CONTENTS

 Letter from the President - Page 3

 Editor’s Note - Page 4
 Increase your probability to win with Chart Patterns by C.M Patil - Page 5
 Quant...um Leap: Graduating from Manual Analysis to Automated Trading by Manish Jalan - Page 9
 Is the Change in Time-frame the Need of Time? by Dr. Bhooshan Shanbhag - Page 14
 Testy Bytes by Kora Reddy - Page 17
 Identifying Trend Changes and Trend Continuation by Ananth Acharya - Page 21
 Book Review - The Trading Athlete by Vishal Malkan - Page 27
 Past Events’ Update - Page 29
 Forthcoming Events - Page 31

This newsletter is produced by the Association of Technical Market Analysts. All comments and editorial material do not necessarily reflect the organization's
opinion nor does it constitute an endorsement by the Association of Technical Market Analysts or any of its officers, of any products or services mentioned.
Sources are believed to be reliable at time of publication, but not guaranteed. The Association of Technical Market Analysts and its officers, assume no
responsibility for errors or omissions.

2 | ATMASPHERE JUNE 2012

LETTER FROM THE PRESIDENT

Dear Colleagues,

A home-grown definition of a professional is a person who can be relied upon for regular work. I am immensely pleased at the
committed and regular work from our editor, Ms. Meghana Malkan in pushing along all frontiers to ensure that the second issue of the
ATMASphere reaches you in time and with the same standards as in the first issue.

Summer is a time when so many are travelling. The appointments with a couple of Global Gurus in TA that I had fixed for the GuruMeeting feature could not
be met with. I am sorry; this issue will not have this feature, which indeed would be a continued feature in subsequent issues.

I am happy to notice a very useful article from our colleague Ananth Acharya, a mind as fertile as can be.

ATMA agenda for the remainder of the calendar year is being finalized. It already is looking pretty heavy with at least two high profile confirmed global
speakers having committed dates to us. Mr. Larry Berman, Immediate Past President of MTA shall be in Mumbai during the first week of September ’12 and
Mr. David Keller, President, MTA in the first week of October ’12. Detailed agenda, event details are being worked out. Mark your diaries; I surely would want
to see you at these two events. We are working on yet another powerful speaker for November and soon as details available will be shared.

Enhancing leadership at ATMA is my core focus now. I continue to solicit fertile committed minds to step forward and undertake wider responsibilities at our
organization. In time, we have to groom and prepare the next generation to take over from the founders. I do see a future ahead for all of us where younger
and way more energized shoulders will take us into the future faster.

Sincerely,

Sushil Kedia

JUNE 2012 ATMASPHERE | 3

EDITOR’S NOTE

We hope you enjoyed reading the first issue of ATMASphere. In line with our intention we shall continually try to bring before you rich
and educative content in technical analysis.

This issue contains three Articles:

1. C M Patil shares his research on the ‘Polar Pattern’ and explains how this increases the probability of success while trading with chart patterns.

2. Dr. Bhooshan Shanbhag writes about changing the time-frames of tools and indicators in a technical analyst’s kit. He explains the distinction
between following the conventional and unconventional parameters and how traders following the latter gain an edge over the former.

3. Ananth Acharya presents an Elliott Wave approach to identifying trend changes and trend continuation.

In the regular educative features, namely ‘Quant…um Leap: Graduating from Manual Analysis to Automated Trading’ by Manish Jalan and ‘Testy Bytes’ by Kora
Reddy, the authors continue their journey into educating the readers deeper into the respective concepts.

Vishal B Malkan reviews the “The Trading Athlete” by Shane Murphy and Doug Hirschhorn.

We would love to hear from you. Please let us have your feedback on ATMASPHERE by sending an email to editor@atma-india.net. You can subscribe to
ATMASPHERE completely free by clicking here.

Sincerely,

Meghana V Malkan

4 | ATMASPHERE JUNE 2012

 Let me quickly summarize the concept of Chart Patterns before we get into a
INCREASE YOUR PROBABILITY TO WIN
discussion of how to confirm the genuine chart pattern breakouts and
WITH CHART PATTERNS increase the success ratio when you trade on these patterns.
BY C.M PATIL
The guiding principle of Technical Analysis is ‘Price’ is everything. All known
There is a constant criticism about
information is already discounted in the price. Therefore it is a known fact
Technical Analysis when it comes
among stock market fraternity that “news” has a perishable shelf life. All
to trading. Technical charts &
“news” are already discounted in the stock price, thus if you make a move
pattern breakouts looks fantastic
after news is open to the public, you would of course diminish your chances
when one is looking at historical
of a profitable bet.
data and validates the hypothesis.
However the common complaint is The second principle is Price always move in a trend. A trend can be
that technical charts simply don’t work when one applies its predictions for identified as uptrend or downtrend based on its typical characteristics such
actual trading. The worry is price chart and pattern breakouts give more as consecutive highs & lows, the degree of angle in which prices are moving,
whipsaws than genuine buy or sells signals. And I am tempted to believe that interval at which correction cycles are appearing, price band or channel
this assumption must be correct because otherwise every trader who follows within which prices are moving and so on an so forth. One must also keep a
Technical Analysis and let’s say knows about famous Head & Shoulder, Cup & tab of volumes which reflects the participation of people in the rally or sell
Handle or any other pattern should have made money in this market. offs. Volume should increase when the price moves in the direction of the
However, the reality is all together different. So the question is why majority trend and decrease when the price moves in the opposite direction of the
of the people lose money in the market and only few handful people are trend.
successful?
However not always prices would move in a much disciplined price channel.
Do you agree that Technical Charts are wrong? How can it be wrong? A Majority of the time it makes various lows and highs around support and
Price chart is plotted based on actual price traded on the exchange. resistance levels which are outside the typical Higher Top / Higher Bottom or
Therefore a chart is never wrong… The person who is reading the chart and Lower Top / Lower Bottom formations. In a process it starts forming various
his interpretation is wrong when trades fail! shapes and these patterns are have been popularly named as head &
shoulder, cup & handle, wedge, triangles, flag, diamond etc. However these
JUNE 2012 ATMASPHERE | 5
names are given based on ones imagination and no need to seriously decline in OI means squaring off of open positions and slowing down the
remember these names. trend.

In theory Pattern Formation begins as prices get confined within a certain In this article I am going to talk about Polar Pattern which is being proved as
support and resistance level and when it breaks the barrier the prices move most reliable pattern as per my practical experience. This pattern formation
very fast. Traders try to take advantage of this pattern breakouts and price is based on one of the most important principles of Dow Jones Theory.
movement but very often get trapped! The reasons are:
 Whenever any major support line is broken it acts as resistance in the
1. Most of the time patterns are seen in isolation and traders ignore the future. Similarly whenever any major resistance is broken the same
historical support & resistance. resistance line provides a very strong support when prices corrects.
2. Traders seem to ignore the volumes. The average volumes must be low  In fact in other words whenever there is a bullish breakout, prices
while price consolidate inside the pattern and volume must increase corrects and retest the ‘breakout line’ as support. Same way when there
substantially when breakout happens. is a bearish breakout, there is always a pullback up to earlier ‘support
3. In a hurry traders do not wait for time wise confirmation. Whenever turned resistance’ line before further fall begins.
breakout happens the price must remain outside breakout line at least
for 3 days. The reason why I say 3 days is because those who have
bought or sold the stock on margin or T+2 bases are required to settle
the transaction either by taking/giving the delivery or squaring off the
position. If they don’t take/give delivery then the breakout is likely to fail.
4. Most of the time traders ignore to study OI (Open Interest) buildup.
Along with volumes it is equally important to check the OI (Open
Interest) buildup in Futures segment. If there is least 5% + increase in the
OI along with price breakout then the probability of successful breakout
would be as high as 70%-80%. On the contrary there is a high chance of
failure if OI starts declining immediately after price breakout. Increase in
OI confirms addition of new position in the direction of trend where as

6 | ATMASPHERE JUNE 2012

In the above example NIFTY Index continued to move into a perfect price Case-1: Ranbaxy give bearish cup & handle breakout in the 3rd week of
channel for almost one year i.e. from September 2009 till September 2010. November 2011. You will notice that the same support line acted as
During this period it formed parallel support & resistance levels and then resistance for the pullback rally in this stock in the last week of January 2012.
gave a bullish breakout by breaking the resistance line. You will notice that
the earlier resistance line provided support in November 2010 and later the
same line acted as resistance in April 2011. Further you will notice that the
support line which provided strong support to NIFTY index during 2009-2010
later proved to be strong resistance during 2011 whenever Index tried to
bounce back. In the recent month Index moved out of the falling channel
when it broke 5200 level in February 2012 and based on the same principle
the upper line of this channel is providing the support during the present
correction phase.

You will find plenty of such examples if you glance through the technical
charts for various stocks. Below is just couple of other stock specific
examples of the same pattern formations.
Case-2: L&T gave bearish Head & Shoulder breakout during last week of
September 2011 when it broke the neckline support. In mid February 2012
the same neckline acted as strong resistance.

JUNE 2012 ATMASPHERE | 7

To conclude, generally traders follow the current pattern breakout but there
could be lot of whipsaws. However, if you track the confirmed breakout in
the past and when prices move near to these breakout lines it’s an excellent
opportunity to trade. You won’t find such formations so often as compared
to commonly known patterns. However whenever you get an opportunity to
trade on this Polar Pattern the chances of success is very high. Important to
highlight that unlike other common pattern breakouts, you are taking
position at the earliest point hence risk/reward ratio is completely in your
favor!

C. M Patil is the founder of Market Rahasya Group

which is dedicated towards driving education for stock
market fraternity. Having done his MBA in Information
Systems, he has been doing active research in Stock
Market price movements and predictions. Apart from
conducting training & seminars on Technical Analysis
& Derivatives, he also writes columns in leading Stock Market news
bulletins.

8 | ATMASPHERE JUNE 2012

 an Algo, and this makes this topic all the more complex. How many times
QUANT…UM LEAP: GRADUATING FROM
have you backtested the Algo strategy that have seen the returns in triple-
MANUAL ANALYSIS TO AUTOMATED digits just to get knocked over in the real world with losses? Sounds
TRADING familiar…read on!
BY MANISH JALAN
I have often seen so many Algo strategies falling flat on their faces, in the real
As the saying goes: The journey is the market – due to proper know how and lack of understanding of back-testing.
destination! In this journey of Backtesting is not only a science – but is also an art, which means the more
quant…um leap, we will take our you practice it, the more seasoned you become in developing great Algo
readers in the world of finance as trading models.
viewed by a mathematician.
Quantitative approach to finance is as Let me once again start with a small anecdote. This was my first year in
old as the field of finance itself. Quant Merrill Lynch, Tokyo and as a young, energetic fresh graduate, I was asked to
believes in the underlying philosophy that numbers, their analysis and develop a trading strategy on Nikkei futures. My guru, Dr. Hiwon Yoon told
interpretations goes hand in hand. This is the second of the several parts of me to backtest a trading strategy. He had observed that whenever the Nikkei

quant…um leap articles which will help you get your feet wet with the futures open higher as compared to previous day’s close by X points and

introduction to one of the most talked about subject in the field of moves higher w.r.t to the opening price by another Y points – it is a great

quantitative finance today called Algorithmic trading. short trade and a short position taken could either be unwounded at a profit
target of Z points, a stop loss of K points or towards the market close (intra-
Dear Readers, let us continue the journey of Quant…um leap by delving
day trade). He then asked me to back-test the strategy and optimize the
deeper into the world of Algo trading. Continuing to build momentum from
model parameters namely, X, Y, Z and K. Needless to say I spent many
my last article where I gave a sneak peek into what Algo world is all about –
sleepless nights as a young energetic quant trader on the desk trying to find
this month is going to be far more exciting. We will talk about backtest, one
the golden goose. Finally I found that every trade of this nature done in the
of the most misunderstood topics in the Algo world. Yes, I say misunderstood
last 10 years could make on an average 15 points, for a certain optimal
because, everyone has their own version of backtesting, own version of
values of X, Y, Z and K. My eyes sparkled and my heart pounded to see that I
playing around with the historical data and coming out with fancy and
was this close to making a strategy which could make the next million dollars
monstrously great backtested results. There are no standards to backtesting
at our desk. My dear readers, 15 points on Nikkei futures, if done on 1000
JUNE 2012 ATMASPHERE | 9
contracts (~ 100 Million USD notional) can make USD 150,000 daily! I was everyday would lose anywhere between USD 25,000 to USD 50,000 daily. So
already annualizing this number and hence my bonus. May be I was too confident I was about my back-test and the live performance this far that I
impatient, in hindsight I was too naïve, but at that time all I could see was continued to run the strategy not worried about the daily loss until one fine
driving a Porsche next year. day, the strategy lost all the USD 700,000 and was down another USD
300,000 in a matter of 2 months. Yes a straight loss of more than a million
Next morning I presented the strategy to the MD of our trading desk and our
dollar in no time. I started questioning myself, and so did the senior
senior management team. They liked my findings and more importantly my
management. It was time to shut the strategy down and go back to the
enthusiasm to get on with the strategy and my detailed backtested results.
drawing board.
Our MD agreed to start with 100 contracts (~ 10 Million USD notional) and
ramp it up if the strategy performed as expected. Dear friends my experience I once again met Dr. Yoon, who by that time had left Merrill Lynch, over
over the last few years in the markets have been that more often than not, lunch. I told him about all the ups and downs of the back-tested strategy and
when you build an Algo strategy, it always starts at a loss and deviates wanted his advice. The first question he asked me was what was the data I
significantly from the back-test, but in my case it was just the opposite. We had taken for back-test? Pat came the reply, last 10 years.
used to run this Nikkei intra-day short strategy everyday on 100 contracts
He said, Manish, Nikkei has been in a complete bear market from 1994 to
and make an average of USD 15,000 daily. Slowly and steadily the profit of
2004. Any strategy on shorting Nikkei futures (intra-day, carry over etc),
the book had swelled to USD 700,000 in a matter of 3 months. Not a small
would make money. Did you see if that strategy made money in a bull
feat for a first timer on the trading desk and suddenly I was the blue eyed
market or a range bound market? The answer was “No”.
boy of our MD, who could do no wrong. I started getting requests to develop
more strategies; experienced traders would seek my advice on quant related
There lied the mistake, I had back-tested the strategy on a biased set of data.
ideas. But all this was soon going to change.
I didn’t know if my strategy could withstand every kind of market or not and
hence when the market turned around from a bear to bull rally in summers
When Murphy (If things can go wrong, they will go wrong) strikes a
of 2005, we kept bleeding on the strategy.
thoroughly back-tested quant trading strategy, it strikes it big. I was no
exception, just that I had not realized it, yet. In the summers of 2005, Nikkei
Had I optimized the strategy to not loose money in bull phases, we probably
very quietly broke through 12,000 levels after several years of resistance. We
would still be in the game. But then as they say, every trader is a billionaire in
continued to short Nikkei futures, which was now on 200 contracts, and
hindsight.

10 | ATMASPHERE JUNE 2012

 The lesson I learnt my friends is When you backtest a strategy or optimize any parameters always take about
that, when you backtest an Algo 70% of the data which we usually call as in-sample data and do the backtest.
strategy take data from all kind of Once you are convinced that the strategy is profitable in this 70% of the data
markets conditions. Bull, bear, – use the out-of-sample 30% data and see if the returns generated in 70% in-
range bound, news related etc. sample is consistent with 30% out-of-sample data or not. If the answer is no,
You never know when your than its time to re-do the strategy and back-test it again.
strategy hits the road which direction the market might take and is your
In the figure below I illustrate all the steps which are usually taken while
strategy equipped to handle this route?
doing a thorough back-testing of a strategy.
The critical importance of back testing lies in understanding whether a
pattern which we think is profitable has actually been profitable across
different kinds of markets. Besides that backtesting gives an Algo trader an
opportunity to avoid mistakes which the strategy might have made in the
past, by applying rules of risk management and stop losses. Thirdly, since we
come to know the limitations of the models in terms of expected returns,
maximum flattish period when the strategy might not make any money,
kinds of market where the strategy are likely to fail etc. It makes us only
more informed about the risk associated with the strategy and hence gives
us an upper hand in terms of preparing for the expected rather than facing
the unexpected.

I too often see young quant programmers, trying too hard to optimize
numbers and parameters to make the strategy profitable in backtesting. Dr.
Yoon, always told me, “Manish, you torture the data enough and it will bend Fig: Steps involved in an end to end backtested strategy
to almost anything!”. Data torturing is as good as, becoming a hindsight
billionaire. Just that it never works in real market. A Good way to find if you
have tortured the data or not in backtesting –is what is called data sampling.
JUNE 2012 ATMASPHERE | 11
The 2 key backbones in any Algo trading strategy to be backtested are the
factors and parameters. In a trend following strategy, factor could be Simple
Moving Average (SMA) crossover, MACD (This might come from host of
technical indicators and patterns) etc. Parameters could be 5 day SMA
crossing over 21 day SMA or a standard 12, 26 – 9 MACD. What is required is
correct set factors and optimized parameters which can work in most market
circumstances. Once you have found the right set of factors and parameters,
for say a trend following system – the next step is to see how they behave
when markets are very range bound. Do they bleed? Do they loose money
within acceptable limits? The answers to many of these questions lie in the
foundation of risk management and statistical factors, which I shall be
covering in my forthcoming articles.

Fig: Equity Curve of cumulative return of Rs. 10 invested in a thoroughly

The final outcome of every backtested strategy has to be an equity curve. An
equity curve is like a bible, which tells everything about the behavior of the
strategy. An equity curve is a daily plot (or hourly, half day in case of high
frequency trading strategies) of the returns of the strategy over the back-
tested period. Just by looking at an equity curve, an investor can sniff
everything about the strategy. An equity curve, tells a complete story about:
the average annualized return of the strategy, the maximum peak to trough
drawdown which the strategy can suffer, the time it takes for the drawdown
to recover, the maximum period for which a strategy can stay flat, before it
starts making any money, the volatility in returns which the strategy is likely
to witness etc. The figure below shows an equity curve of one of the strategy
called samCAP which is run by our company.
back-tested Algo strategy
When we go to the investors, with a thoroughly backtested strategy like
samCAP, we have a complete story to tell them. By just showing the equity
curve, we can make them aware of the kind of markets that the strategy will
do well and vice versa. They know exactly the risk associated and the range
of drawdown they can see – so that there is no panic button to be hit when it
actually happens. The foremost duty of us as an Algo trader, then becomes
to make sure that the Algo like samCAP performs and yields returns and
risks, within the acceptable limits of the backtest. As long as that continues
to happen the investors are comfortable, the Algo traders are comfortable
and the strategy is there to create long term wealth for its investors.

12 | ATMASPHERE JUNE 2012

To conclude, I would like to say that backtest is more like making us aware of
the pitfalls, the dos and the don’ts of any technical strategy which we want
to run for a very long period of time. Once we know the pitfalls, we can
prepare to tackle the rainy days in advance, so that there are no nasty
surprises which might lead to rapid wealth erosion. Long term sustainability
and an ability to withstand any kind of market circumstances, can only come
if the strategy has been thoroughly and truthfully backtested, with no bias
either towards data or towards factors and parameters. Because, remember
when Murphy strikes any Algo trading strategy, it strikes it hard and backtest
helps us avoid the havoc which Murphy could have on our strategy.

The Quant…um leap journey will continue in the coming months with more
sections, more insights and more leaps… Let the journey be the destination!

Manish Jalan is the Chief Strategist and Director of the

Algo trading firm Samssara Capital Technologies LLP.
Prior to his new found Indian venture, Manish was a
Quantitative Prop Trader in Tokyo, with Merrill Lynch
Prop Desk handling USD 100 Million portfolios. Manish
has worked closely with many Indian brokers and numerous International
banks in algorithmic trading, trend following strategies, statistical
arbitrage, factor modeling and back testing. Manish is a B.Tech and M.Tech
from IIT Bombay in Mechanical Engineering.

JUNE 2012 ATMASPHERE | 13


IS THE CHANGE IN TIME-FRAME THE
NEED OF TIME?
BY DR. BHOOSHAN SHANBHAG
In physics, time is defined as the indefinite continued progress of existence
and events that occur in apparently irreversible succession from the past
through the present to the future (many physics books give this definition).
In the terms of financial markets, time is something that is vitally important.
One of the principles of technical analysis is ‘History Repeats’. When we say
history repeats, what we mean is if any event occurs, the reaction given by
the markets will be identical to that given when the similar event occurred in
the past. Hence the time factor comes into picture, as past, present and
future are nothing else but functions of time.
Time can be said to be one of the major variables in Technical Analysis.
Usually in most of the techniques that are commonly employed all over the
world the charts are plotted as change in price against time. The most
common technique where we broadly use time is the moving average.
Moving averages of different time frames are plotted in order to decide the
overall direction of the markets, on-going trends, etc. However, by the
classical definitions, the most common moving averages that are employed
are:
 In the terms of days - 200 day, 100 days, 50 days.
 In the terms of weeks – 52 weeks, 26 weeks, 13 weeks.
 In the terms of months, 12 months (Year), 6 months (half year), 3
months (quarter year).
14 | ATMASPHERE
We accept the numbers (200, 100 and 50) of these time periods without
questioning mainly because we find their source in the Dow theory proposed
by Charles H. Dow. According to the theory, the direction of 200 day moving
average is representing the on-going trend in the markets. One must
understand that this 200 day moving average represented movement in price
over the year, as at the time of Charles Dow, markets did trade only for
about 200 days in a year. Hence according to the older theories, one trading
year is 200 days, half year is 100 days and one quarter is 50 days. We also
usually like the round figures and hence the numbers 200, 100 and 50 suit
our needs perfectly and have been accepted broadly without questioning.
However, in the current scenario are these numbers relevant? According to
wave theory a set of parameters existing at any given time cannot exist ever
again perfectly with all the parameters exactly identical. This means as much
we may try to use the past data to predict the future, it will never be possible
to do so exactly as all parameters will never exactly be the same. We say
History repeats… Mark Twain has said history never repeats, it rhymes!!!
Under these circumstances, it becomes necessary to minimise the variations
in the parameters so as to get a near exact
replica of the variables in order to
extrapolate the past in order to predict the
future. In Technical analysis, we are
expecting to do the same thing, using the
past data in order to predict the future
movements in prices. If the variables are
not matching, our predictions are likely to
JUNE 2012
be wrong. Seasons and Earth’s position around the Sun / distance from the and not 200 days. Similarly half year would be 125 days and a trading quarter
Sun, etc. are the parameters that naturally match exactly after a year and so would be 63 days. We have to understand and accept that the figures 200,
do the sentiments arising from festivals and annual occasions. 100 and 50 have become obsolete in today’s financial markets and unless we
change with time, our predictions based on these moving averages may also
We always say that one has to be as objective as possible while practicing
be erratic.
Technical Analysis. In one year, there is a natural cycle of repetitions. The
season repeats, the festivals repeat and even the time-related events repeat The question is even if we say so, the rest of the world may still be using the
making similar impacts on the markets and hence on the minds of investors. same old figures and taking positions accordingly. Then would not we be
If we are subjective and do not follow what is obvious, then the cycles may deviating from the masses? History shows that what masses follow seldom
not match and hence, there would be a variation in every aspect that has to works in longer time frame. One has to adapt with the changes or else, has to
do with seasonality. Our predictions based on these erratic base may not perish. The changed time frame actually gives better results or not, only time
work just as well and Technical Analysis may start showing variations from can tell and needs extensive research still. However, primarily it appears that
the actual moves. if we compare 200,100 and 50 DMA with 250, 125 and 63 DMA, the later act
as supports or resistances more often than the former.
When any investor is taking the position in the markets, he always considers
52 week high-low and decides accordingly selects the price level to enter the
stock. He studies the company performance in the last year, the last half-year
and the last quarter. Always we compare the profits made by a company in
one quarter or one year. It must be noted that the level is decided based on
52 weeks and not 200 days. It is also easier to remember price levels an year
ago and not something like 9 ½ months before. In today’s world, 52 trading
weeks have about 250 trading days and not 200. Actually 200 trading days
are approximately 9 ½ months in current markets and may not have any
relation with the viewpoint of investors.
Here is daily chart of Nifty futures. 200 DMA is drawn in blue whereas 250
Hence when we are talking about yearly moving averages, it is the need of
DMA is drawn in black. See the areas marketed by circles. 250 DMA has acted
time to change the time frame to 250, as our markets trade 250 days a year
as a support at all these instances, where 200 days has failed to do so.

JUNE 2012 ATMASPHERE | 15

Let us see the actual application of this. All of us know about the cycles in the
markets. We are well aware of the fact that for the last many years, we get
rallies every alternate month of May and a fall in every alternate month of
May. Nifty has gone down in May 2000, 2002, 2004, 2006, 2008, 2010 and
2012, whereas it has come up in May 2001, 2003, 2005, 2007 and 2009
(exception 2011 when after initial fall Nifty recovered but still the monthly
candle is red). Now, considering the time gap (in days) between the May
rallies and May falls, we get the number near 250 and not 200. The January
Effect is observed after 250 trading days and not 200. Most of the holidays
repeat after about 250 trading days and as a result our comparison of the
Markets last year at the same time is a comparison 250 days ago. Whenever
we see the quarterly reports, or yearly reports they are based on 63 days and
250 days performance. All these facts clearly justify the use of 250 day
averages over 200 and the matter needs to be explored further.
We talk of Kondratieff wave; we talk of 10-year Cycle, four year cycle etc.
These cycles are multiples of whole years that are multiples of 250 trading
days and no longer 200 trading days. If we continue sticking to 200 days, our
trading cycles will not be matching with the natural cycles. As much we may
try, we will never be able to force the natural cycles into our needs and
instead it would be wise to adjust our actions in sync with the nature. Once
200 days were representing a year and at that time giving importance to 200
day values was essential, but now as one year is 250 days, it would be logical
to change our time frames to multiples and factors of 250 and not 200.
Considering all in all - in my view - time has come to change our timeframes.
It is but natural that the thought may not be accepted easily by everyone.
16 | ATMASPHERE
There may be skepticism, even some harsh criticism of the thought. Nobody
is ready for a change in his beliefs unless proven otherwise. I am sure this will
at least provoke thoughts in the minds of those who are open to new ideas
and are willing to at least think about the view of others. History shows that
those who are ready to adapt to changes can survive the changes and those
who do not change with time have to be extinct, even though they are as
strong and mighty as once the dinosaurs were.
Dr. Bhooshan Shanbhag (M.Sc. Ph.D.) has been
associated with financial markets since 1993. Holding
a Ph. D. from the University of Mumbai, he has a
strong research background and has three research
papers in international journals to his credit. He is
active in teaching Technical Analysis and specializes in
trading derivatives. He is on the panel of experts for myiris.com and is also
a regular writer for investment weekly Informed Investor for over three
years.
JUNE 2012
 RFR = Annualized risk-free rate (90 - day T-bills are typically used as a proxy)
TESTY BYTES
Standard Deviation of APR (StdDevAPR) = Annualized Standard Deviation of
BY KORA REDDY the Portfolio’s Returns.

In continuation to the last series of articles under "Testy Bytes" in this Article I
For short term trading as our holding period is only one day, the RFR can be set
will educate the readers about a few advanced concepts that one needs to
to zero.
keep in mind on various backtesting strategy performance reports.

Advanced concepts Sharpe Ratio indicates the smoothness of the equity curve. The higher the
ratio, the smoother the equity growth or decline. A Sharpe Ratio value of
Here are few other concepts that need to above 0.5 is considered good, while a value above 1.0 is excellent and a value
be considered to gather confidence to above 2.0 is considered outstanding.
trade it in real life.
When choosing a pattern’s reliability in real-life trading, Sharpe Ratio is used
Sharpe Ratio: This is probably the most on the assumption of a zero risk-free rate of return and at least a Sharpe Ratio
common measure used by large fund houses in comparing potential of 0.6 from the back testing results.
investments. The Sharpe Ratio was formulated by Nobel Laureate William F.
Sharpe in 1966 as a measure for comparing the performance of mutual Pessimistic rate of return: Pessimistic return on margin (PROM) is an

funds. This measure was introduced as a reward-to-variability ratio but annualized yield on margin that is adjusted in a way that pessimistically

subsequently came to be referred to simply as the Sharpe Ratio after its assumes that a trading strategy will win less and lose more in real-time trading

originator. Sharpe Ratio was one of the first statistical measures that factored than it did in its historical simulation.

both return and risk into a single formula, thereby giving us a single statistical
PROM adjusts the gross profit by calculating a new, mathematically adjusted,
measure of risk-adjusted return.
pessimistic lower gross profit. The first step is to calculate the number of

Sharpe Ratio = (APR - RFR)/ (StdDevAPR) winning trades reduced by its square root or, in other words, adjusted by its
standard error. This adjusted number of winning trades is then multiplied by
Where: the average winning trade to arrive at a new, adjusted lower gross profit.

APR = Annualized Portfolio Return

JUNE 2012 ATMASPHERE | 17

PROM next adjusts the gross loss by calculating a new; mathematically
adjusted, pessimistic higher gross loss. The first step is to calculate the number
of losing trades increased by its square root or, in other words, adjusted by its
standard error. This adjusted number of losing trades is then multiplied by the
average losing trade to arrive at a new, adjusted larger gross loss.
A new adjusted gross profit, or loss, is then calculated using these adjusted
pessimistic gross profit and gross loss values. This is then used to produce an
annualized rate of return on margin.
An example here would help. Assume a Rs. 50,000 annualized gross profit, 50
wins, Rs. 20,000 annualized gross loss, 50 losses, and a starting capital of Rs. 1,
00,000.
As a basis for comparison, let us first calculate an annualized rate of return on
the starting capital. This would be a 30 percent annualized return on margin
(50,000 - 20,000) /1, 00,000 = 0.3 x 100 = 30%).
In contrast, let us look at the PROM of this strategy:

Adjusted Number of Wins = 50 - Sqrt (50) = 43

The formula is

Adjusted Number of Losses = 50 + Sqrt (50) = 57

PROM = {[AW x (#WT — Sqrt(#WT))] — [AL x (#LT — Sqrt(#LT))]} / Margin

Adjusted Annual Gross Profit = (50,000/50) x 43 = 42,929

#WT = Number of Wins
AW = Average Win
Adjusted Annual Gross Loss = (20,000/50 x 57 = 22,828
#LT = Number of Losses
AL = Average Loss
PROM = Rs. (42,929 — 22,828) / 1, 00,000 = Rs. 20,101
A#WT = Adjusted Number of Wins
A#LT = Adjusted Number of Losses
PROM = 20.1 percent per year.
AAGP = Adjusted Annualized Gross Profit
AAGL = Adjusted Annualized Gross Loss As you would note, the nearest digits have been rounded off in the above
A#WT = #WT - Sqrt (#WT) calculations.
A#LT = #LT +Sqrt (#LT)
AAGP = A#WT x AW This example clearly demonstrates why this measure is termed pessimistic. It
AAGL = A#LT x AL assumes that a trading system will never win as frequently in real life as it had
Sqrt = Square root
in testing and also that the system will lose more frequently in real life than it
did in its testing. PROM is a robust measure because it factors in a number of

18 | ATMASPHERE JUNE 2012

significant performance statistics, such as gross profit, average win, gross loss,
average loss, number of wins, and number of losses. Also, PROM by nature of
the square-root calculation penalizes small trade samples; that is, the square
root of 4 is 2 which 50%, whereas the square root of 100 is 10, which is 10%.
PROM is an excellent measure to compare the performance of different
trading models; it is suggested that a trading model’s PROM be at least 50% of
the historical returns.
T-Test: The t-Test is a simple statistical test that tells you how likely these test
results are to have occurred by chance alone. A t-Test of less than 1.6 favours
chance, above 1.6 and one is more likely to have found something real – a
tradable Key Idea. The higher the score given(over at least 20) the more likely
one has found a tradable history.
The t-Test is calculated as
t = square root (n) * (average trade / standard deviation of trades)
Optimal-f: The second test to run is called optimal f. Optimal f is the market’s
line in the sand for your Key Idea. Optimal f is the maximum number of
contracts one can trade given one’s account size. Trade any more contracts
and one’s account becomes more and more likely to break under risk of ruin.
One doesn’t have to trade the optimal f number of contracts, but one should
never trade more than the optimal f number.
JUNE 2012
Optimal f is calculated as
f = (largest losing trade)/ ((((1+win/loss ratio)*percent wins) – 1)/win/loss
ratio)
Pattern overlap:
“A man with a watch knows what time it is. A man with two watches is never
sure” - Segal’s Law
There is no simple formula for this
parameter, but it is assumed that multiple
patterns will be traded in real life, and these
will overlap at times. This is no problem so
long as they both point to either long or
short. But, clearly, there can be confusion if
each points differently, one long and the other short. Simple ways to overcome
this pattern overlap problem is by recording all the patterns individually, and
see that they don’t give conflicting signals more than 20% of the time, better
still no more than 10% of the time.
Remember; even though there is a strong tendency for the market to behave
the way it did the last time when a particular pattern occurred, this is not a
hard and fast rule. It will not happen all the time. However, it will recur often
enough and will provide enough trading opportunities if one do a rigorous job
of thoroughly analysing the performance summary.
ATMASPHERE | 19
In the next month article I will cover how to use MS-Excel for doing backtesting
report (as each of the backtesting platforms available out there have their own
limitations and are not easy to customize to develop your own backtesting
parameters)

Kora Reddy is the author of the recently released

book High Profit Trading Patterns published by Vision
Books and is currently co-founder of a quantitative
trading portal (http://stocksiq.in) for analyzing and
back testing of listed stocks on the Indian Stock
Market.

20 | ATMASPHERE JUNE 2012

 took her over the basics on how markets move in 5 wave structures and 3
IDENTIFYING TREND CHANGES AND
wave structures and how the 5s and 3s repeat in different permutations and
TREND CONTINUATION - AN ELLIOTT combinations and how this interplay brings about the various different
WAVE APPROACH combinations. I then went on to explain that I was trying to figure out a way
BY ANANTH J ACHARYA to forecast what pattern will repeat and where the markets would be as the
next wave unfolds.
An original solution to the oldest problem of the world financial markets.

Children see the world with a different set of 'eyes' and my daughter was no
“The biggest confusion and difficulty faced different. Once I explained the basics to her and she kept staring at a picture
by any trader/analyst almost always of the idealized complete market cycle, she had the most indescribable
remains with identifying a trend change in expression on her face. It was clear, she was thinking, I was the craziest
the markets. How does one identify or person on earth.
forecast a trend change and how does one
ascertain that a trend continuation pattern I am normally used to my daughter look up to me and think the world of me
is unfolding in the market. as every daughter does (especially at that young age of 13) and I could see
that image cracking. I could see there was something wrong. She kept staring

I believe, and you will also see by the end of this article that it is a fairly easy at the chart and then shifting her gaze to me, again and again. She was
task to forecast a trend continuation or a trend change. Elliot Wave theory thoroughly confused. When asked what was wrong, she made the simplest
has this incredible ability to pinpoint both of them. and for me at that time, the dumbest statement

In the year 2005, I was working on the charts and applying my understanding “Dad, Your theory is all wrong”
of Elliott Wave theory, when my then 13 year old daughter, Nikita, walked
And there I was racking my head while a child could see that it was all wrong.
into the room. She was curious why I was pouring over so many charts and
This is what transpired next;
what I was trying to do.

Me: Why what is wrong?

You cannot brush away a child easily and as usual she had a thousand
questions. I then set about explaining to her the basics of Elliott Wave. So I

JUNE 2012 ATMASPHERE | 21

Nikita: “You told me you have 5 wave patterns and then 3 wave patterns and
then the 5 wave pattern repeat.
Me: yes, that is correct and see here at these places that is exactly what
happens.
Nikita: But dad, in this very chart the 5 wave pattern appears immediately
after a 5 wave pattern.
Me: Yes, that is correct too, that is exactly how markets unfold and......
Nikita: Dad, then how can you tell when you do not know what pattern will
unfold at any given point.
And you know what! Your theory is all WRONG! I do not want to know or
learn any more of it. That was it! She walked out of the room and forgot all
about Elliott Waves and to date has not made any effort to even look at it
again.
So much for an excellent teacher.
I was flabbergasted and brushed her statements aside as my wife screamed
“Dinner's ready”
But Nikita's statement “Your theory is all wrong” continued to haunt me and
I simply could not figure out what she found wrong in the theory. I was
however very keen to understand what she had seen in those 20 minutes
that I has not seen in over 20 months and more… Going back over our
22 | ATMASPHERE
conversation, I could easily figure that her revelation (Her dad was definitely
crazy) came when she saw the idealized complete market cycle.
The next day there was a 5' x 5' poster of the complete market cycle and I
was staring at that poster every free moment that I could find.
About 10 days later, I had my first revelation “Whenever markets change
trend, an Impulse in one direction is followed by another Impulse in the
other direction” Logically this made a lot of sense and then the complete
market cycle also started making more sense and I could understand how R N
Elliott was able to make some of his startling forecasts.
But even this understanding was not complete. And then came the next
realization - it is not a mirror of Impulse, but a mirror of Motive Waves. At
that time, my understanding of Elliott Wave patterns was quite limited. But
one thing that became amply clear with this revelation – Motive and
Corrective. This was the first time, I began to appreciate, the real difference
between a motive and a corrective wave.
The Impulse is not the only motive pattern. While so much emphasis is
placed on the Impulse, the importance of Leading and Ending Diagonal is
completely overlooked.
I then set about studying the charts and two months and
2000 charts later, I could say confidently,
Markets only change trend when a motive wave is followed
by another motive wave.
JUNE 2012
TREND, COUNTER TREND AND TREND CHANGE But this would call for a market to trend indefinitely in one direction duly
interrupted by counter trends.
1. What is a Trend? 5
2. What is a counter trend? So how and when does the market change its trend? Reflecting on these two
3 patterns it becomes clear that, if a five wave pattern (motive action) is a
Trend - A trend is a period or action where
trend and the corrective action only corrects that trend, then the only way to
price moves from one point to another. RN 4
1 have a change in trend, would be to have a trending pattern in the opposite
Elliott discovered that markets trend in only
direction. So a trend change would be to have two trends in opposite
three patterns, Impulse, Leading Diagonal and
2 direction, without any pattern between them.
Ending Diagonal and all three of them unfold in
5 wave patterns. A trend change is seen only when a five wave pattern is followed by a five
wave pattern in the opposite direction. Thus we can distill our understanding
A counter trend – A counter trend is a period or
now to just two combinations.
b action when price moves in opposite direction to
earlier trend, till such a time the earlier trend repeats. 1. Motive pattern or Trend is followed by a Corrective pattern or a
a
Once again, RN Elliott was quite clear that there are counter trend leading to a motive pattern in direction of earlier
five other corrective patterns and all other patterns trend.
c
can be reduced to these three. The Five patterns are 2. Motive pattern or trend followed by another motive pattern or trend
Zig Zag, Double Zig Zag, Flat, Double Three and The Triangle. in the opposite direction reflecting a change in trend.

51
When we combine both, we can see that a trend, There are only 2 patterns that the market unfolds at the lowest degree, a
3 b
and in Elliott wave parlance called a motive motive wave or a five wave pattern and a corrective wave or a three wave
action or a five wave pattern is essentially a pattern and all larger patterns are just multiple combinations of these two
1 4

followed by a corrective action or a three wave c2 bricks of the market.

2
pattern, and, that is once again followed by a
The basic building bricks of the market are an Impulse and a Zig Zag
motive action or a five wave pattern and on and on and on.......

JUNE 2012 ATMASPHERE | 23

 It appears that the rule is satisfied each and every time, and across all the
charts analyzed, and across all time frames. There has NOT been one
instance that the rule was found to be incorrect.

We can reduce the entire principle to a very simple observation.

During a Trend Change, a motive wave preceding the apex or the bottom,
either an Ending Diagonal or an Impulse is immediately followed either an
Impulse of a leading Diagonal.

Every other Instance where the Motive wave is followed by a corrective

pattern is only a temporary pause and markets WILL RESUME the earlier
trend when the correction ends.

Let us look at a few charts to highlight this Trend Changing and Trend
Continuation behavior
You may have seen the above picture countless number of times. This is the
idealized complete market picture. You can see that every time markets
change trend from down to up or up to down, there is a five wave pattern on
both sides of the point of Trend Change.

I went about analyzing this phenomenon on real market charts to ascertain if

this is indeed true. Over 5 Million charts of Stocks, Indices, Commodities and
Forex, were analyzed in different time frames. 1 Minute, 15 Minute, 1 Hour,
Daily and weekly charts have been taken for the study and the rule appears
to hold true on all time-frames and across the different markets
examined. The only criterion has been that the markets be highly liquid,
In all the charts you will also notice that when a motive pattern is followed by
traded with very high volumes and reflect mass participation.
a corrective pattern, the earlier trend WILL repeat.

24 | ATMASPHERE JUNE 2012

JUNE 2012 ATMASPHERE | 25
 turned. One needs to analyze the markets at different degrees to ascertain
the next likely direction of the markets.

I strongly encourage you to research this phenomenon and it will give you
some outstanding results. After all the charts are the true reflection of the
markets and they alone are sufficient to indicate and forecast the markets.

ANANTH J ACHARYA is the Founder of Applied Elliott

Wave. Apart from working extensively with world’s most
successful Traders and Technicians, he has worked with
Elliott Wave Guru, Richard Swannell, to develop the
world’s only Pattern Recognizing Software. Ananth’s discoveries, called the
Golden Keys of Elliott are being applied for successful forecasts of the
markets. He has also distilled the essence of Elliott Wave Theory into the
proprietary AEW Trade indicator. His clients span across 4 continents and
include some of the wealthiest people in the world.

This throws up several successful trading and profit opportunities in the

market as thrown up by this study. Readers will also note that every time
there is a trend change, market will show an Impulsive Mirror, and however
a mirror does not in itself guarantee that the larger trend on the market has

26 | ATMASPHERE JUNE 2012


THE TRADING ATHLETE - BOOK REVIEW
REVIEWED BY VISHAL B MALKAN, CMT
Trading can be best compared to Sports. A trader’s life is very similar to an
athlete’s. They both go through winning and losing, handling pressure,
dealing with injuries etc. They both need to work on psychological traits such
as – self-esteem, motivation, confidence and above all - focus. The Trading
Athlete (TTA) is the only book which I have come across that identifies this
similarity. Written as a self-help book for traders, it uses sports analogies and
compares an Athlete to a Trader. There is ample use of sports metaphors
throughout the book. It successfully addresses the unique challenges faced
by short-term traders.
TTA is written by -
1. Shane Murphy - a sports psychologist and a
trading coach/former athlete. He served as a
psychologist for the U.S. Olympic Committee and
guided the mental preparation of five Olympic
teams. He now personally consults brokers and
traders.
2. Doug Hirschhorn – Hirschhorn traded
securities at the CME and CBOT for seven years and is a former Division I
athlete. He is the director of trading psychology at Schonfeld Securities, LLC.
TTA has a separate chapter dedicated to each psychological trait.
JUNE 2012
Motivation - The authors relate how motivation is the key ingredient of a
successful person. While right motivation leads to desired results, wrong
motivation leads to failure. The authors classify motivation as –
 Internal - desire to become an excellent trader
 External - desire to make money or to gain status
In the world of trading failure is inevitable. Traders with external motivation
do not last long. All successful traders, inspite of failing persisted due to
strong internal motivation to excel in trading.
Goal Setting - “You cannot hit a target which you cannot see and you cannot
see a target which you do not have”. Goals are vital to a successful trader.
The authors maintain that effective goals are achievable, strategic,
measurable, controllable, flexible and positive.
Confidence - The authors say that the only impasse to becoming a confident
trader is the fear of failure – this impairs the ability to learn from mistakes.
They suggest methods such as - establishing positive routines and adjusting
body posture – as keys to restore confidence after a performance slump.
Handling Losing Trades - A major difference between successful and
unsuccessful traders is how they handle losses (failures). With numerous
examples and anecdotes they have explained how can one handle bad
trades, losing streaks and develop a positive trading attitude.
The other important key points include –
ATMASPHERE | 27
  Energizing in pressure situations
 Trading for revenge Vishal B Malkan, CMT is the founder of Malkansview –

 Recovery from trading injuries An Institute which conducts training programmes on

 Concentration Technical Analysis and Behavioural Finance. He is a

 Enjoying the moment by staying in the here-and-now proprietary trader, trainer and a trading coach.

Worksheets have been provided throughout the book. These can be used for
recording -

 Mission statements including your strengths, weaknesses and goals

 Trading rules and trading goals across all time frames

There are checklists to determine if you are meeting your goals. There is also
a weekly performance log for recording each trade, its outcome and also
your comments about it.

To summarize, TTA is one of the best books on trading psychology ever

written. Appropriate for all classes of traders and investors. Highly
informative, interactive, straight forward and practical. It provides a very
easy understanding of the importance of trading psychology.

After trading the markets from over 16 years and committing all the mistakes
a trader can possibly commit, I completely agree with the authors that a
trader’s life is no less than a sportsperson’s life. The book has always been in
my students’ “must read” list. At the same time, I strongly recommend the
book to anyone who desires to take up trading as a serious business.

28 | ATMASPHERE JUNE 2012

 PAST EVENTS’ UPDATE

5th ATMA JAIPUR MEETING 20th ATMA MUMBAI MEETING

Date - 19th May, 2012 Date - 26th May, 2012

Held at - Women Teacher Training College Held at - Assembly Hall, St. Xavier's College,
(Modern Education Society),
Mumbai, Maharashtra
Jaipur, Rajasthan, India
Attended by - 45 Participants
Attended by - 15 Participants
Topic of study - Trend-Following with Time Neutral Charts
Topic of study - ‘Using continuation patterns for break-out
Presented by - Mr. Vishal B Malkan, founder of ‘Malkansview’
trading’
an Institute that provides training in Technical Analysis &
Presented by - Mr. V.P. Gehlot, founder of ‘mfcs.in’ an Institute Behavioural Finance.
that provides training in Technical Analysis
Focus of the Meeting:
Focus of the Meeting:
 Characteristics of Trend Following Systems
 Types of pattern used for trading. - Advantages and Drawbacks

 Chart patterns with high forecasting probabilities.  Trading Time-Neutral Charts:

 Short term patterns useful for short-term trading. - Three Line Break Charts
 Right angle & Inverse triangle formations.
- Kagi Charts
 Longer Patterns v/s Shorter Patterns.
- Renko Charts

JUNE 2012 ATMASPHERE | 29

PAST EVENTS’ UPDATE (CONTD….)

12th ATMA DELHI MEETING 3rd ATMA PUNE MEETING

Date - 27th May, 2012 Date - 3rd June, 2012

Held at - India International Centre Held at - Conference Hall, 1st floor,

Main Building, New Delhi Deccan Gymkhana, Pune, Maharashtra

Attended By - 40 Participants Attended By - 23 Participants

Topic of study - Finding Opportunities using Cycles and
Rankings as a Guiding Light
Presented by - Mr. Mukul Pal, Co-Founder, Orpheus Capitals is a
Chartered Market Technician, MBA Finance and a member of
the reputed Market Technicians Association (MTA). He has more
than a decade of Capital Market experience dealing with
derivatives and global assets.
Focus of the Meeting:
 Is Performance Cyclical?
 Do worst performers outperform?
 What is Mean Reversion and how is it used for investing?
Topic of study - Evolving the Technicals with Time
Presented by - Dr. Bhooshan Shanbhag, M.Sc., Ph.D., a lead
author for investment weekly Informed Investor for over three
years & he also conducts training programmes for Technical
Analysis and in Derivatives.
Focus of the Meeting:
 Oscillators and their historic time frames
 How time frames are applied to oscillators without
questioning the applicability in changing times.
 Different oscillators and indicators as applied to intra-
day basis as well as to positional trades.

 The Sectoral Outlook for India 2012-2015  Benefit of changing time frame from the conventional
one thus giving rise to a modified oscillator that better
 Best Buy/Sell Portfolios represents the price changes and trend changes.

30 | ATMASPHERE JUNE 2012

FORTHCOMING EVENTS

th
5 ATMA BANGALORE MEETING 21st ATMA MUMBAI MEETING

Date: 23rd June, 2012

Date: 17th June, 2012
Venue: Assembly Hall, St. Xavier's College,
Venue: Sri Bhagawan Mahaveer Jain College,
Mumbai, Maharashtra
Bangalore, Karnataka.
Timing: 2:30pm to 6:00pm
Timing: 10:00am to 1:00pm
Presenter: Mr. C. M. Patil, Founder of Market Rahasya Group
Presenter: Dr. Musa R Kaiser, MBBS, MD, is a medical doctor who
who is dedicated for driving education for stock market fraternity.
stepped into the world of Investing, Finance, Markets, Wealth
He writes column in leading Stock Market news bulletins such as
Creation and Financial Education. He is a member of the MTA -
Informed Investor, SMART Investment, and Loksatta - Artha
USA and ATMA - India.
Vrutant etc.
Topic of study: Understanding Technical Analysis the CMT way
Topic of study: Technical Analysis - A Game of Probability

Focus of Meeting shall be:

 Understand –Law of Probability

 Identifying opportunities favoring your trading position

 Analyze your chances to Win

 Trading on Trend Lines & Chart Patterns by taking

advantage of Law of Probability 20th ATMA
MUMBAI MEETING

JUNE 2012 ATMASPHERE | 31

32 | ATMASPHERE JUNE 2012
 Benefits of Membership with the ATMA
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34 | ATMASPHERE JUNE 2012