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Probability—
probably a good
thing to know
Measuring the probability
distribution of indicators 8
The V-Trade
Part 8: The basic
trading rules 16
One-Day Wonder
Trades
A strategy for short-term
options traders 30
INTERVIEW
Walking forward
with Dion Kurczek 34
OCTOBER 2018
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The editors of S&C invite readers to submit their opinions and information on subjects The main purpose of the SRSI is to
relating to technical analysis and this magazine. This column is our means of communi- confirm corrections and reversals based
cation with our readers. Is there something you would like to know more (or less) about? on the convergent or divergent moves.
Tell us about it. Without a source of new ideas and subjects coming from our readers, this The SMAs applied to the RSI differences
magazine would not exist. are there to smooth the signal.
Email your correspondence to Editor@Traders.com or address your correspondence The ideal SRSI should indicate buy
to: Editor, Stocks & Commodities, 4757 California Ave. SW, Seattle, WA 98116-4499. All and sell signals when turning up or
letters become the property of Technical Analysis, Inc. Letter-writers must include their full down from the low or upper side (see
name and address for verification. Letters may be edited for length or clarity. The opinions the vertical dotted lines in the chart in
expressed in this column do not necessarily represent those of the magazine.—Editor Figure 1 here) while at the same time
showing the type of reversal based on
the convergent and divergent moves.
ERRATA: THE V-TRADE, PART 6 interested in Vervoort’s SRSI indicator, Personally, I apply all the techniques
Editor, which I programmed for the Nanotrader explained in my V-Trade article series.
When reading part 6 platform. That works fine but it is not easy. You
of Sylvain Vervoort’s To be honest, I find it difficult to in- need a lot of practice.
series on the V-Trade in terpret the results of the SRSI, as they I find that the trader needs to apply a
the August 2018 issue, are quite different from the normal series of different techniques to remain
I was a little irritated RSI or STO. Can the author offer any consistently profitable. In addition, you
when I read the text on more explanation on why he uses the should not use, or use as little as possible,
page 17 referring to positive divergence stochastic on the two SMAs of the RSI any technique that uses optimization.
in Figure 2. Is it possible that Figures 2 differences?
and 5 were mistakenly exchanged, since In my opinion, one of the greatest Weekly & Daily Stochastic
the author writes that price is going down influences on the success of a trading Editor,
but in Figure 2 price is going up? system is the timeframe used. Prices are First and foremost, thank you for Vitali
Currently, I am working on a trading not fractal, and if you use too small of a Apirine’s September 2018 article in S&C,
system based mainly on Bollinger Bands timeframe, any trading system is going to “Weekly & Daily Stochastics,” which
for the entry (enter long if close>0,5 up- fail. At least that is my experience. even a novice technical analyst like me
per Bollinger Band). My main problem juergen can truly understand.
is that there are too many entries, so I My investing timeframe is longer than
need to find another indicator to reduce Author Sylvain Vervoort replies: that of most traders/investors and thus,
the bad entries. Thank you for writing. You are correct— I find the weekly/monthly charts to be
After testing dozens of different Figures 2 and 5 were switched. (My very important in my work. In Apirine’s
indicators, I am still not satisfied with fault, I marked these files with the wrong article, he uses settings of 14 (daily) and
the system’s reliability. Thus, I was very name.) 70 (weekly). I would like to construct
a weekly and monthly dual stochastic
on a single chart. Therefore, would the
author be so kind as to tell me what
monthly input setting he would use for
the monthly, assuming that 70 would
still be used for the weekly input? Thank
you very much.
Nancy West
Inside-Range Winner
Gap Breakouts
16 years
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T
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rading gaps is a long-time
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above the previous day’s high. You can example). If you’re swing trading, use Gaps occur when traders are willing to
see these visually by using a two-day the prior day’s high as your initial pay a premium price above the previous
chart similar to the one featured here stop level.
in Figure 1. Continued on page 46
Back To Normal
Probability—Probably A
Good Thing To Know
The idea of reversion to the mean is one that traders accumulate the bin counts across the data history.
tend to take for granted. Can you confidently assume Then, on the last bar on the chart, I export all the bin
all indicators subscribe to the normal probability values to a text file. I can then import this text file into
distribution? Here, we measure the probability Excel and plot the occurrences in each of the bins as
distribution of a few indicators to determine if they a bar chart. The result is the probability density of
can be used as part of your reversion-to-the-mean the indicator.
trading strategy. In the sidebar “EasyLanguage Code For Measur-
S
ing Probability Distribution,” I provide a listing titled
wing trading, or reversion to the mean, is a “Code fragment to measure indicator probability
popular trading style mainly because it is distribution” that shows how to accumulate the bin
a strategy that typically yields a relatively counts and export them to a text file.
high percent of winning trades. The idea In my May 2018 Stocks & Commodities article
behind it is that if prices have swung far enough from “RocketRSI,” I described an RSI indicator that swings
their mean price, there is high probability that price from -1 to +1. I’ll use that indicator to measure the
will swing back to the mean value. Two of the most probability distribution of an RSI. You can find the
inelegant technical analysis terms—overbought and complete code listing for doing this in “MyRSI With
oversold—imply probability considerations. There Probability Distribution Measurement” in the sidebar
are a number of strategies based on overbought and to this article. Since this RSI only swings from -1 to
oversold conditions. For example, a commonly pro- +1, I won’t be using all the bins, but it will still provide
moted rule is to buy when an RSI is crossing over 20. a good handle on the probability distribution itself.
The assumption is that when RSI is below 20, it is a The measured probability density of the MyRSI
low-probability event and prices could recover back indicator, measured with default settings and applied
toward the mean. Similarly, the complimentary rule to daily data of SPY for the 10-year period from
is to sell short when the RSI is crossing under 80. January 1, 2008 to December 31, 2017, can be seen
in Figure 1. The probability distribution is certainly
Let’s challenge those assumptions
It turns out that measuring the probability distribution
of an oscillator-type indicator is relatively easy. First
of all, you can assume the oscillator has a zero mean.
If it doesn’t have a zero mean, it will be apparent in
the probability distribution measurement itself.
microsoft excel
2008 TO DECEMBER 31, 2017. Here you see the RSI probability distribution is
nearly uniform with an upside bias because of the uptrend in data over the time period
the indicator value on each bar through history, and analyzed.
by John F. Ehlers
October 2018 • Technical Analysis of Stocks & Commodities • 9
article “Deviation-Scaled Moving Average.” The code for this
oscillator is shown in the code listing titled “Deviation-scaled
oscillator” in the sidebar to this article, with the code to measure
the probability distribution appended.
That indicator starts with an oscillator called zeros that is a
simple two-bar difference of prices. This oscillator is important
because of two characteristics in its transfer response, which
I’ll describe next.
First, when the cycle periods are long, and at the limit there
is no change in price, the transfer response is zero. It is this
Figure 2: rocket rsi indicator’s effect on probability distribution. characteristic that provides the nominal zero mean in the
The RocketRSI has a bell-shaped Gaussian probability distribution, which suggests oscillator output. Further, its filter rolloff from shorter-cycle
it’s an indicator that could be used in a mean-reversion strategy. periods is -6 dB per octave. Market data is fractal, meaning the
cycle amplitudes in its spectrum increase in direct proportion
not the bell-shaped probability distribution that is commonly to their cycle periods. That means the data cycle amplitudes
assumed. I would characterize it as having a nearly uniform increase statistically at the rate of 6 dB per octave. Since the
probability distribution with a bias toward the upside due to oscillator rolloff is -6 dB per octave and spectrum amplitudes
the uptrend in the data over the 10-year period. Certainly, are statistically increasing at the rate of +6 dB per octave, the
this probability distribution shows the RSI should not be your result is that the zeros oscillator whitens the price spectrum.
indicator of choice to swing trade the SPY. The probability of This is a good thing.
being “overbought” is more than twice the probability at the Second, when the cycle period is exactly at twice the sampling
mean. The upside bias due to the general trend up is also ap- rate, the samples are exactly one cycle period apart. This is called
parent in Figure 1. the Nyquist frequency period and is the shortest possible period
in sampled data. In the zeros oscillator, the transfer response
But there is a way around it is zero at the Nyquist period because the samples are exactly
All is not lost if you really want to use reversion to the mean as one period apart for that spectral component. Having a zero
your trading strategy. A characteristic of the nonlinear Fisher in the transfer response at the Nyquist period eliminates the 6
transform is to convert virtually any waveform into a waveform dB increase in noise produced by a simple one-bar difference.
having a nearly bell-shaped Gaussian probability distribution. I Having a zero in the transfer response at the Nyquist period also
used this characteristic of the Fisher transform when I described reduces the impact of aliased data in the oscillator output.
the RocketRSI. The RocketRSI swings are limited to plus and The zeros oscillator output is smoothed in my two-pole
minus three standard deviations, which is the reason I scaled SuperSmoother filter (for more on this, see my January 2014
the bins to measure probabilities to range between -3 and +3. S&C article “Predictive And Successful Indicators”). The
The code for the RocketRSI is repeated here from my earlier critical period of the SuperSmoother filter is the “half the
article and can be found in the code listing “RocketRSI with input” period to retain the oscillator’s responsiveness, and the
probability distribution measurement” in the sidebar to this filter coefficients are calculated only on the first bar of data for
article, with the code to measure the probability distribution computational efficiency.
appended. Since the zeros oscillator has a nominally zero mean, the
When you apply the RocketRSI indicator to the same 10-year SuperSmoother filter output also has a nominally zero mean.
span of SPY data, it results in the beautiful bell-shaped prob- Therefore, the standard deviation can be calculated as the square
ability distribution you see in Figure 2. The nearly Gaussian root of the average sum of the squares of the smoothed filter
probability distribution means we have an indicator that we can waveform over the input period. This is commonly called the
use in a reversion-to-the-mean strategy with confidence. root mean square (RMS).
For example, if the indicator crosses above -2, this means it is
departing a region that has only a 2.5% probability of occurring.
In other words, there is a high probability of reversion to the
mean, and that is a good opportunity to buy. Alternatively, you
could anticipate the turning point by buying when the RocketRSI
Not all oscillators are suitable
crosses under the -2 level. You might be a little early in your for swing trading because their
entry if you use this strategy, but you have also mitigated some probability distributions don’t
of the lag created by calculating the indicator itself. necessarily have low-probability
Beyond RSI events at the extreme swings of
The use of indicators for swing trading or reversion-to-the-mean the indicator.
strategies isn’t limited to the RSI. For example, I created a simple
oscillator indicator in my July 2018 Stocks & Commodities
10 • October 2018 • Technical Analysis of Stocks & Commodities
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A characteristic of the nonlinear
Fisher transform is to convert
virtually any waveform into a
waveform having a nearly bell-
shaped Gaussian probability
distribution.
FIGURE 3: PROBABILITY DISTRIBUTION FOR DEVIATION-SCALED OSCILLATOR.
The oscillator is suitable for swing trading but there is a trend bias and the distribution
has “fat tails.”
Dividing the RMS into the smoothed filter waveform scales the
waveform in terms of standard deviations, and you can evaluate
the indicator by measuring its probability distribution. I did that
using the same data as before, and Figure 3 shows the oscillator
is suitable for swing trading, but the trend bias is obvious and
the distribution has “fat tails.” That is, the probability of being
further from the mean is higher than a Gaussian probability
distribution would have at the same deviation. This necessarily
reduces the efficacy of the indicator for swing trading.
It is possible to improve the probability distribution by using
a trick associated with the Fisher transform. The indicator is
FIGURE 4: adding THE FISHER TRANSFORM TO THE DEVIaTiON-SCALED
already scaled in terms of standard deviations. You don’t care OSCILLATOR. This improved the probability distribution, as can be seen by the nearly
much if the deviation exceeds an absolute value of 2. So you perfect bell-shaped Gaussian probability distribution. This makes it a suitable indicator
simply apply the Fisher transform to absolute values of the for swing trading.
indicator that are less than 2, and divide the input to the Fisher
transform by 2 to avoid having the transform blow up. Fisher Stocks & Commodities Contributing Editor John Ehlers is
transform inputs must be limited to absolute values less than a pioneer in the use of cycles and DSP technical analysis. He
unity. In the code listing “Deviation-scaled oscillator with is president of MESA Software and cofounder of StockSpotter.
Fisher transform” in this article’s sidebar, you see the same com and BeYourOwnHedgeFund.com, which is a new site that
code as for the deviation-scaled oscillator but with the Fisher provides portfolios based on his algorithmic strategies.
transform trick included.
When the Fisher transform is introduced with this trick and Further reading
added to the deviation-scaled oscillator, and the oscillator Ehlers, John F. [2018]. “RocketRSI—A Solid Propellant For Your
is applied to the same data as before, it results in the nearly Rocket Science Trading,” Technical Analysis of Stocks &
perfect bell-shaped Gaussian probability distribution. This is Commodities, Volume 36: May.
demonstrated in Figure 4. [2018]. “The Deviation-Scaled Moving Average,”
Technical Analysis of Stocks & Commodities, Volume
Low or high probability? 36: July.
Not all oscillators are suitable for swing trading because their [2014]. “Predictive And Successful Indicators,” Tech-
probability distributions don’t necessarily have low-probability nical Analysis of Stocks & Commodities, Volume 32:
events at the extreme swings of the indicator. With this article, January.
I have provided a code fragment that can be appended to any Ehlers, John F. [2013]. Cycle Analytics For Traders, Wiley.
properly scaled oscillator and modified to produce the prob- ‡TradeStation
ability distribution of that oscillator on any data symbol of your ‡See Editorial Resource Index
choice. If the oscillator is not scaled, you can apply the RMS
scaling without distorting the oscillator response or introducing The code given in this article is available in the Article Code section
any computational lag. Almost any oscillator-type indicator can of our website, Traders.com.
have its probability distribution improved for swing trading by
applying the Fisher transform using the technique I’ve described See our Traders’ Tips section beginning on page 48 for commentary
here and that is shown in the code listing “Deviation-scaled and implementation of John Ehlers’ technique in various technical
oscillator with Fisher transform” in the sidebar to this article. analysis programs. Accompanying program code can be found in the
Good swing trading! Traders’ Tips area at Traders.com.
//Produce Nominal zero mean with zeros in the transfer response at //Compute Standard Deviation
DC and Nyquist with no spectral distortion RMS = 0;
//Nominally whitens the spectrum because of 6 dB per octave rolloff For count = 0 to Period - 1 Begin
Zeros = Close - Close[2]; RMS = RMS + Filt[count]*Filt[count];
End;
//SuperSmoother Filter RMS = SquareRoot(RMS / Period);
Filt = c1*(Zeros + Zeros[1]) / 2 + c2*Filt[1] + c3*Filt[2];
//Rescale Filt in terms of Standard Deviations
//Compute Standard Deviation If RMS <> 0 Then ScaledFilt = Filt / RMS;
RMS = 0;
For count = 0 to Period - 1 Begin //Apply Fisher Transform to establish real Gaussian Probability
RMS = RMS + Filt[count]*Filt[count]; Distribution
End; If AbsValue(ScaledFilt) < 2 Then FisherFilt = .5*Log((1 + ScaledFilt /
RMS = SquareRoot(RMS / Period); 2) / (1 - ScaledFilt / 2));
LAS VEGAS
NOVEMBER 12-14, 2018
Pa r i s / B A L LY ’ S R es o r t s
WOMEN IN TRADING
BACK TO THE FUTURES
CRYPTO INTELLIGENCE
ALL-STARS OF OPTIONS TRADING
LIVE TRADING: FUTURES, CRYPTO, & EQUITIES
The V-Trade
Part 8: The Basic Trading Rules
In this eighth part of a multipart series, we look at the V-Trade part. And in part 9, I will show a number of trade examples
trading rules. applying these rules.
Trading rules
T
by Sylvain Vervoort
I have split the rules into two basic parts: a downtrend-to-
he objective of this series on the V-Trade is to uptrend reversal, and an uptrend-to-downtrend reversal. In this
explain the techniques I apply to make manual article I will look at the up or down reversal; the retracements
and automatic buy & sell decisions, or a combina- during the up or down move; and finally, the continuation of
tion of both. the up or down move after the retrace.
Last month in part 7, I discussed the V-wave In addition to applying the basic rules, it is good practice
count, which is based on Elliott wave theory. This to look at short-term candlestick charts for flag and pennant
WAVE: NATINKA/V: WOO GRAPHICS/SHUTTERSTOCK/
count can be applied to almost any move in the continuation patterns before opening or closing a trade.
markets. In that article, I documented the rules
for the basic wave counts. In reality, this count Downtrend-to-uptrend reversal
will likely be more complex with possible extensions in any Price reaches the end of a downtrend, either finishing an
COLLAGE: CHRISTINE MORRISON
Positive divergence
MetaQuotes Software Corp.
volatility channel. FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED OR HYPOTHETICAL TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT
THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE
The downward impulse wave is most FIGURE 3: MODIFIED RENKO CHART, correction wave. Rules are applied to a modified renko chart
probably complete, which means this could correction wave for a downtrend-to-uptrend reversal.
be the time to open a long trade.
Modified renko chart reversal after DU4 The SRSI started from the top with a convergent move
a downward correction wave after the tops of waves B and b for a continuation of the
Figure 3 is a modified renko chart of the S&P 500 that il- down move. Now that prices have reached the bottom
lustrates a downtrend-to-uptrend reversal after a downward with a convergent move between wave bottoms a and
correction wave. c, you can expect a wave A up correction.
The index complies with the downtrend-to-uptrend V- DU5 Price is near a support level reaching a down target at
Trading rules: the 261.8% Fibonacci projection over the first b-wave
correction.
DU1 Expect wave A after a double upward renko brick. DU6 Price has a wick below the current double-sized revers-
DU2 Price low is at the bottom of the volatility band. ing renko brick.
DU3 The last move down is a completed double zigzag cor-
rection wave. Looking at the start of the second wave b, do you see a
20 • October 2018 • Technical Analysis of Stocks & Commodities
positive divergence with price coming close
to the 161.8% Fibonacci target? All rules
are complied with, except, at that point, the
correction wave is not completed.
This is probably a good sign to close an
open short trade. But it is not the time to
open a long trade.
Since you expect a b-wave correction, you
have to verify whether there is a downtrend
retrace signal at this level with the following
rules applied:
Trend reversals: Applying uptrend-to- UC1 Expect a continuation of the up move impulse wave
downtrend reversal rules after the retracement of wave 4 to create impulse wave
Modified renko chart reversal after 5, while retracing to price support.
an upward impulse wave UC2 Price is at a Fibonacci price support level.
Figure 5 is a modified renko chart of Nasdaq 100 (USTEC) UC3 SRSI indicator has a positive hidden divergence with
illustrating an uptrend-to-downtrend reversal after an upward a higher bottom in price but a lower bottom in the
impulse wave. indicator.
The index complies with the uptrend-to-downtrend V-
Trading rules: The Nasdaq is likely at the top of wave 5. The upward impulse
wave is coming to an end. Time to open a short trade!
UD1 Expecting a wave A or 1 after a double downward
renko brick. Candlestick chart reversal after an upward impulse wave
UD2 Price is near the top of the volatility band. Figure 6 is a 15-minute candlestick chart of the Nasdaq 100
UD3 The last move up is a completed impulse wave. (USTEC) illustrating an uptrend-to-downtrend reversal using
UD4 The SRSI is moving down from the top with a negative the same time period as in Figure 5. Note the high volatil-
price divergence between the top around the middle ity that starts wave 1 and wave 3. Making a count using a
of wave 3 and wave 5 top. There is a convergent move candlestick chart is less easy compared to using the modified
between the top of wave 3 and wave 5. At first instinct, renko chart.
you have to expect the start of a correction. The index complies with the uptrend-to-downtrend V-
UD5 Price is at a resistance level, reaching the 423.6% Trading rules:
Fibonacci targets projected over the last small c-wave
down of the previous downtrend, just before the start UD1 Expect a wave A or 1 after a series of negative candles
of the up impulse wave 1. and approaching a price target.
UD6 Price has a wick above the double-sized
reversing renko brick.
E
hicles. The sector rotation strategy I’ll use is one presented
by Cassandra Wang by Marisa Yang in the February 2018 issue of Stocks &
Commodities.
xchange-traded funds (ETFs) have become popular Sector rotation is an investment strategy that involves the
among investors for their flexibility and ability to be periodic allocation of money from one industry sector to an-
traded like a stock. The $476.1 billion cash inflow into other in an attempt to control market exposure, manage risk,
US-listed ETFs in 2017 far exceeded the inflow of and hopefully, beat the market. The momentum-based sector
$287.5 billion in 2016. Because of the tax efficiency rotation strategy described by Yang has been shown to be
and low fees of ETFs, many investors tend to add ETFs instead beneficial to investors. The strategy used quarterly data from
NATEE K JINDA KUM/SHUTTERSTOCK
of mutual funds to their investment portfolios, even though nine of the 10 S&P depositary receipt (SPDR) sector ETFs
mutual funds have a much longer history and offer a similar between 2000 and 2016. The nine ETFs used were Consumer
diversification vehicle through active management. Overall, Discretionary (XLY), Consumer Staples (XLP), Energy (XLE),
the mutual fund industry faces strong competition from ETFs; Financials (XLF), Health Care (XLV), Industrial (XLI), Ma-
the $174 billion cash inflow into mutual funds in 2017 was terials (XLB), Technology (XLK), and Utilities (XLU).
less than half the value of the inflow into ETFs. To make a side-by-side comparison of ETFs, I selected nine
24 • October 2018 • Technical Analysis of Stocks & Commodities
INVESTING IN ETFS
?DON’T
? ?
?
??GAMBLE
?
? ? ?
?? ?? ?
sector-based mutual funds from Fidelity.
? On? Your?Next
These mutual funds are Fidelity Select
Industrials Portfolio (FCYIX), Fidel-
ity Select Consumer Staples Portfolio
(FDFAX), Fidelity Select Financial
?
?Investment
?
Services Portfolio (FIDSX), Fidelity
Select Consumer Discretionary Portfo-
?
lio (FSCPX), Fidelity Select Materials
?? ??
Portfolio (FSDPX), Fidelity Select En-
??? ?
ergy Portfolio (FSENX), Fidelity Select
Health Care Portfolio (FSPHX), Fidelity
Select Technology Portfolio (FSPTX),
?
and Fidelity Select Utilities Portfolio
(FSUTX). I downloaded monthly data
for mutual funds and ETFs from Yahoo
? ?
Finance for the period between the years
2000 and 2017.
?ANALYZE? ?ANY
Momentum-based sector
rotation strategy
The sector rotation strategy I am using
for this article ranks sectors by their per-
centage change in price for the current
month. The price is an adjusted price,
accounting for price and dividend. Upon
ranking the percentage price movements
STOCK FREE!
from highest to lowest, the sector with
the highest percentage return is denoted
“rank1” and its performance in the fol-
lowing month is then calculated. The
sector with the second-highest return
is denoted “rank2,” and so on through
Visit www.VectorVest.com/SC
rank9. Next, you calculate the annual
return for each rank by summing the
12 monthly returns (January through
December). To determine which rank
was most profitable, I calculated and
Get 9 FREE Reports Showing:
compared the average annual returns
over the period between 2000 and The True Value of a Stock
2017. I then compared the returns of
ranks 1 through 9 with the total return The Stock’s Overall Safety
of the S&P 500 (SPY), which served
as a baseline. I also evaluated the rank
Whether to Buy, Sell or Hold
strategies based on their volatility (the
standard deviation of annual returns)
Award Winning Software 19 Years
and maximum drop (MaxDrop), which Running
is defined as the largest annual drop. VectorVest analyzes, sorts, ranks and graphs over
1999 - 2018
19,000 stocks daily for value, safety and timing. Get
As you can see from Figure 1, the
clear Buy, Sell or Hold recommendations on every
rank4 strategy, which selected the stock, every day.
fourth-highest ranked sector mutual
fund at the end of the current month,
was the best strategy among all nine
momentum-based strategies. Rank4 had
an average annual return of 15.21% and
a relatively low volatility and a small
maximum drop, as shown through its
October 2018 • Technical Analysis of Stocks & Commodities • 25
small bubble in Figure 1. The aver-
age annual return of rank4 was more
than 7% higher than the S&P 500’s
total return with a small increase in
volatility. The highest (rank1) and
lowest (rank9) momentum strategies,
on the other hand, did not perform
well in terms of average annual
returns and volatilities. Both rank1
and rank9 underperformed relative
to the S&P 500.
Mutual funds
outperformed
The annual returns for the mutual Figure 1: Annual Returns from the Ranking System. The y-axis describes the percentage of average
fund, ETF, and S&P 500 are tabu- annual return and the x-axis is the annual volatility of each rank as calculated by standard deviation. The size of each
lated in Figure 2. As shown, rank4, bubble is proportional to the maximum drop. The rank of each mutual fund is labeled on the graph and the red dot
the best strategy for the mutual fund, represents the S&P 500 total return with dividends. The navy blue dot represents the Rank4 strategy for the mutual
fund; it has significantly higher returns than the other ranks and the S&P 500.
yielded an average annual return of
15.21% with a volatility of 19.43%
and MaxDrop of -26.67%. Rank4 ETF, which was the best and MaxDrop.
performer among the nine ETF momentum strategies, yielded When I applied the same moving averages to the ETF, rank4
an average annual return of 13.31%, 1.90% worse than that of still performed best among the nine ETF momentum strate-
the rank4 mutual fund. The annual volatility and MaxDrop gies. As emphasized by the red border around the blue bubble
of the rank4 ETF are 17.32% and -31.74%, respectively. The in Figure 3, the rank4 ETF with a moving average of three
best performers from mutual funds and ETFs outperformed months (SMA3) had the best combination of annual return
the S&P 500 by 8.27% and 6.37%, respectively. (7.97%) and volatility (10.92%) as determined by the Sharpe
Benefits of applying Rank4 Mutual Rank4 Mutual Rank4 ETF Rank4 ETF SPY
a moving average Year
Fund (no SMA) Fund (SMA8) (no SMA) (SMA3) (no SMA)
I applied a moving average to 2000 31.28 31.48 8.83 -10.55 -9.03
the same momentum-based 2001 -4.79 -2.91 18.70 3.77 -11.85
sector rotation strategy to see 2002 -20.36 7.42 -31.74 -6.40 -21.97
if the results improved. I added 2003 17.84 13.41 32.89 21.25 28.36
simple moving averages (SMA) 2004 28.34 10.49 19.85 15.78 10.74
with monthly lookback periods ranging from two 2005 16.94 11.05 9.22 3.25 4.83
to 12 months for each rank (ranks 1 through 9) 2006 8.99 8.25 8.71 10.41 15.61
between 2000 and 2017. Here’s how I applied the 2007 17.81 7.31 8.09 7.82 5.48
SMA: If the underlying sector value is greater than 2008 -26.67 -6.40 -18.37 -4.13 -36.55
or equal to the corresponding SMA’s value, you 2009 51.36 31.02 41.28 18.95 25.94
could execute the trade. Otherwise, you avoid the 2010 38.49 22.20 20.46 19.49 14.82
trade and hold cash. 2011 12.47 6.38 7.83 10.01 2.10
When I tested each rank with the SMA, rank4 2012 17.59 17.69 30.18 15.51 15.89
was found to yield the best results again. Overall, 2013 33.84 33.84 29.13 13.67 32.15
a moving average with a lookback period of eight 2014 13.07 10.35 14.40 7.12 13.52
2015 14.61 3.51 9.68 -14.16 1.38
months (SMA8) (orange bubble with red border in
2016 -0.20 2.28 7.90 9.30 11.77
Figure 3) produced the most favorable results for the
2017 23.15 27.48 22.45 22.45 21.64
mutual fund. Its average yearly return was 13.05%, Avg. Annual
significantly higher than the S&P 500’s return (6.94%). Returns
15.21 13.05 13.31 7.97 6.94
Although the annual return of the rank4 mutual fund MaxDrop -26.67 -6.40 -31.74 -14.16 -36.55
with SMA8 was ≈2% lower than the return without Volatility 19.43 11.88 17.32 10.92 17.77
the moving average, its maximum annual loss was FIGURE 2: Annual returns calculated from mutual funds and ETFs, with and
improved to -6.40%. Its annual volatility also de- without moving averages, compared to SPY. Rank4, the best strategy for the mutual
creased from 19.43% to 11.88%. Based on this, you
fund, yielded an average annual return of 15.21% with a volatility of 19.43% and MaxDrop of
-26.67%. Rank4 ETF, which was the best performer among the nine ETF momentum strategies,
would be better off if you sacrifice a small percent- yields an average annual return of 13.31%. The best performers from mutual funds and ETFs
age of profit in return for reduced annual volatility outperformed the S&P 500 by 8.27% and 6.37%, respectively.
by Barbara Star
Charts
The charts display prices on fixed
timeframes from intraday to quarterly
but may also be customized for specific
dates. The daily, weekly, and monthly
trade triangles may be placed on the
chart of most timeframes. They aren’t
available for use on intraday charts. The
triangle shows the direction, but hover
your mouse over any triangle to see the
date and price level when that triangle
occurred. The trade triangles are small Figure 3: Smart Scan. MarketClub scores each symbol in its database for trend strength and direction
and triangles in every timeframe are and places them in categories ranging from +100 to -100. The scan results are shown as small charts, which
colored red and green so it is difficult
also contain links to a full-size trade triangle chart or a more detailed chart analysis.
T
their expiration. As Friday’s expiration approaches, all the air
he existence of weekly options makes it possible to (premium) comes out of the balloon (option price) and that is
create weekly credit spreads, which in turn makes what makes this trading opportunity possible.
possible a specialty trade I call the one-day wonder It is the certainty of time decay that makes it difficult for
trade. Want to find out more about it? Well, it com- many retail traders to make money trading options. They
bines the strength of a computer-generated opinion think that buying out-of-the-money (OTM) calls and puts
or advisory with an options strategy that I developed is a cheap way to trade options. The problem is, they don’t
several years ago. The computer-generated opinion is used to consider how quickly the premium collapses in the OTM
provide the probable direction of the underlying stock. I apply options as expiration approaches. They can be correct on the
this trading strategy to weekly options. price direction for the underlying stock but unfortunately,
they still lose money.
Here’s how I trade it The one-day wonder trade is designed to take advantage of
I initiate the trade on Thursday as near to the close of the this phenomenon. To see how this works, check out the options
market as practical. If it is a short holiday week, use Wednes- chains in Figure 1. They are both for Chipotle Grill (CHG).
FIZKES/SHUTTERSTOCK
day as your trade day. The trade is an off-strike horizontal The first chain is for the February 9, 2018 expiration while
spread that takes advantage of the time decay in expiring the second is for the February 16, 2018 expiration. On this
weekly options. day, CHG was trading at $266.91, down $5.30 on the day. It
A horizontal spread involves the purchase of a deferred should be immediately apparent that even though the stock
30 • October 2018 • Technical Analysis of Stocks & Commodities
OPTIONS
QUICK-SCAN/MARKETCLUB
Continued from page 29
MarketClub offers traders a mechanism
for scanning a broad array of symbols in
during the trading day. Alerts may be many types of asset categories, and uses
set to notify the trader when changes
occur. The portfolio tab on the homepage can incorporate the multiple timeframe
enables access to all portfolios. directional signals into a trading system.
Members receive daily emails that
keep them apprised of new trade tri-
angles; smart scan portfolio alerts; a many types of asset categories, and users Barbara Star, PhD, is a retired university
list of the holdings in the portfolio each can incorporate the multiple timeframe professor and a Contributing Writer for
with price information, trend scores, and directional signals from MarketClub this magazine. She can be reached by
directional trade triangles; plus current into a trading system. With the potential email at star4070@aol.com.
blog postings. to shorten the search for good trading
candidates and trading opportunities, it ‡MarketClub
don’t searCH so Hard might be worth taking a trial to determine
MarketClub offers traders a mechanism whether those features provide a good
for scanning a broad array of symbols in fit for your trading needs.
32 • October 2018 • Technical Analysis of Stocks & Commodities
VerVoorT/The V-Trade
Continued from page 23 You have to learn, understand,
and practice the V-Trade
rules as much as possible to
UD3 The last move up is a completed ABC correction
wave.
successfully trade with the
UD4 SRSI is near the top with a negative divergent move, a V-Trade system.
higher top in the index, but a lower top in the indica-
tor.
UD5 Price reached the 50% retracement over the complete
impulse wave down. There is resistance from the 100 Vervoort, Sylvain [2018]. “The V-Trade, Part 1: Five Basic
bars active average and resistance from the R1 daily Trading Rules,” Technical Analysis of StockS & com-
pivot level. moditieS, Volume 36: March.
UD6 Price has a wick above the reversing doji candle. [2018]. “The V-Trade, Part 2: Technical Analysis,”
Technical Analysis of StockS & commoditieS, Volume
The upward correction wave has most likely completed, 36: April.
which means it’s time to open another short trade. [2018]. “The V-Trade, Part 3: Technical Analysis—Fi-
bonacci Projections And Daily Pivots,” Technical Analysis
First, know the rules. then … of StockS & commoditieS, Volume 36: May.
Now that you know the V-Trade rules, stay tuned for part [2018]. “The V-Trade, Part 4: Technical Analysis—
9, where I will look at a number of example trades for you Trends & Reversals,” Technical Analysis of StockS &
to study. You have to learn, understand, and practice the V- commoditieS, Volume 36: June.
Trade rules as much as possible to successfully trade with [2018]. “The V-Trade, Part 5: Technical Analysis—
the V-Trade system. You will need additional tools to assist Moving Average Support & Resistance And Volatility
in entering and exiting trades, whether you apply a manual, Bands,” Technical Analysis of StockS & commoditieS,
semi-automatic or even fully automatic method. These tools Volume 36: July.
are integrated in the V-Trade expert system, which I will look [2018]. “The V-Trade, Part 6: Technical Analysis—
at starting in V-Trade part 10. Divergence Indicators,” Technical Analysis of StockS &
commoditieS, Volume 36: August.
Sylvain Vervoort is a retired electronics engineer who has [2018]. “The V-Trade, Part 7: Technical Analysis—
been studying and using technical analysis for more than V-Wave Count,” Technical Analysis of StockS & com-
40 years. Currently, he experiments with trading forex and moditieS, Volume 36: September.
CFDs with rule-based systems. His book Capturing Profit With [2009]. Capturing Profit With Technical Analysis:
Technical Analysis received a bronze medal from the 2010 Hands-On Rules For Exploiting Candlestick, Indica-
Axiom Business Book Awards in the category of investing. tor, And Money Management Techniques, MarketPlace
His Band Break System Expert is available on DVD. More Books, Inc.
information about the V-Trade System will become available [2012]. Ground-Breaking Band Indicators: Newly
on his blog under construction at at http://blog.stocata.org. Discovered Tactics for Timing Profit, DVD, http://stocata.
Vervoort may be reached at sve.vervoort@scarlet.be or via org. Includes an autotrading expert system.
his website at http://stocata.org. ‡MetaTrader4 (MetaQuotes Software Corp.)
‡See Editorial Resource Index
Further reading †See Traders’ Glossary for definition
Frost, A.J., and Robert Prechter [2001]. Elliott Wave Principle,
John Wiley & Sons (first published in 1985).
LeTTerS To S&C haNGING oUT WITh The JUNKIeS Once again, thank
Continued from page 6 Editor, you, and I enjoy your
I would like to thank Hector Landazabal magazine.
my article. Unfortunately, a monthly for his December 2017 article in S&C, WiLLie
setting doesn’t work properly because “Hanging Out With The Junkies.” Very
of the large lookback period. Instead, interesting concept of using bonds with Thank you for writing
I use 200-day simple moving average SPY. and for your interest.
(SMA). I am wondering if the author has We have forwarded your note to the
I hope this helps. software, an Excel file, or a website for author.—Editor
following this strategy.
Walking Forward
With Dion Kurczek
Dion Kurczek is a software developer and individual trader. Developing gaming
for chess players in the early days of the Internet led him down the path of
developing charting and backtesting programs for trading, after he discovered
technical analysis and became interested in trading. In 2000, he created the
Wealth-Lab backtesting platform, acquired by Fidelity Investments in 2004.
He worked with Fidelity until 2017, enhancing and developing the platform.
Since then, he has developed a cloud-based backtesting platform, Quantacula,
and a Javascript-based charting and backtesting site, JuicyCharts.com. He is
also an abstract artist and resides in Sarasota, FL.
Stocks & Commodities Editor Jayanthi Gopalakrishnan spoke with Dion
Kurczek on August 8, 2018 to find out more about why it’s important to him to
offer traders a way to develop and test their own trading systems and ideas.
Tell us a little bit about out and then pull back, and that’s when
yourself and how you got he would get in. That way, he would hit
interested in the industry. these large bull market sort of moves.
I was primarily, and still So that’s what got me interested. At
am, a software developer. that point, I started reading a lot of
That’s my main talent, which I recog- books on my own and learning all the I believe it’s valuable
nized pretty early on. I was working basics of technical analysis, indicators, for the trader to develop
with a company back in the late 1990s, in and chart patterns. his or her own strategy
Vancouver, British Columbia, in Canada,
named Grandmaster Technologies. We How did that interest lead you to
to cater to his or her
were developing strategic network games develop the software product Wealth- individual tastes,
on the Internet. The Internet wasn’t very Lab? especially when it comes
old at the time. And this company was Once I learned about technical to risk tolerance.
run by two chess grandmasters who analysis, I started trying different soft-
wanted to develop an Internet-based ware packages that were available at
chess-matching network. So they hired the time. Unfortunately, none of them
me and when I traveled to Vancouver, could do the kind of analysis I wanted to You developed Wealth-Lab and it has
I would stay at a colleague’s home. He do. Either they only allowed you to test since been sold. What have you done
was from Taiwan, and he had a trad- trading systems with a single position, or since then and what are you doing
ing setup with all these computers and there were other limitations. My system now?
charts. I found that fascinating, and my ideas managed multiple positions and I After the sale of Wealth-Lab to Fidel-
curiosity led me to ask him questions, wanted a product that would let me do ity, I continued to work with Fidelity until
and he explained some things about that. So I started developing one just about a year ago, working to improve
technical analysis. for my own use. I was showing it to a Wealth-Lab to keep it up to date. Since
friend of mine who was impressed with then, I’ve been working on a couple of
What types of things did he explain? it and who told me that I should make it a new projects. One is Quantacula, which
He showed me trendlines, for example, commercial product. I thought about his is a new backtesting platform I’ve de-
and said, “Notice how the stock always advice and went ahead and put in some veloped, and the other is JuicyCharts,
bounces off of this trendline.” This got additional work and then launched the which is a web-based JavaScript charting
me interested in charts and technical Wealth-Lab website. The first version of package. I’m also an abstract artist, and
analysis in general. And he was good at Wealth-Lab, which was called Wealth- I put effort into my painting, which also
identifying breakout points after a long Lab Desktop, was released around the takes up some of my time.
decline. The stock would finally break year 2000.
34 • October 2018 • Technical Analysis of Stocks & Commodities
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SIMULTANEOUSLY LONG & SHORT? on the sidelines! In other words, traders the rule against being long and short
Why won’t my futures broker allow me are paying transaction costs to not have a simultaneously. While you can have two
to use a “hedging strategy” in which I position in the futures market. The only separate trading accounts trading two
am long and short a futures contract party benefiting from such an arrange- different strategies that occasionally and
simultaneously? ment is the brokerage and the exchange coincidently are long and short the same
I am asked this question often and (who would be earning transaction fees commodity at the same time, consistently
am surprised at how many traders are on positions that have no risk exposure entering offsetting trades in two differ-
interested in having equal and opposite or profit potential). ent accounts is forbidden. This is true
positions in the exact same futures There are traders who legitimately even if the accounts are held at different
contract. The reality is, a trader who is believe this rule is a hindrance to their brokerage services (each futures trader
both long and short a futures contract ability to profit in the markets. Their with platform access is assigned an ex-
is simply “flat” the market. In other argument is that if they were able to hold change ID for tagging purposes and IP
words, the trader has no position at all. a long and short position simultaneously, addresses are recorded). In addition to
On balance, this is the point of hav- the unnecessary and difficult-to-digest
ing futures markets. Traders can buy transaction costs involved in the strategy
or sell in any order because they are A trader who is both of being long and short the same market,
trading obligations rather than assets. there are deeper regulatory concerns
In addition, the only way to exit a long long and short a futures including money laundering (if you think
or short position is to take the opposite contract is simply ‘flat’ long and hard about this, the concern
side of the trade—that is, traders who the market. will become apparent).
sold short a December emini S&P 500 If you truly believe you have uncovered
futures contract must buy a December a trading edge employing a strategy of be-
emini S&P 500 futures contract to exit they could eventually offset the win- ing long and short simultaneously, don’t
the trade. Because of this process and ning trade to lock in a profit and hope break the rules. Instead, get creative; a
the logistics of the futures markets, it is the losing side of the trade eventually trader who buys a futures contract and
not possible to be both long and short at recovers. Nevertheless, the losing trade then sells an at-the-money (ATM) call
the same time. The trader is simply out might never recover and while both the option, or even sells two of them, is
of the market. long and short contracts were open, the recreating a similar trade while staying
The lack of ability to employ a “hedg- trader would have had the same fate had within the rules. This type of strategy
ing strategy” in which a trader is both the trader been flat the market. Offset- probably makes more sense in that it
long and short the same futures contract ting the profitable side of a simultaneous enables traders to benefit from options
is not the decision of the brokerage ser- long and short futures position in hopes time-value erosion. That said, if the
vice; it is a futures exchange and regula- of the losing side recovering mimics the goal is to mimic being long and short a
tory rule that is enforced by the CME profit, loss, and risk potential of simply futures contract exactly, a trader could
Group as well as the NFA and CFTC. entering a fresh position at the point the go long a futures contract and then buy
Rulemakers’ disdain for the practice of profitable leg of the “hedging strategy” an ATM put option and buy an ATM
being long and short the same instrument was liquidated. Yet in the meantime, call option.
is simple: There is no potential for either the trader would have paid two sets of While I am a big fan of premium-
profit or loss. Instead, the trader simply transaction costs rather than one. collection strategies, and particularly, of
paid commission, exchange transaction Keep in mind, opening two separate trading covered calls using ATM strike
fees, and potentially platform fees to trading accounts to house the offset-
have the same risk exposure as being ting trades is not a viable way to bypass Continued on page 41
38 • October 2018 • Technical Analysis of Stocks & Commodities
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October equals opportunity December not knowing what to expect Here are some particulars about the
While October is synonymous with in the new year and are looking for upcoming elections as far as what is
risk, opportunity favors the bold and information. in play:
informed. What do most traders think The US federal government fiscal
about October’s typical market activity? year-end is September 30. I am not en- At the federal and state levels: 500 to
Most thoughts run toward, “Beware of tirely sure what, if any, impact this has be elected
potential market crashes,” and “Volatility on October’s behavior, but it is worth House of Representatives: 435 seats
reigns supreme.” a mention for those who may wish to Senate: 33 of 100 seats
Let’s add a few more items to this con- research this further. Many financial Governors: 39 states will vote.
versation about the month of October: institutions have their fiscal year-ends
in September or October. As you can see, there is enough at stake
• It is an important earnings season Mergers are often consummated in the to cause some market movement as we
• There are potential macro events at third or fourth quarters of the year, and move through September and October,
home and globally over the years we have seen some large factoring in the probable outcomes.
• It can be the start of significant IPOs debut in the fall. These may be These election results will play into how
market rallies contributing factors to market movement the second half of Trump’s presidency
• It can be a generally tense month and behaviors. Once again, context. unfolds. In addition, there is always
during election cycles. plenty of opportunity for macro forces
to add some excitement between now
Context You can reference the and then as well.
There is a need to pay special attention various VIX charts
to what happens in the month before Oc- Trading
tober. This is because looking at context from the CBOE to view There are stocks you could trade regard-
helps to anticipate activity. the average volatility less of the market’s direction. Some
September can be an interesting per month, and October trades could be assembled as sound
month partly because it is the first month is the clear winner. fundamental pairs, others as technical
after the summer season, and investors plays, and still others as quantitative
are not sure what to expect for the fall trades based on historical patterns. Some
season. Investors usually lean on the November 2018 election season trades might have ingredients of all those
analyst community for information in The potential outcome of the elections things to overlay the probability sets.
September more so than they would in could exert pressure on the market even In addition, long versus short baskets
other months. before November 6. Remember, the mar- could be formed for either intraday op-
It usually takes a week or two into the ket is almost prescient in the way it seems portunity or as swing trades.
month of September for the indecision to to know about things before they happen, The wild card in swing trading for an
be brushed aside and then for a trend to or as it is often put, “The market factors extended period is the earnings season.
catch on either way (up or down), setting in everything it knows or can anticipate, You could have a situation where your
the stage for an interesting October. Oc- just not surprises.” Outcomes like Brexit trade is going swimmingly but an earn-
tober tends to lend itself to more “drama” or our most recent US presidential elec- ings event is on the horizon. This is your
than other months. You can reference the tion were disruptive because they were call as to how effective your research
various VIX charts from the CBOE to a surprise to many. can be. I still think that earnings plays
view the average volatility per month, The actual outcome of the upcoming are a gamble and the only time I see an
and October is the clear winner. elections on November 6, 2018 could edge is where one side of a correlated
Just a note here for future reference: cause a continuation of the October move pair has reported and the other side
January is like September in that inves- or a reversal depending on how things hasn’t. You have information on how
tors lean more on the analyst commu- play out and how much of the outcome both the earnings stock and sympathy
nity. Market participants come out of was truly factored in beforehand. stock performed, and you can evaluate
40 • October 2018 • Technical Analysis of Stocks & Commodities
Q&A
your risk/opportunity from where the looking for anomalies in a group and other months. Recall my column from
pair finds itself just before the next side’s exploiting those relationships. In turn, last month’s issue on MOME (middle-
earnings event. you play a part in helping them return to of-the-month effect) and TOME (turn-
For single-stock trading, if one of the their mean (and hopefully return to you of-the-month effect) and remember to
dominant stocks in a peer group has some profit) through your actions. You observe context as we approach those
reported and none of the others have, can use ATR as percentage of price or timeframes.
you can watch all stocks in the group straight-up dollar balancing when tak- Last year in 2017, we saw a bad selloff
for information from their respective ing these trades. You can form pairs or in August and from that correction, the
behaviors. If there is enough disruption, keep it as baskets, or just take the long market rebuilt and closed high by the end
creating premium or discount from the or short naked trade, or balance one of September. That played into continued
industry mean, that might attract some stock or a few stocks against the SPY strength for October.
piston trading. Back as early as 2001, or appropriate ETF. In 2016 there was a big October selloff
I coined the term piston trading as a Utilizing automation or semi-automa- right before the November elections.
strategy to take advantage of the percent tion to assist your trading can increase In 2015 we had a huge drop in August
separation of a peer group from the indus- your ability to harvest anomalies. Being and another perfect retest of those lows
try mean or from each other, on the day armed with data about the historical at the end of September that set the stage
of or within your specified timeframes. percent separation amounts and how for an October rally.
It came from my experience in rebuild- long that persists before snapping back This shows just how important con-
ing a small-block eight-cylinder motor. to the mean can only assist you in your text is.
In a four-stroke engine, pistons can be at expectation and risk management. There are stocks that, with beta and risk
the top dead center (TDC) on the intake, adjustments, beat the SPY every October.
exhaust, and compression cycle or at bot- What if you could tap into those stocks
tom dead center (BDC) at the end of the With earnings plays, while shorting those that perform worse
power stroke. The stroke is the length of the only time I see an than the SPY? You could trade intraday
the movement from TDC to BDC. The each day by taking trades if things are
pistons rotate around a crankshaft. edge is where one side still lining up, or you could stay with an
The parallels here between a motor of a correlated pair has ongoing swing trade.
engine and trading are that if you have reported and the other October opportunities abound!
eight stocks in a peer group that are side hasn’t. Even though I am suggesting there is
moving in different directions, that is opportunity in October, the decision is
like eight pistons in an engine being yours on whether to play or be benched.
at various positions between TDC and I always encourage traders to find a But I would not be active unless you put
BDC while they are still connected to scalable methodology to build a stock- a lot of effort into research and then rely
the industry mean, represented by the trading business, and the best founda- strongly on that data. In the past, it’s been
crankshaft. tion is to apply capital in a distributed our observation that increases in volatil-
Compression ratios could be like fashion with an emphasis on being closer ity can enable point-and-click discretion-
Bollinger Bands and %B indicators to market-neutral. That is done by long ary traders to perform a bit better than
in that the greater the compression (or dollars against short dollars simultane- during periods of lower VIX.
penetration of the Bollinger Band), the ously or with minimum lag time.
more power is produced as we come
away from it. Seasonality
I could go on with analogies, but I think There are seasonal patterns for October
you get the point. Piston trading is about just as there are seasonal patterns for
In
Determine the trend
by Bruce Ross How can a trader or investor determine whether a stock’s trend
is up or down? Some draw a straight line along the tops or
the stock trading world, we’ve all heard the bottoms of major lows and major highs on a price chart. To
saying “The trend is your friend.” But that them, these highs and lows represent support & resistance
rule of thumb raises some questions: levels. This simple method is often effective.
Some have used various indicators that are generally ac-
• How do you determine the direction of a stock’s cepted as being trend-following indicators. There are several
trend? of them. Some work but many don’t. As an example, some of
• What determines when a stock’s trend begins or ends? these indicators may indicate an overbought situation, which
Arthimedes/SHUTTERSTOCK
• What trend length is best to follow? makes you expect a trend reversal but the security continues
• Once a trend is identified, how do you use the trend to moving in the same direction (up or down). As in that example,
make investment profits? these types of indicators are sometimes not reliable. Other
• Which securities best follow a trend? traders have found using MACD or moving averages—which
can be adjusted—to be helpful.
44 • October 2018 • Technical Analysis of Stocks & Commodities
CHART PATTERNS
Up trend
What trend length is best?
Trend length is determined by the timeframe used in the Up
chart setting. It could be used on a daily or weekly chart, or
bruce ross/midtermalgo
trend
on a one-minute or 15-minute chart. That is usually selected
based on the individual trader’s or investor’s time horizon.
A long-term trend—such as on a daily, weekly or monthly
chart—is best for those with a long-term buy & hold plan.
A shorter timeframe, such as a five-minute or 30-minute FIGURE 1: UPTRENDS & DOWNTRENDS. All trends go through peaks and valleys.
chart, is for those who want to hold their security for a There are many ways to trade them—it’s a personal choice.
shorter time period.
The trend length you select is a personal choice. Both types, separated from the men. How do you use the trend? How do
long- and shorter-term trends, can be profitable. If you look you make the trend your friend? How do you use your newly
at a security’s price chart, you’ll likely see several peaks acquired friend to make trading profits?
and valleys over any timespan (Figure 1). Some traders or As already mentioned, along any trend there are up and
investors will hold their position along all those peaks and down peaks and valleys. So in an uptrend, you can expect to
valleys (ups and downs) for a long-term buy & hold approach. see pullbacks that create valleys along the uptrend—like a
Others may wish to buy during the shorter up moves and sell saw tooth blade—up and down. One approach is to wait for
short during the smaller down moves—sometimes referred a pullback (or a down valley) and look for an opportunity to
to as swing trading, or for very short-term trading, it might enter a trade when it indicates that it will turn back up to go
be called scalping. higher in the already established uptrend. Using an established
Different traders can profit in different ways using different trend to look for key opportunities to re-enter along the trend
trend lengths. One isn’t necessarily better or worse than another. is a good way to utilize a trend.
It only has to suit each investor’s profit objective or investment Another method of utilizing an established trend is to “ride
horizon. The longer the trend length, the fewer the number the trend.” When the indicator or method you have established
of trades will be generated. The shorter the trend length, the to determine the trend, whether long-term or short-term, shows
greater the number of trades will be generated. a trend change is about to occur, you could enter the trade
Each trader must determine for themselves how active and stay in the trade for as long as that trend continues, even
they want to be. Shorter-term traders would rather “take” through all its ups and downs. You may hold that trade for
profit before it disappears. Longer-term traders will hold for several hours, days, weeks or months. It depends on the length
the long term through all the ups and downs. Both methods of the price trend’s time frame. Whether long term or short
have their benefits and shortcomings. No one will ever pick term, you hold on to that position until the trend indicates it
the very bottom or top of any price trend. is about to turn in the opposite direction.
When a trend reversal is about to occur, you need to decide
How to utilize a trend whether you will exit the buy (long) position, or exit the buy
Once someone has come up with a reliable method to identify and then sell short to attempt to profit in the downtrend. These
a trend and has it set at a timeframe length that suits their are the decisions a trend trader often faces. If you have con-
investment style, how do they use it to make good investment fidence in your trend-following model (whatever its length),
decisions? If they are following any method that has lines that you may choose to follow the trend, up or down, and make
cross over each other, should they enter the trade as soon as profits. How far will each uptrend or downtrend last? No one
the lines touch, after they cross, or anticipate their crossing? knows. The next one might be the big one.
Should they stay in the trade as long as the trend is indicated Obviously, the smoother the price action and trend of a stock
to be continuing, or exit before they ‘give back’ any profit they or security, the better a trend-following system will perform.
had realized? If the trend turns down, should they be selling Part of developing a trend-following model is being able to
short to profit on the downside? apply the model to the best stock or security. If a stock has a
Many so-called professional traders will readily tell you the history of being choppy and moving erratically, the trend will
trend is your friend, but do they explain how to use the trend be difficult to determine and/or difficult to follow.
in a practical way to profit from it? Here is where the boys are It is a beautiful thing for a trend trader to find a stock with a
October 2018 • Technical Analysis of Stocks & Commodities • 45
smooth trend and that fits the trend model well. When a stock
or security follows a smooth trend, you can see the trend and
follow it clearly. It increases the chances of the profitability One of the most effective
of your trades. methods to identify a trend is
Long, smooth, and profitable to superimpose an elaborate
You want the trend to be your friend, but to do that, you algorithm onto a price chart.
have to:
caLhOUN is no exception. The price that proves or other instrument you are trading.
Continued from page 7 the trade wrong here is the loss of the Once you learn how to identify mo-
previous day’s low. The price that proves mentum breakout patterns like the ones
the trade correct here is a continuation I share in this column, the next step is to
day’s close. This could be for a number breakout above the prior day’s high. Two- develop a trading plan with conservative
of reasons. As a technical price action day charts like this are useful for day and risk-management strategies. Managing
trader, you simply look for strong patterns your trades using small gaps and prior-
like this that are likely to continue. In day support & resistance levels can
general, the worst place to enter a new Gaps of any size will provide you with an effective strategy
trade is inside the prior day’s trading attract attention from for successful active trading.
range, with the important exception experienced traders but
of this particular gap pattern. Gaps Ken Calhoun is a producer of trading
of any size will attract attention from
you may find this pattern courses, a live trading room, and video-
experienced traders, but you may fi nd gives you an early start based training systems for active traders.
this pattern gives you an early start on on strong breakouts. He is the founder of TradeMastery.com,
strong breakouts. an educational resource site for active
traders, and is a UCLA alumnus.
traDe management tips swing trading, because they provide an
Using tight stops is always a smart idea excellent technical analysis tool to help
and this technical gap trading pattern you see close-up price action in the stock
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Digital Edition — the complete magazine as PDF, Complete Digital Archive — from 1982 through
available to read in your browser or download to to the present. More than 17,000 pages of articles,
your device for offline viewing. You will still receive product reviews, charts, spreadsheets, and code.
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return b;
}
—Eric Lippert
eSignal, an Interactive Data company
800 779-6555, www.eSignal.com
F WEALTH-LAB: OCTOBER 2018 TRADERS’ TIPS CODE double[] bin = new double[61];
In his article in this issue, “Probability—Probably A Good for(int bar = GetTradingLoopStartBar(10 * 3); bar <
Thing To Know,” author John Ehlers shares an interesting Bars.Count; bar++) {
for(int i = 1; i <= 60; i++)
technique that charts the probability density of an oscillator //Bin the indicator values in Bins from -3 to +3
to evaluate its applicability to swing trading. {
However, exporting the data to a text file to be used by double j = (i - 31) / 10d;
double k = (i - 30) / 10d;
Excel for plotting as a bar chart is something we’d like to if( rrsi[bar] > j && rrsi[bar] <= k)
avoid. What we call the “Wealth-Lab way” would be to con- bin[i] = bin[i] + 1;
veniently build the chart on the fly. }
}
To approach this, we’ll leverage the power of .NET frame-
work (preinstalled on any Windows PC), which comes with Chart chart = new Chart();
a powerful charting control under the hood. Its broad feature //Histogram chart
chart.Width = 600;
set can be easily used to extend Wealth-Lab’s ability to plot string name = "Bins";
various objects, images, and text. Let’s employ it to overlay a chart.ChartAreas.Add(name);
stock chart with a nice histogram of an oscillator’s probabil- chart.ChartAreas[0].AxisX.MajorGrid.Enabled = chart.
ChartAreas[0].AxisY.MajorGrid.Enabled = false;
ity density. Below, you can have a look at the short sample chart.ChartAreas[0].AxisX.Title = "Deviation";
code in C#, which takes RocketRSI as an example (but can //Custom axis titles
be adjusted to accept any oscillator). chart.ChartAreas[0].AxisY.Title = "Occurences";
chart.Series.Add(name);
The bottom line is that Wealth-Lab lets a trader build chart.Series[name].ChartType = SeriesChartType.Col-
some complex logic or visualization without having to resort umn;
to third-party applications.
for(int b = 0; b < bin.GetLength(0); b++)
A sample chart is shown in Figure 3. chart.Series[name].Points.AddXY( (b - 31)/10d,
bin[b]);
Wealth-Lab strategy code (C#):
using System; using (MemoryStream memStream = new Memo-
using System.Collections.Generic; ryStream()) {
using System.Text; chart.SaveImage(memStream, ChartImageFormat.
using System.Drawing; Png);
using WealthLab; Image img = Image.FromStream(memStream);
using TASCIndicators; //required DrawImage( PricePane, img, Bars.Count-50,
using System.IO; //required for plotting Close[Bars.Count-50], false );
using System.Windows.Forms.DataVisualization.Charting; }
//1. Click "References...", then "Other Assemblies..." > "Add a }
reference" }
//2. In "C:\Windows\Microsoft.NET\Framework64\v4.0.30319\" }
(or "Framework" on 32-bit systems),
//choose and okay "System.Windows.Forms.DataVisualiza- —Gene (Eugene) Geren, Wealth-Lab team
tion.dll" MS123, LLC
www.wealth-lab.com
namespace WealthLab.Strategies
{
public class MyStrategy : WealthScript
{
protected override void Execute() F NEUROSHELL TRADER: OCTOBER 2018
{ TRADERS’ TIPS CODE
var rrsi = RocketRSI.Series(Close,8,10); John Ehlers’ probability distribution and associ-
ChartPane paneRocketRSI = CreatePane(40,true,true);
PlotSeries(paneRocketRSI,rrsi,Color.DarkBlue,LineStyle. ated indicators, which are discussed in his article in this
Solid,2); issue, can be easily implemented in NeuroShell Trader using
October 2018 • Technical Analysis of Stocks & Commodities • 51
Figure 5: TRADERSSTUDIO. This shows the Fisher deviation-scaled oscillator
on APPL.
Figure 4: NEUROSHELL TRADER. This NeuroShell Trader chart displays an SPY
chart with the probability file output indicator applied to MyRSI, RocketRSI, devia-
tion-scaled oscillator, and deviation-scaled oscillator with Fisher transform. minal window and then choose the first option “Save to file.”
I ran all the tests on Apple Inc. (AAPL). Figure 5 shows the
probability distribution for the Fisher transform deviation-
NeuroShell Trader’s ability to call external dynamic linked scaled oscillator.
libraries. Dynamic linked libraries can be written in C, C++,
or Power Basic. 'PROBABILITY-PROBABLY A GOOD THING TO KNOW
'Author: John Ehlers, TASC Oct 2018
After moving the code given in the article to your pre- 'Coded by: Richard Denning, 8/19/2018
ferred compiler and creating a DLL, you can insert the re- 'www.TradersEdgeSystems.com
sulting indicator as follows:
Sub Ehlers_Prob(SmoothLength, RSILength)
1. Select new indicator from the insert menu. Dim a1 As BarArray
2. Choose the external program & library calls category. Dim b1 As BarArray
3. Select the appropriate external DLL call indicator. Dim c1 As BarArray
Dim c2 As BarArray
4. Set up the parameters to match your DLL. Dim c3 As BarArray
5. Select the finished button. Dim Filt As BarArray
Dim count As BarArray
Dim CU As BarArray
Users of NeuroShell Trader can go to the Stocks & Com- Dim CD As BarArray
modities section of the NeuroShell Trader free technical Dim MyRSI As BarArray
support website to download a copy of this or any previous Dim I As BarArray
Dim J As BarArray
Traders’ Tips. Dim K As BarArray
A sample chart is shown in Figure 4. Dim Bin As Array
—Marge Sherald, Ward Systems Group, Inc.
If BarNumber=FirstBar Then
301 662-7950, sales@wardsystems.com
'SmoothLength = 8
www.neuroshell.com 'RSILength = 14
a1 = 0
b1 = 0
c1 = 0
F T RADERSSTUDIO: OCTOBER 2018 c2 = 0
c3 = 0
TRADERS’ TIPS CODE Filt = 0
The TradersStudio code presented here is based count = 0
CU = 0
on John Ehlers’s article in this issue, “Probability—Probably CD = 0
A Good Thing To Know.” The code can be found at www. MyRSI = 0
TradersEdgeSystems.com/traderstips.htm as well as at the I=0
J=0
Stocks & Commodities website at Traders.com in the Trad- K=0
ers’ Tips section. It is also shown here. End If
To run the four sets of probability output code, they
ReDim (Bin, 62)
need to be set up as separate sessions. The code needs to Bin = GValue501
be saved as a system. These code sets do not produce buy If CurrentBar - 1 Then
& sell signals but rather print the probability bins to a ter- a1 = Exp(-1.414*3.14159 / (SmoothLength))
b1 = 2*a1*Cos(DegToRad(1.414*180 / (SmoothLength)))
minal window. c2 = b1
To save the results to a .csv file, right-click inside the ter- c3 = -a1*a1
used to selectively display the basic oscillator, the Fisherized and turning points.
version, or both.) To keep this spreadsheet to a manageable download size,
We can clearly see that the red MyRSI histogram is rather I reduced the capacity to 1,000 bars for the computations.
broad with much of its bulk offset to the right of zero as Keeping it to under 1,000 bars translates to just under four
confirmed by the red mean value line at 0.167. And we can years, as opposed to the 10 years used in Ehlers’ article. This
see the blue RocketRSI diagram presents a tight, balanced leads to slight differences in the histogram distributions from
profile with a mean that centers rather nicely on zero. those shown in the article.
The overbought and oversold values shown in the figure The spreadsheet file for this Traders’ Tip can be down-
were estimated by using a simple running accumulation of loaded from Traders.com in the Traders’ Tips area. To suc-
the histogram buckets to have roughly 5% of the data points cessfully download it, follow these steps:
below the oversold threshold and roughly 5% of the data
points above the overbought threshold, with the remaining • Right-click on the Excel file link, then
90% of the data points falling in between. You can change • Select “save as” or “save target as” to place a copy of the
the 90% as you see fit to observe what happens to the thresh- spreadsheet file on your hard drive.
olds estimated using this technique.
Since we have to calculate the oscillator values to build —Ron McAllister
Excel and VBA programmer
the histograms, it seems like a good idea to go ahead and
rpmac_xltt@sprynet.com
plot them. Again, I have placed them on the same subchart,
color-coded to independent vertical scales. While using in-
dependent scales can distort the apparent vertical range, it
allows us to see the similarities and differences of the shapes
The Stiffness Indicator The Options Risk Curve, Part 1 The V-Trade, Part 9:
by Markos Katsanos by John Sarkett Example Trades
How “stiff” are your stocks? Find out If you’ve ever tried to make profits from options by Sylvain Vervoort
how this new indicator can help answer “decay,” you may have found yourself waiting In the ninth part of this ongoing series, the
the question and/or identify the next patiently too eek out even a bit or profit. Find author demonstrates some example trades
FAANG stock. out what some pros have to say about this. for study and practice.
T
rading liquidity is often over- very high volumes. The greatest number three-year period. Thus, all numbers in
looked as a key technical of dots indicates the greatest activity; this column have an equal dollar value.
measurement in the analysis futures with one or no dots show little Columns indicating percent margin
and selection of commodity activity and are therefore less desirable and effective percent margin provide
futures. The following explains how to for speculators. a helpful comparison for traders who
read the futures liquidity chart pub- Courtesy of CBOT wish to place their margin money ef-
lished by Technical Analysis of Stocks ficiently. The effective percent margin
& Commodities every month. is determined by dividing the margin
value ($) by the three-year price range of
Commodity futures contract dollar value, and then multiply-
The futures liquidity chart shown be- ing by one hundred.
low is intended to rank publicly traded
futures contracts in order of liquidity. Stocks
Relative contract liquidity is indicated Trading liquidity has a significant ef-
by the number of dots on the right-hand fect on the change in price of a secu-
side of the chart. rity. Theoretically, trading activity can
This liquidity ranking is produced by serve as a proxy for trading liquidity
multiplying contract point value times All futures listed are weighted equally and equals the total volume for a given
the maximum conceivable price motion under “contracts to trade for equal dol- period expressed as a percentage of the
(based on the past three years’ historical lar profit.” This is done by multiplying total number of shares outstanding. This
data) times the contract’s open interest contract value times the maximum pos- value can be thought of as the turnover
times a factor (usually 1 to 4) for low or sible change in price observed in the last rate of a firm’s shares outstanding.
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F
by Gabriel Gonzalez of investing, and this applies particularly to rookie investors or
those with fixed incomes, you want your investment vehicle to
or fixed-income earners, safety-based investments are be reliable in fulfilling its purpose and secure against outside
ideal and tend to be the most stable in terms of payout. change that could compromise that reliability. Safety-based
But they also tend to pay back the least. When you investments meet these criteria, typically because the insti-
think of safety-based investment vehicles, you think tutions involved are usually established and stable, such as
treasury bills, notes, government bonds, certificates of governments or big corporations.
deposit, commercial paper, and bankers’ acceptance I should add that it cannot be emphasized enough that
slips. These are commonly known as debt securities. there is ultimately no such thing as a truly safe investment.
Money markets and bond markets are where most of the Everything mentioned here will always carry some kind of
safety-based investment vehicles are exchanged. Stable, es- risk. That risk is just the lowest relative to other investment
tablished business entities and governments issue many of the vehicles and markets. Get it?
safest investment vehicles.
Last time, in my August 2018 article, I established three big Securities
VICTORIA KURPOS/SHUTTERSTOCK
objectives you could use when determining what investment At the foundation of safe investing are debt securities, which
strategy to implement with your hard-earned money. I also are defined by parameters such as notional amount (amount
suggested you can’t typically excel in one without compro- borrowed), interest rate, maturity, and renewal date (where
mising the other two. That said, I will continue building upon applicable). We all know what a debt is, but what is a secu-
the foundation of general investing knowledge and give each rity? A security is an official document, verifying a specific
objective its due diligence, starting with safety. fact—usually, credit or ownership of stocks and/or bonds. In
60 • October 2018 • Technical Analysis of Stocks & Commodities
AT THE CLOSE
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Futures, foreign currency and options trading contains substantial risk and is not for every investor. Only
risk capital should be used for trading and only those with sufficient risk capital should consider trading.