focused on the S&P 500, are explained in my course The Polarity Factor System. The PFS (Polarity Factor System) is a model I developed based upon an understanding of the work of the great WD Gann. It gives me indications of the general movement of the market for the entire year, indicating dates to expect accelerations or pushes, either up or down, but always indicating to me which direction to follow. Combined with this forecasting tool, I use a strategy based upon Gann’s planetary longitude lines (developed in my prior course The Law of Cause & Effect) to determine precise price confirmations, where I can place tight stoplosses, allowing me to safely enter the market and follow the trend with little risk and good profits in the case of an accurate forecast. This is the reason that I’m able to make consistent profits in the market, by limiting losses while letting profits run when following the trend. My new course, The Polarity Factor System explains exactly how I do this, so that you can learn the strategy and discipline that I use to make the same kind profits for yourself too. The first secret is to have precise and particular price indications, which I define as my Key Prices. This is a particular price, with a particular energy, which continually repels the market, or pushes it in one direction or another, up or down. But knowing these price levels still leaves us needing to know in which direction we want to trade? Here is where I use my PFS model confirmed by other forecasting models which combine to clearly indicate to me the way to follow. If we look at a record of the average trader, noting the losses and gains in each trade, we will see that what destroys the final results are the big losses, compared to which the small profits become insignificant. From this analysis we can see that the problem is mental, being based primarily on an incorrect approach to trading, and superficiality upon the effects of hope and fear. I constantly point out that the best way to gain over the time is to cut losses and let profit run. But this is easier to say than to do… By merging the PFS forecast model with my Key Prices, I have been able to create my reality, my strategy, my method… by arriving at what is the final target: FACTS. We can observe an example of my strategy by looking at one of my last trades documented on my Blog, in order to understand my approach. We will speak about the SHORT position that I took in March 27, 2012. It was a SHORT position with a stop-loss placed just above the Key Price. The key price given in the daily post was 1419-1420.6. The S&P 500 made a High exactly in the area of this key level, and following my rules, we took a SHORT position at the first confirmation of a weakness under this level, with stop-loss just above the Key Price. The fundamental strategy is this: risk 3 points in the case of an error in the forecast, but gain 20 or 29
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THE LAW OF CAUSE & EFFECT CREATING A PLANETARY PRICE-TIME MAP OF MARKET ACTION THROUGH SYMPATHETIC RESONANACE BREAKTHROUGHS
IN
GANN’S PRICE/TIME RELATIONSHIPS
BY DANIELE PRANDELLI W. D. GANN’S PLANETARY LINES CRACKED USING CALIBRATION FACTOR! This new course unravels the correct application of WD KNOW IN ADVANCE! Gann’s Planetary Longitude Lines. Gann used these lines on his famous May Soybeans chart, but most EXPLAINS MISSING CALIBRATION FACTOR people have never been able to figure out how to apply WHICH FITS LINES TO ANY CHART! them as effectively as Gann did. Until now!
DETERMINE IMPORTANT ENERGY LEVELS
This new course explains why most analysts have failed USING PRECISE MATHEMATICAL RULES here! There is a missing conversion factor or calibration rate which must be used to adjust the planetary KEY PRICES TO TAKE TRADING POSITIONS relationships to the scale and vibration of the market at any particular price level. This book CRACKS the FORECAST CLEAR TARGET EXIT LEVELS conversion factor and makes Planetary Lines one of the most valuable tools you’ll have in your toolbox.
KNOW IMPORTANT TURNING POINTS THRU CONFLUENCE OF PLANETARY LINES
Simple to apply with the proper software, which is easily available, this powerful technique will give an added DETERMINE THE SLOPE OF THE EXPECTED dimensional perspective to market action. These lines TREND THROUGH PLANETARY ANGLES call both price and time, and are one of the easiest but most powerful of all Gann tools. Once you know them, LONG-TERM, INTERMEDIATE AND INTRADAY you will NEVER stop using these lines to trade from! FOR A DETAILED WRITEUP INCLUDING CONTENTS, SAMPLE TEXT
& CHARTS, FEEDBACK &
WWW.SACREDSCIENCE.COM/PRANDELLI/LAWOFCAUSEANDEFFECT.HTM
MORE SEE:
SEE HOW LINES ON CHART CALL MOVES! Notice how the market just bounces along from one line to the next, and particularly how it often turns exactly upon these lines. Planetary price lines are Magnetic Attractor Fields which draw the market to them, then push them away again, giving a trader a map of the geometric, electro-magnetic lattice that the market is influenced by. In the same way that electrons jump between orbital levels, the market will vibrate between these zones defined by planetary resonance.
BLACK SUEDE HARDCOVER 240 PAGES
SACRED SCIENCE INSTITUTE Ө
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EMAIL:
[email protected] Ө US TOLL FREE: 800-756-6141 INTERNATIONAL 951-659-8181 Ө MAIL: P.O. BOX 3617, IDYLLWILD, CA 92549-3617 30
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more points in the case of a right forecast. This is a correct strategic approach to build profits over time. It happens sometimes that I make 2 or 3 losing trades before I catch my profitable move. But it is not critical if I lose 3 points in 3 trades (9 points in total) if then I gain 20 or more points. In one profitable trade I make more than twice what I lose in 3 failed trades. On exactly March 7th, the Blog indicated a buy at 1361.25 futures points on the S&P, and by March 19th, a part of this trade had already been closed with a profit of 47 points. What are 3 points in loss when there is the potential for an easy 47 point gain? Really the loss is little thing, when you know how to limit it correctly… And this is what too many people do not know how to do, so that their risk eats away at their gains and they do not come out a winner in the end. Chart 1 was posted on the Blog about the trade on March 27th: The PFS and the Key Prices presented in The Polarity Factor System are used to provide these indications allowing one to follow the market and trade with a precise strategy that permits us to have continuous profits over the time, while keeping the risk under control for every trade. In my personal trading, the PFS and the price level strategy are the most important tools.
Chart 1 31
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th Two of the important Lows we recently had were on the 4th of October and 25 of November. On the Blog, by using these tools, we bought exactly on October 4 and on November 25. We did this not because we are infallible forecasters, but because we had an accurate timing model, and then waited for the exact price confirmations, then all we had to do was follow the trend. Following the PFS forecast, we had a clear indication of a low in late November, and we took our Long position accordingly catching a strong upward move.
Chart 2 shows the PFS for the last 2 months of 2011: Chart 3 shows the S&P500 Index for the same time in the last months of 2011. How would it be possible not to gain a lot of points when we knew in advance to be ready for an up push from the 25th of November? The PFS gave a clear indication of a Low, not on November 20th or 30th, but exactly between the 24th and 25th of November. In cases like these, it is really easy to make money if you are able to follow this clear strategy. So, the final goal is always the same. Cut your losses and leave the profits to run. If you are ready and you have the right tools, you can do it. It is very useful to have an accurate forecast or idea about the possible future scenario of the market. I do always have my forecasts to follow. But what is most important is to enter the market only when price confirms the forecasted direction, and not before. In the same
Chart 2 32
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way it is important to close all positions in the case that price does not confirm the forecast. No one is infallible, and sometimes I also make bad forecasts. The difference is that I’m here to make money, not to show others that I’m the best forecaster in the world. If I am wrong, and prices tell me so, I accept my error and I quickly cut the loss. In the end I will have some losses, but all of them will be small, usually not more than 3 points. This allows me to always be profitable at the end of the year, since my strategy is designed to do exactly this. I always say that a bad forecast is absolutely not a reason to make a bad trade. Since we will not place that trade without our confirming Key Prices, if we are wrong the market will clearly tell us so, and we will not take a significant loss, if any at all. I conclude with chart 4 that shows the PFS model for the Corn market. Within the Private Online Forum available to all the owners of The Polarity Factor System, we have been compiling further historical data in order to create PFS forecasting models for other stocks and commodities. My latest research shows that the PFS is even more accurate on some other markets than on the S&P 500, forecasting trends years in advance.
Chart 3 33
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The following chart is an amazing example of the power of the PFS for CORN in 2008. The PFS forecast called the top of the Corn market within 2 days, and indicated 4 clear trades that would have produced a 523 point profit. If you find these studies interesting, and would like to learn more about the PFS forecasting technique, the Key Prices and the risk management strategy discussed above, you can find further details on my new course, The Polarity Factor System, at the following link: www.sacredscience.com/Prandelli/Prandelli-Polarity-Factor-System.htm For confirmation of the forecasts discussed above, and to see direct proof of the potential to make money trading with these tools, see my Blog at the following link: http://iaminborsa-eng.blogspot.it/ Daniele Prandelli Email:
[email protected] Web: www.sacredscience.com/Prandelli/Prandelli-Polarity-Factor-System.htm Phone: 951-659-8181
Chart 4 34
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BEHIND THE VEIL A NEW APPLIED TRADING COURSE USING ADVANCED PRICE/TIME TECHNIQUES TO PROJECT FUTURE TURNING POINTS...
BY DR. ALEXANDER GOULDEN PRESENTING POWERFUL GANN STYLE FORECASTING & TRADING TOOLS! We are extremely happy to announce the release of a new and deep Trading Course. Behind The Veil presents powerful trading techniques based upon the deepest scientific and metaphysical principles. It unveils many mysterious and difficult theories and applications similar in approach to those of W.D. Gann and shows a trader how to use these principles to successfully forecast and trade the markets. DON’T MISS THIS VALUABLE COURSE!
Dr. Goulden, a Cambridge educated scholar, penetrated many of the hidden techniques used by Gann, and has developed numerous new and original trading applications based upon similar principles, leading him to the forecasting results in seen here. The techniques developed by Dr. Goulden will teach traders how to identify future pivot points following which profitable market moves ensue. All of the timing tools needed to forecast these pivot points and the geometric tools used to identify price entry and exit points, and to determine the nature of the ensuing trend are demonstrated in the Course. Based upon a deep level of metaphysical and cosmological insight, these techniques are easily applicable, clearly presented and shown through numerous chart examples in multiple markets, including stocks, commodities & Forex, in all time frames, monthly to minute.
FORECASTING RECORDS
In August of 2009, Dr. Goulden produced 7 forecasts in 7 different markets. His results were impressive, 7 out of 7, yielding 3,161 points in 7 days, with 7 trades, in 7 different markets!
Wouldn’t you like to forecast like this?
T-Notes 20-22 August. Result - a pivot low on 21 August, followed by a rally of 241 points to 2 Sept.
Soybeans 17-20 August. Result - a pivot low on 17 August, followed by a 710 point rally in 6 days.
Gold 17- 20 August. Result - a pivot low on 17 August, followed by a 780 point rally to 8 Sept. Platinum - 23/4 August. Result - a pivot high on 24 August, followed by a 607 point drop in 7 days.
NY Cocoa 21-24 August. Result - a pivot high on 25 August, followed by a 257 point drop in 4 days.
NY Cotton 21- 24 August. Result - a pivot low on 26 August, followed by a 426 point rally in 7 days.
German Bund 21-24 August. Result - a spike low on 24 August, followed by a 140 point rally in 7 days.
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THE PHASES OF A TRADING CAREER By Adrienne Toghraie, Trader’s Success Coach www.TradingOnTarget.com
For each phase of a successful trading career, there is a beginning, middle, and end. While some traders are good at starting a project, others are good at sustaining a project, and still others are good at completing a project. The problem for traders is that, if they are to make successful transitions to a new phase, they will have to have the skills needed to complete beginnings, middles and ends.
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No End in Sight This fact was underscored when a trader named Harry called for help. Harry was very upset at the prospect of going into the next phase of his life. This long-term, successful trader and money-manager felt old. Life was no longer exciting for him. Harry knew that changes would have to be made in his life, and he was keenly aware of the promises he had made to his wife and family about his departure from trading. In fact, he was at the point of selling his business to his partner and phasing out of the business completely. So, why was Harry in a panic? Harry was frightened thinking about his friends who had retired from trading. According to Harry, they were either bored with life or dead. Of the retired traders who still had a pulse, all wanted to get back into the game to feel alive again. Harry was also aware of the fact that he had never learned to enjoy life beyond his trading. He had difficulty relating to his wife, Edie, who hoped that when Harry gave up trading, their fighting would stop. Her reasoning was based on the fact that Harry excused his lack of loving involvement by saying that he was under too much pressure from trading. Harry would placate Edie with the promise, “One day, when I give up trading, everything will be all right.” But Harry did not know how to stop and smell the roses along the way. He had been highly skilled throughout his career as a trader, and then, as a money manager, but Harry had no concept of how to end things. Successful endings are critical to a trading career because they set the stage for the successful beginning of the next phase of life, whatever that might be. If a trader is afraid to end something and holds on too long, serious losses can result, not just from a single trade but from a transition that must be made. Fear is usually the issue as it was in Harry’s case. The solution is a new set of associations framing ending and closure as a source of opportunity and forward movement rather than a source of pain and loss.
Beginning Phase Of all of the traders I have worked with, Charles is one of the most skilled at completing the beginnings, middles, and ends of things. While he was still in college, he had started up a small business with a family friend, which he leveraged into a flourishing operation. Several years later, when Charles decided that he wanted to be a floor trader, he realized that he would need a mentor. Charles found a mentor by spending time observing floor traders while considering, “Who do I want to be like?” When Charles identified the trader he wanted to model, he found someone to introduce them. This introduction launched a life-long friendship as well as the start of Charles’ career on the floor. The young trader read all of the books his mentor read and, as quickly as he could, he molded his every action on his mentor’s pattern. For the next fifteen years, Charles was very successful, in his trading, in his marriage, his relationships with his children, and with the other people in his life. Charles was definitely a good starter. On the other hand, there was Todd, a trader who wanted everything now. From his need for instant gratification, Todd wanted to experience the feelings of success before he had actually achieved success. While he was skilled at creating these good feelings in his own mind, Todd forgot to put into his imaginings the details and steps needed to reach his goals. When Todd came to the floor of the exchange, he had no plan for learning his new profession, 37
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which required study and preparation. Instead, he felt he could learn by trial and error. The result was that Todd experienced so much error that it wiped him out of the business. Unlike Todd, successful beginners have a different set of associations, which make them willing and eager to do the things necessary to make this phase successful. They see beginnings as exciting and challenging. In addition, they see beginnings as the foundation for their project - not as an inconvenience or as the end in itself.
Mid-phase After fifteen years, Charles, our successful starter, realized that he had to get off of the floor. At forty years of age, Charles’ back and feet were aching and he felt that he was wearing out. So, Charles did what many floor traders do, he became an upstairs trader. Instead of resisting the change and clinging to the past, Charles saw the ending of his career as a floor trader as a step toward a new challenge which he eagerly anticipated. Charles was also aware that the transition from floor trader to upstairs trader is often called “the kiss of death.” To avoid sabotaging himself during this transition, Charles decided to approach this change as though he was starting a new career. Using his pattern of seeking the right teachers, he attended conferences, seminars and read books on trading. Once again, Charles succeeded in completing the transition. Within a year, he had developed himself into a good discretionary trader off the floor. Along the way, Charles had also learned about successful middles. He understood that there would be a second phase in his trading, after the exciting beginning period. During this phase, he would have to give up the excitement of trading on the floor, and develop his craft off of the exchange floor. During this mid-phase, Charles would accept the fact that his system and trading methods worked and that he would need to be content to reap their rewards. Now, he was in a new period where he just had to follow his plan. Many traders find this phase boring, so they sabotage their efforts, wanting to go back and rediscover the early excitement. When he looked at his life, Charles saw the rewards that becoming a successful trader brought to him and his family. He was exceptionally good at aligning his excitement with following his rules and the rewards he would get from being a good trader. Charles was a good, mid-phase man. The mid-phase of a trading business requires these qualities of character, which are needed for a successful trader. When trading gets boring, a trader must persevere. When inevitable losses occur, a trader must stick to his commitment. When the temptation is great to break your rules, a trader must have the integrity to hold fast to his trading rules and to his word to himself and others. He must respect the foundation in market study and research that helped him to get where he is. At the same time, he must be flexible in order to deal with the inevitable changes that will be encountered. He must be willing to continue to refine his system to make it the best it can be. And finally, he must be disciplined enough to keep his business afloat every day, which means that he has to attend to his physical and emotional well-being and do the things that are hard, but necessary for continued success. Like Todd, the “instant gratification” guy, Elliot wanted success immediately. Fortunately, he was also willing to pay the price and do the things that it took to launch his trading career 38
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and become very successful - until the period of routine set in. Then, Elliot found ways to create excitement by sabotaging his results. He would do this by changing his system, adding new rules and generally experimenting with what was tried and true. Inevitably, Elliot’s trading career was lost. Interestingly enough, Elliot not only acted out this pattern in his trading, but also in his personal life. He loved romance and seduction. Elliot wanted each romantic encounter to be another “Titanic” affair. However, when he finally did extend his honeymoon into a real honeymoon and married the love of his life, the routines of everyday life and dealing with the emotional issues that couples face daily, led him to separation and, finally, divorce. Isn’t it interesting how new romances no longer produce the same impact for Elliot because he sees them through the eyes of a wounded lover?
End Phase - to a New Beginning Charles, our successful starter and mid-phase trader, had a good life with his family because he knew how to balance his life. Charles had come to a point where he wanted more special moments with his children and grandchildren. To accomplish this, he would have to phase out some of his career as a trader. In typical Charles fashion, he decided to become a longterm investor. While he was still a day-trader, he looked into long-term investing and began investing in tandem with his day trading. As a result, making the transition to full-time investor did not involve learning new skills, but giving up one of his careers. Now, you can find Charles with his son and his grandson on the golf course, or with his wife in exotic places where they are experiencing the beauty of this planet and enjoying themselves.
Conclusion The beginning, middle and end of each phase of a trader’s career are important to the longterm success of his overall career. A trader must be able to carry his ambition to trade past the first few hurdles of learning his business, doing his research and building his system if he wants to have a trading career at all. A trader cannot rest once his business is established simply because he likes the challenge and excitement of starting up his business. He must sustain that trading business through its development and day-to-day activity even though it may become routine and boring. And finally, it is important to a trader’s life to know when to end his trading career. For a trader to make these transitions requires a tremendous commitment to his goals, a willingness to model those traders who are successful in each phase of the business, and the flexibility to make the adaptations required for that next step forward. ADRIENNE TOGHRAIE, a Trader’s Success Coach, is an internationally recognized authority in the field of human development for the financial community. Her 13 books on the psychology of trading including, The Winning Edge series 1-4 and Traders’ Secrets, have been highly praised by financial magazines. Adrienne’s latest book published by Wiley, Trading on Target, is available at Amazon.com. Adrienne’s public seminars and private coaching have achieved a wide level of recognition and popularity, as well as her television appearances and keynote addresses at major industry conferences. www.TradingOnTarget.com 40
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Diversification The Holy Grail? Kevin J. Davey www.kjtradingsystems.com
The Holy Grail. If you’ve been around trading for any period of time, I’m sure you’ve heard of it. The Holy Grail is the one trading strategy that will make you rich. Most trading vendors claim to have a version of this for sale, usually at a very reasonable cost. Yet, these vendors don’t seem to trade it themselves. Hmmm. Anyone testing trading ideas with backtesting software, such as Tradestation or Ninja Trader, usually finds The Holy Grail soon after working with the software. They get results similar to Figure 1. The problem is they have either “tricked” the backtest engine, or neglected to add in proper costs. Once the costs and tricks are accounted for, their actual results look nothing like The Holy Grail! So, does the Holy Grail actually exist? While traders may find their own personal Holy Grail, there is no universal strategy that will give profits to everyone who uses it. That makes sense, because if there was such a system, it would quickly be overtraded, and any edge would disappear. In 20+ years of trading, I have never found a Holy Grail trading system. BUT, I have found a good alternative - DIVERSIFICATION. Many strategies, traded together, can produce phenomenal results. And as it turns out, diversification is much easier to achieve than the mythical Holy Grail.
Figure 1 - A Typical Holy Grail Trading System 42
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The Power of Diversification
Figure 2 shows the hypothetical performance, in both walkforward historical testing and simulated live testing, for my diversified SFE Trading System. The total Net Profit, after commissions and slippage, is very good over the 4+ year test history. There are drawdowns, to be sure. And, some drawdowns are quite significant, although the trading system eventually overcomes them. The unique aspect of this equity curve is that it is not based on 1 trading strategy - it is actually based on 5 unique and independent strategies, traded all at the same time. Each of these 5 strategies, by themselves, is a decent - not superb - positive expectancy trading strategy. This is evident in the hypothetical results of Figure 3. Clearly, none of those equity curves alone is a Holy Grail system! The idea behind diversification is that each trading strategy will perform differently over time, with different times of peaks and troughs. But when many strategies are combined, the equity curve will be smoother, and the drawdowns will be less severe. Hopefully, it is clear from Figures 2 and 3 that you can create a very good system, one that is better than any of its component parts, by diversifying and trading multiple strategies at the same time. So, how exactly can you do this? There are a few basic steps.
Figure 2 - Hypothetical Performance, Diversified SFE Trading System 44
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Get unique markets
The first step to creating a diversified set of systems is to identify some different markets. Ideally, you want markets that have little or no correlation. You can create correlation matrices to help determine which markets, but it is not necessary. Just pick completely different market sectors. So, for example, you would not want a system that had both a Soybean Oil and a Soybean Meal strategy. But a system with Silver and Wheat would probably be OK. I personally do not calculate correlations for just the market, since 2 negatively correlated markets might have the exact same equity curve, if they were always traded in opposing directions. I save my correlation analysis for actual trading results. How many markets should you choose? The answer really depends on you, but based on the principles of Portfolio Theory, I’d recommend anywhere from 3 to 10 strategies. Less than 3 and you likely will not have enough diversification, and more than 10 would be both hard to develop, and hard to trade. When I developed my diversified SFE system, I looked at 5 different markets:
Figure 3 - Hypothetical Performance, Individual SFE Strategies
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I picked these both for their high volume and open interest, and also because many times they are not correlated. Note, though, that sometimes these markets are HIGHLY correlated. In the event of a disaster or other “Black Swan” event, it is entirely possible to have all 5 positions go against you in any one day. That is why proper risk management and position sizing is so important.
Get unique ideas and timeframes
Remember, your goal with developing an overall diversified trading system is to have component strategies which are varied. We’ve already made the markets unique, so the next step is to make the timeframes and the strategy ideas unique. There are an infinite number of unique strategies you can create. You can have counter trend strategies, trend following strategies, range bound strategies, etc. The possibilities are only limited by your imagination. The key is to have different strategy ideas for each market. So, for example, if you want to use a moving average entry (trend follower), use it for one market only. Other markets could then trade counter trend, or possibly use only overbought/oversold indicators. For timeframes, try to use as many different timeframes as possible. Having all the strategies work on 5 minute bars, for example, might lead to perfect correlation during a Flash Crash type scenario. Multiple timeframes will minimize this impact. The table below shows the strategy idea and the timeframe I used for my 5 diversified SFE
Figure 4 - Real Time vs. Hypothetical Performance 46
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trading strategies. As you can see, each one looks different than the other. Hopefully that will result in a smoother equity curve.
Create A Positive Expectancy System
Although there is a theoretical concept called Parondo’s Paradox, where a winning system can be created out of losing strategies, it is much simpler to just develop a positive expectancy strategy for each of the components. Of course, this is tougher than it sounds. The proper steps to developing a strategy could easily be its own article, and many have written books about the subject. Suffice it to say that strategy development is full of pitfalls and traps. And if you do not know what these traps are, then you are probably not developing the strategy right. But, the process is made easier because you are looking for good strategies, not great ones. Remember, you do not need to create the Holy Grail with any one strategy. Your goal is to create individual strategies that work reasonably well. Trading them together, as a system, will help overcome the shortcomings of any one strategy. That is because of the diversification impact. For this step, I recommend creating strategies based on 1 contract traded all the time. Do not apply any money management or position sizing to it. That can be done later, if you desire. As an example, here are some performance statistics for the 5 unique strategies I use in the SFE system. Note that none of these can be considered a “super” strategy, but all five are profitable, with good positive expectancy.
Check correlation of results
Once you have the individual system results, you want to make sure that the correlation between the individual strategies is low. For example, if the correlation of daily returns between any 2 strategies is above 0.9, you might have 2 systems which are too similar. The Net Profit might be better, but that is not as important as the correlation. As an example, the correlation analysis for the SFE strategies is shown below. Note the high degree of non-correlation in the daily returns of the strategies. 47
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The above correlation matrix is over a 4 year period. For shorter periods of time, the correlations will likely be greater. Although it is fairly easy to perform correlation analysis in Excel, you might find it easier to just combine the equity curves, and do an “eyeball” test. If the overall equity curve looks smoother than the individual curves, then you have probably successfully created a diversified system.
Putting It All Together
Once you have created a diversified system, one that satisfies your goals for rate of return and drawdown, it is best to monitor the overall system in real time for a few months. An example of this is shown in Figure 4. The objective with doing this is to verify the system performs in the future as it did historically, before you commit real money to trade. You can analyze the results statistically, or you can “eyeball” the equity curve. If you notice a distinct change in real time results, chances are your strategy was developed improperly. At this point, you can also create a position sizing approach. Since you are trading multiple systems, you need to be careful with the amount of margin you use, relative to your account size. If all your strategies are open at the same time, you want to be sure that you do not oversize any position, and thereby trigger a margin call.
Conclusion
Hopefully you now realize that diversification is one possible answer to the riddle of The Holy Grail. Creating multiple unique strategies, and trading them together, as I have shown with my diversified SFE system, is a great way to achieve diversification. This approach may get you one step closer to the Holy Grail. Kevin J. Davey is an award winning private futures, forex and commodities trader. He has been trading for over 20 years. In each of the years 2005-2007, Kevin achieved over 100% returns in a real time, real money, year long trading contest, finishing in first or second place each of those years. Prior to trading full time starting in 2008, Kevin was a quality assurance and engineering executive for an aerospace company. In addition to trading, Kevin also writes, consults and mentors other traders. Kevin graduated Summa Cum Laude with a BS engineering degree from the University of Michigan, and received an MBA degree from Case Western Reserve University. Kevin maintains a website, http://www.kjtradingsystems.com/, where you can find useful information on trading. Also, visit his site and learn how you can trade the same systems Kevin does.
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Know When to Hold‘em, Know When to Fold‘em!” Trading the Equity Curve! By Joe Krutsinger, CTA www.eTrackRecords.com Not all trading strategies work all of the time. One way to decide which strategy to use is to paper trade them all and choose those that show the most promise based on their equity curves. Be honest. Do you believe enough in your current trading strategy that you’d stick to it come rain or come shine? Say you have four or five losers in a row — will you continue to trade exactly the same way as before, or will you start bending your rules or perhaps even discard the particular approach completely? The truth is that most traders abandon a strategy after three or four consecutive losing trades, thinking it no longer works. In reality though, no approach will work well all the time. A trend-following strategy simply will not work in a choppy market, just as a top- and bottom-picking strategy is very unlikely to work in a trending market. It isn’t the strategy’s fault the market isn’t behaving in a way most suitable to its underlying logic. The questions you need to ask yourself are “When should I stop trading — or re-optimize — a strategy that obviously is not in tune with current market conditions?” and “How do I know when to start trading the same strategy again?” Alternatively, if you trade the same markets using several strategies, how do you know which strategies currently are the best to use? Another side of the same dilemma occurs when you dig up that age-old strategy you once abandoned because it didn’t seem to be working, only to discover several years later that it would have worked like a charm had you just been patient enough and given it some time. But there are tools that can help you determine when a trading approach is in sync with the market and when you’d be better off not trading it.
System Monitoring Tools A trader who lost more than $1 million trading pork belly futures was asked why he kept on trading the same strategy in the same market despite the obvious fact it wasn’t working. His response: “This is the only thing I know how to do.” The trader truly believed that he had just been a little unlucky lately and that the only way to come back was to continue trading pork bellies using the same strategy he always had, until his luck turned around once again. It never occurred to the pork belly trader that it doesn’t matter which markets he trades or what strategy he uses, as long as he makes money. He should have cut his losses by changing 49
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either the market he was trading, his strategy, or both, and not fall back on the original market-strategy combination until the elements showed some solid proof of being in sync with each other again. To avoid making the same mistake as the pork belly trader, you need to use a filter technique that will monitor your strategy’s performance from the inside, so to speak, and tell you when to trade or not trade a particular model on a particular market. The JoeKrut Diff and JoeKrut Switcher indicators are tools that enable you to monitor (but not trade) a system during its drawdown periods so that you can begin to trade it as soon as it shows signs of starting to perform well again. Paired together with any type of trading strategy, these two indicators may increase overall performance and strengthen your bottom line. The JOEKRUT SWITCHER indicator was developed as a 30-day moving average of your strategy’s equity curve. (30 on a daily bar to measure a month; 250 on a daily bar to measure a year; I use 240 on a 60 minute bar, 2880 on a 5 minute bar and 14400 on a one minute bar) The idea is to only trade a strategy when the continuously paper-traded JOEKRUT SWITCHER is rising. For easier and quicker interpretations, the JOEKRUT DIFF indicator measures the difference in the JOEKRUT SWITCHER indicator from one day to the next. When the JOEKRUT DIFF is negative, the JOEKRUT SWITCHER is declining and, consequently, the strategy should not be traded in real-time.
A Free Basic Strategy To illustrate how these tools work, we’ll show how a trading system called JK-Call Buyer (written in 2000 and published with the original version of this article in September of 2000 Active Trader Magazine) performs with and without them. The strategy I am giving you has been developed over the full history of the S&P 500 futures up to September 2000 with no changes made to the rules or the logic, except I have made it a one input system you can test on items other than the S&P 500. The strategy works on end-of-day data and gives all trade signals as market orders the night prior to execution. Here it’s illustrated with the S&P500 futures, but it can be used on individual stocks as well as buying at-the-money call options. The strategy exits all trades after 10 days regardless of any other factors. The rules are as follows: When you have no current position, enter long tomorrow at the market if: • today’s seven-day relative strength index (RSI) is greater than yesterday’s seven-day RSI; • today’s close is below the close of seven days ago; and • today’s close is less than or equal to the average of the last seven days’ closes. Close of Today is higher than the Open of the day Exit tomorrow at the market if: • today’s close is higher than the average of the last seven 50
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days’ closes, or • you have been in the trade 14 days. For those of you who use TradeStation, the Easy Language code is: Input:VarA(7); Condition1=RSI(c,VarA)>RSI(C,VarA)[1]; Condition2=C < C[VarA] and C<=Average(C,VarA) and C > O; If Condition1 AND Condition2 then buy next bar at market; If MarketPosition=1 and (C > Average(C,VarA) OR BarsSinceEntry>VarA*2) then Sell next bar at market; Table 1 (below) shows the strategy’s simulated performance statistics for 20 years: April 13, 1992 to April 12, 2012. .
The strategy had more than 77 percent profitable trades for a total profit of more than $335,000 51
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and a maximum of three losing trades in a row. But this strategy, like any other, will under-perform from time to time. The next step is to see how the JOEKRUT SWITCHER and JOEKRUT DIFF indicators can improve the performance of this basic system. By applying the JOEKRUT DIFF and JOEKRUT SWITCHER filters described earlier, you can avoid trading the strategy when it is out of sync with the current market action. Figure 2 (below) shows the same strategy and market as Figure 2 just the equity curve chart with the “bad area” marked in yellow:
With the addition of the JOEKRUT SWITCHER indicator (the yellow line in the middle of the chart, with red and green stop and go indications) and the JOEKRUT DIFF indicator (the white line at the bottom of the chart). Without changing the rules of the system, do this: When the yellow line in the middle chart is rising, trade the strategy; when the yellow line is falling, exit all real-time trades but continue to paper trade the strategy and track the hypothetical equity curve until it starts to move back up again, at which point you resume the real-time trading. For easier interpretation, you can look at the white line in the bottom chart, which will move into negative territory as soon as your strategy starts to under-perform and the JOEKRUT SWITCHER indicator starts to sink. In the case of this strategy, you can see that over the two years Oct 2010 through Oct 2002 the Switcher went RED three crucial times, helping you avoid much of the trouble in the yellow box of figure 2. 52
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Figure 3 (Below) shows the trade signals generated by applying this strategy on the S&P 500 futures from 2000 through 2003.
The simplicity of the strategy should work as an insurance against it breaking apart when applied to future, unseen data. If you’re using several different strategies on the exact same market and the exact same timeframe, you could simply look at the JOEKRUT DIFF indicator for each strategy and trade the one that has the highest value, which should be the one where the market and the strategy are the most in tune with each other. Remember the JoeKrut Diff, Switcher and JoeKrut Profit Size can be applied to almost ANY system, without opening or changing the code! By going to : www.eTrackrecords.com\switcher You can get the eld and the tsw for use on TradeStation 9 The eld will include: JK Call Buyer,
a strategy; JoeKrut Switcher, JoeKrut Diff, and JoeKrut Profit Size: Indicators. Any trouble or questions? Call my office at 573224-3366 or email me at:
[email protected]
Disclaimer Regarding the Many Illustrations of Systems and Performance Results in This Publication: THERE IS A SIGNIFICANT RISK OF LOSS IN FUTURES TRADING. THE USE OF STOP ORDERS DOES NOT GUARANTEE LIMITED LOSS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
The performance summaries provided above are provided to inform persons considering this system. The performance assumes one contract of the security traded and $0 round turn for brokerage commission and $0 per contract for slippage. Mr. Krutsinger does not manage accounts for clients and never has had power of attorney over accounts trading these systems. Mr. Krutsinger is not advising or soliciting anyone to trade or use any system illustrated in this article. These are educational examples of the art of system writing and development that he wants to share with you.This information is not to be construed as an offer to buy or sell futures. This information does not purport to be a complete statement of all material facts relating to futures. We gratefully acknowledge TradeStation Technologies, Inc. for permitting reproduction of the above results produced by TradeStation software. TradeStation Technologies, Inc. is in no way associated with or responsible for these results.
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DOWNLOAD THE FREE TOOLS NOW
ATTENTION SYSTEM TRADERS
DownloaD the FRee SyStem anD InDIcatoR toolS to help! This is the exact same system (“JK-Call-Buyer”) Joe Krutsinger discussed in his article, “Know When to Hold’ em, Know When to Fold ‘em”, in this issue of Trader’s World. The JK-Call-Buyer system has been extensively tested over years of data on the S&P 500. Now you get it for FREE in OPEN CODE! Research on this system is featured in Joe’s article in Trader Magazine. With this system, you will also receive the Fully Automated Trading System Tool, the “JoeKrut Switcher” Indicator, designed by Joe Krutsinger, CTA. JoeKrut Switcher tracks the equity curve of the trading system, allowing you to see a quick heads up when it starts to move into drawdown. It will also signal when you are starting to come OUT of drawdown. This system indicator will also come with the JoeKrut Diff and the JoeKrut Profit Tools. For more info and a video briefing on this system and indicator...CLICK HERE
WHo Is JoE KRutsIngER, CtA? Joe Krutsinger, CTA has been developing fully automated trading systems for over 36 years. He has an article entitled: “Know When to Hold ‘em, Know When to Fold ‘em!” inside the current issue of Trader’s World Magazine. The article provides information and research on this system trading indicator. 54
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Download Joe’s Trading System and Drawdown Indicator Toolset for FREE!
CliCk Here To requesT iT Now
Visit Our Web Site:
etrackrecords.com/switcher
Where Traders Go Wrong Five Reasons Why Traders Fail By Bennett McDowell, President & CEO TradersCoach.com
We have found that traders usually fail for five primary reasons: • • • • •
Lack trading skill Lack risk capital Improper trading psychology Lack of support Lack of experience
1.) Lack Trading Skill: Usually new traders are so eager to make a killing in the market that they are just too impatient to learn how to trade before trying to trade. Basically they either wing it, or think they know what they are doing without objectively determining their skill level. If new traders can get the dollar signs out of their eyes and focus on developing their trading skills in a stress free fun environment, they will be off to a good start. We encourage new traders to “paper trade” first so that they can practice their trading skills in a risk free and stress-less environment. Our feeling is that if you cannot be profitable “paper trading,” then 55 www.tradersworld.com May/June/July 2012
you will not be profitable trading in the real markets. “Paper trading” is an excellent way to practice trading. Once you are consistently profitable paper trading over a period of time and you feel ready for the real markets, then try trading in the real markets. The key to properly using “paper trading” effectively is to be sure you are consistently profitable, you will feel it when you are! If you do not feel it, then you are not ready to trade the real markets. Wait until you are ready. Do not deceive yourself here, it is very important. If you feel ready and then trade the real markets and become unprofitable, then your problem is more than likely with you psychology. If this is happening to you, stop trading the real markets, and go back to paper trading and seek some help with how your psychology is negatively affecting your trading results. The key here is to be persistent until you do have the skill to excel. It takes work along with time and patience, but with both it can be done.
2.) Lack Risk Capital: In order to be a successful trader, you want to create a stress free trading environment. To help do this, you need to be trading with risk free capital. By this I mean do not use money you cannot risk, like money for rent, food, and to support you family needs this month! It amazes me how many traders do this. It is a recipe for failure and possible disaster. Don’t do it! If you love trading, but lack the necessary funds to participate, wait! Instead “paper trade” and develop your trading skills so when you have the money to trade, you are ready.
3.) Improper Trading Psychology: How do you know you have the improper trading psychology? Here are a few things to look for. • Feeling too much stress • Successful “paper trading” and not successful when trading in the real markets • Getting mad or too joyous depending on your trading outcomes or results (excessive highs & lows) • Feeling fear • Can’t “pull the trigger” • Fail to exit trading positions at stop loss points • Exit trades to relieve anxiety • Impulsive trading, etc. When “paper trading” you are apt not to feel the psychological impacts of real trading. Thus, “Paper trading” will not generate most of the above psychological feelings. However, when making the transition from “paper trading” to real trading, the psychological issue may be felt and have to be dealt with just like when you learned the skills of your trading system. When you hear that trading is both an “art” and a “science” it often refers to the combining of psychology and feelings with that of a technical trading approach. 56
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In order to be successful, the psychology has to be mastered and managed.
4.) Lack Of Support: Because of the many challenges in trading and because of dealing with issues that require objectivity, new traders and experienced traders alike may need a support system in place. TradersCoach.com recognized this need early on and has developed Coaching/Consultations and Mentoring Programs to provide this needed support to traders worldwide. Many top athletes and executives incorporate this same coaching and support regime into their busy schedules in order to excel at their chosen field. It is essential! Remember there is no amateur trading league. Every market you will trade is made up of expert traders. There is no little league so to speak. Whenever you enter a market, you are entering a championship arena where to win you must be one of the best in the arena. Therefore your skills have to be top notch before you enter the markets. To become top notch, you will need to practice, practice, and practice some more until your skills are at the championship level. Sorry but that is the way it really is! So in order not to lose your trading money, you must not enter the markets before you are ready. And to get ready you should “paper trade” and develop your skills first. If you enter the markets before you are ready or skilled, it will be a mistake!
5.) Lack of Experience: Many novice traders fail to realize that when they enter a market to begin trading, that all markets are championship arenas. An unprepared trader will be trading against prepared traders and will find it difficult to win. We strongly suggest that you do not trade with real money until your “paper trading” has been profitable for awhile. The time it takes will depend on the time frame in which you are trading. For example, if you are a day trader, you may do 30 to 100 trades within 10 days. If you are a position trader, you may do only 100 trades a year. The idea here is to give yourself enough time to experience different market conditions and see how you do thus improving your trading skills. Once you are doing consistently well “paper trading,” then you maybe ready to start trading with real money. Once you start trading with real money, you will experience the psychology of trading. If after trading with real money you experience poor results, you know you have a more than likely have psychological issues that are effecting your trading. With experience, you will learn what your psychological strengths and weaknesses are and begin blending them into your trading to improve your results.
Professional Trading Coach: You may need help to do this, which is why we provide private consultations to traders who need help in this area. To learn more about how we can help you achieve results, visit http:// beacontraderscoach.com/
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Don’t Be Fooled
H
By Brady Preston
ave you ever spent a lot of time modeling a market, and then as soon as you turn it on it gives you unexpected results? A trader’s usual response to this is to deactivate it and blame it on a failed system or over- optimizing. In reality, it may not be a failed system but poor statistical sampling during the modeling phase. In fact, this system could be performing perfectly according to the population, but you are comparing it to the sample. When developing a system, we must remember that it is a sample of data versus a full population. This condition worsens as we apply filters and minimize the sample further. This is why it seems that optimization fails to work in the future but in reality you are just receiving a more acute sample of the population. The big question we should be asking ourselves is “how close is the sample to the population?” When modeling markets, traders can often be fooled by an error in the sampling population. Sampling errors occur due to the fact that we are estimating a population characteristic by using only a portion of the population size. Therefore, a sampling error is the difference between the estimate found in the sample and the actual population value. Sample errors could affect every value on the trading summary sheet due to the fact that our sample did not give us an accurate estimation of the true population. For a trader this can be troublesome because we like to feel certainty in our back-testing results. We can achieve more certainty in our modeling if we follow these general rules about sampling: • The sampling error will generally decrease with an increase in the sample size • The population size will have a great impact on the sampling error • The more variability in the population, the greater the sampling error • Setting out an appropriate sampling plan can improve a sampling error • Using multiple methods to estimate the population characteristics
Increasing the Sample Size The most obvious way to produce a large sample size is to use robust systems. As a trader, if you want larger sample sizes you need less-restrictive filters, patterns and triggers. Generally what happens is that a trader will back-test a restrictive signal, receive very good results and believe that he has found a profitable signal. What is really happening is that he has restricted his sampling size and has ended up with an outlier that will most likely not produce the same results in the future. We must also remember that adding more signals to a model is not increasing the sample size, but rather it is increasing the population size, which gives the illusion of a large sample size. If you want to back-test restrictive signals, I would recommend applying the signal to other similar markets. The reason for doing this is that when you add more markets you are not increasing the population size, because the given market conditions are already unlimited. For example, if I wanted to test a restrictive signal 58
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on the E-mini S&P, I would also verify the results on the E-mini Midcap, E-mini Nasdaq, E-mini Russell and the E-mini Dow. By doing this we are keeping the population sizes the same, but increasing the sample size. I would personally feel much more comfortable trading a system that worked on many markets than a system that only worked on one market. A system that works on many markets tends to absorb market change better than a single-market system. When choosing a group of markets to test the signal I find it is best to use is a correlation table to find markets with similar price action. The image below summarizes how filters affect the size of the sample. The blue circle is the population, which represents every possibility given all market conditions. The red circle represents a sample of the population, because we have a limited amount of market conditions. The yellow filter is what happens when you apply a filter to your sample, which then filters out some of your sample. The turquoise area with the label “AND” is what happens when you connect two filters using the “AND” operator. The yellow, green and turquoise area would represent two filters connecting with the “OR” operator. Just the yellow and green areas would represent two filters connected using the “XOR” operator.
Population Size The smaller the population, the smaller the sampling size can be. In terms of trading, it can be very hard to determine the size of the population because the population is any possible outcome. There are two factors that will affect the population size -- the signal trigger and market conditions. We have no control
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over the market condition so this means that we must adjust our trading triggers to decrease the population as much as possible. The only way to really limit the population size is to limit the number of triggers in the model, because we have already seen how filters only decrease the sample size. The other problem is that the population size will always be unknown because we are unsure of the market conditions, meaning that we have not seen all market conditions. Consequently, the best idea for a trader would be to limit the number of triggers and increase the sample size as much as possible.
Variability in the Population A varying population will create a sampling error because the probability of catching an outlier becomes larger. A varying population will primarily come from the market being modeled. Traders will often find a lot of variability in the population when modeling trend following principles. Trend following modeling tends to win large trades that will make the system profitable. The hard question then becomes “is this sample with this large trade representing the population fairly? Or is this large trade the only one in the population?” The best way to determine this is to apply this model to other markets to determine if they also have large trades in their population. Another rule I use is to see how much the largest trade made of the overall profit. If you were to remove the largest trade the model should remain profitable. Don’t be fooled into an unprofitable model just because it had one large losing trade. Look for models with consistency as they will most likely be a better representation of the population.
Sampling Plan One of the most important criteria when modeling markets is to make sure that you have set out an appropriate plan. The plan should include a system design and an estimation of the outcome. The system design phase will help insure that you are not developing a system on the fly during the modeling phase. It is a common problem when modeling that we look for ideas from the back-tested results instead of using principles in the market. By creating a design plan the trader is more likely to stick to principles and this should reduce the sampling error. It is always a good habit to estimate the results before you back-test. From prior research, the trader should have a good understanding of what to expect from the model and how it will most likely perform. For example, a trader should be alerted if his long-term trend following model returns 95% winning trades with a win/loss ratio of .50 because it goes against trend following principles. A trader should have a good understanding of the expected trade frequency, percentage winning trades, trade length, etc. before modeling starts.
Other Tools to Help View the Population The main objective to modeling is not to understand the sample but to get the clearest possible picture of the population and what may lie ahead while trading the model. One of the first things I will do to test the sample is to calculate the consecutive losing trades. Calculating the consecutive losing trades is one of the easiest and fastest ways to see how close the sample is to the population. I do this because traders can be fooled sometimes by the order of trades, which can lead to a smaller drawdown and a lower number of consecutive losing trades in the sample. For example, look at the charts below; the first one was the exact results I received from the back-tested trades and in the second one I randomized the trade order.
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The order of the trades did not change the primary stats such as winning percentage, average trade and largest loss. The only significant difference it made was that the drawdown decreased, which is a very important stat to a money manager. The best solution I have found to get around this is to generate new trades from current given stats about the model. I find the frequency of each trade happening in the sample and then generate new trades using this information. The chart below shows the model in figure 2 with 150,000 new trades generated using the stats method.
The two main stats that I am interested in are the consecutive losing trades and the drawdown. As you can see the drawdown has gone from $9,350.00 to $14,606.15 and the consecutive losing trades went up to 19. If the results came back and the consecutive losing trades went down, it would most likely mean that the trades from the model were negative dependant and the trade probabilities would have to be adjusted given the last known trade. Overall, this will give you a better picture of the population and this will allow the trader to better understand how close the sample is to the population, providing a better picture of the road ahead. My recommendation for systematic traders is that they should keep their models robust, giving them a clearer picture of the population. They should also understand how filters work and should not use them to make their model profitable, but to filter out undesirable conditions. Lastly, traders should start using multiple tools to get a better picture of the total population.
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NOTES ON GAP THEORY Part 2 from “Novy Principles of Market Flow By Leonard Novy
www.trainingfortraders.com
...Gap Trading Part 2 In this article, I am going to continue my talk about Gap Theory as Part 2. You can find Part 1 in the last Trader’s World magazine issue #50 Dec/Jan/Feb 2012 • How and Why Gaps are Covered • Old Gaps vs New Gaps, Do Gaps expire? • Gap Coverage in Related Markets and Other Games
How and Why Gaps are Covered Gaps are inflection points. Inflection points are price areas where traders are buying or selling the market with urgency so that there is a quickness in the move that leaves a price area thinly traded. A few decades ago, prior to electronic markets, we were able to find gaps intra day where bid offers were suddenly and wildly separated due to a report or a surprise news item. This of course was when open outcry was the norm for order placement. The ability to place trades in a micro second in the electronic forums have all but eliminated intra day gaps . Gaps are now created over night between “pit sessions” as Asia and Europe take turns trading the same market during their “pit sessions” It is therefore important to use a pit session daily chart or my favorite, a pit session hourly chart so that you can see the gaps. When it is our turn to trade the ES as an example, the market may be trading above the high of the last bar, or below the low of the last bar of the pit session from the previous day. For us this gap would be a price area that we have not explored. This generally causes day traders to fade the gap, to trade in the opposite direction of the opening flurry. It is presumed that the market may have gapped up or down on a report or that the Europeans may have pushed the market into an overbought or oversold condition on a short term basis. See chart below
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As you can see, the markets have been very directional lately with traders having very little success fading the gaps as the penetration back into the gap is very shallow before resuming in the direction of the gap. This is indicative of highly emotional markets.
Old Gaps vs New Gaps, Do Gaps Expire? The answer is no and yes. Gaps in commodities that are tied to supply and demand considerations tend to stay relevant because commodities vacillate in wide swatches of price 64
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movement. A low price in a commodity is not a bad thing. Gaps in stocks and indexes can become fossilized over time since the general pricing of equities rises to higher plateaus over a very long time. I don’t expect to see the Dow Jones trading at 300 ever again whereas I expect to see gold trading at some point in the future at $300 an ounce. Common gaps (gaps created within consolidations sometimes called Pattern Gaps) are expected to be covered sooner than later, but they can remain uncovered for quite a long time. I have seen common gaps remain uncovered for years. It is a good thing to keep a list of all common gaps. Very old gaps lose their importance as related to old news but if the market approaches a very old gap it still takes on importance as a target. Traders are conditioned to using gaps as targets
Gap Coverage in Related Markets and Other Games Related markets are those markets within groups, sectors, or categories that tend to move in the same direction together, albeit at different rates of speed. In the example below the chart on the left is the hourly E-mini S&P 500. The chart on the right is the hourly E-mini NASDAQ 200. The S&P 500 generally represents the broad based economy and in recent times has been affected by the strength and weakness of banks and financial centers throughout the world. The E-mini NASDAQ 200 generally represents technology. These two indexes move in similar directions and both are subject to higher or lower gap openings on the same day. But how these gaps get covered is an interesting and informative matter. There was a gap higher opening on the charts on March 26. Then on March 28 the ES came down to cover it’s gap. The NQ however did not cover it’s gap. That information would imply that the NQ is holding up better than the ES but the common gap on the NQ is still unresolved and a target for the traders as an area of better support. The next day on march 29, the NQ finally drops into it’s gap and then rallies. The same trading contour is duplicated on the ES while it surpasses it’s gap to the downside before rallying.
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The rally that ensues in both markets leaves the NQ gap behind still not entirely covered. This would imply that both markets would be subject to falling back down to finish off the job of covering the NQ gap. And that is exactly what happens on the 4th of April. The benefit to having this information is that if you were trading the ES you could make better decisions about pending changes of direction in the market as well as better targeting areas of support and resistance by also watching the NQ There is always a chance that a common gap can be left uncovered in urgently driven trending markets but that would be the exception rather than the rule. In summary it took 3 attempts for the NQ to entirely cover it’s common gap created on March 26. The ES covered it’s March 26 gap on March 28 in one attempt but then moved in tandem with the turns on the NQ as it continued to struggle to eventually cover it’s gap. For more on Novy Principles of Market Flow please contact me at
[email protected] or 760 841 1522 and go to www.trainingfortraders.com 66
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The Price of Certainty Part One By Joel Rensink
”The game taught me the game.” – Jesse Livermore Extraordinary Achievement Is Less about Talent Than It Is about Focus. Most people think you have to be very smart to be an effective trader. It certainly doesn’t hurt to be smart, but being smart is definitely not enough. In the pits I saw many very smart traders lose all their capital within a year of starting. And having lots of money is no guarantee either. More about this later.... I’m sure a number of you have read Malcolm Gladwell’s new book, Outliers- The Story of Success. If you haven’t, you’re missing out. It’s a “must read” for traders. He’s also written The Tipping Point and Blink. Two exceptional books for traders, because The Tipping Point helps you understand the way things (think: people and markets) work in the real world, and Blink explains how people actually think about thinking. Both books can help you formulate your own permanent edge in trading. Outliers, takes away the mystery about how exceptional people (human outliers) succeed according to consistent principles. For example, it’s been proven that someone with an IQ of 150 is much more likely to reason better than someone whose IQ is 80. The same idea holds where the comparison is even closer between IQs of say- 100 and 130. But this relationship isn’t as consistent when one compares two people who have relatively high IQs, an adult of 130 and another adult whose IQ is 180. The higher you get past, let’s say, an IQ of 110 -- patterns of attainment because of relative intelligence stops being much of an issue. So far, so good for traders. 67
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It seems that IQ has a threshold. Past a certain threshold, you’re smart enough to accomplish just about anything. Einstein’s IQ was 150. My barber’s IQ is 160, and his greatest passion is shooting skeet, not splitting the atom. Individual desire becomes the largest factor after that threshold is past. Psychologist Robert Sternberg has done a lot of research about what he terms “practical intelligence”. It is about the difference between being “book-smart” and “street-smart”. Practical intelligence is more procedural in nature. It is about your knowing how to do something without necessarily knowing why you know what you do. It’s not knowledge for its own sake. It’s knowledge that helps you read situations correctly and get what you want. Cause-and-effect kind of intelligence. Practical intelligence is the kind of intelligence that doesn’t necessarily test well when IQ tests are taken. You can have lots of book smarts and very little practical intelligence or lots of practical intelligence and not much book-smarts. Or you can have lots of both. This means that if you have enough intelligence to know the intense preference of a $500 trading profit versus a $500 loss, and know how and why either of them can happen -- you meet the minimum qualifications for success in trading. Outliers suggests strongly that just because people would like to excel at some skill doesn’t mean they will. And I agree with Mr. Gladwell – especially as it applies to highly competitive arenas like trading. There are heavy personal costs involved. Malcolm Gladwell introduces a concept of approximately 10,000 hours of effort being required to become a human outlier in any field of endeavor. He compared diverse groups of talented/skilled individuals such as soloists, pianists, chess Grandmasters, basketball players, composers like Mozart, Canadian hockey players, computer programmers. Even groups like the Beatles or individuals with the success similar to Bill Gates -- can credit most of their success to spending more than ten years in the preparation of their skill sets. What is so illuminating from reading Gladwell’s book is the kind of focus necessary from the outlier individual. Their 10,000 hours or more of intense focus typically results with little initial monetary gains. Even though most of these outlier types become very successful financially, money is not the initial or prime driver to the outliers’ success. The incredible secret of their success? They love their work. Do you love the markets and market research so much that you’d do it for years without a profit? In 1995 I met an incredibly determined trader, Doug Seifert, who barely survived on the receipts from driving a cab, because he didn’t make money trading. Anything he made extra while driving cab, he lost in the market. He traded on borrowed seat, posting red ink every year for 28 years until he finally had his first marginally profitable year in 1998. In 1999, he earned 3 times the size of the considerable losses he accumulated over his previous 28 years. And didn’t have another losing year for the rest of his life. He told me that it was as if the market all made sense to him. And he couldn’t understand why he didn’t see it before. (This was the most extreme case I ‘ve ever seen. I do believe I would have given up if I wasn’t profitable after a year. In Market Wizards (1989) Tom Baldwin stated that “if you can afford to stand in the pit long enough you HAVE to pick it up. It is just a matter of how long you 68
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can afford to stand there before you do.” I didn’t think that was necessarily true until Doug proved the concept. He had determination!) If you had the choice of being a private trader making $100,000 a year or being a Wal-Mart greeter every day for the rest of your life for $100,000 year – would you take the former? I know I would. Being able to govern your own time and effort, have the opportunity to get better at a skill, and have a situation where you can scale up your reward versus your input – is meaningful. Being a greeter at an anonymous box store for even twice the money a year is nowhere near as satisfying as living by your wits, and the certain knowledge that your actions create your profits. It is not necessarily how much money we make that ultimately makes us happy. It’s whether our work fulfills us. This brings up the question: is there any way of getting around the 10,000 hour rule? My answer: yes and no. You’ll see why shortly. A commonly heard statement is, “What one man can do, another can do!” I absolutely know this to be true, if are talking about similar men, with similar abilities and temperaments. The two-pronged question for most of us is, how long will it take me and how much will it cost? Or, what is the price of certainty? It would stand to figure, if someone has already spent more than 10,000 hours becoming successful in trading, you should be able to follow in their footsteps and become as successful as them in much less time. Ideally, that would work. If you were almost identical to them for the skill at hand. It rarely does though, because of what I call the “Tiger factor”. Currently worldwide, there are an estimated 60,000,000 golfers. In the United States alone there are an estimated 25 to 40,000,000 golfers. Only a very small percentage of these players are considered pros. Pros get paid. Professional golfers are basically divided into two main groups. The majority of professional golfers (at least 95%) make their living from teaching the game, running golf clubs and courses and dealing in golf equipment. Like Kevin Cosner in the movie “Tin Cup”. A very small but high profile group of professional golfers earn their living from playing in golf tournaments. Like Tiger Woods, and thousands of lesser players, making much less than Tiger. Having watched Tiger’s career for years even though I am not a golfer, I ‘m impressed with the fact that he was introduced to golf before the age of two, and played it constantly because he loved it. He had support from an athletic father, who was extremely supportive of his son’s interest. I also find it telling that Woods’ father, Earl said that Tiger first beat him at golf when he was 11 years old with Earl trying his very best. From that point on, Earl lost to his son every time they played together. Tiger first broke a 70 score on a regulation golf course at age 12. (Source: Wikipedia.org). Of the last 14 years, Tiger Woods has been the year-end, number-one-ranked golfer for 11 of them. As well and consistently as he has played in the last two decades, today he is ranked eighth in the official World of Golf. Tiger definitely has spent more than 10,000 hours honing his craft. Probably more than 30,000 by most accounts. The thing is, his current competition at the top of the leaderboard, like Luke Donald and 69
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Rory McIlroy (who started playing at 18 months old), to mention just a couple - have all spent at least 10,000 hours of playing too. All these guys have watched countless golfing videos of previous pros, had coaches helping them..., but nothing hones skills like the experience. They love the game and they love to win. A new golfer can analyze Tiger Woods’ swing, training regimen, attitude, etc. But if he wants to have results similar to Tiger’s, he will have to make golf his own. By working at least as hard as Tiger. By experiencing the bad lies, the wind, rain and the pressure to perform that a real pro has to handle. Here is the parallel to trading. You can have an edge shown to you by another winning trader, but to get great at trading - the countless trades you execute yourself will actually teach you how to trade! Each trade you take will be different from every previous one, with different news vying for your attention minute-by-minute; with emotions erupting you didn’t believe you could have. And real losses of real money faster than you thought possible. Relatives and friends who tell you that trading is nothing but gambling and you are a fool. A known winning trader – Victor Sperandeo, was interviewed in the New Market Wizards (1992) by Jack D. Schwager concerning his views about teaching others to trade. He said that over a five-year period, he trained 38 people. Of the 38 people, only five (13%) made money. Each of these people spent months with him side-by-side, while he taught them everything he knew about the markets. One of the most profitable traders Victor ever taught was a high school dropout who seemed to be afraid of everything. So he took losses quickly. Another guy he trained was a certifiable genius, with a 188 IQ, but never made any money from trading in five solid years. Victor believes the key to trading success is emotional discipline, and that intelligence takes a backseat to it every time. “To be a successful trader, you have to be able to admit mistakes. People who are very bright don’t make very many mistakes. In a sense, they generally are correct. In trading, however, the person who can easily admit to being wrong is the one who walks away a winner.... In trading, you can’t hide your failures. Your equity provides a daily reflection of your performance. The trader who tries to blame his losses on external events will never learn from his mistakes. For a trader, rationalization is a guaranteed road to ultimate failure.” Mr. Sperandeo was asked if he had to do it all over again, how would he proceed? Victor said he would look for people who had the ability to admit mistakes and take losses quickly. This is because he believes that most people look at losing as a personal flaw. So when it comes time to take a loss according to their game plan, they deviate from the game plan because it’s just too hard emotionally, to take the loss. Many new and even seasoned traders agree that trading psychology makes it almost impossible to learn to trade correctly. So is the solution trading a mechanical trading system, preferably one designed by a pro? From what I’ve experienced, it comes down to your love of the game, and your personal focus. For more than 20 years, trading systems; particularly mechanical trading systems have been all the rage. For the last decade; short term trading systems-- primarily trading the E-Mini S&P, and in Forex- Expert Advisor programs have been the most popular. For those of you who have traded them, how successful have you really been? 70
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Have you tried one system after another with bad results? You’re not alone. Tens of thousands of traders have tried systems that they’ve failed with. (My #1 recommendation: Avoid multiple indicator systems like the plague. With few exceptions they are a black hole for your mind and your money. More on this topic in The Price of Certainty, Part Two) One thing I’m certain of is this: you need to find an approach that you not only are comfortable with, but one that suits your personality. (Otherwise, you’ll have too much difficulty executing your trades, and especially taking losses.) Maybe you want to trade multiple markets on the same time-frame. Or you might want to trade a single market on numerous time frames many times a day. Maybe you love options or some form of arbitrage strategy. Unfortunately, in my experience, less than 25% of you will start trading effectively with the first method you discover. But it is essential – whichever methodology you settle on – that there is no conflict between your personality and your trading style. Unless you want to go through severe mental reprogramming which can take precious additional time. And regardless of which markets and time frames fit your personality, it’s essential to find (at least at the beginning) a simple approach based on a recurring market principle. Not necessarily mechanical, but the concept you trade needs to have well-defined risk. Or money management will be impossible. Successful trading is a business of low risk entries, and reasonable exits. It has to be done with proven mathematical edges based on unchanging principles leveraged with reasonable amounts of capital. Because the Tiger’s of the trading world – are trading with every advantage possible. After years of reading and studying charts, and a worn copy of How to Make Profits in Commodities, I started off trading long, narrow range breakouts on daily charts. I was profitable my first year. And the next 3 after that. Even though it isn’t considered a sexy, “new age” trading method, at least half of my yearly profits still come from trading breakouts from narrow ranges. I’ve enjoyed more than 30 years of researching virtually every reasonable method possible. I’ve tested promising ideas for months with Tradestation and newer simulators, realizing that negative test results are just as important as positive ones. Trading has more opportunity now than ever before. The Price of Certainty, Part Two will deal with the monetary costs of trading. How much capital do you really need to become a functional trader? Can you really afford to trade? How much money can you expect to make? Joel Rensink has been a professional futures, floor and forex trader for more than 30 years. In addition to his daily active trading, he is a consultant for determined traders, trading firms and hedge funds seeking robust trading models. For any comments or questions on the article above or the markets, e-mail him at:
[email protected]
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The Vibrational Positioning Sequence (VPS) A Market Forecasting Model based on the Law of Vibrations By Anthony Scelfo with Thomas Hart
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.D. Gann spoke about the Law of Vibrations and said everything is governed by it. He never explained the details of it nor did he reveal where he got his information about the law. There was only one other person at that time who was speaking about the law of vibrations and that was George Gurdjieff. Gurdjieff also called it the law of the discontinuity of vibrations, or the Law of Octaves. He said there are two fundamental laws governing the universe, the first of which is the Law of Three (every action has 3 forces: active, passive, and neutralizing) and the second is the Law of Vibrations or Octaves. From the point of view of this author, the Fibonacci numbers stem from the universal Law of Threes. The Law of Vibrations is not as recognizable. Basically, the law is something like two steps forward, one step back. Like the musical scale which contains whole notes and half notes, an octave of vibrations has two intervals, one part way through, called the mi-fa interval and one toward the end called the si-do interval – corresponding to the points at which the half notes would occur in the musical scale. A scale is complete when the rate of vibration has exactly doubled. It is helpful to understand that the Law of Vibrations is not ordinary knowledge. You can’t find it in the encyclopedia or in libraries or just about anywhere. It is knowledge that was hidden for a long time Gurdjieff tells us. Where did it come from? From all I could discover Gann and Gurdjieff obtained this knowledge in India or in the Near East from some type of monastery or spiritual group that used the knowledge for spiritual development. Gann said that all he learned about timing the stock market he learned from the bible. Besides getting knowledge of the spiritual quest from these religious texts, we also find universal laws. The Law of Vibrations is one such law. In the early 1980’s, I became interested in the stock market and said to myself that if the Law of Vibrations governs everything, it must also govern the stock market. It took me two years to figure out the relationship and to come up with mathematical formulas which express the Law of Vibrations as it manifests in stock market moves. It took me a few more years to come up with the different scales of movement which explain different phases of the market. Simply stated, there are small scale movements within larger and larger scales of movement. If you are familiar with fractals and the Mandelbrot Set, then you can visualize the concept. There is a small market move, then a big one and another larger one, but all looking the same, like the Russian dolls that fit one inside the other. Another way of saying it is that you have an octave within an octave within an octave as in the harmonics of music. “The micro leads to the macro” would be another expression of the Law of Vibrations.
Why the name Vibrational Positioning Sequence? One day I was trying to explain to my wife how I use the Law of Vibrations for trading the 72
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stocks / commodities market. She knows nothing about the markets but she said it sounds like GPS (Global Positioning System). After thinking about it, I realized that this was a good description of the vibrational sequence, a GPS for the stock market. It tells you when to turn. And so the name VPS was created.
Comparing VPS with Fibonacci Most people involved in the stock market world are familiar with the Fibonacci series of price movement which is a similar concept to the theory of Vibrational Movement, so a comparison between the two methodologies might be a good place to explain just how the vibrational sequence works. The Fibonacci sequence is a series of numbers based on the difference between consecutive numbers being added to the last number in the sequence. This is often referred to as the Fibonacci ratio. The Fibonacci Cycles are based on two numbers and the Fibonacci ratios between them. Enough literature exists to explain the Fibonacci ratio that it is probably mundane to go into greater detail. Similarly, the idea of vibrational moves is based on a beginning number, called the Anchor Point, from which all future peaks and valleys are projected to follow. In contrast to Fibonacci, the VPS which expresses the projected rate of change generates a more complete forecast of the highs and lows; VPS is more precise than Fibonacci. The VPS sequence is derived from just one anchor number and not the difference between two numbers. Fibonacci is incomplete, but in competent hands, it is very good. We do not seek to take away from Fibonacci, but only to say it is limited compared to the vibrational wave theory. Thousand of traders are using Fibonacci but only myself and my trading partners are using VPS. Below is a table which compares the two:
Fibonacci Uses two anchor points to forecast a retrace Calculates 5 anticipated retracement lines,
VPS Uses just one anchor point Calculates 21 anticipated stopping points over a 14% market move, - 11 “following” and 10 “fading”
Used by just one group of technical Used by thousands of technical traders
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traders (so far)
Pros and Cons of the Vibrational Positioning Sequence Lets be honest, every indicator has its own strengths and weaknesses. We think the advantages of VPS far outweigh the disadvantages. Some Strengths: • The VPS is not a lagging indicator. It is forecasting future moves. • If you wait to enter a trade at or near a projected number, you will be at the safest entry point with little or no heat (drawdown). • Quite often, the market will bounce off or hover around the projected stopping points. This is a sign of consolidation. • Once given the formulas for computing vibrations, with a simple handheld calculator an ordinary trader can stay one step ahead of the market. • With a little experience using VPS, a trader can know when big moves are coming. As the market advances up or down, some of the future price channels get larger and you will know in advance how large they will be.
Disadvantages of using the Vibrational Positioning Sequence What are the difficulties with using the vibrational sequences? • You do not know for certain on which scale a price move will stop. For example, some trends are longer than others and may continue at an ever expanding scale. • You do not know how long it will take to advance to the next forecasted price. There may be a forecast for an up move of 20 points in a particular index, for example. That could happen in one day or it may take several weeks. After a while, you will get an idea. In today’s market, it is not usually too long. • It cannot be guaranteed that the market will stop at each and every projected point; often, the market will bypass a projected stop and overshoot. For example, in a strong up market, price will not step back – retrace – when projected to do so. It may only stop at one projected up point for a while and then go on to the next up point without ever retracing. So, if you’re too form-oriented and insist that price must stop and reverse at every projected point, this theory will not work for you. The market is a living thing, so to speak. It likes to have the last word. These projections are just potentials. You could think of the potential turning points as support and resistance lines - or as overbought/oversold lines. They may hold or they may get penetrated.
Examples We will try to give some examples, but it is difficult without giving away the whole show, so to speak, since VPS in its construct is actually quite simple. Using the Law of Vibrations we could have forecasted the major highs and lows for the decade after the high in 1929. Following the high in 2011, we correctly forecasted the SPX low of 1075. For the near future VPS is forecasting a high of 1520 and beyond that 1800. The latter forecast is an example of a very large scale move. Of course, there are more in between forecasts.
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Figures 1 and 2 compare Fibonacci and VPS using a daily chart for a commonly traded Futures Index. Figure 1 shows the price bars over a period of about 2 months.
Figure 1 – Fibonacci Retracement Construction To calculate the Fibonacci Retracement Lines, you need to identify two points – a recent low (Point B) and the previous high (Point A). After connecting the two, Fibonacci will project the five price points at which you would expect a retracement. Just looking at this chart, you would have to agree that Fibonacci fails to accurately forecast the market retracement all the way up to the anchor high and beyond. Figure 2 shows the same index over the time period, about 2 months, with the VPS forecasts plotted on the screen.
Figure 2 – VPS Construction 75
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Step one is to establish the Anchor Point from which all future points will be derived. In this case, the recent low in the market. The previous high is not needed. Whenever price penetrates a projected point, shown by the white arrows, the next two stops are plotted. On day 2, a decent up move had been established so, at Step 2, we plot the next projected points at A and B. At the end of day 3, when price closed above point B, we simply re-plot. Step 3 is to plot the next forecast points at C and D. Step 4 occurs on the next day - we plot the next projected points at E and F. Note: there is nothing to recalculate from day to day, only to plot. All of the calculations were made when we input the Anchor Low at Step 1. After Step 4, notice that price never moves down to point E - there was only a brief downturn, and then a price move up to F, which took several days. On the day the index reached Point F, Step 5 would be to plot new projections G and H – which happen to be a “fading” pair of projections. In just two days, price dropped to the point we projected at G. There are some points in between A and D that we did not include but which we would have if we were trading the index intra-day. Also, plotting is not necessary. We use it here for illustration.
Figure 3 – an example of VPS on an Intra-Day chart Inside each big move are smaller sequences of moves. These smaller sequences can be used for day trading. Figure 3 is an intra-day chart from a recent trading day in April 2012 which shows how we used VPS to successfully take several points of profit out of a narrow trading range. Figure 3 – using VPS for Intra-Day trading The market was coming down from a high and hit our Target on the VPS and went below our number by one point. At that low, the Anchor Point, we plotted another VPS, expecting an up move and went long near that low. We put in a sell Stop at Target 1, which it reached so we were out with a profit of $200. The market hovered at Target 1 for a time; consequently we went short and exited near Target 2, for a profit of $130. At Target Point 2, we went long and exited again near Target 1 for a profit of $140. The volume was low so we did not expect the market to get too far too fast. After the market returned to Note 2 we went long and exited again around Target 1’s high for a profit of $100. Figures D lists the first 10 trades of the day. As can be seen, the first trade was at 7:58 and the 10th trade was at 10:15 for a profit of $700, less commissions, over a period of 2 hours 76
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and 20 minutes. There were more executed trades later in the day and we managed to make a few hundred more dollars, but the ten listed trades give you an idea of how we used VPS for intra-day trading.
Figure D
Further development of the VPS trading Model
In the past, VPS was only available to a handful of investors. Recently, we began to develop a fully fledged trading system which incorporates VPS. Upon completion, it could be made available to a limited number of like-minded investors. Until then, we are available to train a small, limited number of people in how to use VPS to forecast turning points in the market. Contact information can be found at the end of this article.
Prerequisites for training •
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There are just a few prerequisites for learning how to use VPS. The first is that one must have a flexible mind. The mathematical formulas which are the basis of VPS do not lend themselves well to automated trading, at least, not without a computer model approaching artificial intelligence. The next thing is that one must use these projections first, before looking at other indicators. This is not a lagging indicator. It is forecasting the future. See what to expect first and then see how the other (lagging) indicators fit in. Getting the projections is the easy part. The part that takes time and flexibility is learning which anchor point to use and when to change anchor points. Part of it depends on whether you are day trading or swing trading. Willingness goes a long way. One has to be willing to let go of what one knows for a little while, not forever, but for a little while. It is necessary to immerse oneself in the VPS calculations and their projections onto a trading chart; then, recognizing trading patterns will become second nature. It is best if one already knows how to trade and has been through the learning curve. Based on years of experience, the futures market has been proven to be the best medium for using VPS, more so than individual stocks. VPS will work for individual stocks but not as well. VPS can also be used for the Forex or any of the commodities, although gold is most challenging.
Anthony Scelfo, P.O. Box 820, Oregon House, CA 95962,
[email protected] 77
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High Profit Candlestick Patterns Enhancing Market Trend Returns The Fry-pan bottom By Stephen W. Bigalow
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ll boats rise in a rising market. Candlestick analysis provides a huge advantage for profiting in a rising market conditions. It identifies candlestick patterns that will produce inordinate profits when the general market is in a slow steady uptrend. A slow uptrending market condition reveals there is no change of investor sentiment for extended periods of time. This allows candlestick patterns to perform, resulting in extremely large profits. Candlestick signals make analyzing market patterns relatively easy. Trading patterns become recognized patterns because of the reoccurring mental process of investor sentiment. ‘Normal’ investor decision-making is flawed with the input of emotion. Human emotions are contrary to investment rational decision-making. Being able to graphically analyze ‘what investors normally do’ provides a huge advantage for the candlestick investor. Candlestick analysis is capturing and analyzing investor sentiment on a chart. Western analysis has identified many reoccurring patterns. Adding candlestick signals to the analysis makes the anticipation of the pattern easier. Whether patterns are identified on a one- minute chart for day trading or a weekly chart for long term investing, the sentiment for each time period is clearly defined with candlestick formations. Once recognizing that a trading pattern is developing, it can be better analyzed and more accurately timed when utilizing candlestick signals. Candlestick analysis is not rocket science. It is simple investment philosophy’s put into a visual graphic. The 400 years of actual investment results from Japanese rice traders have provided high probability signal results. The candlestick signals illustrate the investor sentiment mostly defined as fear and greed. Human emotion, when it comes to investing
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funds, will always have the same ingredients. The candlestick signals are simply the graphic depiction of investor sentiment. Candlestick signals were not discovered and tested by computer back testing simulations. Candlestick signals are the result of centuries of analyzing how human emotions effect a price trend. The signals, occurring over and over at specific points in a trend-reversaI, provide a statistically proven trading platform. If you understand how the signals are formed, you’ll understand what makes prices move. One of the most highly profitable stock market trading patterns is called a Fry-pan bottom. The Fry-pan bottom pattern is very easy to recognize and easy to understand how it forms. Understanding the ramifications of the psychology that forms the Fry-pan bottom allows an investor to prepare for the potential of a high profit trade. The Fry-pan bottom pattern is aptly named. It does not take a high degree of technical analysis to figure out the investor sentiment that forms a Fry-pan bottom. This pattern gets its name because it looks like a Fry-pan bottom. The pattern is a slow curving pattern to the downside, flattening out at the bottom, it is slowly coming up out of the other side of the pattern. The analysis for the investor sentiment that forms this pattern is very easy to understand. Initially after a downtrend, the selling sentiment starts to wane, making the trajectory of the downtrend a slow inactive bottoming trading pattern. After a lengthy period of time, the sentiment almost becomes neutral, forming a flat area. This lack of interest, one way or the other, eventually starts to incorporate a very slow change of investor sentiment to the plus side. The new positive outlook shows the same lack of enthusiasm on the buy side as it did on the sell side. However, the difference now becomes that the selling interest has disappeared and the buying interest is slowly coming back into the price. This pattern, unlike other patterns that become effective when stochastics indicate an oversold condition, utilizes the condition of the stochastics in an opposite manner. It is usually when stochastics are approaching the overbought conditions that the investor sentiment can now be gauged.
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The alert for this pattern is activated when stochastics get up in the overbought area. The price now shows that confidence has built back up into the price in the form of a large bullish candle or a gap up coming out of the positive side of the Fry-pan bottom pattern. This ‘buying’ indicates that investor sentiment has now produced confidence of being back in the position. A “gap up” or a large bullish candle becomes a signal to buy even though the stochastics are approaching the overbought area. That enthusiasm, coming out of a long bottoming action, usually will create a strong buy trend. As illustrated in the DANG chart, a Fry-pan bottom was forming over the past three weeks. That slow bottoming action is the Fry-pan bottom. The psychology is simple to analyze. First investors had a negative bias. That bias became neutral, then started slowly moving back to the upside, revealing the building back of investor confidence. A conservative investor could have bought after the first little bullish engulfing signal knowing that the stop loss would have been any trading below the bottom of that bullish candle. A more aggressive trader would start buying as the candle formations started to enlarge, revealing that investor sentiment was dramatically building up confidence Being able to analyze the formation creates a fairly low risk trade as well as an aggressive trader’s strategy. Note how the downward trajectory was very slow, followed by a few days of indecisive trading, small spinning top signals, then a small bullish engulfing signal that was followed by a slow uptrend. This stock market trading pattern was occurring during a time when the indexes were in a steady downtrend. The result of a Fry pan bottom is that when it breaks out through the peak that started the downward trend, the force of the new confidence will move it to much higher levels. Does this work every time? Not every time, but the probabilities are extremely high. This is the type of knowledge that is easily obtained through candlestick analysis. Once you understand the commonsense logic of how the formation is formed, the eye will become easily trained to
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LF identify this type of stock market trading pattern. This evaluation creates a consistent platform for analyzing when to get in or when to get out of a stock. A gap at the top usually represents a time to start looking to take profits. In a Fry-pan Bottom analysis, a gap-up out of the end of the pattern indicates strong buyer sentiment. A gap up or a strong bullish candle reveals an optimal time to buy. Occurring at the end of the slow positive trend reveals that investors have gained their confidence and want to get back into the position with zeal. This is the area that will produce very large profits. This calculation does not need to be exact. Visually the buying can be seen as the confidence starts building back up. When that buying level starts approaching the same level as when the pattern started to develop, that is when to start taking action. Because of the length the time that a Fry-pan bottom takes to develop, they should not be a primary source for a trading strategy. However, they can be used when the timing becomes apparent. Although they do not occur with great frequency, the percent return produced makes them well worth being able to recognize the formation. Being able to correctly analyze candlestick formations allows an investor to better evaluate when a high profit moves are about ready to occur. Stephen W. Bigalow is author of “Profitable Candlestick Investing, Pinpointing Market Turns to Maximize Profits”, “High Profit Candlestick Patterns” and “Candlestick Profits, Eliminating Emotions” is also principal of the www.candlestickforum.com
, the leading website on the Internet for providing information and educational material about Japanese Candlestick investing. Over 28 years of extensive study and utilization of candlestick analysis has produced an array of easy-to-learn educational material about Candlesticks. As one of the leading Candlestick experts in the nation, Mr. Bigalow, through consulting with major trading firms, has developed multiple successful trading programs from the day-trader to the long-term hold investor 81
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Why Trade the Cup with Handle Pattern? By Dale Glaspie
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any traders/investors swear by the Cup with Handle. On the other side there are just as many that don’t want any part of this beast. So what is the truth! Those that trade it with great success have spent the time necessary to understand how and when it works and when it doesn’t. Others have tried it when the market wasn’t right and have met defeat. To fully understand how to use the pattern correctly you must first experience the other side. The old adage “for every action there is an opposite reaction” applies in this case. Not until after developing the Inverted Cup with Handle during the bear market from March 2000 to September 2002 and beginning an in-depth study on how these two patterns interacted was I able to glean a clear picture on how to trade them. The Cup with Handle is a bullish pattern and is formed when a stock, while in an uptrend, stops to take a rest. If the market remains bullish after the pattern is formed it will usually breakout and move up for good gains providing other factors such as strong fundamentals, earnings and relative strength, exist. If the market turns bearish during the consolidation period the pattern will meet almost certain death even with the best fundamentals. This traps those that try to force it to work and they end up in a losing trade. The Inverted Cup with Handle is a bearish pattern and is formed when a stock, in a
Chart 1 - (HPQ) 82
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downtrend, takes some time to consolidate. After the pattern is completed if the market is still bearish, the stock will breakdown giving the trader that enters a short position a rapid gain. If on the other hand the market turns bullish while the pattern is being completed it will meet almost certain failure, which means instead of going down the price will take off to the upside. Both of these patterns are formed when a stock is trending either up or down. It must be in a trend for a while before either pattern can form. What I am about to say is going to shed a light on your trading that you never before knew existed. Why can I say that? Because I am the one that discovered it and no one else has ever mentioned it anywhere. The reason is because they didn’t know about the Inverted Cup with Handle pattern. Here it is! Why wait for these patterns to form before we make a trade. Let’s get in when the trend begins to form. That first leg up or down will be the most powerful. It will also offer you a great opportunity with low risk. Many strong downtrends start from a failed Cup with Handle pattern. Likewise a good number of uptrend’s start from failed Inverted Cup with Handle patterns. I call these directional changes “Transition Phases”. When the Cup with Handle fails as the market turns bearish we are entering the Down Transition Phase. Likewise when the Inverted Cup with Handle fails as the market turns bullish we will be entering the Up Transition Phase. There are three identifiable trades associated with each phase. In the past we have been told a market cycle occurs when we go from a bull market to a bear market back to a bull market. Using what I call the “Four Phases of the Cup with Handle Cycle” we go from a bull market phase to the down transition phase to the bear market phase to the up transition phase. Previous wisdom has stated the stocks will follow the market about 70 percent of the time. By using the Cup with Handle Cycle philosophy we can increase that to better than 90 percent of the time. In the following paragraphs I will point out the different strategies I have identified to trade
Chart 2 - SBS 83
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each phase of the Cup with Handle Cycle. Bull Market Phase – The Cup with Handle pattern works great in a well established bull market. The first trade will always be from a Cup with Handle setup. After breaking out above the “Pivot Point Trendline” and moving up, the stock may make a correction that requires us to exit. If the uptrend starts up again we use my Up Trend Strategy to enter a second trade and any other trade we make in this uptrend. Note: The Pivot Point Trendline is a horizontal line drawn to the right of the Pivot Point Price (PPT) which is the Close on the bar that made up the Right Side of the Cup. This line will become a powerful Support and Resistance Line. Down Transition Phase – There are three trades used in this phase depending on where the pattern development is when the market turns bearish. If the Market has already turned bearish when the pattern is completed we use the CHandle Strategy. This strategy enters a short position, as the stock will be expected to immediately enter a down trend. In other words the pattern will fail in the handle of the cup. If the pattern is in the handle of the cup when it fails it will trade up to the Pivot Point Trendline (PPT) and appear to repel or bounce off the PPT. Here we would use the CBounceOff Strategy to catch a ride on the down trend. If the stock price has already brokeout above the PPT and the market turns bearish and reverses we want to get in the trade when it closes back below the PPT. This strategy we call the Reversed Cup with Handle Trade. If either of these trades makes an exit before the down trend ends, additional trades can be made using the Down Trend Strategy. Bear Market Phase – The Inverted Cup with Handle pattern is used in an established
Chart 3 - GGC 84
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bear market. After breaking down below the PPT the strategy will enter a short position. If a correction causes the strategy to exit before the down trend ends, additional trades can be made using the Down Trend Strategy. Up Transition Phase – During a prolonged bear market there will be a large number of Inverted Cup with Handle formations ready to fail when the market turns around. This phase offers some of the best trades you will ever have the opportunity to engage in. Markets usually turn around in one day enabling the astute trader to get in at the beginning of an Up Trend. If the market has already turned bullish before the Inverted Cup with Handle pattern is completed we would use the IHandle Strategy to enter a long position as soon as the stock shows up in our Daily CupWatch Report*. If the stock is in the handle and moving back toward the PPT when the market turns we would use the IBounceOff Strategy as it will likely repel or Bounce Off the PPT to start the uptrend. If the stock has already broke down and closed below the PPT when the market turns up we would use the Reversed Inverted Cup with Handle Strategy to catch the uptrend when the stock broke out above the PPT on its way up. This is my favorite strategy. It enables us to get in at the lowest possible price with little risk. Since 2000 we have had four major bear markets come to an end and after each one there were a good number of Reversed Inverted Cup with Handle trades. During the fourth quarter of 2010 I made a 241% profit trading options using this pattern. Many of those trades came from Visa, Mastercard and American Express. There is not enough space available in this article to go into the detail needed to fully exploit the Cup with Handle Family. Since 2000 I have been doing research and development on a set of strategies that automatically trade each of the trades explained above. There are 10 different strategies that make up the CupTrade Strategies©. The following charts will
Chart 4 - CRL 85
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show you how some of these have worked in the past. It performs in this manner consistently with low risk. Chart 1 for Hewlett Packard (HPQ) shows how the stock formed a Cup with Handle pattern during the end of a Bear Market and the beginning of a Bull Market. In the chart I have explained how the CupTradeLE Strategy entered a long position when the stock broke out above the Pivot Point Trendline on stronger than average volume. We would only make this trade if the company has strong fundamentals and has proven it can make a profit over several quarters. When the price forms an Inverted Cup with Handle during a Bear Market it usually breaks down rapidly and rewards the savvy trader with large gains in a short period of time. Such was the case with Chart 2 SBS. Most bull markets will last for several months or even years. During this time there will be a large number of Cup with Handle patterns formed. When the markets turn bearish most if not all of these will never breakout or will fail shortly after breaking out. Chart 3 shows how GGC failed immediately after it was reported in the Daily Cupwatch Report. We were able to capture good gains by using the CHandleSE Strategy. Notice how the DnTrendTradeSE Strategy entered the last three trades after the initial trade that was based on the failed Cup
with Handle made an exit. When the Cup with Handle fails after it has already broken out it will more often than not cross back below the Pivot Point Trendline where we get in a short position by using the ReversedCWHTradeSE. Chart 4 for Charles River Labs (CRL) provides a good example of this powerful trade. My favorite strategy of all is the Reversed Inverted Cup with Handle Trade. It is formed when the market turns bullish after a strong bear market. Stocks that have broken down below the
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Chart 5 - SHOO
PPT will turn around sharply and cross back above the PPT for large gains. Remember all Cup with Handle patterns are formed after the stock has been in an UpTrend for a period of time. The traditional cup with handle trader will miss this first uptrend completely as they await the Cup with Handle setup. Chart 5 for Madden (SHOO) shows how the ReversedInvCWHTradeLE Strategy caught this powerful move just as the trend started up. Notice how the Cup with Handle formed at the top of this first runup. The rest of the world missed this 90% gain in two months. When the market turned around in one day on March 9, 2009 all three major indexes, Dow Jones, Nasdaq 2000 and the S & P 500 along with several good stocks including Apple and Madden (see previous chart), had formed Inverted Cup with Handle patterns that would fail and cross back above the PPT to make tremendous gains. Chart 6 for the NASDAQ 2000 Composite ($COMPX) offers a good example of how the ReversedInvCWHTradeLE Strategy will make unbelievable trades. This strategy will enter the market at the lowest possible point, just as the uptrend begins. This approach may be new to you. If you wish to be included in one of our upcoming seminars to learn more about the opportunities of trading the Cup with Handle Family of Trades, email me at [email protected] or call me at 800-453-9080. Visit my website at www.cupwatch.com. *The Daily CupWatch Report is available by subscription and identifies stocks that meet the criteria used by our strategies.
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Chart 6 - SA
THE 1:1 STOCK TIME EQUILIBRIUM ANALYSIS & THE LAW of VIBRATION By Dave Franklin Mr. Franklin is an independent Analyst / Researcher who has devoted the past thirty years of his life to seeking the attainment of purely mathematical explanations to movements of stocks and the DOW 30. His Time Sine Wave Analysis© and Stock 1:1 Time Equilibrium Analysis© represent the current State of the Art and the “Fruit” from these past thirty years.
“Progress only comes through free thinking and applied inspiration.” unknown It was in the very early 90’s that I began to look into the movements of stocks and the market. Before that time, my mind was uninformed of all prior published ideas. That is, I had not read any Thing which purported to offer scientific explanations for the movement of securities. One could say my mind was blank and free of all prejudices and predispositions. Being completely unbiased, I started looking at pure numbers, in particular, stock option prices. My research was done at the local university’s Business School Library. Over a six month period, I had reviewed many hundreds of rolls of microfilm which contained the record of many years of End-of-day stock and option prices.
WHAT I OBSERVED… Within ninety days or less of the Expiration of stocks’ True Option Cycle, options near the strike price on both sides of a ‘straddle’ would become very “cheap” at nearly Equilibrium (1:1) values. Shortly thereafter, the stock would launch upward from this Equilibrium.
BACKGROUND Part of my formal scientific training was in chemistry and biological science. From that experience I came to understand the following: Every Thing in Nature and the Universe, living or inorganic, possesses unchanging physical and chemical properties that exhibit balance and constant, fixed proportions and ratios.
REPEATABILITY and RELIABILITY A scientific proof requires two conditions must be met, in order to validate the results of the experiment, and prove a theory to be true. Starting with identical ingredients and conditions, the product(s) or results must always be the same. A simple example is how water is made. Mix Hydrogen and Oxygen gas together, ignite them with a spark, and the results always 88
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produce water. Achieving over and over again, the same results with the same ingredients and conditions, is known as REPEATABILITY and RELIABILITY. In my nearly three decades of research into the movements of stocks and the market, I have endeavored to achieve results that satisfy those two criteria of a scientific proof. In the very beginning of my stock research, I intuitively understood the following: The only way to consistently succeed in any kind of security trading is to possess an objective, rational, purely mathematical method, tested and proven over time, whose results consistently exhibit the scientific criteria of REPEATABILITY and RELIABILITY. After years of dozens of varieties of Real Time calculations made using Time and Distance values found in stock options, only the TIME component exhibited the promise and characteristics of REPEATABILITY and RELIABILITY.
THREE TRUE TIME CYCLES Each “optionable” stock has only ONE TRUE TIME CYCLE. A True Time Cycle for an ’optionable’ stock will be only one of THREE ORIGINAL OPTION TIME CYCLES wherein options are naturally “born” and “expire”. Here they are: JAJO: January, April, July & October MJSD: March, June, September & December. FMAN: February, May, August & November.
EXAMPLES 1. IBM’s True Option Time Cycle is JAJO. 2. WMT’s True Option Time Cycle is MJSD. 3. BA’s True Option Time Cycle is FMAN.
HOW TO FIND A STOCK’S TRUE OPTION TIME CYCLE 1. Go to the website: http://www.cboe.com/DelayedQuote/QuoteTable.aspx 2. In the SYMBOL text box, enter the stock symbol, click on “List all options,..” and SUBMIT. What will appear is a complete list of all currently available options on that stock. The months comprising the stocks TRUE TIME CYCLE will be revealed by the option month(s) displayed just before the LEAPS options.
TIME The author hopes the reader finds the following easy to comprehend:
A FICTIONAL, TRUE MATHEMATICAL EXAMPLE Stock XXX’s price is 100.00. The 2012 DEC 95 Call is 10 points. The 2012 DEC 105 Put is 10 points. Verify for yourself, the following statement, based on the facts stated above: There are 5 points of Call TIME in the DEC 95 Call, and 5 points of Put TIME in the DEC 89
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105 Put. The Time Ratios expressed here is a 1:1 relationship: AN EQUILIBRIUM of TIME: 5 points Call time to 5 points Put Time. The Time Sine Wave Analysis© now has a perfect beginning according to the Law of Motion (Vibration), to begin tracking in Real Time, Call and Put Time for these two options.
THE LAW of MOTION “All motion begins from a point of rest, seeks a point of rest, and returns to the Equilibrium from which it sprang.” Dr. Walter Russell In 1993, I found in the writings of the late “illuminated” Dr. Walter Russell, his LAW of MOTION. This Law became the ‘missing link’ that provided the degree of accuracy, understanding, and the repeatability and reliability exhibited in the COMPASS CHARTS of The Time Sine Wave Analysis©.
RESTATEMENT of The Law, in mathematical terms: “All motion begins at a mathematical 1:1 (Equilibrium), seeks a mathematical 1:1 (Equilibrium), and returns to a mathematical 1:1 (Equilibrium) from which it started.”
THEREFORE The Time Sine Wave Analysis© begins each stock’s individual True Time Cycles at a perfect 1:1 Equilibrium of Time, per Dr. Russell’s Law of Motion (Vibration). Further, each individual Time Cycle begins at a fixed, constant value of Total Time determined by many years of practical experience. From carefully selected options not less than 7 months out, The Time Sine Wave Analysis© locates the strikes which yield nearly equal values of Call Time and Put Time. Using factoring, these two ‘Natural’ values of Call and Put Time are brought to identical starting values. Then, these two individual Time values are tracked forward in Real Time, until their “Death” on Expiration Day.
THREE PROVEN FACTS Here are three proven facts that illuminate CAUSE via the Law of Motion: 1. WHEN…the stock moves UP from the beginning Equilibrium Strike Price, Put Time goes UP and Call Time goes DOWN. 2. WHEN..the stock moves DOWN from the beginning Equilibrium Strike Price, Call Time goes UP and Put Time goes DOWN. See the attached JPEG for graphic illustration of these observed Real Time facts. 3. Within the last 90 days of an individual Stock Time Cycle, that Stock’s next Expiring Tue Time Cycle always achieves a 1:1 Time Equilibrium. That is, Call and Put Time must, and do come together. The diagram below illustrates Facts 1 & 2 above:
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LONG and SHORT SIGNALS
“Verrry eenteresting..”spoken by Artie Johnson, playing the German Soldier character on “”Rowan & Martin’s Laugh-In”
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REAL TIME GRAPHIC RESULTS The stock is found to change direction upon the following “Time” conditions: 1. WHEN…the BLUE and RED lines in the TOTAL COMPASS come together at a 1:1 Time Equilibrium. 2. And/or 3. WHEN…the BLUE and RED lines in the stock’s individual Time Cycle Compass attains a 1:1 Equilibrium.
HERE ARE REAL TIME LONG & SHORT SIGNALS on GOOG’s TOTAL COMPASS:
SPECIAL NOTE: The BLUE and RED lines observed in the TOTAL COMPASS CHART represent the sum of individual Put and Call Time as seen in the stock’s Three Original Option Time Cycles.
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HERE ARE REAL TIME LONG & SHORT SIGNALS on GOOG’s INDIVIDUAL TIME CYCLE COMPASSES:
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In the two Real Time Charts above, please note the fact that the stock changes direction as Time perfectly obeys the Law of Vibration, by moving from one 1:1 Time Equilibrium to the next. Comprehension of these proven “TIME” principles depicted above operate as CAUSE on TIME via the Law of Motion (Vibration) and serve to provide timely, valuable insights as to when…the probabilities are very high, that a stock will change direction in Real Time.
“There is nothing more important than an idea whose time has come.” “An invasion of armies can be resisted, but not an idea whose time has come.” Victor Hugo
PROPRIETARY MATTERS The author asks the reader to appreciate the following: Due to the expenditure of more than thirty years of human capital in order to come to these ‘Time’ revelations, the author’s Time calculation formulas and methods must remain completely proprietary. The author welcomes inquiries by individuals or firms who are seriously interested in the professional employment and application of these ‘Time’ discoveries. David W. Franklin, The Time Sine Wave Analysis©
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Order all Back Issues of Traders World Magazine on CD Contains all of the back issue articles of Traders World Magazine on CD in a pdf reader format. 4901 - Issue #1, February 1988 Gann & Elliott Wave.
50 Back Issues
$69.95 These are many of the trading articles from major traders from the last 20-years. Some of the covers are below. For a complete lising or to order go to: www.tradersworld.com or call 800-288-4266 or 417-882-9697
The Market Cycle Investment Management Methodology (MCIM) Steven R. Selengut Most investors, and many investment professionals, choose their securities, run their portfolios, and base their decisions on the emotional energy they pick up on the Internet, in media sound bytes, and through the product offerings of Wall Street institutional boiler rooms. They move cyclically from fear to greed and back again, most often gyrating in precisely the wrong direction, at or near precisely the wrong time. The MCIM methodology combines risk minimization, asset allocation, equity trading, investment grade value stock investing, and base income generation in an environment whose time frame recognizes and embraces the reality of cycles. It attempts to take advantage of widespread "fear and greed" decision-making by others, by using a disciplined, patient, and common sense methodology. This methodology embraces the cyclical nature of markets, interest rates, and economies --- and the political, social, and natural events that can trigger changes in cyclical direction. Little weight is given either to the short-term movement of indices and averages, or to the idea that the calendar year is the playing field for the investment "game". Interestingly, the cycles themselves seem to concur with the irrelevance of calendar year analysis, and it makes little sense at all to think
of investing as a competitive event. What index or average comes even close in content to your unique portfolio of securities? The MCIM methodology is not a market timing device in any sense of the word, but its disciplines will force managers to add equities to portfolios more during corrections and to take profits enthusiastically during rallies. As a natural (and planned) effect, portfolio "smart cash" levels will increase during upward cycles, and decrease as buying opportunities increase during downward cycles. (See the "Process" Chart) Absolutely no attempt is made to pick bottoms or tops, and strict rules apply to
both buying and selling disciplines. NOTE: these rules are covered in minute detail in “The Brainwashing of the American Investor” (click on the book on the left to order the book from Amazon. Take the opportunity to come to the Kiawah Golf Investment Seminars for more information click here.
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How To Make Short Term Trading Your Long Term Investment Strategy Trading, the Operational Mainframe of Successful Commercial Enterprise By Steve Selengut Click “delete” right now if you are looking for a shortcut to obscene wealth based upon some new algorithm or magic “app” that will predict the future price either of individual investment securities or of the financial markets in general. Sure, there are countless trading tools and information collection/analysis mechanisms that can help you prepare for the wanton unpredictability of markets; and there are tons of opportunity signaling methods, screening techniques, hedging strategies and the like that you can experiment with. You can even pretend to understand Modern Portfolio Theory, as it attempts to transfer your wealth to Wall Street’s new breed of passive managers and economists. They’ll suggest to you that good performance is staying even with a bunch of indices and averages that institutional wiz-kids manipulate for your entertainment. (Google: Indexed Investment Illusions) But most programs are designed to reward the genius and hard work of their creators, not the passive involvement of “add to cart” speculators looking for assistance making investment decisions. Face it people, much as I still love the over-regulated markets that we call Wall Street, the “Master’s of the Universe” are clearly more interested in enhancing their own wealth then ours. If you have grown to the point where you know you need a long term strategy that fuels itself with short-term trading; if you recognize that most investment professionals (stock broker, financial planner-advisor, etc.) have been regulated out of the individual security business; if you are wary of wealth managers who have never managed any wealth of their own --- welcome. Welcome to the realization that investing does not involve rocket-sciencesque formulae that replace common sense decision making; welcome to the appreciation of short-term trading as the portfolio management equivalent of running a “for-profit-you-betcha” business; and welcome to the concept that trading is the operational mainframe of all successful enterprise.
Short Term Trading vs. Day Trading vs. Buy and Hold vs. Exchange Traded Index Funds The short-term trading style that powers Market Cycle Investment Management (MCIM) has some elements of day trading, a securities selection universe that would make “buy ‘n holders” smile, and an entrepreneurial mindset that just scares the bejesus out of people with the happy-to-be-average mentality of ETFs. 96
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There’s not an MCIM short term trader alive who wouldn’t be thrilled to buy and sell a security in the same day with a net-net profit of between seven and ten percent. It happens. But our expectations are that we will hold on to our selections for an average of four to six months. Day traders want to get in and out of a position as quickly as possible, and at a target profit that is easier to obtain quickly. The distinction may be a function of age, wealth, responsibility, experience, or business sense --- it boils down to this: the more experienced we become, the more aware we are of the need for a secure income that is under our own control, and the more we choose not to be brainwashed by Wall Street, the more we realize that we need a long term methodology that will get us from point now to point then. MCIM trading focuses its selection process on the highest quality US based companies, plus a select few foreign company ADRs. If you were a Buy and Hold investor, you would be comfortable with most of the companies that make up this elite group of successful businesses --- but that’s about all. The Buy and Hold approach fears the tax code more than it loves profits. The indexed ETF approach is a combination shell game and roulette wheel that hinges on the mathematical skills of Wall Street economists. Both are sold to the public with an “Emperor’s New Clothes” rationale that asks for our trust and faith in a cadre of product sales persons and experts who have never failed in their ability to be in the wrong place at precisely the wrong time --- even if the high tech math is impressive. Gimmicks have never solved the mysteries of the stock market; mathematics can only be applied to markets past; the future will never become knowable. Hello! The basic problem is that people want to embrace the myth that there is a “knowable” right place or right time; another is the mindset that the only good market is a rising one. And then there is the need for most professionals to cram all performance evaluation into a calendar year, compared to the S & P or the Dow. Market Cycle Investment Management uses a reality based short-term trading mechanism as the operating system for your long-term investment plan. It’s different, and respectful of whatever directional change the forever fickle investment gods bring your way. It can operate within, and automatically balance, any asset allocation.
A Chart For All Seasons --- Lines & Dates You Can Relate To Although the chart focuses on the time surrounding the recent “financial crisis”, it could easily be applied with similar results to patterns of activity over the past forty years. The best long-cycle illustrations were clearly the “Crash of ‘87”, and the “Dot Com Bubble”; the best short-cycle illustrations could well be the second of those below, and the period surrounding 9/11.
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The IGVSI line tracks Investment Grade Value Stocks trading on the NYSE. They are S & P, B+ or better rated and dividend paying --- significantly higher quality and safety than those in either the Dow or the S & P 500. The Yellow line tracks the S & P, the Pinkish line tracks an index of taxable and municipal bond Closed End Funds (CEFs). Only IGVSI equities, and high quality CEFs, find homes in MCIM neighborhoods. Every security pays some form of income, and all income is reinvested using “cost based” asset allocation. Equities are purchased at least 20% below their 52-week highs; income CEFs are purchased whenever “income bucket” cash is available. All securities have profit targets of 10%. No security is held for more; any security could be sold for less. The S & P average is unmanaged, yet widely used as a benchmark for portfolio manager performance --- typically, it outperforms most of them, but... The “most” are professional, “Managed By The Mob” mutual fund managers. (Check the Glossary in your copy of the “Brainwashing” book for this and other quotation mark surrounded terms.) It is nearly inconceivable that any (six figure) MCIM portfolio could underperform the S& P 500 in any true cyclical scenario (Peak to Peak, Trough to Trough, or combination). Ya follow?
The Chart Includes Some Important Dates: June 30, 2007: Both equity indices (the S & P and the IGVSI) were at their highest levels in five or more years; the income Closed End Fund index was down slightly from highs it had achieved earlier that year. 98
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September 30, 2007: The S & P 500 established a new All Time High while both the IGVSI and the WCMSI moved slightly lower. No profits were realized within the S & P as it climbed. MCIM portfolios, however, held considerable profit-taking (“smart”) cash just waiting for new equity opportunities. Closed end funds were generating around 7% at the time of this S & P bubble. March 9th 2009: After a 17 month blood bath, equity prices hit rock bottom. S & P equities fell more than IGVSI equities; income CEFs fell less than either; income levels remained stable throughout the drawdown; MCIM users were compelled to reinvest all available cash in lower priced securities. The S & P and index ETFs suffered passively as owners either jumped ship or abandoned their retirement plans indefinitely. By April 29 2011, MCIM portfolios were at new all time high value levels, although only the IGVSI had established new high ground, and flush with “smart cash” which became mostly reinvested during the May through October 3rd correction! Can you tell me why we call it smart cash, and have you “lightbulbed” what’s not in the chart? The IGVSI and WCMSI components, both individually and within sectors, have cycles of their own --- with a range of movement both different from and similar to those of their neighbors. And so it goes, cycle after cycle after cycle. Disciplined short term trading turns market volatility (major or minor, short term or long term) into increased wealth and increased cash flow --- without ever even thinking that there is a chance to actually “know” what is going to happen next. This is what makes short term trading both a long term strategy and a potent force for both wealth creation and income production --- much more flexible and versatile than any other approach I am aware of. And those MPT probabilities, standard deviations, and correlation coefficients --- well frankly, Scarlett, what have they done for you lately?
Experience, Understanding & Discipline; Planning, Organizing & Controlling Clearly, there’s more to complete portfolio management than an eight minute read of a Traders World article. There’s more than just money, education, opportunity, luck, or effort. In addition to the development of realistic expectations (no easy task itself), there are at least six basic elements or skill sets required for long term investment success, with an emphasis on the long. Success in creating wealth doesn’t make a person a qualified investor (only a government regulator could think so) --- but an understanding of investment securities (not investment products), coupled with basic management skills can do just that. Why are the best and the brightest from all backgrounds, professions, and successes so easily victimized by Madoff-like scams, Wall Street derivative betting mechanisms, and oxymorons like passive management? Investing itself is fairly simple, but developing reasonable expectations and constructing a manageable plan may not be. Relying blindly on the “best minds” of the biggest operators on Wall Street will lead to disaster nearly 100% of the time, mainly because of their product99
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driven mentality. Going the popular route may feel all warm and fuzzy at the onset, but the road to sustainable wealth takes every bit as much experience, understanding, and discipline as it takes to become a neurosurgeon, attorney, or politician (just wanted to see if you were paying attention with that last one). If you don’t have investing experience, work with a person who has been successful investing his or her own money --- and beware of all “we-thinkers”. Develop an understanding of market, interest rate and economic cycles, and of actual securities before they become a component of some product. Be skeptical of anything future predicting or hedging, and create personal minimum guidelines concerning quality, diversification, and income production. And, you must trade, just as you do in your own business or profession. You must have disciplined, flexible, downward-only, profit-taking objectives. If you think of investing as a “betting” devise, if you avoid income because you have enough of it already, or if you feel fine with speculations because you can afford to lose --- you will fail as an investor while your advisors prosper. The same management or professional skills needed in any other endeavor are needed even more in investing because of the emotions you have about “your” money. You must plan and organize your portfolio; you must control, and direct your employee, and you must be the ultimate decision maker. You must direct the trading, with appropriate selection rules and disciplined selling targets. Yes, you must trade, as you embrace the investment cycle and use it to your advantage; you must make short-term trading the operating mechanism of your investment plan. You’ll find that short term trading can be done most effectively with high quality individual equities and equally high quality income CEFS. A profit, any profit, is a terrible thing to waste. Perge. Steve Selengut http://marketcycleinvestmentmanagement.com http://valuestockindex.com
Author of “The Brainwashing of the American Investor: The Book That Wall Street Does Not Want YOU To Read”
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Gold / Mining Stock Index Divergences – Leading Indicator? By Robert Miner, Dynamic Traders Group, Inc. It has often been described that the relative bullishness or bearishness of a precious metals mining stock index to gold is a leading indicator of the gold trend. Let’s compare gold trends and reversals with a gold mining stock index and see if this is the case or not. The GDX is an ETF which tracks the NYSE Arca Gold Miners Index (GDM). The index consists of 31 large, medium and small cap gold and silver mining stocks. It is a good proxy for the broad precious metals mining industry. The GDX has only been trading for four years which will provide enough information to begin the gold / mining stock trend comparisons. The XAU has a much longer history of data. The XAU is a gold/silver mining stock index of just 16 large cap stocks. However, just 5 of the stocks comprise over 60% of the index so it certainly represents the major large cap companies but not the broad mining stock industry. I prefer to use the GDX for this study because it is a broader based index and is a tradable ETF but I also refer to the XAU. I’ll compare the trends and reversals of GDX with the continuous gold futures contract to see if it gives us any consistent indication of the relative strength or weakness of gold. Besides comparing chart patterns, I made an Excel table to compare the dates and price ranges of obvious swing highs and lows in both gold and the GDX. The table compared the time ranges and price percentage change between swings. For space reasons, I have only included a few of the recent swings in the table below. I will first describe the general observations, then we’ll take a look at the recent gold / GDX data and see what it may indicate for the current gold trend as of mid-April. 1. Gold and GDX tend to make swing highs and lows at or very near the same time. 2. The percentage change between swing highs and lows both up and down in the GDX is usually 50%-200% greater than for Gold. We can consider GDX a leveraged gold play but be warned that declines are usually much greater than for gold. Leverage works both ways. 3. Any divergence of price, time or pattern between gold and GDX is usually resolved in favor of GDX. This is by far the most useful information. What do I mean by gold / GDX divergence? Here is an example. In Feb. 2009, gold made a swing high, a correction into April and another minor swing high in early June below the Feb. high. GDX made only very minor corrections from its Feb., but was much higher at the early June high. GDX was relatively stronger during this period or a bullish divergence in favor of GDX. Gold eventually resumed the bull trend to new highs, catching up with the bull trend of GDX. GDX was leading the trend. The relative strength of the GDX warned that the gold bull trend was likely to continue. This is only one example but shows how to compare the trends and swing highs and lows 101
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Know Yourself Astrological Report
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of gold and GDX. In most cases, the gold trend is resolved in the direction of the GDX trend. Let’s take a look at the relatively recent positions of gold and GDX. Below is a table of the swing highs and lows for the past year, going into the gold Sept. 2011 high and right up to date to the early April 2012 low. The last column refers to the note number found below the table.
Gold / GDX Swing Comparisons
Gold / GDX Swing Comparison Table Notes 1. April/May High: Gold high made later than GDX and above prior Dec. high. GDX high double top with Dec. high. GDX relatively weak to gold. A bearish divergence for gold. 2. Sept. high: Gold Sept. high much higher than the May high. GDX Sept. high just above April high. XAU Sept. high below its April high. Mining indexes relatively weak. Not confirming gold’s new high. A bearish divergence for gold. 3. Sept./Oct. low: Gold swing low higher than prior swing low. GDX lower than prior swing low. GDX relatively weak. A bearish divergence for gold. 4. April low: Gold low above prior swing low but the GDX low below prior swing low. GDX relatively weak. Another bearish divergence for gold. The bearish divergence of GDX to gold into the April 2011 high warned gold may be at or near a major reversal. Gold did eventually make another spectacular run up to a new high in Sept. but on another bearish divergence with GDX (and XAU). From the Sept. high, gold began the largest decline since the Oct. 2008 low. The bearish divergence of the GDX to gold warned the upside in gold may be limited. The bearish divergence of GDX to gold at the recent Dec. and April lows warn gold may eventually catch up to the GDX bear trend and any gold rallies may be just corrections in a bear trend. Chart 1 is weekly gold showing the relationships of the swing highs and lows described in the table above. Chart 2 is weekly GDX for the same period. You can easily see the relative weakness of GDX compared to the gold positions at the highs and lows. See Charts 1 and 2. In a related article in this issue (EUR/USD and Gold), my compatriot at Dynamic Traders Group, Jaime Johnson, describes the technical reasons the Dec. low in gold may have completed an ABC correction which implies gold will eventually continue the bull trend to a new high. The 103
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Chart 1 Miner Gold Wk.
Chart 2 Miner GDX Wk 104
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bearish divergence of GDX to gold warns this may not be the case. Here is what I’m going to be looking for in the weeks ahead. Gold is in a technical position to have an advance off the early April low which was made at the 61.8% time and price retracements with a weekly momentum Bullish Reversal as Johnson describes in his article. If gold does advance but the next weekly momentum high is made below the March high, it would be a warning gold may be weaker than the technicals appear and gold may continue to decline to below the Dec. low, whether in a complex correction or bear trend. However the gold trend plays out in the next few weeks to months, the bearish divergence with the gold/silver mining stock indexes as of mid-April is at least warning us to be cautious about expecting new highs in gold.
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NAKEDSWAN TRADING
“Where traders come to convert their pain points into profit”
Integrated Idea Generation & Risk Intelligence:
A New Framework For Converting Your Pain Points into Trading Profits
I
n this article, Efrem Hoffman, Founder & Visionary of NakedSwanTrading.com, features a new kind of market intelligence, called RiskWindows; and describes how the research service built around it, and generated by his proprietary software innovation, is offering traders a unique quantitative and leading indicator, which is developing a solid record of analytic accuracy. Real market data from today and tomorrow is utilized to test its predictive strength, and build industry traction from its ongoing performance. This is already being demonstrated by the stream of market calls made on NakedSwanTrading.com and its Twitter feed source, NakedSwanTrader. For a real-life sneak- preview of how our research is made actionable, look no further than our illustration in Fig. 4, and our special webinar event (posted in March on NakedSwanTrading.com), regarding the precise timing of Apple’s reversal. Hoffman describes the financial markets as the most extensive and longest running data warehouse on human social behavior that ever was – an elaborate laboratory having an unparalleled shelf-life for testing out new theories of how human experience and interaction can impact your pocket book. [Every month more than 100 Billion transactions or 19.3 tera-bytes per year get executed across all traded asset classes in North America alone, along with 41 trillion messages per day pushed out across the 13 U.S. Stock Exchanges, 9 Options Exchanges, and 60+ Dark Pools of capital assets] -- according to Interactive Data -- making the social media data store, of the
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more than 845 million people that record and share 30 billion traces of their daily lives per month on Facebook alone [according to McKinsey Global Institute], look like a ball in the park. Tapping into this collective intelligence, he has also rigorously tested this research framework in the midst of financial hurricanes in equity, commodity, and currency markets, to successfully warn investors right before the top of the Housing Bubble and Mortgage Meltdown; specifically pre-identifying, the demise of WorldCom, Bear Stearns, Lehman Brothers, GM, among others, before any signs of trouble emerged. A review of the much more mixed market settings, scrolling back as far as 400 years across world capital markets, shows similar predictive intelligence. The richness of that information field goes some distance to explain why Wall Street is in an arms race to re-invent and make better sense of all this information. To address these growing demands, our mission is to play a leading role in the development and contribution of change-making technologies, to help transport this new science ‘Out of the Lab and into your Trading Room.’ Stay tuned! -Efrem Hoffman is bolstering his operating capabilities to make NakedSwanTrading.com the premier innovation center and on-line destination for trader education, alpha-idea generation, and global risk intelligence -- all designed to make learning how to maximize RiskWindows, for your trading style, a snap. That means eliminating your blind-spots to help you keep your wallet closer to your hip and on a competitive playing field with institutional traders. One research group inside NakedSwanTrading, known as the Big-Data Science and HumanDecision Network, is tasked with the challenge of mathematically sniffing out digital records of market data to look for deep structure that explain the HOW and the WHY of the market’s human social wiring, and specifically quantifies how and when traders with different market perceptions and time horizons are plugged into the global grid of fear and greed. We call this analytics engine, Bottom-Down Intelligence – first drilling down to the very first and smallestscale transaction of an individual security, and then digging deeper into our underlying
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motivations for making trading decisions; and the interactions that shape the market outputs of our minute to minute transactions across groups of market securities. Another characteristic that is unique to our research strategy is that we defined a novel mathematical notation that corresponds to our discovery of an elaborate mathematical structure, which exists in and of itself, without fine-tuning parameters to match past experience. The structure dynamically traces out the extremities of price movement across all time-lines, while the mathematics of this solution framework decodes how, when, and at what valuation level market decision-makers (buyers and sellers) will observe and act on perceptions of momentum change into the future -- specifically when viewed from the perspective of each performance time-line. Hoffman likens what they do to building a telescope of human perceptions, saying that the techniques they engineer are transforming our scientific understanding of market rhythms in the same way that astronomy and relativity revolutionized our discovery of the cosmos, or how biology has inspired our design of more efficient information transfer, as well as lighter, stronger, and cheaper materials, with a more energy efficient purpose. To advance our capabilities in these areas, for the better part of 16 years, Efrem Hoffman has conducted ongoing scientific investigations to addresses the most elemental themes about human market dynamics, namely, personal influence and salience of decision-makers, diffusion, and viral propagation of information -- that telegraph market contagion; as well as the shape of the social network (code-named ‘i-Grid’) which gives rise to these attributes. His weapons of analysis have their home at the intersection of where first principles of quantum physics meets the mathematics of social interaction. He has engineered a High-Definition Risk Map that shows what extremes could be expected
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over a period of time (branded under the RiskWindows Trademark); how devastating tail-risk events like credit crunches, currency crises, and market crashes can be; and which asset classes and global hot-zones are going to be on the forefront of recovery after prolonged risk events. For retail investors, busy with their full-time commitments, as well as wealth advisers and professional traders alike, this could help them whittle down to a dozen or fewer areas where they could be focusing on high performance growth opportunities, and another dozen areas where they might want to go short in the near term -- out of more than 5,000 liquid assets – including stocks, financial futures, commodities, currencies, bonds, and global-assetclass proxies, such as today’s diverse array of exchange-traded funds (ETFs). This process is designed to yield ‘diversification without redundancy;’ namely, because our analysis allows traders to avoid generating a large number of mediocre ideas that would otherwise drag down the best performers. Our real-time market updates on NakedSwanTrading.com are specially formulated to put this information at your fingertips, so that you can enter your trading positions right near overhead resistance or baseline support, before your competition takes a piece of your potential profits. The service addresses three actionable time-lines, ranging from intra-day trading to 5 days forward, 2 to 3 week trends, as well as 3, 5 and 9 month macro events. When we see a market crisis on the horizon, as we do today (see Fig. 3-7), we extend the outlook beyond 12 months, and upwards to 3 years. Efrem Hoffman summarizes his review of how he uses this proprietary information to build a unique market intelligence service: “By combining a forensic analysis of global trends -- and their inter-market variables -with a bottom-down research process, we are helping traders hunt down the hidden structures
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and subtle relationships between markets and the trading participants that create them.” This type of insight enables RiskWindows to give traders first-mover advantage in zeroing in on attack-points (see figures 1 through 7 for an illustration) -- special Risk-On, Risk-Off switches, that allow traders to sense upcoming short-term price trends, expansions or contractions in volatility and liquidity, as well as anticipating buying and selling inflection points of all shapes and sizes, with just-in-time action cues. To account for how traders weigh in on events on different time-scales, we are the first in the industry to create market momentum maps that chart out future perceptions of zero momentum crossing points -- branded under the trade name, Momentum Perception Maps (MPM). This process begins by overlaying zero momentum isobars on a price chart, one for each marginally longer trader time horizon -- starting from the tick (single transaction) level to multi-generation time-lines. Analogous to isobars on a weather map, which plot out boundaries of equal pressure, zero momentum isobars are curve-linear lines, overlaid on a price chart, that represent constant price levels of zero momentum. When the full spectrum of such isobars are displayed at once, and across all assets covered, a 360 degree view of global decision-maker pressure points are instantly rendered visible. How? By tracing out the gaps between valuation levels that correspond to future zero momentum crossing points on different time horizons. These forward-looking valuation zones define what different trader groups will see in hindsight on their momentum oscillators, such as MACD or RSI. Because the momentum jet stream, which these isobars telegraph, is versatile in shape and malleable in structure, many interesting and pertinent properties of future momentum change can be deduced and quantified with unparalleled resolution and lead-time. These properties are illustrated in Fig. 1 (step 1) and Fig. 2 (step 2), where we walk you through the construction of a risk window from start to finish. They are further exemplified in our free weekly analysis of global markets on NakedSwanTrading.com. Specifically, these zero momentum isobars are designed to indicate how fast an asset will be rising or falling in value – its speed or momentum. Moreover, contrary to the popular belief that a stock must first slow down, or even stop
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before plunging lower, we have discovered an anomaly in this occurrence at special points in an asset’s lifecycle, which we call attack-points -- located at the leading edge of risk windows. These points define when people’s perceptions of market sentiment can instantaneously change or be magnified without any application of force or external stimuli. This is a revolutionary development, Efrem adds, because it implies that black swan events have been misclassified. They are often born out of the background noise of prior crises. This intelligence can forever change the way traders defend their assets ahead of parabolic manias or market capitulations. As an illustration, you need not look any further than those times when a runaway stock or commodity heads into the stratosphere, only to find out later that it plummets back to earth without a shred of warning. What makes these special events counter-intuitive and exceptionally difficult to grasp or quantify, with any level of logical certainty, is that they violate a well guarded principle of classical physics – which we have all been endlessly trained to believe ever since our childhood experiences with nature. These stories of our pastime indicate that before an object (i.e. baseball or price) can fall back to ground level (fair value equilibrium), it must first slow down, or even stall out completely as it passes through its zero acceleration point. Although this slight change in momentum can be usually exploited to detect trend change in price, when a market is parabolic in nature and closing in on its high tick before the final bell rings, there is very little that a momentum indicator can tell you regarding the opening transactions on the following day. But all too often, and with great surprise, markets can gap down violently, blowing through your capital preservation stops or even decimating your option-driven income-generation strategy – even in those instances where there is no sign of negative pre-market action. Traders can be guided to avoid these types of market train wrecks with potentially high levels of consistency, by following our free weekly webinars, and subscribing to our ‘attackpoint database,’ which we will be rolling out, in Q2 and Q3, as an online application service solution. It was our risk window analysis of these attack-points, as showcased in Fig. 4 (timestamped on Twitter feed: NakedSwanTrader ), that enabled us to precisely predict and map out Apple’s (symbol: AAPL) parabolic reversal, with high confidence, specificity, and lead time,
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as it plunged from its high point this past week, taking many investors by surprise. What should really get traders excited about NakedSwanTrading.com is that its market intelligence is now signaling, loud and clear, unparalleled short and long opportunities in multiple equity, commodity, currency, and bond markets, right as they are entering a large number of attack-points and critical risk windows, which are expected to amplify the frequency of trade during the next 18 months and beyond. Figures 3 through 7 provide a sneak preview of such tail-risk that will likely impact several key markets, including the e-Mini NASDAQ 100 Futures, Apple (AAPL), e-Mini S&P 500 Futures, SPDR S&P 500 (SPY), and Spain ETF (EWP). Start building your information advantage today by subscribing to our free weekly webinars; and checking out our latest market commentaries and archived videos trend pieces at: http:// NakedSwanTrading.com ; Twitter Feed: NakedSwanTrader Fig. 1 Step One in the Construction of a Risk Window, as illustrated on the 89 minute price sampling interval of the NASDAQ 100 Futures (June Contract) sell-off, which triggered near April 4th (as illustrated in Fig. 3), following the run-up on a breakout which began on March 13, 2012 (as depicted in this figure). Fig. 2 Step Two in the Construction of Risk Window trigger points and attack- points, as illustrated on the 84 minute price sampling interval of the NASDAQ 100 Futures (June Contract) sell signature, which was evaluated before April 2nd. Note: Attack-Points signify zero momentum crossing points that are first observed by longer-term traders -- before shorter-term market players – this implies an inversion in the ordinary flow of incoming future information, leading to short term momentum players running for the gates as soon as large block orders come in from institutional traders that act on information regarding momentum changes first. Fig. 3 NASDAQ 100 Futures (June Contract) Risk Window for Sell Off which began near April 4th; 2738 to 2757 is overhead resistance ; 2633 is critical support; Extreme Base-Line Support: 2535 if a spike low into May; Each price bar represents the price range of an 84 minute time interval.
Figure 7 112
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Fig. 4 Apple Inc. (symbol: AAPL) Risk Window for Sell Off which began near April 11th crossing below $633.00 (as predicted in our NakedSwanTrader Twitter post on April 10th, 2012; just above $640 level was overhead resistance level, identified at that time, and which trapped prices and reversing them as low as $571 so far, as of April 17th. Trailing resistance has now dropped down to the $620 to $627 price zone into April 24th. Next significant baseline support comes in at $556 to $548 price zone, with a risk of a spike down to 538 to 526 levels. Each price bar represents the price range of a 60 minute time interval. Fig. 5 E-Mini S&P 500 Futures (June Contact) Shorter-Term Risk Window (see Fig. 6 for longer term outlook) for Sell-Off which began near April 3rd, crossing below 1415 attack-point at the first red arrow; 1420 to 1430 price zone was overhead resistance, identified at that time, and which trapped prices and reversing them as low as the 1352.50 so far, as of April 10th. Trailing resistance has now dropped down to the 1396 to 1405.50 price zones into late April. Next significant support comes in at 1340 with 1330 to 1320 offering longer term baseline support into the May period. Each price bar represents the price range of an 89 minute time interval. Fig. 6 S&P 500 ETF (SPY) Long-Term Risk Window for Sell-Off which is in place for the period of early/mid December 2012 through 3rd Quarter 2016, with the most precarious liquidity crisis playing out in the interval as early as Dec 2012 or as late as July 2013 into Jan 2014, and possibly again in 2015. A violent long-term market sell-off with extreme downside volatility will ensue when Price trades below the 145.20 attack-points (the strip in time between December 2012 and June 2013, where the upper teal line hugs the upper yellow line), and particularly while the upper white line is sloped up into the future in any portion of this strip. Longer term extreme overhead resistance, which covers the interval into the 3Q 2016 is resting at $156 to $157. $114.81 is baseline intermediate term support until mid-year 2013 [in event of an all out market crisis -- Spain, being the canary in the coal mine when selling escalates through critical longer-term support levels as illustrated in Fig. 7 -- before December 2012, $128 to $123 will support market into year-end], until such time that price trades below the Red Horizontal Line (which rests at a level of 109.42) for at least one trading week. If this level is breached thereafter, then the $80 level to as low as $72.59 on a spike low is in the cards. If before 2017, price trades below $72.50 level for at least one week of persistence, an all out market meltdown into the $40.00 level (equating with the S&P 500 near 400 or lower) is a real possibility. As nearer these times, detailed crisis advisories and warnings will be issued and updated on NakedSwanTrading.com as well as our Twitter feed, NakedSwanTrader. Fig. 7 SPAIN ETF (Symbol: EWP ) Long-Term Risk Window for Sell-Off which is in play for the period into April 2013 to as late as September 2013 marks the interval with highest potential for crisis. Critical Support is now resting at a price level of $22.30. If prices trade below this level for at least one week, this market has no base-line support until $5.00. The only good news is that this support level rises to $10.00 in 2014 – that is if we are not already below this level when we get into this time zone. Until such time that this ETF trades above $28.21 for at least one week, EWP will remain one of the weakest markets in the world with longer term overhead resistance starting out at $33.75 to $36, thereafter. A dire situation indeed! The 113
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A Critical Alert Window was opened on AAPL starting in March which led to a precise Attack-Point™ set up at the 633 level on April 10th. Traders had eleven full days to develop short strategies as AAPL was on the verge of a serious drop. Efrem Hoffman laid it all out on his HIGH-DEFINITION RISK MAP days in advance!!
EFREM HOFFMAN is Offering His Market Intelligence on dozens of markets as they set up their exact Attack-Points™ for trading strategies. See Efrem's exclusive article on ™Risk-Windows in this issue.
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He has invested over 16 years of research for the purpose of identifying Tail-Risk Attack-Points™ on specific equities, futures, commodities and emerging markets as they enter their Critical ™Risk-Windows See his decades of data mining experience using dozens of computers to drive the analytical engine that distills the bottom down intelligence Benefit from this analysis utilizing advanced math and physics tools to secure a telescopic and forward looking view of market rhythms and human perceptions.
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Efrem Hoffman states there are going to be extensive trading Critical Windows Setting up over the next 18 Months! To learn more about Efrem Hoffman, go to: www.NakedSwanTrading.com
Identifying Tops and Bottoms Using the Sweet Pea Deep Dip Triple Oscillator Divergence Concept By Jan Arps, President, Jan Arps’ Traders’ Toolbox
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s technical analysts we use various tools to consider historical price and volume characteristics of the market to measure factors such as price trends, power and momentum. Oscillators are particularly important tools because they often lead price by changing direction before the price changes direction, thus helping traders to frame buy and sell decisions. Oscillators got their name because they oscillate up and down within a fixed range over and under a central line. That is, they don’t follow a price up and down a price chart like a trendline or a moving average; instead, they oscillate up and down from an upper overbought zone to a lower oversold zone. When an oscillator crosses above the overbought zone it can be compared to an automobile exceeding the speed limit. If the oscillator crosses below the oversold zone, it’s like an automobile going too slow for the prevailing traffic flow. Many oscillators consist of a pair of oscillating lines: a “fast” line, which is the basic value of the oscillator, and a “slow” line, which is usually some form of moving average of the fast line. There are at least three ways to utilize oscillators in the technical analysis process: • Look for crosses of the slow line by the fast line. • Look for the oscillator to cross into and then out of overbought or oversold territory. • Look for divergences between the movement of the oscillator and the movement of the price. This article will focus primarily on process #3, looking for divergences. We will discuss how to identify and trade divergences between the movement of the oscillator and the price. Divergences occur when two or more successive oscillator peaks diverge in direction from corresponding price highs or when two or more oscillator valleys diverge in direction from corresponding price lows. For example, consider the chart in Figure 1 displaying price and an oscillator. On the left of the price chart we see two price peaks, or “bumps” in a strong uptrend. Note that the more recent price bump is higher than the preceding bump. Now look at the two oscillator bumps occurring at the same time as the price bumps. Notice that the most recent 115
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oscillator bump is lower than the earlier price high bump. If a trendline is drawn from one price bump to the next price bump and another trendline is drawn between the two corresponding oscillator bumps, the two lines can be seen to diverge away from one another. This is referred to as “divergence” and is usually a sign that the uptrend in price is losing steam and energy and that we may be approaching the end of the uptrend. Now let’s look at the right side of the chart in Figure 1, where prices are in a strong downtrend. This time the “bumps” are price valleys. A trendline has been drawn from one price valley to the next price valley and another trendline has been drawn between the two corresponding oscillator valleys. What do we see? We see that the two lines are pointing in opposite directions, converging toward one another. This is a sign that the downtrend in price is losing steam and energy and that we should be looking for an opportunity to buy instead of sell. Confusingly, most traders use the term “divergence” to refer to both of the conditions just described, even though the trendlines converge in downtrends and diverge in uptrends. Nonetheless, to conform to popular usage, we will be using the term “divergence” for the rest of this article to refer to both divergence in uptrends and convergence in downtrends. So, a sell divergence occurs when price is making higher highs while the oscillator is making lower highs. Conversely, a buy divergence occurs when price is making lower lows while the oscillator is making higher lows. One problem with divergence analysis is this: Changes in trend direction come in many sizes, from very brief to very deep, so the trader has to decide what kind of divergence pattern
Figure 1 - Normal DIvergence 116
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is most reliable for putting on a winning trade. When the price bars are in a strong uptrend you will often see a lot of small peaks and valleys caused by “sloppiness” in the price wiggles as shown in Figure 2. Note that the first major bump in the oscillator below the price contains minor wiggles that should be ignored. We call that pattern a “lobster tail”. If it is bigger than a small lobster tail, we call it a “prong”, or “deep prong”. These are just fun nicknames. Once the oscillator crosses below the midline and back above it, we get a second bump that we call a “smoothie” because it is relatively smooth. These false signals can cause a lot of frustration for the divergence trader, so we must use a set of rules that allow us to identify only significant divergence patterns that are likely to anticipate a major trend reversal.
The Deep Dip Concept One of the most reliable ways to make sure your divergence signal is valid is to ignore lobster tails and prongs and look for what is known as a “deep dip” divergence pattern. The concept of the deep dip pattern was first introduced by trader and divergence expert Jay Dorger in the 1990’s. This concept requires that the oscillator must cross its midline between bumps to ensure that the divergence is big enough to be taken seriously. A deep dip oscillator pattern looks something like the example in Figure 3. On the left side of this chart we are in an uptrend and are watching for a divergence pattern to signal the end of the uptrend and the beginning of a new downtrend. The first step in this
Figure 2 - Lobster Tails and Deep Prongs 117
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process is to look for a hill to form in the oscillator while it is above the midline. The oscillator should then roll over and cross below the midline. Before reaching the oversold zone, the oscillator should reverse back up above the midline, forming a valley below the midline. The oscillator should then create a second, lower, hill-shaped bump above the midline. When it again rolls over while the price continues to reach new high levels, we have a strong sell signal. Although the oscillator must display a pair of distinct successively lower peaks interspersed by a distinct valley below the centerline for a sell reversal signal in an uptrend, the price doesn’t necessarily have to display recognizable peaks and valleys over that interval. For a valid sell divergence in an uptrend to occur, the price level corresponding to the rightmost (lower) oscillator peak must simply be higher than the price level corresponding to the previous (higher) oscillator peak to its left. Conversely, for a buy signal to occur in a downtrend we must wait for an up-divergence to develop in the oscillator valleys below their midline. The first valley will have to reach back above the midline before returning to create a second, higher valley. After the divergence forms between the two oscillator valleys and a downtrending series of prices, we have a strong buy signal. The oscillator below the price in these examples is a Stochastics oscillator. The trendlines, dots and “DDD” (“deep dip double”) annotation on the chart were automatically drawn by the JADV Deep Dip Double Divergence tool from Jan Arps’ Traders’ Toolbox. (www.janarps.com )
Figure 3 - Deep Dip Double 118
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Divergence analysis can be a very powerful tool to identify potential major reversal points in the price trends. However, it sometimes takes a trained eye to quickly spot divergences between the price and an oscillator, so here’s a reminder: always look for significant bumps in the oscillator first. Then look at price to see of these bumps are diverging from the price trend direction. In the oscillator, look for falling peaks for sell signals and rising valleys for buy signals. Then look for corresponding rising peaks or falling valleys or in the price.
Watch for Crossings You want to be quick in identifying oscillator bumps. If you wait until an oscillator bump is fully formed, referred to as a “roundover”, you may have lost the opportunity to get into a trade near the beginning of the new trend. Many divergence traders don’t wait for the roundover to complete to look for significant oscillator turns. Instead, they look for crossings, where the fast oscillator line crosses below its slow line near the top of a peak or above its slow line near the bottom of a valley. If this developing bump is the second part of a pair that is diverging from price and meets our other qualifications, we have a strong and timely indication that prices are about to reverse direction. In Figure 4 we see the fast line crossing below the slow line of a developing oscillator peak before the slow oscillator line actually rounds over. Consequently, in this example, we can see the oscillator crossing signal approximately three bars before the actual price peak occurs.
Figure 4 - Roundover 119
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This gives us some extra time to set up for a trade when the next price bar makes a lower high.
The Sweet Pea Deep Dip Triple Divergence Pattern: Solving the Problem of False Divergence Signals in Strongly Trending Markets Double bump divergences work well in oscillating markets, meaning markets where prices are moving sideways or gently trending. However, in strongly trending markets, double bump divergence signals sometimes go astray and give signals before the end of the trend. One way to deal with this problem is to wait for a triple bump divergence to confirm the end of the trend. Triple bump divergences are just what the name implies: three bumps in the oscillator forming a diverging pattern with respect to the price trend, instead of just two bumps. The important fact about triple bump divergences is that they are more likely than double bump divergences to occur at the end of a strong trend and less likely to occur in the middle of a strong trend. For example, Figure 5 displays a price chart with the Stochastics oscillator displaying a triple-bump deep-dip divergence buy pattern near the bottom of a strong downtrend and a triple-bump deep-dip divergence sell pattern near the top of a strong uptrend. See Figure 6. Let’s consider the types of price pattern associated with a triple-bump sell divergence.
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I want to first call your attention to an old standby in technical analysis, the “Head and Shoulders” formation. A Head and Shoulders is three peaks in price that look like a head and shoulders outline. Usually the second peak is the tallest and is referred to as the “Head” while the “Shoulders” represent the (lower) first and third peaks. The common trading rule is to draw a trendline between the bottoms of the two shoulders (the “neckline”) and take your short position when the price crosses the extension of the neckline. However, we won’t be using the neckline break in this study of the triple-bump divergence. Instead, when we see a head and shoulders top formation in the price, we will be making these small, but very important additional stipulations for it to qualify for a triple-bump divergence topping pattern: First, I want the third bump in price (the “right shoulder”) to be higher than or equal to the first bump (the “left shoulder”). Also, this triple-bump price formation should occur at the end of a long, hard-charging trend; not somewhere in the middle of a sloppy sideways price movement. At the same time, I want the first peak in the corresponding oscillator pattern to be the highest of the three to qualify as a sell signal. The second and third oscillator peaks must both be lower than the first oscillator peak. Note that the second oscillator peak may still be lower than the third oscillator peak, but it must not be higher than the first peak! The most important factor is that the first oscillator peak be higher than the third peak. Jay Dorger, the originator of this concept refers to the triple-bump divergence pattern as “Sweet Pea”, his slang for “Three Peaks”, so we have incorporated that into the name of our pattern identification tool. When we are looking for a Sweet Pea pattern for a triple-bump sell setup, any of the three price patterns, the “Head & Shoulders”, the “Hunchback”, and the “Straight Three” shown in Figure 6 would qualify. However, it is important to note that a “Head & Shoulders” pattern DOES NOT qualify in the oscillator, because the leftmost peak of the oscillator must be the highest of the three. If you turn these images upside-down, you would have a set of buy divergence patterns, with the exception of the inverse head & shoulders in the oscillator which does not qualify, as mentioned above. Now the leftmost valley of the inverted price pattern must be lower than the other two valleys while the middle valley can be either higher or lower than the rightmost valley, so long as it is lower than the leftmost valley. In other words, no inverse head-andshoulders in the oscillator! As in everything technical, these patterns are easier to see in hindsight. They are there in real time but only after some time has gone by do their individual fingerprints truly reveal themselves. Thus it is quite helpful to computerize the recognition of these patterns to alert the trader. We can’t trade hindsight. Remember, oscillator divergence is trying to signal a new trend at its very beginning, and that is dangerous, because you are going against the momentum of the old trend. Sometimes divergence signals merely call a hesitation in the old trend, in which scalping a few points is the best approach, and then the old trend just kicks back in and keeps going in the original direction. Divergence traders seeking to identify significant turning points must be cautious, only 121
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Figure 6 - Three-Bump Divergence taking well-formed three-bump formations. Oscillator bumps must dig significantly below their midline in order to qualify as a deep dip divergence bump. A lot of triples in a strong trend can be shallow and mushy. They are easy to see in hindsight, but would we really have made a trade on some of those triples? Eliminating the mush is why we look specifically for the Sweet Pea Deep Dip Triple divergence pattern. We might lose some good trades by sticking with the deep dip theory, but in the long run it is a safer and more reliable indication of a potential major trend turn. In summary, divergence is a powerful tool to identify potential reversals in price direction. Waiting for a divergence signal before trading a reversal in trend direction can greatly help the trader with his timing. No matter what time frame or symbol you trade, when you find a Deep Dip Triple divergence bump formation and let the Arps Sweet Pea Divergence Finder “pat you on the back” to confirm the pattern, I do believe you will value this pattern as a treasured component of your trading toolbox, or at least be aware of it in your trading.
Jan Arps’ Traders’ Toolbox [email protected]
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New! The Arps/Dorger “Sweet Pea” Divergence Finder A Sophisticated Divergence Tool To Identify In Real Time Those Symbols Ready To Make A Significant Trend Reversal For technically-inclined traders, divergence analysis is recognized as one of the most reliable ways to identify the end of a trend and an impending major price reversal. Incorporating divergence analysis into your trading can greatly improve your odds of capturing the most profitable trading setup—getting onboard early in a new trend. It doesn’t hurt either having a sound methodology to enable you to know when to bank your profits and to cut losers short. For the novice and advanced trader alike, we describe in this month’s edition of TradersWorld Online magazine various types of divergence patterns and the best patterns to trade. The “Sweet Pea” Deep Dip Triple-bump divergence pattern is our favorite oscillator divergence pattern to trade because it is more likely to occur at the end of a strong trend and solves the problem of false divergence signals that can occur in strongly trending markets. To help traders identify this pattern in real time, we have created the Arps/Dorger “Sweet Pea Divergence Finder” tool. The chart image on the right shows this tool identifying both a three-bump divergence buy signal and a three-bump sell signal. In both cases you can see how the three-bump deep dip divergence signal leads to a major change in trend direction. The Sweet Pea Divergence Finder is applicable for day trading as well as longer term and swing trading….it works well on any symbol and timeframe. As a special offer for TradersWorld Magazine readers, we are offering the “Arps/Dorger Sweet Pea Deep Dip Triple Divergence Finder” and the “JADV Deep Dip Double Divergence” tool, as described in the article, as a set for $299.95 (The set retails for st $399.95). This offer is good through June 1 , 2012. (Tools currently available for TradeStation and MultiCharts. Soon to come: NinjaTrader and eSignal). To order, click on this link: Arps Triple and Double Bump Divergence Toolset
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www.janarps.com Backed by over 50 years of trading experience, Jan Arps’ Traders’ Toolbox has been the serious trader’s preferred source for unique, powerful trading tools since 1991. Besides having created numerous revolutionary proprietary tools, our world-class services to the trading community include personal mentoring, incomparable trading clinics, and expert custom programming.
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THE CRITICAL NATURE OF VOLUME Part Two By:
Jeffrey A. Kilian Trader, Technical Analyst, Educator
In part one we laid out the case for trading the US Equities and SP500 E-Mini Futures Markets only when we have substantial volume behind the trades we will be taking. I covered how most market participants are wrong in their trading decisions and therefore lose money when they trade. We also covered that we as professionals who work in the business every day know that even though what most dedicated traders do is correct.......they have missed the critical ingredient know as “volume”. Volume is the catalyst behind the most explosive and profitable moves in trading any instrument within any market place, and to this day still remains the number one factor that determines the probabilities of future price directional movement. Where volume is the number of shares or contracts that are traded over a calculated period of time, the result of those volume numbers must then be used to determine the current and future Supply and Demand ratio of what we are analyzing.
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A professional trader will focus his or her attention on the Smart Money Volume. This volume is the most important type of volume as it is created by the people whom actually move futures and securities and E-Mini Futures from one level to another. These are the heavy market participants including off shore hedge funds, US based institutions, major market makers along with specialists on the trading floor who will orchestrate the mechanics behind the new price moves before the general public is aware of what is about to happen. Here is the key traders and investors: We learn how to know before the general public knows, where prices are headed. Reference the Metastock Professional chart below of the DOW clearly indicating the major sell off by the institutional Smart Money on the 03-16-2012 before the market corrected. See Chart #1 Now after viewing the DOW correction and understanding that the volume in fact was the catalyst behind the correction, the effect of what the Smart Money does now creates a new level of demand or supply that was previously non-existent. Where that ratio of supply and demand changes, so do the opportunities to invest or trade in anticipation to make money whether long or short. However without a sufficient amount of accumulated volume incorporated into the analysis of our trading decisions, we leave a reward to risk ratio on the table that is just unacceptable. Where trading is a business, we must only take trades with substantial volume behind them to become superior traders and eliminate sub standard trading. The most important thing that I teach every client is to how to know with a high degree of accuracy, “ what is the current state of the Market”. Every serious trader absolutely positively has to spend a minimum of 20 minutes every single night analyzing the current
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state of the US Markets so you know when an event has taken place such as the volume sell off on 03-16-2012, and that now it is time to start paying very special attention to the upcoming trading opportunity to make the lion’s share of money. View the Metastock Professional chart: Energy Sector 10. See chart #2. SELECTING THE RIGHT SECTOR TO SHORT Selecting the right sector to short is a matter of making a relative comparison between all sectors in your organized data base and the Market. In this case we are making a relative comparison between the Energy Sector 10 which is one of the sectors in a special SP 1500 organized data base by number that myself and Metastock have created, and the Dow Jones Industrial Average. Now because we have just made a careful examination of all the sectors within our database and have arrived at the conclusion that the Energy Sector was the only sector having a substantial volume spike on the exact same day as the DOW, we are now sure that we have confluence of Insider Volume that has to play itself out one way or the other. It will either be the catalyst for a short move, or a long move. Again either way, we as superior traders will be ready to capitalize on that move because we are now in waiting and tracking this sector, all the groups within it, and obviously the stocks with the strongest set ups in progress to take the trade with conviction, when we are sure that the high probability set ups have completed themselves, and our precision entry point has been clearly laid out long before our trade will ever be taken. View the Metastock chart of the Energy Sector date: 03-20-2012 See Chart #3.
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USING YOUR END OF DAY ANALYSIS TO MAKE REAL LIFE TRADING DECISIONS Once again let’s be clear where trading is a business, we want to take only the true high probability trades to load up and make a substantial amount of money in a short period of time. To do this we use only the proven Technical Analysis techniques that have stood the test of time and through Objective Analysis, we arrive with actionable intelligence to trade as a professional. The trend line break on 3-20-2012 was a clear signal within the chart pattern itself, that the volume previously illustrated to us on 3-16-2012 has now played itself out and has revealed to us that it in fact it was an inside Smart Money sell off. So now in fact what we have just completed is a simple relative comparison between the volume on the Dow as compared to the volume on the Energy Sector and the relative comparison between that volume, as it played itself out and the trend line violation within the chart pattern to show us “how we can let the trade come to us”. Remember as a professional trader, your greatest positional advantage is PATIENCE.
HOW TO BE SURE THE VOLUME WAS INSTITUTIONAL SELLING Money flows in and out of a Market, Sector, Group and individual stocks and the E-Mini Futures as sure as the sun rises and sets. Not just any money, but real money and millions and millions of insider money. I’m referring to institutional money that drives prices to and from one level to another. These people are the ones that I have developed a trading methodology to Find Track and Trade because when their movements are clearly identified, we have a trading opportunity that otherwise simply does not exist. View the Metastock professional chart of the Energy Sector with The Chaikin Money Flow
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Indicator. See Chart #4. The Chaikin Money Flow Indicator clearly indentified a strong negative divergence ( A connected to B ) as compared to the chart action long before prices ever sold off during this short selling opportunity. Even more, this indicator clearly marked out additional strong downside momentum again before the prices sold off in this incredible short selling opportunity ( C connected to D ). Trading is a business and by investing in yourself in getting the proper education about how to learn what really works in real life trading can make all the difference in your trading career. The small cost of education far out weights the loss of your hard earned capital in a lesson the markets will teach you until you master these proven trading techniques. View the Metastock chart of the entire Energy Sector short move. See Chart #5. Jeff Kilian is a real life Trader Technical Analyst and Educator. He has clearly developed a Smart Money Trading Methodology that trades only the true high probability trades. His focus is US Equities and the SP 500 E-Mini Futures Market. He has become one of the most sought out Trading Mentors in the world today. Outside of The inside Technician’s standard training and courses,he now offers full exclusive professional trader mentoring 10 and 20 day programs for those who are serious in becoming real life profitable traders. See the latest Mentor program details on page 7 and page 8. Jeff Kilian: Founder of www.theinsidetechnician.com
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Elliott Wave Outlook S&P and Gold By Peter Goodburn | Copyright © 2012
Use of Ratio & Proportion R.N. Elliott (1871-1948) developed his theories of repetitive pattern development of the stock market after the dramatic events of Wall Street during its collapse between 1929-1932 that led to the Great Depression. He was inspired by Robert Rhea’s book entitled Dow Theory and in the fourteen years that were to follow, completed a detailed, methodical analysis of price behaviour that was to eventually distil into a comprehensive and exact method of pattern recognition from which the seemingly chaotic activity of the markets could be viewed in an orderly manner. Elliott introduced the investing community with two underlying aspects of his methodology that were the driving forces of the ‘Wave Principle’ – and these later, inadvertently created two branches of discipline that were to direct the course of its application by successive practitioners in the decades that followed. The first is derived from ‘human activities’ that develop from our social-economic processes commonly referred to as the mass-psychology of market behaviour. The second relates to the study of numerology and geometry, how its governing laws of measurement and form manifest in the creation of ‘waves’ and ‘patterns’ with regular occurrence. This raises the question of ‘cause’ and ‘effect’ – which discipline brings us closer to the underlying cause of price development? It seems the psychology/socionomic aspect has taken precedence since the theory has been popularised, particularly during the last twenty-five years or so. Despite this, Elliott’s original work revealed the ‘causation’ of price-development in his definitive work ‘Natures Law – the Secret of the Universe’ (1946) where he devoted many passages to numerology through the Fibonacci Summation Series and geometry through the philosophies of Pythagoras. After Elliott’s death in 1948, one of his successors, Hamilton Bolton stated that wave form takes precedence over ratio/proportion analysis and this has generally been echoed by others since, although it seems this is because very little research on its potential has been published during the last twenty or so years. The use of Fibonacci price ratios (fib-price-ratios) is nothing new to Elliott Wave practitioners, but it has mostly been applied in a very basic and rudimentary way. I rather consider ratio and proportion, pattern and form as the two sides of the same coin – one cannot exist without the other – neither is dependent nor independent but instead co-existing as interdependency. Without its use, it is possible to construct a wave count around whatever ‘whim’ or ‘fancy’ that fits the subjective personal desires of the analyst. But including it, this increases the probability of a concise and objective approach to successful forecasting.
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S&P and Gold Forecasts S&P 500 - When applying Fibonacci-Price-Ratios (fib-price-ratios) to any analysis of a market, we begin by constructing stringent measuring tests to the price data and across several differing degrees of trend – it’s generally a top-down approach, beginning with the long-term data first, then successively lower. Each pattern retains certain key fib-price-ratio measurements that recur over and over again. One aspect that is also important is to apply fib-price-ratio measurements to the data in log-scale through all degrees of trend. Over the last fifteen years, I have collected and archived several hundred examples of these and established a set of guideline measurements to work from. An example of this is shown in fig #1. The S&P 500 was expected to decline last year into a counter-trend pattern – this was empirically tested in the manner mentioned above, through various degrees of trend. Even before the decline began, our analysis expected a deep countertrend corrective decline based on the measuring of the preceding advance – this was going to be a big one. As the price data began to unfold, it became clear that it would unfold into an expanding flat pattern, labelled (A)-(B)-(C) and subdividing into a 3-3-5 sequence. The
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starting point of measurement is always wave (A), in this case unfolding between 1344.07 to 1249.05 (Feb.-March ’10). In order to project the conclusion for wave (B), three most common fib-price-ratios would be used to extend wave (A) by either, 14.58%, 23.6% or 38.2% - these will encompass about 80% of all (B) waves is such patterns. A fib. 23.6% extension projected to 1367.53 with the actual high recorded to 1370.58. In common expanding flat patterns, wave (C) can be projected to its conclusion by using the same ratios – to determine which one would finalise the pattern, an overlay of Fibonacci retracement levels of the preceding upswing would be added to search for a convergence. In this particular example, we realised wave (C) would extend beyond the common measurements because of its location within this aggregate/larger pattern. This meant extending wave (B) by a fib. 161.8% ratio and this projected the low for wave (C) to 1074.82. As wave (C) began to unfold, we were able to add another fib-price-ratio to the developing five wave impulse pattern to test for convergence levels. In any five wave expanding-impulse (not a diagonal-impulse) pattern, one of the most common ratios used to determine the completion of the fifth wave is to measure this unfolding by a fib. 61.8% (correlative/correlation) ratio of the first-third waves, i.e. 1370.58-1101.54 x 61.8% - 1230.71. This measured the terminal 5th wave to 1075.24. A convergence of this kind is very powerful, and acts like a magnet, attracting the price to it. It is the ultimate in proportion, a natural law that states price action unfolds through the points of least resistance. The actual low was recorded on the 4th October 2011 at 1074.77. At the low of 1074.77 last October, this decline was labelled as ending one of two ongoing counts – the first as primary wave 2 of a larger five wave expanding-impulse pattern in progress as cycle wave C that began from 1010.91 (June ’10) – very bullish. The second as primary wave A of a larger complex corrective pattern labelled cycle wave B and acting as the countertrend to the preceding advance from the March ’09 low. As the progress of the Oct.11 upswing unfolded, an interim high formed later that month to 1292.66. From this, another set of fibprice-ratio measurements were taken – see fig #2. We wanted to test this upswing as part of primary wave B of a complex expanding flat corrective pattern. The first measurement was to extend the 1074.77-1292.66 advance by a fib. 61.8% ratio and this projected a potential high for wave C to 1448.87. The second extended the entirety of primary wave A’s preceding decline between 1370.58-1074.77 to the upside by a the common three ratios – the 14.58% level to 1420.04 and 23.6% to 1451.52. The latter formed a convergence and so for the last several months, we have been expecting a test to this price area and have waited to see its reaction – whether it would accelerate higher to confirm a larger 3rd wave in progress, very bullish, or alternatively stage price-rejection and a subsequent reversal signature that isolates the entire advance from 1074.77 as a zig zag pattern – very bearish. Earlier this month, prices tested the minimum 14.58% extension level at 1422.38 and have subsequently triggered a reversal signature basis prices breaking below the preceding reaction lows of early March ’12. This provides an early warning of reversal. Isolating a zig zag advance from the Oct.’11 low labels this upswing as ending primary wave B of a much larger expanding flat pattern with wave C downside projections until Oct.’12 towards 979.45 (40.68 month cycle). This is measured by extending primary wave A by a fib. 38.2% ratio and this converges with the fib. 50% retracement support of cycle wave A’s advance that began from 131
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the March ’09 low (666.79-1422.38 – log scale!). Gold - There has been a lot of forecasts published on gold in recent weeks, perhaps more bears emerging as analysts downgrade their expectations perhaps due to the fact that prices have remained below last year’s peak of 1921.50 (LBMA – spot bullion). Despite this, the Elliott Wave Principle (EWP) combined with Ratio & Proportion studies determine the longerterm uptrend as intact. The decline from the Sep.’11 high of 1921.50 is identified as a counter-trend pattern that ended intermediate wave (4) at the late Dec.’11 low of 1522.48 – see fig #3. Since then, prices rose rapidly to the late Feb.’12 high of 1791.16 whilst unfolding into a five wave expanding-impulse pattern. Evidence of a five wave impulse is usually enough to confirm the larger uptrend has resumed, but this could also become the final sequence of a horizontal (running) flat pattern with bearish implications for the next several months. How can these two scenarios be separated? The subsequent decline revealed its true intensions – the initial decline to 1688.56 was extended by a fib. 61.8% ratio to test as a counter-trend zig zag
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One of the Universal Laws that we apply to the Elliott Wave Principle is that of the Law of Vibration, or ‘Motion’. This study is an acknowledgement of this profound Truth as it reveals the hidden nature of another as it manifests across the geometric plane - the existence of Nature’s rhythm or frequency as revealed in the Law of Polarity. The most basic yet prolific symbol known to Man is the circle. It has stretched across the aeons of time immemorial. Hidden within its motion are the ratio relationships that make up its DNA. Attributed to (Leonardus) Fibonacci the ratios that build and guide the organisation of growth & decay - a natural phenomenon that exists not only in the material world, but also in our thoughts that in turn, translate into the markets! Ralph Nelson Elliott left us a great legacy in his monograph ‘The Wave Principle’ (1938) and it has most undoubtedly stood the test of time in its robustness as a tool for price-predic- t i o n , esp e c i a l - ly during the last decade when many other methodolo gies h ave collapsed. It has its detractors though, and despite being a strong advocate and practitioner of the Elliott Wave principle (EWP) myself, am symp a thetic of their dismissive remarks. Why is that? Simply put, some big calls or forecasts have not unfolded in the way we might h ave expected or hoped – certainly, I perienced failures too. Some have worked quite well, but then degraded over time making them redu n d a n t s o m e time later. The EWP is so dynamic in its predictive qualities that there is a ‘human’ temptation to make bold statements at key intervals – but in the heat of t h e moment, obvious clues get missed. There is one element to the EWP however that i s the key in resolving this issue – and that is combining Elliott’s original concept of Pattern Repetition with his less known studies of Ratio & Proportion. Elliott’s Introduction to the Fibonacci Series. Soon after publishing The Wave Principle, Elliott was sent several books, recom mendations and various articles related to Natural Laws of science & metaphysics by Charles J . Collins, director of Investment Council Inc. These included works from Professor Arthur Henry Church entitled ‘On The relation of Phyllotaxis to Mechanical Laws’ a n d Sir James Hopwood Jeans’ ‘The Mysterious Universe’. This also led to Elliott’s invest igation of the Fibonacci sequence that he referred to in his ‘Educational Bulletin’ dated October 1, 1940 in which he stated “The Basis of the Wave Principle is very old…Pythagoras in the sixth century B.C., Fibonacci in the thirteenth century and many other scientists, including Leonardo da Vinci and Marconi, have all shown that they were aware to some extent of this phenomenon… Fibonacci was an Italian mathematician…His Summation Series of Dynamic Symmetry agrees in every respect with the rhythmic count of the Wave Principle…”. What Elliott read and learnt in the years that followed his receiving those books from Collins ignited his fascination and shaped his theories of the Wave Principle around the concept of the Fibonacci Summation series and its inherent relationship to ratio & proportion. In this same ‘Educational Bulletin’, Elliott placed emphasis on the fact that his discovery of five waves of progress followed by three waves of regress was emulating two of the adjacent numbers found in Fibonacci’s summation series, 5-3 – added together equals 8, another in the sequence... | Understanding the principles of Nature’s Law is to learn the universal language of form and vibration – Waves to Patterns as Ratios to Proportion. These manifest in all financial price data and can be discovered in the most clear, concise and pragmatic illustrations of the Elliott Wave-Compass report – visit us now on www.wavetrack.com .
Waves to Patterns as Ratios to Proportion
ELLIOTT WAVE-COMPASS Elliott Wave perspectives for global markets:
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pattern. This projected wave ‘C’ of the zig zag to 1628.11 – the actual low recorded to 1628.16! Furthermore, wave ‘C’ of this zig zag unfolded into an ending-diagonal pattern, a wedge-shaped formation that confirms this as the completion of the zig zag without any bearish alternative. Prices have since advanced into three waves, then declined into three waves to 1612.26 that together confirms a counter-trend pattern is set to extend the original single zig zag decline from 1791.16 to 1628.16 into a double pattern with price projections to 1551.86 sometime during the next few months. The secondary zig zag decline is measured so that it unfolds by a fib. 100% equality ratio of the first whilst more critically, ending above the Dec.’11 low. Fibonacci ratio and proportion studies remain an important aspect of Elliott Wave and remains an effect tool in the process of ‘proofing’ and ‘determining’ a successful forecast. Peter Goodburn is the senior Elliott Wave analyst at WaveTrack International and is the author of the monthly institutional Elliott Wave-Navigator report and the bi-weekly private client Elliott Wave-Compass report. Details at www.wavetrack.com
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The EUR/USD and Gold By Jaime Johnson Dynamic Traders Group While the EUR/USD trades inversely to the Dollar Index it also tends to trend with gold which can help determine trend and trade direction for all three markets. I want to emphasize the words “tends to trend”. The patterns of gold and EUR/USD are usually not the same and the occurrence of them trending together is not as consistent as the EUR/USD and Dollar Index inverse correlation. Nonetheless, looking at both gold and the EUR/USD can often help determine net trend directions of both markets. In this article we are going to look at pattern and momentum position of both markets to see if trend direction can be determined over the next several weeks following the writing of this article. While the EUR/USD and gold sometimes do not trend together, if momentum and pattern suggest they will trend together, trades in the potential trend direction should be of higher probability. The Dynamic Trader analysis and approach to trading is used to determine trend and trade direction. The analysis is based on Elliott Wave and oscillators. While the oscillator used in these charts is a propriety oscillator to the Dynamic Trader software, any oscillator can be used in which the bearish and bullish reversals of the oscillator (or highs and lows of the oscillator) correlate relatively well with the swing highs and lows of the markets. This article was written the first week of April 2012.
EUR/USD Weekly Closing Data Chart 1 is a weekly closing data chart of the EUR/USD. Closing data often cleans up the noise caused by intraweek volatility so we can see a clearer pattern. However, since the Forex market is a 24 hour market, it is not a good idea to use closing data in the daily time frame or lower. However, the Forex market does close every week, so closing data may be used in the weekly timeframe. The May 2011 high in the EUR/USD appears to have completed an ABC correction off the June 2010 low. A few things support this. First, the June 2010 – May 2011 rally has a clear three wave corrective pattern. Secondly, the Jan. 2011 probable Wave B low has been taken out. Last but not least, the decline off the May 2011 high has unfolded in a five wave pattern. If the May 2011 high is in fact a Wave C corrective high, the June 2010 low should eventually be taken out, but this may take months to occur. What we want to know is the probable trend direction over the next several weeks. A couple factors suggest the net trend direction for the next few, if not several weeks should be bullish. Firstly, with the May 2011 high a probable corrective high and with the June low a probable completion of a five-wave decline off the May 2011 high, the rally off the Jan. 2012 low should also be a correction. However, the typical price target for the completion of a corrective high, the 50%-61.8% retracement zone of the May 2011 – Jan. 2012 decline 135
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has not been reached. Also the (8) weekly DTosc is bullish, a momentum signal the net trend should be sideway to up for a few to several weeks potentially reaching the typical price target for the completion of a corrective high.
Gold Chart 2 is a gold weekly chart. I am not using closing data because it really does not give us much more information. The Dec. 2011 low is a potential completion of an ABC corrective decline off the Sept. 2011 high. However, there still needs to be a trade above the Nov. 2011 potential Wave B high to further support the completion of a corrective low. But there is a five-wave rally off the Dec. 2011 low complete as of the March 2012 high supporting the Dec. 2011 low as a corrective low. The decline off the March 2012 high also has corrective characteristics. Also, the low of the week ending April 5, 2012 is slightly below the typical price target for the completion of a corrective low, the 50%-61.8% retracement zone of the Dec.
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2011 – March 2012 rally. It is also in the typical time target for the completion of a corrective low, the 38.2%-61.8% time retracement zone of the Dec. 2011-March 2012 rally. So the Dec. 2011 low is a probable corrective low off the Sept. 2011 high and the April low so far is at or near both typical time and price targets for a corrective low off the March 2012 high and the (8) weekly DTosc is bullish. It is very likely a corrective low off the March 2012 high is near completion, if not already complete. If it is not yet complete, the bias is the immediate downside should be limited before it is complete and the net trend direction over the next few, if not several weeks should be bullish.
Different Patterns, but High Probability Trend Direction. While the patterns for the EUR/USD and gold are totally different, they both suggest the trend direction over the next few, if not several weeks should be up. However, the upside potential in gold is greater. For the EUR/USD, the immediate upside may be limited to the
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50%-61.8% retracement zone of the May 2011 – Jan. 2012 decline. With gold, if a corrective low is at or near completion off the March 2012 high, the March 2012 high should be exceeded. If the Dec. 2011 low is a corrective low, the Sept. 2011 high should be exceeded. Remember, as I mentioned before, gold and the EUR/USD “tend to trend” together, but often don’t. However, as of the writing of this article, pattern and momentum suggest they will trend together for the next few, if not several weeks in a bullish direction.
So, What Side of the Market Should You Be On? With a probable multi-week rally in both the EUR/USD and gold, you should look for potential long positions in these markets and short positions in the Dollar. However, keep in mind, during a multi-week bull trend, there should be multi-hour to multi-day corrections to the bull trend which can also be taken advantage of in the lower degree time frames. So regardless the direction or time frame you choose to trade, always use objective trade entry strategies, always use stop-losses, trade more than one unit and have exit strategies for each unit, use stop-loss adjustment strategies, use a money management plan and most importantly, be disciplined enough to stick to these trade strategies. For education on practical trade strategies for every time frame to take advantage of the potential week-week rally in the EUR/USD and for corrective declines during this rally, check out my NoBSFX Trading course (info below).
More Information as the Market Unfolds With the EUR/USD and gold, as well as any other market, more information is revealed on whether the longer term outlook is correct or not as the market unfolds. For continued analysis of the EUR/USD and gold as well as many more top Forex and Futures markets as they unfold and for further education on the analysis used in this article, check out the DT Daily Forex Report and DT Daily Futures Report (info below). Jaime Johnson is the author of the NoBSFX Trading Workshop. For complete information, go to www.nobsfx.com. For more info on the Dynamic Trader Daily Stock and ETF Reports, Futures Reports, Forex Reports and DT Alerts Reports which Jaime Johnson co-authors, go to www.dynamictraders.com.
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Decoding the Hidden Market Rhythm Software Review By Larry Jacobs
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ycles influence the movement of the financial markets. They are directly tied to people’s moods and emotions. If you can get a handle on cycles in the market, it will substantially improve your trading ability. So cycles are very important in the market and it can mean the difference between success and failure in trading. After hearing the presentation of Lars Von Thienen at our last Traders World Online Expo #10, I was very interested in his cycle software that is an add-on to Wave 59. So I was able to get a copy of his book and software for a review in this issue of Traders World. Mr. Thienen’s book is entitled “Decoding the Hidden Market Rhythm, A dynamic Approach to Identify and Trade Cycles That Influence Financial Markets”. It is a 255-page book along with a CD which contains the software add-on to Wave 59 that takes full advantage of his cycle concepts. In the book Mr. Thienen explains that most approaches to identify cycles in the market fail basically for two reasons. You have to detect the right high or low to get the starting point and that is very difficult as there are a lot of cycles, so which one do you select. The second reason is that you need to identify the right force behind the cycle, such as tidal movements, planetary positions, which is also extremely difficult. He believes that astrological cycles have an influence on cycles and particularly those associated with the Sun and the Moon. Therefore, solved the cycle analysis problem, he developed a method specifically designed to analyze the financial time series datasets of the market. By designing Discrete Fourier Transform (DTF) methods including the Goertzel algorithm, validated by means of statistical measurement methods and his own approaches to detrending he was able to develop his own method for measuring cycles in the markets. Building on his expertise as an engineer, Chart 1 software developer and trader, 139
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he was able to develop this method as add-on software for Wave59. The software for Wave 59 has the following in its Cycles Menu : • Cycle Swing Indicator • Cycle Scanner • Cycle Plotter • Dynamic Cycle Explorer • Manual Cycle Explorer • Superposition Energy Wave This menu is actually now integrated directly into Wave59 in the Cycle 2.0 update. It is a dropdown menu. The advantages Chart 2 of this direct integration with Wave 59 is that any updates can come directly from within Wave 59 updates and it is also easier to use. It also requires the Pro2 version of Wave59. The easiest indicator to use in the menu is the Cycle Swing Indicator. With just the click of the button you have the swing cycle on your chart automatically. You can change the up and down colors and the thickness of the lines plus plot adaptive bands. This indicator is very fast and indicates sharp turns on the screen. It is also easy to see divergences on the screen with this indicator. This indicator is much better and faster to indicate divergence than using standard indicators for divergence such as stochastics, RSI, etc. See Chart 1. Another tool in the menu is the Cycle Plotter. This tool is mainly used for research. You can plot up to 8 different cycles. You can set the start date, the length and amplitude. You can also set it to anchor to a high or a low. You can tell it how far to plot ahead. It can be set to Chart 3 zigzag instead of the sine wave 140 www.tradersworld.com May/June/July 2012
form. It can create single plots or a composite plot of several different plots. This is very interesting if you know how to use it properly. There is a detail button that allows you to see the composite plus the individual plots. See Chart 2. The most basic tool is the cycle scanner. You are able to scan the market to find the cycles. The scanner was based on an engine developed by Mr. Thienen. You can set the analysis start date. The easiest one to do is using the hotspot 1 and 2 which is the Chart 4 beginning and end date of the scan. It can also be set on the last bar of the chart minus for example 300 bars. It can also be set manually to a start and ending date. The parameter can be set to the length range for example 50 to 299 bars. The output can be also set for cycle strength or amplitude. The scanner has two tabs, one for the Professional Spectrum Plot and the other with the Dominate Cycle Data. See chart 2. The Spectrum Plot gives you a visual idea of the cycles. The x-axis gives you the cycle length and the y-axis gives you the amplitude of the cycles. It also gives you the top 5 cycle lengths. The Dominate Cycle Data tab gives you the results of the engine such as cycle length, amplitude, date cycle low, cycle strength and % real cycle percent (Bartels Value). Note that the cycles in the Dominant Cycle Data report is sorted on Cycle Strength. What do you do with Chart 5 141
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this information? You can plot it on the chart with the Cycle Plotter. By using copy and paste through your computer, all of the scanner results can be put into the Cycle Plotter. This can be done for the individual cycles and also the Composite plot for all the cycles that you have inputted. See Chart 5. Experimenting with the composite cycle plot based on 4 cycles, I have found it to be very accurate. The composite plot is very useful to do a forecast into the future. So it is easy to do a cycle forecast by using the Chart 6 Cycle Scanner to just first find the dominate cycles and then copy and paste them into to Cycle Plotter and creating a Composite of the cycles. These static cycles and also be used in conjunction with the cycle swing indicator which shows divergences. So this gives you a check between the cycle forecast and momentum and you can do this for every turning point. Another feature of the program is the Dynamic Cycle Explorer. It uses presets such as range length minimum and maximum. It can be set for both short and long term. It is generally anchored to the last major low. It creates a sine wave at the bottom of chart that is in sync to the market. Bar by bar the cycle the dominate cycle is checked to be in sync with the market as the market moves. When the sine wave at the bottom of charge is stable and starts to turn up you know you have a market bottom. Then you can look at the next estimated high turning point. You could then follow the market bar by bar making sure it stays in the frame of the up move and that gives you a valid projection of the move. The static forecast and the dynamic cycle explorer forecast will in many times be in sync and that gives you more assurance that the market is on track. The last item on the menu is the Superpostion Wave Builder. See Chart 6. You can go into many back years to analyze the market. The feature requires more history on the chart. It uses offset years to analyze the markets. They are set up for basically the years of 8. 11, 19, 27, 30, and 38 years. These years are based on the cycles of the sun and the moon. I won’t explain them here, but the book explains why. You can also change the offset years to anything you want such as every 10 year, or presidential election years, or planetary based years or whatever. Finally the combination of the Cycle Smooth RSI and the Swing Cycle is excellent for 142
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intraday trading. In many cases a 2-4 minute chart can be used for fast moving markets such as the QQQ. The basic rules are to look for divergence on both indicators. The Cycle Swing indicator is what to keep your eye on. Look for example bearish divergence. If it is near or above the upper band and turns down a short is confirmed. If it is near the lower band and bearish divergence is in place skip the short. For bullish divergence if it is near or below the low band and turns up a long is confirmed. If it is near the upper band and bullish divergence is in place skip the long trade. See the Nasdaq 100 Chart 7.
Situation 1: Classic Sell Signal (10:06) • Divergence Cycle Swing • Over upper band CSI (Cycle Swing Indicator) • Over upper band cRSI Situation 2: Classic Buy Signal (11:10) • Divergence Cycle Swing • Near lower dynamic band CSI (Cycle Swing Indicator) • Divergence cRSI Situation 3: NO SELL SIGNAL ! (12:24) • Divergence Cycle Swing • Divergence cRSI • BUT: Cycle Swing is near its LOWER band! This means cycle momentum will go UP shortly -> No room for a short trade right now! Even if the divergence is in place. The Cycle Swing is too low to enter short now. Situation 4: NOW - > SELL SIGNAL ! (13:00) • Divergence Cycle Swing • Divergence cRSI • AND: Cycle Swing is ABOVE upper band -> now we have the right time to enter a short (compare to situation 3 – the “low” cycle swing prevented us from going short there) Situation 5: NO BUY SIGNAL ! (14:24) • Divergence Cycle Swing • Divergence cRSI • BUT: Cycle Swing is near its UPPER band! This means cycle momentum will go DOWN 143
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Power Cycle Day Trading Course Review by Larry Jacobs Larry Gaines spoke at our Traders World Online Expo #11. After his presentation, we were very impressed with his course. He is the developer of the Power Cycle Trading Courses. Mr. Gaines believes that one of the fastest ways to build wealth is to participate in market moves that happen all the time. It is also good to be in the big market moves that happen only occasionally during the year. You need to be ready and in the markets for these moves. He believes that in order to participate in these moves you need to have a trading edge. It seems that he has that edge, which greatly reduces your trading risk, produces excellent returns and will return a good night’s sleep without worries. Larry has over 30 years of professional trading experience and thousands of hours of research. He has developed a trading system that is highly accurate, and can be adapted for both day trading and longer term investing. In reviewing his course, I learned all about his patent pending, 4-step Power Cycle Trading Model. It can be used for any market, such as gold, corn, silver, stocks, ETFs or even FOREX. It works on virtually any market that has real-time data and good market liquidity. The system is based on a four-step cycle trading model. It uses four powerful indicators to signal a price cycle change by identifying: • A defined price range • Price volatility • Change in price cycle • Change in price cycle momentum These indicators are used with highly accurate custom settings in a specific way to identify intraday price trends. They provide timely entry at the beginning of an intraday price cycle. The system is mechanical; this helps day trading because it eliminates the intraday and often emotional decision making that happens to most traders throughout the trading day; this frequently sabotages profits. A highly systematized model alleviates the difficulty in making quick decisions on entries and exits. These decisions can otherwise be highly stressful and difficult. Many times stress is the biggest detriment in day trading, so if you eliminate this negative factor, trading results can be instantly and dramatically improved. Once this happens, traders typically realize more consistent trades with bigger profits and fewer losses. Larry also provides a virtual trading room, which helps the members learn and implement the 4-Step Power Cycle Trading Model. He posts excellent results from actual trades called out in the trading room on his site at www.OptionsOnTheOpen.com. Larry emphasizes that the 144
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more one trades with a mechanical model, the more one gets in sync, and therefore successful with that model. I agree with that. The trading model is also used for screening intraday trades. The system uses different time frames to do this, such as a 15, 45 and 60-minute chart. The model for daily charts provides the overall direction of the market, automatically giving traders the advantage for trading in the direction of the trend. This is an important bias filter that keeps traders in the right direction of the market at all times and easily increases the probability of success. The bias can be down or up, allowing profits no matter which direction the market is headed. The Power Cycle Day Trading Course provides a proven trading system developed by a veteran professional with a simple execution plan. It explains in detail how to enter trades, identify exit zones to get out of trades and how to use all important risk management. Larry believes that 90% of trading success is due to mental and emotional control. If you are not in control of your emotions, you are doomed. To be successful, a trader needs to know what the market thinks and then get in alignment with it. He feels it is not that difficult to be successful given the right tools. When emotion is removed from trading, then it is much easier to generate consistent profits. The Power Cycle Day Trading Courses contain: • Step-by-step workings of the model and its custom model indicators • how to use the indicators to monitor and set alerts across the various asset classes • how to identify a potential market position from a chart for any time frame • step by step identification for clear and easy entry and exit points • various trading vehicles that can be used, such as options, stocks, ETF’s, or futures The course includes a 95 page color manual explaining the trading system in detail; it provides a search tool that allows for questions to be immediately answered. The course also includes 18 videos with over 5 hours of course material. A 2 month membership to Options On The Open virtual trading room is also included in this course program for a limited time. This provides access to a unique live online trading desk where experienced real traders use the Power Cycle Trading system, along with Larry. Members learn how to select and execute weekly options for day trades and option spread for swing trades using the Cycle Trading Model. Members receive powerful mentoring every day on the trading desk by easily seeing how the trades are executed, posted and frequently reviewed by Larry. Right now, an options course, Option Trading Made Simple is included as a bonus in this program. This course teaches how to select an option strike price for day trades, swing trades and long term trades using the option’s delta. It also teaches how to trade option spreads using the option delta. Larry refers to this as the practical way of using an option’s delta to make money and reduce trading risk through the use of options. The Option course is a 17 page color manual with 3 course videos explaining option delta and how to use it to set your strike price. For more information about Larry’s Power Cycle Trading Courses go to: www. OptionsOnTheOpen.com. 145
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The Ivy Bridge Sonata
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By Larry Jacobs
he new Ivy Bridge Trading Computers are being released from Sonata. These will use the new Intel 22nm Ivy Bridge 3rd generation multi-core processors. They give you around 20% more power using 20% less energy. The also use the new z77 motherboards that are easy to use and can easily overclockable, even for the average user. They can be set to overclock only when you need the power. The multiple-core feature allows you to run many programs at the same time. They also easily connect to the new solid-state drives, which are 100 times faster than the old hard disk drives. So why does a trader need this power? Today the trading computer needs to have the power to monitor the markets even when the volume shoots up. Old computers now lockup when there are volume spikes in the markets. To monitor many charts, view business news, chat rooms, etc. The Ivy Bridge processors run 146
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at 3.1Ghz to 3.5GHz and can easily overclock to nearly 5.0 Ghz. Most traders today now use 2 - 6 (24-inch) monitors. The more screens a trader has usually improves his productivity and profit. It is also very important that the computer be nearly silent as traders need that feature to concentrate. Another feature that the Sonata Trading Computer has is a removable front port for cloning your drive for backup. This feature is nice if your drive fails, then it is easy just to replace the drive through the front port and you are up and running in a couple minutes. So if you are in the market for an upgrade, now is the time. The Sonata Trading Computer that supports up to 4 monitors starts at $1399.00 For more information go to: www.SonataTradingComputers.com
Traders Book Library Classical and Modern Technical Analysis www.tradersworld.com 800-288-4266
A Unique Approach To Forecasting Market Reversal Points, A comprehensive guide for predicting precise, price and time turning points for any market. Price: $36.00 By Ivan Sargent This book is possibly one of most advanced books in technical analysis you will read regarding price and time reversals. Knowing the Price and time of a stocks reversal point is undeniably an important element for to successful trading. Unlike most trading books which use indicators, oscillators, and basic geometry to forecast the markets outcome; this technique uses a series of lines which when accurately placed can deliver reversal points with amazing accuracy. Trend lines, retracements lines, channels, fan lines, pivot points etc, all inspect a stock chart from the outside, which is more or less the obvious point of view. While these techniques can give probable predictions at times, for many of us this just isn’t enough. Now what would happen if you were able to analyze charts from what I like to refer to as, “the inside” of the chart? As you read on in the book, you soon will discover an amazing way find reversal points, and finally realize that back doors to chart analysis do exist. When attempting to look at the market from the inside the main thing you need to understand is that the rules in which how the market is predicted changes completely. Normally when using trend channels or retracement lines to determine the markets trend direction for instance, it’s ok to allow the chart to slightly exceed or come close to either of these lines and still be in legal limits for correct analysis. However these rules do not apply to this different type of analysis. This type analysis requires that all lines be accurately placed for accurate predictions. It’s a little more work, but at the end of the day it has its virtues. When using tools which allow you to see the market from the inside the predictions that manifest within the analysis are totally different than common technical analysis. Here are two main occurrences that you will notice when working with this type of analysis. A) Exact target points will be forecasted or, B) A complete miss of a target point, and nothing else. This is not a case of a 50/50 hit or miss. When you apply this technique to the markets it becomes a matter of line accuracy resulting in high target percentage. As you read on through the book, you understand how to use this technique and see how easy and powerful this technique can be when used in conjunction with other analysis. 147
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Patterns of Gann Price: $159.00 By Granville Cooley This set of books [included within this bound volume] is not about pulling the trigger. It is not a system on how to make a million dollars in the market in the morning. It is about certain mathematical and astronomical relationships between numbers and their possible application to the number of W. D. Gann.
The Definitive Guide to Forecasting Using W.D. Gann’s Square of Nine Price: $150.00 By Patrick Mikula It has been almost ten years since I wrote a book about W.D. Gann’s forecasting tools. I wanted to return to this subject with a book that would stand the test of time. This book was written with the intention of creating the official book of record for all the Square of Nine forecasting methods. I believe I have achieved that goal. This book contains virtually very Square of Nine forecasting method.
Complete Stock Market Trading and Forecasting Course Price: $529.00 By Michael Jenkins The author is a serious, highly successful, professional trader. In his two books, Geometry of the Stock Market and Chart Reading For Professional Traders, he shares some of his ideas on how he trades. Hungry for more of his ideas and direction, many of his readers literally begged for more. Jenkins has written this complete course in response to these requests. In his books, Jenkins explains, among other concepts, how he uses some of Gann’s methods and techniques, but he never mentions Gann. In this course, by contrast, he specifically states that many of the ideas are those originally developed by Gann, and he goes into great detail on how he personally uses these ideas and techniques. If you want a detailed, in depth course on how to use Gann in your own trading, this may prove to be what you have been seeking all this time.
W.D. Gann in Real-Time Trading Price: $69.00 By Larry Jacobs If you feel that you would like to do short term scalping or swing trading in the markets, then this book might be for you. It illustrates many short-term Gann mathematical trading techniques which have a high tendency to work intraday. Various intraday time frames are shown and how they can be used together to keep you in the direction of the market. 200 pages
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Patterns & Ellipses Price: $49.95 By Larry Jacobs Stocks and futures move in elliptical paths. When a market makes a gap, its price action usually passes into a new sphere. All its activity will remain in the current sphere until it moves into another new sphere. This new book tells you how to use ellipses along with detailed chart patterns to determine if a stock or futures contract is bullish or bearish. 100 pages
Pyrapoint Price: $150.00 By Don Hall Mr. Hall discovered a secret from one of Gann’s associates “Reno” who shared a desk with him on the floor of the Chicago Board of Trade. Apparently Gann carried a piece of paper with him to the floor every time he made a successful recorded trade. Mr. Hall found out what that paper was and developed the Pyrapoint trading method around this. An easy to understand trading software program was fully developed. It creates a natural trend channel and areas of both support and resistance. It’s clearly tells you when the trend changes. 300 pages.
The Structure of Stock Prices Using Geometrical Angles Price: $49.95 By Russell M. Sedlar “This chart based book shows how the Geometrical Angles described by W.D. Gann, when used is this newly discovered way, literally become the controlling force of stock price fluctuation, causing tops and bottoms to form and trend lines to be determined.”
Gann Master Charts Unveiled Price: $49.95 By Larry Jacobs Complete 100 page book explaining how to use Gann’s Master Square of Nine Chart, The Gann Hexagon Chart and the Gann Circle Chart. Many articles on the square of nine are also included from past issues of Trades World Magazine
The Geometry of Stock Market Profits Price: $45.00 By Michael Jenkins This book is about Jenkins’ proprietary techniques, with major emphasis on cycle analysis, how he views and uses the methods of W. D. Gann, and the geometry of time and price. You’ll find angles are important & how to draw them correctly and more.
Geometry of the Markets Price: $49.00 By Bryce Gilmore Book explains the theory behind time in the markets, Ancient Geometry and Numerology, Squaring Price Levels, Time Support and Resistance. Heliocentric Planetary Cycles.
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Chart Reading for Professional Traders Price: $75.00 By Michael Jenkins This book is a complete, comprehensive study on reading charts, forecasting the market, time cycles, and trading strategies. Explains reversal of trends, when to expect them, and how to know the trend has change. Shows you how to forecast with great reliability how long the new trend will last and its price target.
The Secret Science of the Stock Market Price: $149.00 By Michael Jenkins In this book Mr. Jenkins gives a start to finish ‘scientific’ examination of time and price forecasting techniques starting with basic line vectors and advances the concepts to circles, squares, triangles, logarithms, music structure and ratio analysis. These concepts are developed into a comprehensive method that allows you to forecast any market with great accuracy. Mr. Jenkins demonstrates how a few simple calculations would have predicted many of the greatest stock market swings of the past seven years with accuracy down to the day and price targets within one point on the market averages. This new book advances the work started in his other books and course but goes much further revealing little known secret methods only a very small handful of professionals know and in many cases he reveals proprietary techniques never before revealed to the public at any price. The chapter on the Gann Square of Nine is much more complete than 90% of courses available selling for hundreds to thousands of dollars more. This chapter alone is worth several times the cost of the book but the secret ratio analysis at the end of the book will truly change your trading habits forever. When you finish this book there is little left to learn about advanced trading and forecasting techniques with the rare exception of astrological methods, which are not covered in this work. This book goes from beginning concepts to the most advanced so anyone can greatly benefit from reading it. All concepts are demonstrated with actual chart histories. It is not, however, for the casual investor who does not want to take the time to calculate a simple square root on a hand held calculator. If you liked Mr. Jenkins’ previous books and/or his trading course, then this one will easily surpass your expectations.
Simple Secrets of the Trading Master Price: $90.00 By Jack Winkleman In the ebb and flow of the markets over a longer time such as one year or more, it is important to know what the market has done in the past. Certain years seem to follow the patterns of previous years with uncanny likeness. This is a book put together by Mr. Winkleman and is a very valuable tool. This book tells a trader how to used past harmonic cycles for forecasting future trends. This book is a picture of the markets since 1920 in Soybeans. As an added bonus, it has a track record of the Dow Jones Cash Index from 1900 - 2006. Cycles are nothing more than repeating patterns. Trends follow cycles. This book gives you the key cycles in the market. All you need to know is what those repeating patterns are. That is why the historical charts become so valuable and this is why this book is so important. With the content of the book along with charts, it is nearly 200 pages in length. 150
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The Art of The Trade by Jeff Rickerson Price: $24.95 In this book the author focuses on some of his basic theories such as The Seven Golden Keys to unlocking unlimited trading profits/success. He introduces his UNIFIED THEORY of Price/Time and THE POINT OF SINGULARITY. Also introduces to the reader Albert Einstein’s method of predicting price movement. Reveals his Price/Time Quadrant Analysis and why knowing these four quantrant’s are important to maximizing trading profits. Learn the Anatomy of Picking a Top or Bottom and the simple formula for Trend/Profit as well as the Four Key principles to generating MILLIONS in trading profits! He discusses the Cracking the Code & Unlocking the Secrets of Trend/Profits. Finally learn “How to Accomplish your Investment Goals and the Secrets of The Riches People.
The Art of the Trade II by Jeff Rickerson Price: $24.95 In his second book on trading the author reveals what Albert Einstein had to say about predicting prices; (most traders never have learned this valuable trading idea by the one of the most profound thinkers of our time!) How to apply a simple rule to generate 16 times more profit and how to properly design and develop trading systems and the three most important aspects in trading. He also discusses his Market Timing Matrix. He also discusses his Dynamic Trend Syntax and Delta Neural Analysis. You will also learn a simple formula for calculating buying/selling pressure within a market and how to trade it and The Ten Laws/Principles of Price Trend. Also covers Options Trading Made Simple. Author also goes into how to use volume and price when trading.
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