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Interview: Perry Kaufman – Mastering Systematic Trading P. 72<br />
The Pro’s<br />
Process<br />
Bruce Bower P. 68<br />
Your Personal Trading Coach<br />
Nr. 04, April 2014 | www.tradersonline-mag.com<br />
Multi-Dimensional<br />
Trading<br />
The Ability to Take<br />
the Broader View P. 40<br />
Buying Above and Selling<br />
Below the Snake Line<br />
A Strategy that Trades<br />
on the Cable P. 50<br />
How Small Traders Can<br />
Benefit from the Big Players<br />
David vs<br />
Goliath P. 6
LIGHT UP YOUR<br />
FOREX BUSINESS<br />
www.swissquote.co.uk<br />
CFDs and Forex are leveraged products; trading on margin carries a high degree of risk and losses can exceed<br />
your deposits. Swissquote Ltd is authorised and regulated in the UK by the Financial Conduct Authority: 562170
www.tradersonline-mag.com 04.2014<br />
EDiTOriAL<br />
ioannis kantartzis<br />
Editor-in-chief<br />
if it Feels Good, Don’t Do it<br />
» in the last issue, i described a few ideas on how to gain a psychological advantage.<br />
The key point there was to keep doing those things that you find difficult to do. This<br />
means that you will be one step ahead of others who are either just incapable of<br />
accomplishing those things or fall short of that. Not just in trading, but in many other<br />
competitive areas of life, such as competitive sport, this can help you gradually gain<br />
a psychological advantage and achieve significantly better results over time.<br />
But there is even more to this connection, which is why i would like to pick up on<br />
that topic again. Do you know the situation where you come home in the evening after<br />
a hard day at work and then need to decide whether to watch Tv on the couch or go<br />
for a jog in the park Compounding the problem, that run in the park had already been<br />
scheduled whereas, as is so often the case, there is nothing but (often) rubbish offered<br />
on television. To all intents and purposes, that means that the decision has already been<br />
made for you. And yet, for a short period of time the thought of the cosy couch will cross<br />
your mind. it would feel much better to relax there than to brave the cold and go jogging.<br />
And that’s exactly where the problem is: More often than not, what we wish to do in the<br />
long term doesn’t feel good in the short term. As a result, many people give up what they<br />
really want (in this case, physical fitness) in exchange for what they would like to do at<br />
this very moment (relax). But at the same time that is the very thing that runs counter to<br />
your long-term objective! The upshot is that there are many people who for years have<br />
wanted to get fit, but never make it or even get less fit.<br />
Things may be similar in trading. you have resolved to trade only the best setups,<br />
i.e. just a few swing trades a week. in the short term, you will be feeling bored since<br />
the market is stagnating and you haven’t made any trades for three days (rightly so).<br />
however, since it is much more exciting “to be in on the action“ and “not to miss<br />
anything“, you will place a few short-term intraday trades, sooner or later risking losing<br />
what you really want (swing trading) for what you happen to be wanting at that point in<br />
time (“action“). This is also the reason why it is not enough to have a trading plan – most<br />
importantly, you need to be able to stick to it. Make sure you work on implementing it.<br />
When it gets really boring, go to the gym. And turn off the Tv, for goodness sake!<br />
Enjoy the new issue of TrADErS’ magazine. For those who know that<br />
sometimes you don’t have to go to great lengths to have your eyes opened. «<br />
Good Trading,<br />
3
TABLE OF CONTENTS<br />
www.tradersonline-mag.com 04.2014<br />
6<br />
72<br />
TABLE OF CONTENTS<br />
April 2014<br />
COVER STORY<br />
6 David vs Goliath<br />
In our cover story Gernot Daum discusses how individual traders<br />
(David) may stand a chance against the big players (Goliath) in the<br />
game of trading. In addition, he explores concepts that will help<br />
traders to even gain an edge off the large, inflexible positions of<br />
large institutions. Even more, the author provides some specific<br />
real-trading examples of how to apply these concepts.<br />
INSIGHTS<br />
12 TRADERS´ Talk: Guy Simpkin<br />
We discuss the latest developments in European clearing with<br />
Guy Simpkin from BATS Chi-X Europe.<br />
14 Hedge Fund Series – Part 2<br />
In the second part Bruce Bower reveals what he learned by<br />
working at a Hedge Fund.<br />
18 Be(a)ware of Diversification – Part 2<br />
This time Dirk VanDycke shows how to put the knowledge about<br />
diversification in practise to your advantage.<br />
22 Trading Seasonalities – Part 9<br />
Thomas Bopp introduces a trade with Whole Foods Market and<br />
currency-future AUD/USD.<br />
40<br />
24<br />
News<br />
Find the latest notes and<br />
announcements from around the world<br />
of trading in our “News“ section.<br />
TOOLS<br />
28 New Products<br />
The Latest Trading Technology<br />
30 Softwarereview<br />
iView Charts<br />
34 Book Review<br />
“Inside the House of Money”<br />
by Steven Drobny and<br />
Niall Ferguson<br />
36 Appreview<br />
Trade Tuner<br />
4
TABLE OF CONTENTS<br />
PEOPLE<br />
68 The Pro’s Process<br />
Part 18: Bruce Bower<br />
72 Perry Kaufman: Mastering Systematic Trading<br />
Perry Kaufman is one of the early systematic traders who<br />
started out researching systems back in the 1970s. Due<br />
to his vast trading knowledge and writing many popular<br />
trading books he is today a highly respected expert.<br />
MASTHEAD<br />
Publisher<br />
Lothar Albert<br />
Subscription Service<br />
www.traders-mag.com;<br />
www.tradersonline-mag.com;<br />
abo@traders-mag.com; Tel: +49 (0) 931 45226-15<br />
Address of Editorial<br />
and Advertising Department<br />
TRADERS´ Magazine Limited<br />
The Black Church, St. Mary´s Place<br />
Dublin 7<br />
Ireland<br />
Contact:<br />
E-mail: ioannis.kantartzis@traders-mag.com<br />
Phone: +44 (0) 7798631716<br />
Mobile: +30 (0) 6932 315450<br />
Fax: +49 (0) 9 31/4 52 26-13<br />
STRATEGIES<br />
40 A Multi-Dimensional Approach to Day-Trading DAX<br />
Futures<br />
Stanley Dash demonstrates a ‘multi-dimensional’ approach by<br />
using two measures of the relationship between two markets.<br />
46 The RSI Return Strategy<br />
The RSI is an established indicator for trading. David Pieper<br />
shows how to use it in a simple trading system.<br />
50 Buying Above and Selling Below the Snake Line<br />
Azeez Mustapha explains a Cable trade setup.<br />
BASICS<br />
54 Darvas Boxes Analysis<br />
Nicolas Darvas developed his famous boxes theory in the late<br />
50s. In this article Oscar Cuevas shows you how it works.<br />
58 Trading Journal<br />
U.S. trader and blogger Steve Burns explains one of his SPY<br />
Trades from last year.<br />
60 Risk and Money Management – Part 4<br />
In the fourth part Jens Klatt deals with the fact that trading is<br />
not about how often you win or lose.<br />
64 The Trader’s Technical Arsenal – Part 6<br />
Azeez Mustapha discusses the MACD, Momentum and other<br />
indicators.<br />
Editor-in-Chief<br />
Ioannis Kantartzis, Anastasios Papakostas<br />
Editors<br />
Katharina Boetsch, Prof. Dr. Guenther Dahlmann-<br />
Resing, Corinne Endrich, Marko Graenitz, Lena<br />
Hirnickel, Sandra Kahle, Rodman Moore, Stefan<br />
Rauch, Katja Reinhardt, Karin Seidl, Tina Wagemann,<br />
Christine Weissenberger, Nadine Wiget<br />
Articles<br />
Thomas Bopp, Bruce Bower, Steve Burns,<br />
Richard Chignell, Oscar Cuevas, Stanley Dash,<br />
Gernot Daum, Jens Klatt, Azeez Mustapha,<br />
David Pieper, Dirk Vandycke<br />
Pictures<br />
© Andrei, B.Stefanov, basketman23, bluedesign, Brian<br />
Jackson, chairman, chones, DavidArts, ferkelraggae,<br />
Frog 974, gavran333, Georg Preissl, Givaga, Horticulture,<br />
IMaster, Nneirda, opicobello, Sashkin, sergey_p,<br />
wmedien / www.fotolia.com<br />
Price data<br />
www.captimizer.de; www.esignal.com;<br />
www.metaquotes.net; www.tradesignalonline.<br />
com; www.tradestation.com<br />
ISSN<br />
1612-9415<br />
Disclosure<br />
The information in TRADERS´ is intended for<br />
educational purposes only. It is not meant to<br />
recommend, promote or in any way imply the<br />
effectiveness of any trading system, strategy or<br />
approach. Traders are advised to do their own<br />
research and testing to determine the validity<br />
of a trading idea. Trading and investing carry<br />
a high level of risk. Past performance does not<br />
guarantee future results.<br />
© 2014 TRADERS´ Magazine Limited, The Black<br />
Church, St. Mary´s Place, Dublin 7, Ireland<br />
5
COvErSTOry<br />
www.tradersonline-mag.com 04.2014<br />
David vs Goliath<br />
how Small Traders Can Benefit<br />
from the Big Players<br />
What does a trader need to complete his trades in a<br />
disciplined way Confidence! And how can he get that By<br />
knowing what he is doing and by completely understanding<br />
the situation in which he happens to be trading and by<br />
executing the very trades that match this understanding.<br />
Read here how a retail investor can mentally adjust to the<br />
“trading game”, in which he is pitted as a David against<br />
the major investor Goliaths. What are the strengths and<br />
weaknesses of the Goliaths and what are those of trader<br />
David What is his slingshot and how can he use it best<br />
» Amateurs and Professionals<br />
The situation in the trading arena is as follows (and some<br />
traders – especially neophytes – are not quite aware of<br />
it): Alongside a small number of major investors (equity<br />
funds, pension funds, and so on) that can safely be called<br />
professionals, there is a large number of so-called retail<br />
investors. Of these, most have not progressed beyond<br />
the “amateur” status yet. And unlike in sports where<br />
Gernot Daum<br />
Gernot Daum, who is a trained computer scientist,<br />
has been a swing trader for 14 years, also<br />
focusing in recent years on the intraday trading of<br />
futures and stocks. He uses his very own Statistikfuchs<br />
software (www.statistikfuchs.de), which<br />
he also offers as a Freemium fi nancial service.<br />
email@GernotDaum.de<br />
professionals and amateurs compete against each other<br />
in separate leagues, amateur traders are, of necessity,<br />
pitted against the professionals from the very beginning.<br />
Major investors have a number of advantages:<br />
• Well-trained staff: Portfolio managers can be<br />
expected to have received the best possible training<br />
and to have plenty of work experience.<br />
• Technology: The latest software, good analysts to<br />
use it properly, fast computers, high-speed lines.<br />
• Sufficient capacity to conduct fundamental analyses.<br />
While good fundamental analyses comes at high<br />
cost, large investors can afford to meet them.<br />
• Good contacts: The large investors’ money managers<br />
have contacts in all directions of the financial sector,<br />
which gives them sources of information that retail<br />
investors can only dream of.<br />
• Size: They can move the market.<br />
6
ADvErTOriAL<br />
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Professional trader, Ioannis Kantartzis, will guide you through the common pitfalls and nuances of the FX markets,<br />
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coverstory<br />
www.tradersonline-mag.com 04.2014<br />
Opportunities for Retail Investors<br />
On the face of it, things look hopeless for retail investors,<br />
don’t they To be sure, it’s important to be aware of the<br />
situation. But this awareness allows ways to be found<br />
even for small investors to graduate from amateurs<br />
to professionals in order to finally make money on the<br />
markets.<br />
Let’s start with the last of the five items listed<br />
above: Is it really advantageous for investors to be<br />
capable of moving the market Doesn’t this also entail<br />
disadvantages for large investors It certainly does.<br />
Here is a list of them:<br />
• Inflow and outflow of capital. Customers of the<br />
funds are the ones responsible for timing. And these<br />
are often amateurs who purposely delegate their<br />
personal investment decisions. So the inflow and<br />
outflow of capital is likely to occur at more or less the<br />
wrong time for funds.<br />
• Equity funds need to engage in marketing. This may<br />
lead to constraints on the selection of investments<br />
caused by the need to show for marketing purposes<br />
“that you are doing everything right.”<br />
• Successful equity funds continue to grow. But one<br />
particular fund may have been successful mainly<br />
because of good technical analysis. Starting from a<br />
certain size, however, this does not work anymore,<br />
making it necessary to switch to more fundamental<br />
approaches. But in this case that is no longer part of<br />
the special skills set of the fund managers.<br />
• Is having many contacts always a good thing The<br />
financial crisis of 2009 was primarily caused by the<br />
F1) Software AG Stock on 29th Jan 2013<br />
Outline of a day trade after a down gap. Entry was made shortly before 10 am upon the breakout of prices<br />
below the 32 euro level. Shortly before the close, the position was smoothed below 29 euros near the daily<br />
lows.<br />
fact that everybody owning certain stocks (now<br />
often referred to as “toxic assets”) was doing the<br />
same thing simply “because they all were” – and<br />
along the way everybody seems to have lost sight of<br />
the overall risk.<br />
• And now to the item of size: Moving the market is not<br />
advantageous since that causes your own activities<br />
to be visible making it possible for other participants<br />
in the trading game to adjust to that. At bottom, the<br />
entire trend-following approach is based on this idea.<br />
So, there is hope then. I will elaborate on the latter<br />
aspect of “visibility” in this article, resulting in trade<br />
setups for the retail investor. This is the basic idea of<br />
charting: Looking at what the big players are doing,<br />
following suit and “taking advantage” of their problems.<br />
First off, an example: It’s about a stock that in 2013<br />
quite clearly resulted in constraints on large investors<br />
that retail investors were able to benefit from – by trend<br />
following, of course.<br />
Day Trader David<br />
In Figure 1 you can see a Software AG intraday chart<br />
of 29th Jan 2013 on a 5-minute basis. On this day, the<br />
company released figures showing that while its own<br />
targets had been achieved or even slightly exceeded,<br />
market expectations must have been much higher since<br />
the stock opened with a large downward gap .<br />
The stock had gone up by more than 60 per cent from<br />
July 2012 to January 2013, doing significantly better than<br />
the overall market. There were certainly fundamental<br />
reasons for this. Large investors with good fundamental<br />
analyses recognised this in time and<br />
benefited from it. But what was the<br />
situation now Apparently, there<br />
were quite a few large positions<br />
with a short time horizon in the<br />
market, otherwise there would not<br />
immediately have been the large<br />
gap, considering the numbers. How<br />
does a day trader behave in such a<br />
situation He is going to wait and<br />
see how the situation will develop in<br />
the first one or two hours. After all,<br />
it will become apparent soon how<br />
serious the imbalances of the major<br />
investors really are. There will then<br />
be high pressure on them to reduce<br />
those positions, which may very<br />
soon lead to further sell-offs.<br />
Source: Author‘s own Statistikfuchs software<br />
8
Coverstory<br />
That’s exactly what happened here. There was<br />
important support at 32 euros and the price was able to<br />
hold above it for an hour. A stop sell below 32 or below<br />
the daily low was now a reasonable trading plan. The<br />
trade was triggered shortly before 10 am. There was no<br />
reason to close the trade before the end of the trading<br />
session. This is the time for those who only do day trading<br />
to close their trades. Since it was possible for the stop to<br />
2012), and finally there was a clear trend counter-signal<br />
at point 5.<br />
So there were many shorting opportunities for<br />
retail investors. And all that at the expense of large<br />
investors who had lost sight of the fundamental<br />
perspective and had used technical analysis (which<br />
was inappropriate for their position sizes) to push<br />
each other ever higher.<br />
be placed on the daily high just above 32.50, the trade had<br />
a fantastic risk/reward ratio.<br />
David and Two Goliaths<br />
The following example is a more complicated chart<br />
Swing Trader David<br />
pattern that shows several things:<br />
Change of time level: We are leaving the day trader and<br />
move on to a swing trader who holds his trades for days<br />
or even weeks. The Software AG stock will also have<br />
• What particular signs are there for major investors in<br />
a market<br />
surfaced on his radar. He will be looking closely at the<br />
intraday chart and will figure out his chances. After such<br />
• What are the large investors’ lines of thought and<br />
what traces do these leave in the chart<br />
a day with virtually no resistance to the gap, this trader<br />
knows that many more sales can probably be expected<br />
from large investors. In actual fact, things were going<br />
slightly downhill for a few more days before the multiweek<br />
• What are the consequences for the trading done by<br />
David, our retail investor<br />
While the chart pattern is for the “advanced” among<br />
technical correction occurred which had been due.<br />
After that, though, there were swing trading opportunities<br />
on the short side. The chart in Figure 2 shows the<br />
development in the months after the downward gap<br />
shown in Figure 1.<br />
A detailed discussion of trend-following tactics is<br />
traders, it shows well in which direction you can develop<br />
your thinking about the stock market if you’re looking to<br />
understand the causes behind the patterns. This is all<br />
about the “megaphone” continuation of a rectangular<br />
pattern. The Bayer stock provided a fitting example of<br />
this in early 2013 – see Figure 3.<br />
not part of this article, which is why<br />
the potential trading plans will only<br />
be briefly outlined here: At point F2) Daily Chart of the Software AG Stock<br />
1, a counter-cyclical entry into a<br />
short trade was possible since a 50<br />
per cent Fibonacci correction mark<br />
was hit here. The following procyclical<br />
entry opportunities for the<br />
security-oriented trend trader have<br />
been marked with point 2. At point<br />
3a it was possible for the trade to be<br />
strengthened. However, this partial<br />
position would have been stopped<br />
out at point 3b in any normal trade<br />
management because of a false<br />
signal. Point 4 shows another (this<br />
time successful) opportunity to<br />
strengthen the trade pro-cyclically.<br />
From the end of June it was<br />
possible to reduce the position<br />
significantly since a reversal pattern<br />
The chart shows several swing trading plans. At point 1, the 50 per cent Fibonacci retracement was twice hit<br />
almost perfectly. Points 2, 3, and 4 show suitable spots to increase the short position. At point 3b, there would<br />
have been a false trade of the short position that was opened at point 3a. At point 5, there was finally a clear<br />
had formed above the “great”<br />
counter-signal for the downward trend.<br />
Source: www.tradesignalonline.com<br />
support at 22 euros (low of July<br />
9
coverstory<br />
www.tradersonline-mag.com 04.2014<br />
In December 2012 and January 2013, a rather narrow<br />
rectangle had formed within the limits of 71 to 73.50<br />
euros. In such a case, the probability of the following<br />
scenario occurring is quite high: A strong buyer (Goliath 1)<br />
bought at 71, a strong seller (Goliath 2) sold at 73.50<br />
and the rest of the market participants provided the<br />
fluctuation between these two price levels. “Strong” here<br />
means: There is an interest on the part of a single market<br />
participant (a major investor) in building up or reducing a<br />
large position in the stock.<br />
Then, on 25th January, there was a large upward bar<br />
with a closing price above 76 euros (first marking). This<br />
was a strong buy signal since the seller who had sold at<br />
73.50 euros had apparently sold his holdings while the<br />
strong buyer was still in the market. This is a suitable<br />
signal for our trader David to open a long position. But<br />
there are also false signals, and this was one of them.<br />
Within just a few days the price dropped again below<br />
73.50 euros.<br />
Just on the strength of the many new buyers being<br />
attracted by such a signal, this should actually not have<br />
happened. So the seller was still there after all and<br />
managed to get rid of some of his stocks at much higher<br />
prices. So far, so bad for the breakout trader. False signals<br />
are part and parcel of any trading system. That’s why you<br />
need a stop management system that in case of loss stops<br />
out a position again after a short period of time (second<br />
marking). At this point, all you can do is just regret the<br />
F3) Megaphone Pattern at Bayer in Early 2013<br />
This pattern shows a “duel” between two major investors each of whom “pulled out” their sell orders upwards<br />
(point 1) and their buy orders downwards (point 3) respectively, as described in the text.<br />
loss. Or else try out an “advanced” way of looking at the<br />
situation. And this is exactly where it gets exciting!<br />
Pulling out as a Tactic to Increase the Average Selling Price<br />
The seller had pulled out. He had suspended his sales<br />
for a short time. Presumably, he had also been inspired<br />
by some good news on the stock that came out on 25th<br />
January. The buy signal caused many new buyers to<br />
enter the market and on the following days the seller<br />
started selling again, no doubt getting rid of some stocks<br />
at higher prices than before. This is precisely the task of<br />
a fund manager who needs to reduce a large position:<br />
driving the average selling price upwards. The pulling-out<br />
tactic helps him do that. Upon “coming back in”, however,<br />
he promptly needs to put his cards on the table.<br />
But what is going through David’s mind now that he<br />
has just lost money If he is an experienced trader, he is<br />
thinking one step further. And says to himself, ”The buyer<br />
will now be pulling out too, which is only logical.” And<br />
so it is now possible to turn the long position lost into<br />
a short-term short position and have a good risk/reward<br />
ratio.<br />
Pulling out as a Tactic to Lower the Average Buying Price<br />
Why is it logical for the buyer to also “pull out” Because<br />
the latter knows, of course, that the apparent breakout<br />
– which proved to be a false signal – has caused many<br />
traders to be now in new long positions and that those<br />
traders do not all operate with a tight<br />
stop. And because, given the strength<br />
of selling pressure shown by the<br />
seller “coming back in”, even many<br />
traders who have had their positions<br />
for some time will now be giving up.<br />
So the buyer will remove his bid at<br />
71 euros, waiting for lower prices.<br />
The big red bar on 6th Feb 2013 (third<br />
marking in Figure 3) is an impressive<br />
showing of this mechanism. That was<br />
also the right day to close the shortterm<br />
short position at 70 euros or<br />
just below. Gambling further on this<br />
position would have been risky since<br />
pulling out is a short term tactic.<br />
The buyer needs to come back in<br />
very soon to collect his shares amid<br />
all the panic and triggering of stops.<br />
However, this time the price even<br />
fell quite a bit lower in the following<br />
days, eventually resulting in the chart<br />
Source: www.tradesignalonline.com<br />
10
Coverstory<br />
revealing the line-plotted “megaphone” pattern caused However, the chart situation was the consequence of<br />
by the expansion of the previously existing rectangle. a publicly known takeover bid by Fresenius for Rhoen-<br />
But back to our experienced trader David who Klinikum in April. In Figure 4, the timing of this is<br />
made the breakout trade, accepted his loss and then highlighted by the massive upward gap. This then is not a<br />
implemented the short trade. That trade has probably “duel” between two large investors. In such a case the risks<br />
not only compensated for his loss, but on balance has outweigh the opportunities. It is possible, for example, for<br />
even made him a small profit. This is what flexibility in the takeover not to go according to plan, which was the<br />
trading is. You can develop it by trying to understand the case here causing massive price losses.<br />
situation and motives of those involved in the market – Such situations should be ignored by David and<br />
and by taking advantage of your own “invisibility” as limited to cases where the duel between two Goliaths is<br />
opposed to the visibility of large investors.<br />
visible on the chart but is not accompanied by any news<br />
or at least none that is of any significance.<br />
David’s Trading Work<br />
What will be the consequences now for the daily trading Conclusion<br />
done by our retail investor David Using the example Competing against the large investor “Goliath”, the retail<br />
of the Software AG stock, trades were shown in two investor “David” has a fighting chance if he chooses to<br />
time levels suggesting an important aspect in the base his trading style on Goliath’s weaknesses. The latter’s<br />
organisation of trading: Since a retail investor’s time principal weakness is his visibility which is due to the size<br />
is limited, a strict selection of stocks is necessary. And of his positions. This is where David’s slingshot has an<br />
this means shares where something “extraordinary” opportunity to strike. The Software AG stock was used as<br />
is happening as was the case here with the Software an example to explain how David may benefit from any<br />
AG stock. It’s these shares that you will be looking at false positioning on the part the Goliaths in two different<br />
more closely, and you will then be working out different time levels. The example of the Bayer stock shows how<br />
trading plans accordingly.<br />
flexible trading evolves from an understanding of the way<br />
The formation of a very narrow rectangle is also major market participants operate. The counter-example<br />
something extraordinary. David can set up a scanner for provided by the Rhoen-Klinikum stock demonstrates<br />
such patterns and use these as the starting points of his that it is absolutely necessary to research all the relevant<br />
trading plans. Breakout setups are his first choice in such news that is happening. «<br />
a case. It’s also important for him to<br />
be open to new ideas if things don’t<br />
develop as planned. In the case of F4) A Word of Caution Concerning Rectangular Patterns after Takeover Bids<br />
narrow rectangles, David should<br />
also check and see whether there is<br />
a takeover bid at that price. Prices<br />
especially of minor stocks may then<br />
not move at all and the stock may not<br />
be worth bothering with. However,<br />
major DAX stocks are rather unlikely<br />
to experience this and are easy to<br />
research in any case. In the Bayer<br />
stock, there was no such takeover<br />
bid at that point in time.<br />
A Word of Caution<br />
Concerning Special Situations<br />
Finally, here is a counter-example. In<br />
the Rhoen-Klinikum stock (Figure 4),<br />
a narrow rectangle had formed in<br />
May 2012 and there was a potential<br />
breakout trade (see marking).<br />
The trading risk is too high for takeover scenarios, as is illustrated by the example of Rhoen-Klinikum. News<br />
that the deal is unlikely to be reached caused the stock to plummet at the end of June.<br />
Source: www.tradesignalonline.com<br />
11
insights – TRADERS´ Talk<br />
www.tradersonline-mag.com 04.2014<br />
Guy Simpkin<br />
Head of Business Develop. BATS Chi-X Europe<br />
TRADERS´ Talk<br />
How MiFID Will Affect the Way Clearing Operates in the Future<br />
With barely a month since the ink dried on the new MiFID II text, European market<br />
participants are now working through the details as they seek to derive further<br />
understanding of how European markets could look by the end of the decade. We sit<br />
down with Guy Simpkin, Head of Business Development for BATS Chi-X Europe, to<br />
discuss the latest developments in European clearing.<br />
» TRADERS´: What can we expect from the final,<br />
agreed draft of MiFID II<br />
Simpkin: Many of the measures – like dark pool caps,<br />
or commercially reasonable data costs – that are<br />
contained in the final text made headlines in the many<br />
months beforehand and have remained largely unaltered<br />
since. But in a final twist, the dialogue – comprising the<br />
European Commission, Council and Parliament – agreed<br />
to open up access to derivatives clearing in a last minute<br />
compromise. If implemented in a manner that allows<br />
venues and CCPs to compete with each other it would<br />
deliver long-term benefits to Europe’s capital markets.<br />
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insights – TRADERS´ Talk<br />
Listed derivatives contracts are more<br />
complicated structures than equities.<br />
TRADERS´: What does this mean in practice How will it<br />
affect key market players<br />
Simpkin: This will foster greater competition between<br />
exchange and clearing venues and should serve to<br />
drive costs down whilst increasing innovation. It will<br />
challenge the ‘vertical silos’ operated by exchanges<br />
like Deutsche Boerse, LSEG, ICE and the CME in which<br />
listed derivatives are traded and cleared at the same<br />
venue. Instead, contracts will be fungible across<br />
exchanges with a clearing structure that’s more akin to<br />
the equities model in which customers choose where<br />
they clear.<br />
TRADERS´: Is this unprecedented<br />
Simpkin: MiFID II is not unique among its peers in<br />
seeking to push clearing houses to act for numerous<br />
venues: In the US, the Dodd-Frank Act has mandated<br />
much the same process for over-the-counter derivatives<br />
whilst the Options Clearing Corporation in the US has<br />
very successfully provided fungible clearing of US equity<br />
options to over 20 competing venues for many years.<br />
TRADERS´: Can you really compare listed equities and<br />
listed derivatives Surely different products require<br />
different regulation<br />
Simpkin: Listed derivatives contracts are more<br />
complicated structures than equities. In linking<br />
clearing houses under an interoperable model the<br />
new risk, which lies between the CCPs, needs to be<br />
effectively measured and managed. The CCPs will<br />
need to understand and in some cases accept for<br />
example: each-others margin methodology, acceptable<br />
collateral and rules; legal differences in the event of<br />
a member default need to be understood and the<br />
commercial terms have to be fair, reasonable and nondiscriminatory.<br />
Whilst presenting more complexity<br />
that interoperating in cash equity clearing, this model<br />
was implemented safely and successfully between<br />
Stockholms borsen’s (now Nasdaq OMX) CCP and LCH.<br />
Clearnet Ltd.<br />
With MiFID also introducing the clearing of OTC<br />
derivatives, the need to offer customers the choice<br />
of where they clear becomes ever more important.<br />
Given the size of the OTC markets the CCPs are being<br />
asked to take on considerable new and additional<br />
counterparty, liquidity, operational and market risk. If<br />
these risks are properly measured and managed then<br />
the move to liberalise clearing could not only increase<br />
price transparency and competition but could also help<br />
provide the capacity and diversification of risk that the<br />
market will need.<br />
TRADERS´: What’s the time frame on these measures<br />
coming into force<br />
Simpkin: This is where the picture becomes more<br />
unclear. There will be a delay of at least 2.5 years on<br />
opening access to clearing – with a further, negotiable<br />
2.5 years per member state – and this could render the<br />
measure toothless for the time being. This is frustrating,<br />
but until the ‘Level 2’ text of MiFID II has been agreed –<br />
i.e. the technical detail – we shouldn’t consider it a ‘done<br />
deal’. We’re still hopeful that regulators choose more<br />
competition over protectionism, as it benefits all market<br />
participants.<br />
TRADERS´: Is BATS Chi-X interested<br />
in the listed derivatives space<br />
Simpkin: It remains to be seen how this regulation looks<br />
in its final, detailed form. We regularly review asset<br />
classes beyond equities to determine which market could<br />
prove to be an interesting addition to our business. Right<br />
now, we’re very focused on growing our market share<br />
of the European equities market, and fostering a better<br />
environment for ETFs trading. «<br />
13
insights<br />
www.tradersonline-mag.com 04.2014<br />
Hedge Fund Series<br />
What I Learned Working at a Hedge Fund – Part 2<br />
In the world of investing, hedge funds have an interesting reputation. They are well-known for<br />
producing vast riches and famous fund managers, but their actual operations are still cloaked in<br />
secrecy. This mismatch gives rise to some obvious questions. How do they function How do<br />
they make money How did their founders become so wealthy And, most importantly for traders<br />
everywhere: Could you or me become one of those fabulously successful individuals, like George<br />
Soros or Ray Dalio In this series of articles, hedge fund trader Bruce Bower will shed some light<br />
on these issues and explain what individual traders can learn from all that.<br />
» It’s About Making Money, Not Being Right<br />
Often, you’ll hear people on CNBC or in the press talking<br />
about their positions and their reasons for investing<br />
or holding on to it. They can offer a million different<br />
rationales, such as thinking that “the stock is cheap” or<br />
that “it’s a great long-term story” or that it “a fabulous<br />
growth stock”. Often times, they repeat those rationales<br />
without paying attention to the performance of the stock<br />
or how the markets are moving. It’s fine to have reasons<br />
for investing – actually, you should! But there’s more to it<br />
than that. You have to make money.<br />
The problem comes when they wrap bad trading<br />
practices around it. For instance, if a stock is cheap and<br />
then falls, the same person will come on TV and say “well,<br />
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insights<br />
it’s even cheaper now and we’re averaging down”. Let<br />
me translate: The position is losing money but we’re so<br />
stubborn that we’re going to keep throwing money at.<br />
While the sound bite does a good job of ignoring the loss<br />
and preventing him from looking bad, the reality is at odds.<br />
He lost money. His investment thesis or his timing, or both,<br />
were wrong. The position is a dog and it should be cut.<br />
At a hedge fund, people only care about one thing:<br />
performance. Make money, cut losers and you’ll be OK.<br />
This is how it goes:<br />
• If you “had the right idea but were too early”, it means<br />
one thing: you lost money.<br />
• If you “had a good stock pick but the overall market<br />
doesn’t care about fundamentals”, you lost money.<br />
• If you “took a ton of ‘heat’ on your short but the<br />
market finally caught on”, it means you should have<br />
been stopped out.<br />
• If you “picked a good long-term growth story that the<br />
market finally woke up to”, it means you made money.<br />
Profits and losses (P&L) are what matters, not<br />
the story that you attach to your actions. And if you’re<br />
relying on crutches like “I was early” or “the market just<br />
doesn’t recognise my thesis” to excuse your losses,<br />
then you’re too busy defending your ego and not busy<br />
enough generating performance and practicing proper<br />
risk management.<br />
Focus on what matters most. Have an investment<br />
process and stick to it. Proper solid risk management.<br />
And above all, don’t worry about being right or looking<br />
smart in front of TV audiences. Focus on making money.<br />
You Absolutely Need a Process<br />
If you talk to a trader who is starting out, they are often<br />
grasping for something, anything that works reliably.<br />
They are probably looking to find a style that fits their<br />
personality and is profitable. While that is expected when<br />
people are just starting out, this is absolutely unacceptable<br />
when you work in an institutional environment.<br />
If you are starting a hedge fund, then you should<br />
already know what your “edge” is. After a few years of<br />
working in the market, then you know what you need to<br />
do to make money consistently. Instead of searching for<br />
something that works, you possess all the confidence of<br />
knowing that you have an advantage. If anything, like most<br />
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iNSiGhTS<br />
www.tradersonline-mag.com 04.2014<br />
If you don’t have or can’t define a process,<br />
then you have an uncertain edge.<br />
famous investors, you can simplify your process into a few<br />
simple points on a checklist. You have documented it.<br />
If you can’t document the process, then it means one<br />
thing – you are not sure what your edge is. Maybe you<br />
haven’t thought hard enough about it to define it properly.<br />
Maybe you haven’t tested adequately or looked enough<br />
at your records to make a real judgment. Or maybe it’s<br />
become intuitive and you’re not really sure. Nonetheless,<br />
if you don’t have or can’t define a process, then you<br />
have an uncertain edge. When market conditions are<br />
favourable, then you may do okay; when they are against<br />
you, then you don’t have anything clearly defined to fall<br />
back on.<br />
Now think about if you had a lot of money to manage.<br />
More capital, from more people. These people have to<br />
know what the game plan is and where they fit into it.<br />
This is where having a process is absolutely key. Having<br />
one guy sit in front of the Bloomberg and punting can<br />
be a lot of fun. It can even be profitable. But it’s not a<br />
business. Besides, what would those other people do<br />
What are their responsibilities How do they support<br />
the senior investment professional And what happens<br />
if, God forbid, he goes on vacation – let alone gets hit<br />
by a bus! What game plan is everyone else to going<br />
follow then Having one guy doing everything by the seat<br />
of his pants can potentially be profitable, but it is most<br />
assuredly not a business. And people are only going to<br />
invest in a real business.<br />
Another way of looking at it is to compare with a real<br />
business. Imagine something basic like a dry cleaner.<br />
Bruce Bower<br />
Bruce Bower manages a portfolio of emerging<br />
market equities at a hedge fund. He has<br />
a keen interest in markets, psychology<br />
and self-development, having trained as a<br />
hypnotherapist.<br />
www.howoftrading.com<br />
If you go to drop off clothes, things get taken care of<br />
with responsibilities clearly defined and divided up. One<br />
person receives your clothes, discusses any potential<br />
problems and issues you a pick-up slip. A second<br />
person in the back takes all of the clothes in the space<br />
and cleans them. A third takes them out of the cleaning<br />
machine, shrink wraps them and gets them ready for<br />
pickup. A fourth person mans the desk when you pick<br />
it up. At every stage, it’s pretty clear who is doing<br />
what and the overall plan is for rendering service and<br />
generating profits. Why should a fund be any different<br />
It’s a business after all.<br />
As an investor or trader, you also need to get your<br />
process in order. You need to figure out what your edge is<br />
and try to write it down. If you’re not sure how to verbalise<br />
it, then just the act of writing it down a few times will<br />
help you to get closer to the mark. Even if a checklist<br />
sounds simplistic, you will nevertheless want to reduce it<br />
a simple list of bullets points to understand what matters<br />
most and what you need to be doing.<br />
Just understanding this has helped me in evaluating<br />
investments and preparing my own strategies. If I am<br />
thinking about a new strategy or approach and can’t<br />
reduce it to a few bullet points or define a process,<br />
then it’s a no go. This has also helped me to work with<br />
analysts. I can tell them how to come up with ideas, what<br />
the criteria are, how they should think about investments<br />
– and then what I do on top of their work to figure out if<br />
it’s a portfolio position or not.<br />
Conclusion<br />
While the inner working of hedge funds can seem<br />
shrouded in mystery, they turn out to be mundane.<br />
Surprisingly for outsiders, there is a real emphasis on<br />
the business aspects. While there is so much more<br />
than just this, hopefully this list gives the best of what I<br />
learned at a hedge fund that can help you to be a better<br />
trader.<br />
Next month, it’s all about career advice from a Hedge<br />
Fund Pro. Stay tuned! «<br />
16
insights<br />
www.tradersonline-mag.com 04.2014<br />
Be(a)ware of Diversification<br />
A Good Hard Look at Spreading the Eggs – Part 2<br />
Spreading and its more sophisticated synonym ‘diversification’ is classically being heralded by the established financial<br />
industry as being the right, and for that matter the only, way to cope with risk. Nevertheless this is done with little or no<br />
nuance. All too often the disadvantages are underestimated, if mentioned at all. In this article series we’ll put on our analytical<br />
glasses to study the concept in depth to see if it’s such a great idea altogether. Of course, if it’s not, we have to start<br />
wondering what the better alternatives are.<br />
» In the first article we decided to drag profits and total<br />
return into the picture of diversification, next to its<br />
common risk lowering incentive. This gave us a more<br />
realistic view on diversification. While the advantages<br />
on the risk side are clear to practically everyone,<br />
from the expert to the layman, we shifted focus to the<br />
disadvantages, mostly on the profit side. Diversification<br />
will spread risk, but at the cost of averaging returns. Let’s<br />
see if we can put this knowledge to our advantage while<br />
putting it in practice as well.<br />
Diversification or Concentration<br />
Expectancy, as depicted in Figure 1, first of all, tells us that we<br />
have far more control over the average size of our winners<br />
and losers, than we have over their frequency, which is what<br />
all forms of analysis are all about. So instead of focusing<br />
on increasing the number of winners, whilst decreasing the<br />
number of losers, we should actually just try to minimise<br />
the size of losers and maximise the size of winners. So<br />
expectancy is the mathematical embodiment of the old<br />
trader’s adage of cutting losses and riding winners.<br />
Secondly, and of specific interest to us here, is<br />
the fact that this also implies that resources will have<br />
to flow from losers to ever fewer winners, eventually<br />
concentrating a portfolio rather than spreading it! For<br />
though it’s quite clear to most how to cut losses, i.e.<br />
by selling them early on, before the proverbial mistake<br />
becomes a problem, the answer to the question on how<br />
to maximise profits more often than not doesn’t get<br />
taken beyond holding on to winners. But winners can<br />
be added to as well, even accelerating the speed with<br />
winners get us more profits and as a consequence take<br />
a bigger piece of the portfolio pie.<br />
Thirdly, the mathematics of geometrical growth tell<br />
us that diversification decreases the average return for<br />
sure. Take the example of having nine winners of one per<br />
18
iNSiGhTS<br />
cent and one winner of 25 per cent. Average return in that<br />
case would be a mere ((1 + 0.01 x 9 + 1.25) - 1) / 10 or 3.4 per<br />
Dirk vandycke<br />
cent. If that were not so or the effect was negligible that<br />
Dirk Vandycke has been actively and independently<br />
studying the markets since 1995 with a focus on<br />
could only mean that the original returns must be very<br />
technical analysis, market dynamics and behavioural<br />
finance. He writes articles on a regular basis and<br />
close to each other in which case diversification didn’t<br />
develops software partly available at his co-owned<br />
change a thing other than perhaps increasing transaction<br />
website www.chartmill.com. He teaches software<br />
development and statistics at a Belgian University.<br />
costs and again lowering return.<br />
dirk@monest.net<br />
To look at this another way if diversification is<br />
contradictory to expectancy, then concentration seems<br />
to be the only valid option.<br />
Of course all this raises the question if this doesn’t return of both portfolios was captured. So the interval<br />
increase risk to unacceptable levels Let’s leave that the reference portfolio got monitored depended on<br />
question for later and first turn to experimental, well the moment the last stock of the pruning portfolio was<br />
practical if you want, proof of all this. To address this we stopped out. Hence a period ‘specific to the test’. From<br />
made use of a Monte Carlo simulation.<br />
the thousands of tests that were run, some portfolio’s<br />
only lasted a few weeks while others took more than a<br />
A Huge Simulation<br />
year to get stopped out of their last holdings. So of course<br />
The experiment I ran gave diversification the benefit by now you must be wondering what the results of this<br />
of the doubt. We used a database of several tens of experiment were. Here’s what we got.<br />
thousands of stocks (excluding low volume stocks, very<br />
low priced stock, non-regulated markets, overly volatile Results<br />
stocks and the like). Stocks were monitored over several Take a look at the average return in Figure 2. There you<br />
decades, including a wide range of market conditions. have 13 grey lines depicting the equity curves of all<br />
The Monte Carlo simulator ran (and in the end averaged) 13 holdings in the pruning portfolio. As you will notice,<br />
several thousands of tests, each one going like this. some got drawn over a longer time interval than others,<br />
First a portfolio was made of 13 randomly chosen depending on how long they stayed in the portfolio. The<br />
stocks over a period specific to that test (I’ll explain this un-interrupted black line is the equity curve of the pruning<br />
in a moment). Initial capital was equally divided between portfolio becoming more and more concentrated, while<br />
all 13 stocks. The computer then ran each portfolio in the dashed black line shows the equity curve of the<br />
two copies. One copy was kept as a reference which was homogenously diversified reference portfolio. Keep in<br />
called the homogenous diversified portfolio. One might mind that these are averaged equity curves of the actual<br />
refer to this as an non-weighted index. The other copy did<br />
something very simple to get rid of<br />
the diversification and move over to<br />
the side of a concentrated portfolio F1) Expectancy Depicted as Scales<br />
gradually.<br />
This pruning-portfolio, as we<br />
named it, put a 3 Average True<br />
Range (ATR) trailing stop underneath<br />
all positions. The trailing stop was<br />
of course only allowed to increase,<br />
as the general good practice ideas<br />
of using stops dictate. As soon as a<br />
position got stopped out, the cash<br />
was distributed evenly over the<br />
remaining holdings in the portfolio.<br />
Eventually only one stock would<br />
Being profi table in the long run with trading, and all investing for that matter, is about cutting losses and<br />
survive making up 100 per cent of letting profi ts run. Although it’s a hearsay thing of ages, statistical expectancy actually prooves the saying<br />
mathematically. It’s not about being right or wrong but handling both profi ts and losses well.<br />
the portfolio’s resources. As soon<br />
Source: www.chartmill.com<br />
as this last one got stopped out, net<br />
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insights<br />
www.tradersonline-mag.com 04.2014<br />
equity curves of thousands of tests run on samples of Well the truth is, that never before in history have we<br />
portfolios starting out with 13 randomly chosen stocks. been more able or have we had more tools at our disposal<br />
Systematically concentrating funds in the winners/ to fine-tune and isolate risk than at present. Going in<br />
survivors, seems to be the better way. Which makes a depth through all the tools and techniques available<br />
great case for us warning against mindless diversification, would take at least another article and probably a whole<br />
i.e. without thinking things through first. Apart from book. So let me just give an example in the above case<br />
providing a better end result on average, the return of of having, on margin, 180 per cent of one’s portfolio into<br />
the pruning portfolio stays on top of the diversified one stock. First of all, no one in his right mind would start<br />
portfolio all along the way with a difference up to 2.36 per out any position with 180 per cent of his/her total capital.<br />
cent, including transaction costs. And that’s even after Such a position would only make its appearance after<br />
realising that in this setup the pruning portfolio has to scaling in a stock that is appreciating. The scaling indeed<br />
make a lot of artificial costs just to un-spread itself. In accelerates the profits from the appreciation.<br />
reality a concentrated portfolio doesn’t have to start from So to begin with the position would already have to<br />
a diversified one. Instead of having 13 round-trip costs show quite a nice profit as the current stock price will<br />
as in the experiment, in reality, a concentrated portfolio probably hold quite a distance from the average entry price.<br />
could be built up nicely in three to four entries and only This would provide a first margin of safety. Of course if we<br />
one exit. That leaves room for up to four dips in the water don’t want to indulge in ‘mental accounting’, paper profits<br />
(eight round-trips) and cutting the loss short, before need to be cherished as much as initial capital or margined<br />
starting to generate higher round-trip transaction costs capital. A stop can take us already a long way but only so<br />
than the homogenous diversified portfolio would leave far. A simple technique for coping with this is to extract<br />
you with.<br />
cash from the position by actually selling part or whole<br />
of the position, freeing up most of the cash and securing<br />
But, But …<br />
most of the profits, while exchanging a very small part of it<br />
Isn’t that carelessly dangerous After all, spreading did for call options (in the case of a former long position).<br />
lower the average risk, right Can you even imagine So instead of holding, say, 1000 shares worth $32.37 a<br />
holding 180 per cent of your portfolio (that also implies piece, one could sell the shares, cashing them in for $32,370<br />
the use of margin already) in one position No stop will while buying ten long to medium-term call contracts for<br />
protect you if it opens 40 per cent lower on after-close lets say $3000 or only 9.27 per cent of the original position,<br />
news from the previous day.<br />
cutting the downside to a fraction of what it was. No more<br />
than the option premium can be lost<br />
form there on. It’s like having a stop at<br />
F2) Homogenous Diversified Portfolio vs Concentrated Pruning<br />
9.27 per cent without having to worry<br />
about the whole thing gapping down.<br />
Next to cash extraction you can also<br />
use, what we call, volume extraction,<br />
trying to buy shares for the same<br />
amount at a lower price after selling<br />
on a new base breakout. By buying<br />
for an equal amount at a lower price,<br />
one can buy more shares without<br />
investing more capital in the position.<br />
Of course this will take more time to<br />
manage the portfolio.<br />
So to take this home, instead of<br />
using diversification, pretty much<br />
the only thing available in earlier<br />
An average portfolio of 13 randomly chosen stocks is compared to its concentrated counterpart where the<br />
cash freed up by positions getting stopped out are divided amongst the survivors. The grey lines show the days to minimise risk, we should<br />
average returns from each individual (averaged stock) up until the point where they got stopped out. The black start using new ways of achieving<br />
lines give the total return of both alternative portfolios.<br />
this, without keeping on paying the<br />
Source: www.chartmill.com<br />
negative consequences it brings. «<br />
20
D o y o u s u f f e r f r o m Fo r e x<br />
i n f o r m a t i o n i n d i g e s t i o n <br />
We present the first fully customizable<br />
website built for FX traders where<br />
what information to see.<br />
you decide<br />
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Save your time for<br />
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what you really need!<br />
Real-Time Forex Alerts<br />
Streaming Forex Quotes<br />
Flash Charts<br />
Video Technical Analysis<br />
Economic Calendar
insights<br />
www.tradersonline-mag.com 04.2014<br />
Trading Seasonalities<br />
Part 9: Whole Foods Market and AUD/USD-Future Should Increase<br />
The first trading idea for this month is organic foods retailer Whole Foods Market that has recently<br />
defended its support. In addition we take a closer look at the currency-future AUD/USD for a second<br />
time. Readers of TRADERS´ already earned 300 to 500 ticks profit with this trading idea in September<br />
2013. This currency pair can also be traded on the spot-market or with leveraged certificates.<br />
B1) Trading Idea Whole Foods Market (WFM)<br />
A holding period from 1st April to 7th May mostly paid off in the past with a price increase. The ideal<br />
situation would be price exceeding the downward trendline at entry (green line).<br />
Source: www.lp-software.de<br />
» Trading Idea Whole Foods Market<br />
Organic products are becoming more<br />
and more popular. Therefore our<br />
first trading idea for this month is<br />
Whole Foods Market (WFM) which is<br />
included in the NASDAQ100. In 1980<br />
four businessmen established the<br />
first US-supermarket for organic food<br />
and over the years it has become the<br />
world’s biggest organic supermarket<br />
chain. With its headquarters in Austin,<br />
Texas the company has about 76,000<br />
employees in North America. This<br />
year Whole Foods Market expects an<br />
increase in sales of eleven per cent.<br />
That also could boost the corporation<br />
earnings, which were about ten per<br />
cent higher in the first quarter than<br />
22
insights<br />
last year. Strategic new openings of stores should increase Signal Update<br />
growth – the company plans to raise the current number of<br />
You will find an article regarding these two trading ideas on<br />
373 stores to 1000 in the next few years.<br />
1st and 3rd April on www.tradersonline-mag.com. We will<br />
After the <strong>publication</strong> of the previously mentioned<br />
work on the entry points and the profit targets.<br />
quarterly earnings at the beginning of this year, the<br />
stock opened with a down-gap which had already<br />
closed by the beginning of February. The stock is a buy<br />
at this level. You can expect that the support, which The years 2011 and 2012 were characterised by<br />
is shown by the blue line in Figure 1 will be defended a consolidation in the Australian dollar and by a<br />
successfully.<br />
correction in the year 2013. The new government of<br />
The stock can be bought immediately on the first Australia may be the reason why the year 2014 could be<br />
trading day of April. You could have achieved an average the year of strength for the Australian dollar. The prime<br />
profit of eight per cent in the past 15 years if you would minister of Australia has stopped all initiatives for the<br />
have held the stock until the 7th of May. The hit rate was introduction of renewable energies and the limitation of<br />
93 per cent. Only in one year, 2011, there was a loss of two CO 2 -emissions. This might be not very environmentally<br />
dollars, which is seven per cent. The stop-loss should be correct, but it will make the Australian economy more<br />
placed six per cent below the entry or below the support competitive in the short term. The reasons are lower<br />
line, currently at 51 USD.<br />
production and energy costs.<br />
Often the break in a trend attracts new buyers. The all Also the current strength of gold could lead to an<br />
time high of about 66 USD would be the possible target. increase. The Australian dollar shows a correlation with<br />
You would achieve a profit of nearly 25 per cent if the gold of 0.93. The value one would mean that there was a<br />
stock reaches this target if you enter at 52 USD.<br />
100-per-cent synchronism in the past year.<br />
Both introduced ideas can be traded with options as<br />
Trading Idea AUD/USD Future<br />
well. The duration of bought calls should be about two<br />
The AUD/USD-future June 2013 should be traded long again weeks longer than the recommended seasonal duration.<br />
– as we already did in September 2013. The ideal entry date If you are the writer, the duration may be shorter if the<br />
is the 3rd April with a holding period until the end of April. premium is OK. The basis of the written option should be<br />
The future increased 80 per cent of the time in the past clearly below the stop-loss. «<br />
15 years. The result was an average<br />
profit of 159 ticks or 1590 USD based<br />
on a value of 1000 USD per contract B2) Trading Idea AUD/USD Future<br />
– sometimes even more. The margin<br />
for one futures-contract is 2013 USD.<br />
A stop-loss could be placed 110 ticks<br />
below entry.<br />
The green line in Figure 2<br />
shows the time of the entry with a<br />
holding period to the red bar. The<br />
downtrend started in April 2013 at<br />
1.04 is still valid; the resistance at<br />
0.904 was tested two times since<br />
the beginning of the year and it is<br />
still intact. It would be ideal if the<br />
price of the future would be above<br />
the blue downtrend line at the time<br />
of the entry. The potential based As early as September 2013 the AUD/USD Future could have been traded on the long side with an average<br />
profit of more than 150 Ticks.<br />
on technical analysis would be up<br />
Source: www.lp-software.de<br />
to 0.96.<br />
23
iNSiGhTS – NEWS<br />
www.tradersonline-mag.com 04.2014<br />
carl icahn MaKes $600M in one DaY<br />
Carl Icahn, the billionaire investor, made more than<br />
$600m on Tuesday 18 February, after Dublin-based<br />
pharmaceuticals giant Actavis agreed to buy rival Forest<br />
Laboratories for $25bn. Mr Icahn, who is Forest’s second<br />
largest shareholder with an 11.3 per cent stake in the<br />
company, has spent years agitating the business to make a<br />
deal, and appears finally to have got his way after securing<br />
a seat on its board last summer.<br />
Source: www.telegraph.co.uk<br />
another Big win For lMax exchange<br />
LMAX Exchange has been named “Best FX Trading Venue – ECN/MTF” and “Best<br />
Infrastructure/Technology Initiative by Exchange/ATS” at this year’s Wall Street Letter (WSL)<br />
Institutional Trading Awards. LMAX Exchange has been recognised alongside leading global<br />
exchanges and financial services firms, including NASDAQ OMV, ICE NYSE Euronext, BNP<br />
Paribas Securities. The award was presented at a gathering of FX industry leaders at 583 Park<br />
Avenue in New York City on 25 February, and received by LMAX Exchange’s Chief Executive Officer<br />
David Mercer.<br />
The WSL Institutional Trading Awards honour excellence among providers to the institutional trading<br />
industry, awarding exchanges, brokerages and financial technology companies for achievements<br />
and innovation throughout the previous year.<br />
Source: www.lmax.com<br />
Fxstreet to teaM uP with M-Finance<br />
to sell its Forex news<br />
FXStreet has signed an agreement of partnership with m-finance,<br />
the most experienced and dominant entrepreneur in Hong Kong<br />
and Greater China for forex/bullion trading platforms and financial<br />
information services. They will team up to sell FXStreet’s News in Simplified and Traditional Chinese and English to<br />
m-finance’s network of brokers through their platform, applications and clients websites. This collaboration will open new<br />
markets for FXStreet through m-finance’s extended network in Asia, in particular in China, while m-finance will enrich<br />
its offer by adding this Forex news feed, a product already well implemented in the Western world but not in the East.<br />
The Forex News feed of FXStreet is made of around 160 pieces of news per day in English and around 100 in Chinese. It<br />
gives a technical radiography of the most traded currency pairs and the market’s latest movements, together with experts’<br />
analysis and bank’s forecasts for making trading decisions. The product also includes stocks and commodities news as<br />
well as some of the most important economic indicators, as Central Banks interest rate decisions or Non-Farm Payrolls for<br />
example. FXStreet’s news are provided with technical studies and charts that can be integrated in any information website<br />
or broker’s currencies platform and enterprise wide.<br />
Source: www.fxstreet.com<br />
24
Insights – news<br />
Forex Person of the Year 2013<br />
Laith Marmarchi and Nicole Elliott have been<br />
named “Forex Person of the Year 2013” by<br />
FXStreet, the independent Forex information<br />
website, for their service “ForexTrading.TV”.<br />
ForexTradingTV offers a real-time, technical and<br />
educational service: both new and experienced<br />
traders can go to get a clutter free view on the<br />
markets without the over analysis and noise of<br />
today’s trading environment.<br />
FXStreet decided to give Laith Marmarchi and<br />
Nicole Elliott<br />
Laith Marmarchi<br />
Nicole Elliott the title because they were able to convert their small startup business into a trusted service and collaborative<br />
platform of very high value and quality and managed to gain the trust of both traders and brokers, in only one year.<br />
Source: www.fxstreet.com<br />
$316 Million in Bitcoin Presumably Stolen<br />
$316 million in bitcoins, or six per cent of the outstanding<br />
amount of the digital currency, seem to have been stolen.<br />
The Tokyo based Mt.Gox, the once largest trading place<br />
for the currency is insolvent as announced by Managing<br />
Director Mark Karpeles in a recent press conference. In<br />
seeking bankruptcy protection he blamed ‘weaknesses in<br />
the computer system’ for allowing hackers to plunder the<br />
company. Some 127,000 Bitcoin devotees are reported to<br />
have lost their investment according to Coindesk, a bitcoin<br />
website that aggregates bitcoin news and rates, as quoted<br />
from an internal document. As a result, Mt.Gox has incurred<br />
744,408 in bitcoin debt compared to $350 million before the<br />
crisis broke out. As recently as January, bitcoin had climbed<br />
from $575 to $939. Whether Mt.Gox was a victim of hackers<br />
or unrecognized money was somehow stolen from the<br />
company’s computers or if the company simply swiped its<br />
customer’s money is yet to be determined.<br />
Source: www.sueddeutsche.de<br />
Just A Single Day of<br />
Trading Losses in 1238 Days<br />
Daily Adjusted Net Trading Income Distribution (in Millions)<br />
In its IPO prospectus, High Frequency Trading<br />
firm Virtu reveals it had just one losing trading<br />
day in 1238 days of trading. HFT has become<br />
increasingly controversial in recent years and this<br />
new IPO shines light on an otherwise secretive<br />
(and computerised) industry. Virtu is what’s called<br />
a market maker. It doesn’t hold onto securities for<br />
very long, but instead derives profit from bid/ask<br />
spreads.<br />
Virtu is a New-York based firm famous for trying<br />
(and failing) to buy Knight Capital Group in 2012.<br />
But things are definitely going well for the HFT<br />
firm. Its founder and chief executive officer recently<br />
purchased the Florida Panthers hockey team.<br />
Source: www.businessinsider.com<br />
The chart below illustrates the daily Adjusted Net Trading Income from January 1, 2009<br />
through December 31, 2013. As a result of Virtu’s real-time risk management strategy and<br />
technology, they had only one losing trading day during the period depicted, a total of 1238<br />
trading days.<br />
Source: www.businessinsider.com<br />
25
insights – news<br />
www.tradersonline-mag.com 04.2014<br />
The Trading Show Chicago<br />
The Trading Show Chicago 2014 is the only place you will<br />
hear from leading CTOs, CEOs and experts in proprietary<br />
trading, quant investing and exchange technology. Whether<br />
you’re focused on new quantitative models, adopting<br />
low latency systems or managing risk, The Trading Show<br />
Chicago provides unparalleled opportunities to network<br />
and ultimately do business with top trading firms, quant<br />
funds, international exchanges, end investors, banks,<br />
brokers and technology providers.<br />
North America’s leading traders, funds and exchanges will<br />
be there to:<br />
• Discover what machine learning can predict about<br />
future market behaviour<br />
• Learn how to quantify unstructured news sources and<br />
social media<br />
• Understand how to integrate exchange technology<br />
• Decipher the Dodd Frank and SEF regulatory landscape<br />
• Compare the pros and cons for building or buying<br />
your infrastructure<br />
• Master quantitative portfolio construction and<br />
forecasting<br />
• Realise how volatility can become your strongest asset<br />
• Discuss why it is time for a new non-profit wiki<br />
exchange<br />
• Identify the long-term future of the derivatives market<br />
There are two different options for attending The Trading<br />
Show Chicago – as a visitor, or as a VIP conference<br />
attendee.<br />
• Visitors get access to the on-floor seminars and<br />
international exhibition free of charge.<br />
Register as a visitor here: http://bit.ly/1iEu2p5<br />
• VIP conference attendees get access to on-floor<br />
seminars, the international exhibition, the VIP<br />
conference sessions, networking, an Old Wall Street<br />
themed cocktail party, and lunch and refreshments.<br />
Register as a VIP attendee here: http://bit.ly/1iEu2p5<br />
Additional discounts are available for groups of three or<br />
more – for more information please contact Felipe Lima at<br />
Felipe.Lima@Terrapinn.com or +1 212 379 6320<br />
Download the brochure at http://bit.ly/1oPvoe3<br />
Light beams mounted on the tops of buildings<br />
could soon carry messages about rising and falling prices<br />
A form of rapid-fire communication previously only available to the military is now<br />
coming to the financial world. Lasers perched atop high-rise buildings will next month<br />
allow the New York Stock Exchange’s data centre in Mahwah, NJ to communicate with<br />
NASDAQ‘s data center in Carteret, NJ. Though these two data centers are only 35 miles<br />
apart, the light will allow them to communicate with unprecedented speed. It is the<br />
culmination of a quest for instantaneous trading that first utilised custom-built fiber-optic<br />
cables, then microwave and later millimetre-wave transmissions, and the speed at which<br />
traders’ orders are transmitted is rapidly approaching the speed of light. The technology<br />
is expected to spread to the Stock Exchange’s trading clients as well, which are currently<br />
offered a system that uses microwaves.<br />
Source: www.psfk.com<br />
26
iNSiGhTS – NEWS<br />
news FroM Bats<br />
BATS Global Markets (BATS) and Equinix,Inc., the global<br />
interconnection and data centre company, announced<br />
that BATS has selected Equinix as its primary data center<br />
provider for all of the BATS exchange platforms, including<br />
the Direct Edge Exchanges – EDGA and EDGX. The Direct<br />
Edge Exchanges will remain at their current location at<br />
Equinix’s NY4 data center in Secaucus, NJ until January<br />
2015 when they will migrate to BATS’ technology in<br />
Equinix’s NY5 data center. In the second quarter of 2015,<br />
the BATS BZX and BYX Exchanges, and BATS Options,<br />
will move to NY5 from their current location of NJ2 in<br />
Weehawken, NJ.<br />
In other news, BATS Chi-X Europe appointed Jill Griebenow<br />
as chief financial officer. Ms. Griebenow joined from parent<br />
company BATS Global Markets and is responsible for all<br />
financial control and human resource functions at BATS<br />
Chi-X Europe, including financial planning and reporting.<br />
Jill is based in London, reporting directly to CEO Mark<br />
Hemsley.<br />
Source: www.bats.com<br />
FxcM increases<br />
FXCM reported revenues of $113.3 million for the final<br />
quarter of 2013 (October through December). Compared<br />
to the same period the previous year, this represents a five<br />
per cent increase. For the full year, revenues rose 17 per<br />
cent at $489.6 million compared to $417.3 million in 2012.<br />
Source: www.fxcm.com<br />
soros toPs historical heDge FunD PerForMers<br />
The annual study from fund-of-funds firm LCH Investments found that the<br />
manager, who closed his firm to outside investment a few years ago,<br />
bests most of his peers over the long term. George Soros’ Quantum<br />
Endowment Fund made $5.5 billion in profits last year, net of fees. This<br />
suggests that Quantum Endowment gained between 22 and 23 per cent<br />
in 2013. As a result, Quantum, managed by New York-based Soros Fund<br />
Management, has now generated a total of $39.6 billion in net profits since<br />
its 1973 inception, more than any other hedge fund, according to an annual<br />
study performed by LCH Investments NV, a London-based fund-of-funds<br />
firm. Soros’ strong performance in 2013 enabled his fund to move back into<br />
first place as the most successful hedge fund of all time, by LCH Investments’<br />
calculation. That’s slightly ahead of Raymond Dalio’s Bridgewater Pure Alpha,<br />
which has made a total of $39.2 billion since its inception in 1975. Last year<br />
it generated “just” $2.2 billion in net gains, according to LCH Investments.<br />
The absolute dollar figures cited in the study are astounding and underscore<br />
how much money has been created by the most successful hedge fund managers.<br />
Altogether, hedge fund managers made $192 billion after fees for all investors in 2013, LCH<br />
Investments calculated. The top 20 managers alone generated $55.4 billion in net gains. Since their inception, all hedge<br />
funds have generated $847 billion in net gains, the firm found. Over the past five years, hedge funds have made an<br />
estimated $709 billion, net of fees, for investors.<br />
The current top 20 managers alone made $199 billion over the same time period. These gains more than made up for the<br />
$28 billion loss suffered by the 20 managers during the 2008 financial crisis, according to LCH.<br />
Source: www.institutionalinvestorsalpha.com, by Stephen Taub<br />
27
TOOLS www.tradersonline-mag.com 04.2014<br />
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW<br />
New Products<br />
News from the World of Technology<br />
» U.S. News & World Report, a publisher of consumer<br />
advice and rankings, has released its U.S. News Advisor<br />
Finder, a directory of 320,000 active investment advisors<br />
and 10,000 advisory firms. The directory will offer<br />
information about financial professionals and advisory<br />
firms to consumers seeking advisors. The directory<br />
features online tools that enable consumers to search<br />
based on location, investment and planning needs,<br />
advisor experience and other criteria. Information in the<br />
Advisor Finder is provided by Financial Media Group and<br />
is drawn from state and federal regulatory filings, which<br />
are submitted to state regulators, the Financial Industry<br />
Regulatory Authority (FINRA) and the Securities and<br />
Exchange Commission (SEC). According to the publisher,<br />
information from these filings will be updated quarterly<br />
in the Advisor Finder. You can find more information on<br />
http://money.usnews.com/financial-advisors.<br />
U.S. News Advisor Finder<br />
» Trading Technologies International (TT) announced<br />
its X_TRADER software is now installed at more than 50<br />
universities worldwide. Through its university program,<br />
TT works with undergraduate and graduate educators<br />
in business, financial engineering, math and computer<br />
science programs to help prepare students for careers<br />
in finance and the futures markets. Universities can<br />
incorporate TT’s X_TRADER software and APIs, which<br />
are donated to schools by TT, into coursework and oncampus<br />
trading labs, allowing students to learn about and<br />
experience trading and risk management in a simulated<br />
environment using tools and market data similar to what<br />
professionals use. Some of the schools in the program<br />
include The Johns Hopkins University, Northwestern<br />
University, Purdue University, Tulane University,<br />
University of Chicago, University of Colorado Denver,<br />
University of Illinois, and University of Virginia. Please visit<br />
www.tradingtechnologies.com for more information.<br />
» VectorVest announced the release of VectorVest<br />
AutoTimer and Portfolio Genius, proprietary tools<br />
designed to help the investor minimise time spent<br />
on portfolio management and help eliminate trading<br />
decisions that may be driven by emotion and deviate<br />
from an investor’s trading plan. VectorVest AutoTimer<br />
incorporates market timing signals into both historical<br />
and real-time trading plans for investors to determine<br />
separate portfolio-management rules based on market<br />
direction, and then automatically implements these rules<br />
without manual intervention. It can be used in historical<br />
mode to create, test and refine automated trading<br />
systems that include market timing, stock selection, stop<br />
criteria and other portfolio-management options. It also<br />
can be used in real time to implement an automated<br />
trading plan through VectorVest Portfolio Genius, a<br />
paper-trading tool that, when used with AutoTimer, allows<br />
investors to set up their trading plans with long, short, or<br />
neutral trading templates. For more details, please visit<br />
www.vectorvest.com/AutoTimerRT.<br />
» The CBOE Futures Exchange (CFE) announced the<br />
launch of trading of futures with weekly expirations on<br />
28
TOOLS<br />
the new CBOE Short Term Volatility Index (VXSTSM). Like<br />
CBOE’s CBOE Volatility Index (VIX Index), the Short Term<br />
VIX Index (VXST Index) uses S&P 500 Index options in<br />
its calculations. The VIX Index uses SPX monthly options<br />
to measure expectations of 30-day volatility, while the<br />
VXST Index uses SPX options that expire every week<br />
(including SPX Weeklys) to gauge expectations of nineday<br />
volatility. The VXST Index’s shorter time horizon<br />
makes it responsive to short-term volatility triggered by<br />
market events such as corporate earnings, government<br />
reports, and Fed announcements. The 30-day VIX Index<br />
and the nine-day VXST Index are highly correlated, but<br />
the VXST Index is generally more volatile than the VIX<br />
Index, according to the company. It stated it expects<br />
professional traders could develop strategies to take<br />
advantage of price differences between VIX and VXST<br />
products. Find out more on www.cboe.com.<br />
» Worden Brothers has released version 12.4 of its TC2000<br />
online market analysis program, which features charting,<br />
streaming data and analysis tools. This latest version offers<br />
increased speeds, more flexible layouts, quicker access<br />
to the daily notes and reports, Morningstar rankings,<br />
WatchList additional features, real-time streaming<br />
indicators, more data to plot simultaneously, trendline<br />
alerts, new drawing boards and drawing tools and more.<br />
Additional details can be found at www.worden.com.<br />
» Thomson Reuters announced the roll out of a number<br />
of new features for the buy-side on its flagship financial<br />
markets desktop, Thomson Reuters Eikon. As part of<br />
the ongoing evolution of Eikon, these enhancements<br />
will provide portfolio managers, analysts, strategists<br />
and economists with access to powerful analytics and<br />
workflow. The new Microsoft Office add-in feature for<br />
Eikon enables portfolio managers and analysts to leverage<br />
the breadth and depth of Thomson Reuters content in<br />
applications such as Excel and PowerPoint to produce<br />
insightful models and superior presentations. This feature<br />
includes Excel tools to facilitate deep analysis of premium<br />
content sets including Datastream, fundamentals,<br />
StarMine analytics, smart estimates and key performance<br />
indicators. The addition of StarMine models to Eikon<br />
leverages new visualisation technology to provide buyside<br />
customers with greater insight to uncover actionable<br />
opportunities and better understand credit risk.<br />
Eikon portfolio analytics provides investment<br />
professionals with an intuitive monitor of intra-day<br />
performance across any number of portfolios and<br />
benchmarks, allowing them to identify primary drivers of<br />
absolute and relative performance at the sector/security<br />
level. Eikon briefcase is another powerful workflow<br />
capability that allows users to collect, manage and access<br />
key content and documents via their mobile solution and<br />
synchronise this with the desktop, allowing them to work<br />
remotely from anywhere at any time.<br />
Instead of a fixed home screen, Eikon now manifests<br />
itself as a floating command bar at the top of a customer’s<br />
screen, staying visible whatever application the customer<br />
is currently using and enabling quick access to Eikon’s data<br />
and tools. The floating command bar works seamlessly<br />
with the Eikon plug-in for Google Chrome which installs<br />
into the toolbar of Google Chrome’s browser interface and<br />
on-demand allows Eikon to analyse information that is<br />
being viewed on the internet and provide key related data<br />
for any entities listed on the page. For more information,<br />
please visit www.thomsonreuters.com.<br />
Worden Brothers<br />
29
TOOLS www.tradersonline-mag.com 04.2014<br />
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW<br />
iview Charts<br />
See the Markets through the Eyes of a Pro Trader<br />
For the everyday trader there are 1000’s of trading systems, signal services and educational content out there to choose from.<br />
Trading is a complex art form and there are many things to consider when making your market calls. MT4 (Meta Trader 4) is a<br />
powerful charting tool that a lot traders choose to use for their charting and technical analysis. There are many systems you<br />
can overlay in order to give you better trade signals and iView charts is one of them.<br />
F1) Trade view » iView Charts is currently available<br />
in two versions, the ‘starter’ and<br />
‘professional’ package. This is a<br />
brand new product in the market<br />
and V1.0 is the first release openly<br />
available to the public for purchase.<br />
Developed by Steve Ruffley who<br />
is the Chief Market Strategist<br />
at Intertrader.com and CEO of<br />
Tradermaker.com he has been<br />
using iView for over 18 months to<br />
make market calls via Twitter and<br />
use for his market commentary<br />
which has been featured on many<br />
major sites like Reuters, Bloomberg<br />
and the FT.<br />
The ‘trade view’ window allows the user to see all the products MT4 has to offer. Set up with all the indicators<br />
key to making trade calls. Pay particular attention to the iView bias and ‘hover’ over the arrow to see the trade<br />
call idea and supporting video.<br />
Source: iView Charts<br />
The Packages<br />
In the starter package you will<br />
have full access to the ‘trade view’<br />
window and all the MT4 indicators<br />
and templates that will work on every<br />
time frame on MT4. What makes the<br />
30
tools<br />
’trade view’ stand out is that it uses the technical analysis<br />
self-fulfilling prophecy theory. This theory states that<br />
if the majority of market participants are looking at an<br />
indicator for a signal, the signal will then generally work<br />
with the majority. iView is set to tell the user what other<br />
market participants are basing their trade calls on. All the<br />
key indicators are displayed such as Delta volume, DeM,<br />
RSI and Delta ATR are all set so that the user can clearly<br />
see if the markets are over bough or oversold. These are<br />
all widely available and indicators that are typically used<br />
by traders to identify both market trends and possible<br />
reversals.<br />
The ‘trade view’ window is run from the indicator<br />
list in the MT4 menu. This will run on any time frame of<br />
chart you attach it to, but hourly is recommended. This<br />
means you can use iView on the higher monthly, weekly<br />
and daily time frames for longer term trading decisions,<br />
right down to the 1- and 5-minute chart for intraday<br />
scalps. Once you have grasped this you can then use<br />
the ‘iView bias’ see what Steve, the creator, thinks the<br />
trade scenario for that product may be. There are seven<br />
main trades that Steve has identified from how the bias<br />
is calculated.<br />
0-10 Imminent Bull reversal<br />
10-30 Increasing Bear sentiment – leading to reversal<br />
30-45 Low edge directional bias<br />
45-55 Strong range breakout chance<br />
55-70 Low edge directional bias<br />
70-90 Increasing Bull sentiment – leading to reversal<br />
90-100 Imminent Bear reversal<br />
Once you have decided on the product and iView bias<br />
you think fits in with your view, you<br />
simply double click on that product to<br />
bring up the chart with all the attached<br />
indicators ready to use. This means<br />
that you can set iView running on any<br />
time frame to give you information<br />
and trade calls on every product that<br />
your MT4 broker version supports.<br />
For the ‘professional’ package<br />
you will also get access to real<br />
time trade calls via the Expert tab<br />
in the Trade view window, button<br />
‘analysis’, in which Steve and other<br />
noted professional traders and<br />
analysts are actually trading.<br />
F3) Expert<br />
F2) Sample Chart<br />
This is a sample of the chart you will see when you double click on a product<br />
in the ‘Trade view’ window. The template will show all the indicators, support<br />
and resistance, Fibonacci retracement lines you need to make your trading<br />
judgements.<br />
Source: iView Charts<br />
Pricing<br />
What’s included:<br />
• Three custom MT4 indicators<br />
• Ten custom time frame templates<br />
• Free access to Steve’s webinars<br />
The ‘Expert’ window is where you will see all the trades made by experts traders like Steve Ruffley and other<br />
well-known traders and analysts.<br />
Source: iView Charts<br />
31
tools<br />
www.tradersonline-mag.com 04.2014<br />
iView charts is designed to be both a mentor<br />
and a system that compliments your own trading style.<br />
• 100’s of archived trade examples and educational<br />
webinars<br />
Starter package: $79 per month / $699 per year<br />
Professional package: £129 per month / $999 per year<br />
Complete package: – Professional package & one to one’s<br />
with Steve $199 per month / $1999 per year<br />
The Technical Analysis behind the Indicators<br />
All Time Frame Trading<br />
Once of the most popular questions Steve was asked<br />
on his webinars is what time frame does he use to<br />
trade His answer as always was that ‘I use all of<br />
them’. He states, “when trading the markets you have<br />
to understand that the participants, will be made up<br />
of all type of traders and investors. You will have day<br />
traders, hedge funds, banks, central banks, the list<br />
goes on. All of these will have a different view and<br />
also different tolerances to volatility and directional<br />
moves.” The system takes calculations on monthly,<br />
weekly and daily points of attraction. These are then<br />
disabled throughout all the charts and templates<br />
giving the user a support and resistance frame work<br />
to use.<br />
Fibonacci<br />
What goes up must come down. In keeping to the selffulfilling<br />
prophecy of technical analysis one of most<br />
commonly used technical analysis tools is Fibonacci. It is<br />
often misused and the key to working with Fibonacci is<br />
using it with the correct market conditions.<br />
iView uses the principle of overextended markets<br />
and break out candles with other oscillators to make sure<br />
when the Fibonacci levels are drawn onto the chart they<br />
are of maximum value. The system clearly indicates the<br />
50 per cent retracement level which is a key level when<br />
trading with over extended moves.<br />
Pivots<br />
There are certain aspects of technical analysis that just<br />
work in trading and pivot points are one. Most traders<br />
will use pivots in some way, just as most traders will use<br />
moving averages.<br />
iView is set to give R1 R2 & S1 S2 (support and<br />
resistance) based upon when a certain criteria of volume<br />
and volatility are met. This indicator will work on any time<br />
frame and I again recommend that you use a combination<br />
of time frames to get your own view of the product you<br />
trade and the entry levels you pick.<br />
F4) Trade View in Action<br />
Open as many products as you like to correlate your trading calls, and see how different products perform<br />
against each other with the pre-set iView template.<br />
Source: iView Charts<br />
Conclusion<br />
iView charts is designed to be both a<br />
mentor and a system that compliments<br />
your own trading style. Indicators<br />
and templates are clean and easy to<br />
interpret. With the ‘trade view’ window<br />
your potential to analyse countless<br />
markets may bring an unexpected<br />
addition to the instruments you have<br />
considered trading in the past.<br />
The draw back may be that<br />
you might not want to know how a<br />
professional trader interprets what<br />
he sees and also how he perceives<br />
other trader’s view of the markets. The<br />
fact of the matter is that trading in a<br />
percentage game, so anything that<br />
can give you that confidence to both<br />
enter and remain in trades has to be<br />
worth the investment. «<br />
32
TOOLS www.tradersonline-mag.com 04.2014<br />
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW<br />
inside the house of Money<br />
Top hedge Fund Traders on Profiting in the Global Markets, revised and Updated<br />
by Steven Drobny and Niall Ferguson<br />
» This updated paperback edition of “Inside the House<br />
of Money” lifts the veil on the typically opaque world<br />
of hedge funds offering a rare glimpse at how today’s<br />
highest paid money managers approach their craft. Now<br />
with new commentary, author, Steve Drobny takes the<br />
reader even further into the hedge fund industry. He<br />
demystifies how these star traders make billions for their<br />
well-heeled investors, revealing their theories, strategies<br />
and approaches to markets.<br />
About the Author<br />
Steven Drobny is the founder and CEO of Drobny Global<br />
Asset Management, an independent investment advisory,<br />
asset management and consulting firm focused on global<br />
macro and commodity hedge fund strategies. He is also<br />
the author of “The Invisible Hands: Top Hedge Fund Traders<br />
on Bubbles, Crashes, and Real Money” (Wiley). Mr Drobny<br />
holds an MSc in finance and accounting from the London<br />
School of Economics and Political Science and a BS/BA from<br />
Bucknell University. Please visit www.drobnycapital.com for<br />
more information on Drobny and this book.<br />
Whereas some still maintain that rationality<br />
permeates financial markets, Drobny captures a different<br />
dimension, showing how the unquantifiable human<br />
forces of emotion and intuition are also at play. Along<br />
the way, readers get an inside look at firsthand trading<br />
experiences through some of the major world financial<br />
crises of the last few decades.<br />
Written by respected industry expert Steven Drobny,<br />
the book discusses how no market or instrument is out of<br />
bounds for elite global macro hedge fund managers. In<br />
addition, the book offers unique and illuminating insight<br />
into the inaccessible and sometimes downright secretive<br />
world of hedge fund investing. Highly accessible and filled<br />
with in-depth expert opinion, this updated paperback<br />
edition of “Inside the House of Money” is a must-read<br />
for financial professionals and anyone else interested in<br />
understanding how greed, fear, and the human forces of<br />
emotion drive world markets.<br />
Content<br />
The foreword is written by famous Niall Ferguson. Then,<br />
after the prefaces of former editions, there are 15 chapters<br />
altogether.<br />
34
TOOLS<br />
In the first chapter there is an introduction to Global<br />
Macro Hedge Funds written by Joseph G. Nicholas of HFR<br />
Group. The next chapter describes the history of Global<br />
Macro Hedge Funds, followed by some prospects about<br />
the future of Global Macro Hedge Funds. Then the book<br />
describes several prominent trading styles in detail.<br />
Chapter 4 discusses Family Offices and was written<br />
by Jim Leitner of Falcon Management. Next are the<br />
Prop Trader (Christian Siva-Jothy of SemperMacro),<br />
the Treasurer (Dr. John Porter by Barclays Capital), the<br />
Central Banker (Dr. Sushil Wadhwani by Wadhwani<br />
Asset Management), the Dot-Commer (Peter Thiel by<br />
Clarium Capital) and the Floor Trader (Yra Harris by<br />
Praxis Trading).<br />
Chapter 10 is about the Pioneer (Jim Rogers), chapter 11<br />
describes the Commodity Specialist (Dwight Anderson by<br />
Ospraie Management) and chapter 12 is about the Stock<br />
Operator (Scott Bessent of Bessent Capital).<br />
The final three chapters are about the Emerging<br />
Market Specialist (Marko Dimitrijevic´ of Everest Capital),<br />
the Fixed Income Specialists (David Gorton and Rob<br />
Standing of London Diversified Fund Management) and<br />
the Currency Specialist (anonymous author).<br />
Bibliography<br />
Title: Inside the House of Money<br />
Subtitle: Top Hedge Fund Traders on Profiting in the<br />
Global Markets, Revised and Updated<br />
Author: Steven Drobny, Niall Ferguson<br />
Pages: 368<br />
Price: $12.99, Paperback; $8.99, E-Book<br />
ISBN: 978-1-118-84328-4<br />
Release: April 2014<br />
Publisher: John Wiley & Sons, Inc.<br />
Conclusion<br />
Altogether, the book provides great insights in the thinking<br />
of these great minds and their strategies (in parts). The<br />
book is absolutely worth the read as Steve Drobny once<br />
again shows his ability to find the best managers in the<br />
industry, relate to them and conduct great interviews<br />
readers can learn a lot from. «<br />
35
TOOLS www.tradersonline-mag.com 04.2014<br />
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW<br />
Trade Tuner<br />
Trading Journal App<br />
A company without decent book keeping will not be successful in the long run. The<br />
same goes for traders: If you do not have an overview of your current and closed<br />
trades and – even more important – if you do not learn from past mistakes, you will not<br />
grow as a trader and miss out on an essential tool for your trading success. All traders<br />
who are looking for a simple, easy-to-use trading-journal-app should take a look at<br />
Trade Tuner.<br />
» Step 1: Trade Parameters<br />
You can keep a trading journal in different ways:<br />
handwritten or with simple software like Excel or an app.<br />
We already introduced a professional solution for all<br />
iPad-users in TRADERS’ 08/2013. In the following we test<br />
a ‘liter’, but also less expensive solution. Let’s start.<br />
After the download from the App store the starting<br />
screen opens and explains all important functions. On the<br />
left side you see the menu options and from there the<br />
entry of the first trades is very easy. Figure 1 shows the<br />
entry mask. Here you enter the following information for<br />
your entries and exits:<br />
• Name of the security<br />
• Trading direction<br />
• Number of stocks<br />
36
tools<br />
• Commission<br />
• Entry and exit price<br />
• Entry and exit date and time<br />
• Market situation<br />
• Mood of the trader<br />
(15 pre-defined characteristics)<br />
• Stop<br />
B1) Entry Mask<br />
Furthermore you can enter<br />
individual notes in a separate box.<br />
Therefore every trader can remember<br />
the trades even after a longer period<br />
of time and he can analyse them and<br />
make improvements. Finally the user<br />
can enter whether or not he followed<br />
his trading plan. The entry of the<br />
parameters is very quick on the iPad.<br />
The entry of the trades is easy and can be adapted individually. You can comment every trade in the notes box.<br />
Source: Trade Tuner<br />
Step 2: Filtering and<br />
Display of the Trades<br />
After the trader entered the activities<br />
he now uses the “Trader Viewer”. This screen fulfils same goes for the display of the trades. Therefore we’ll<br />
two essential tasks. First, the trader can display a list test the visualisation of Trade Tuner in the next step. The<br />
of all of his trades. You can see this list in Figure 2. It is area “account graphs” is placed on the left menu bar. The<br />
clearly structured and includes all essential information, trader sees his trading results as a bar chart.<br />
profitable and losing trades are highlighted. If you want to The most important thing is the display of<br />
have more details on a certain trade you only need to click the performance, which you can see in Figure 3.<br />
on the trade and the total overview of all parameters is Unfortunately you can only see the result on a monthly<br />
displayed on the right side of the screen. The risk/reward basis, which is ok for medium- and long-term analysis.<br />
ratio is calculated automatically. You<br />
can adjust the sorting of the trade<br />
list individually and therefore every B2) Trade List in Detail<br />
trader gets an overview of his own<br />
preferences.<br />
Especially if you have a high<br />
number of trades it is very annoying<br />
to search for a specific trade. The<br />
developers recognised this problem<br />
and have included an extensive<br />
filter-option. If the user wants to<br />
filter only winning trades or losing<br />
trades or only trades that executed<br />
in a certain mood it can be done with<br />
a few clicks. Furthermore filtering<br />
by certain periods of time or certain<br />
markets is also possible.<br />
Step 3: Visualisation<br />
There is a saying that goes: A picture<br />
is worth a thousand words. The<br />
The overview of all entered trades is a good tool. You see a short overview or you can click on a specific trade<br />
to see all parameters in detail.<br />
Source: Trade Tuner<br />
37
tools www.tradersonline-mag.com 04.2014<br />
You can display the results of the trades<br />
based on different criteria.<br />
B3) Visualisation of the Trading Results<br />
You can display the results of the trades based on different criteria; with that you have a good basis to<br />
recognise mistakes and ways to improve your trading.<br />
Source: Trade Tuner<br />
A display of all single trades would<br />
be helpful to identify anomalies.<br />
However, the ability to “zoom” into a<br />
month is lacking – which is too bad,<br />
because a detailed inspection of a<br />
certain month can be interesting if<br />
one result differs heavily from the<br />
average. You can also display the<br />
trading direction (long/short), the<br />
number of trades, the markets and<br />
the risk and the number of stocks.<br />
These graphs are also displayed on<br />
a monthly basis.<br />
The “position graphs” are also<br />
interesting. These are charts that<br />
display trading in different facets<br />
which can then be analysed. You can<br />
choose the following display options<br />
for different time periods (twelve<br />
months at maximum):<br />
Solid Trading Journal with Room for Improvement<br />
Account summaries will be available soon!<br />
All in all there is room for improvement at Trade Tuner. It<br />
would be very important to include the usual key figures<br />
like hit rate, profit factor, maximum drawdown and so<br />
on – they are not offered yet, but should be available<br />
soon according to the developer. Trade Tuner fulfils the<br />
requirement of a clearly structured documentation and<br />
sorting for traders who do not want to use Excel or Access.<br />
The Trade Tuner app costs 26.99 EUR and can be extended<br />
by an unlimited number of trading journals for a small fee<br />
– for example to separate a daytrading journal from a long<br />
term trading journal.<br />
• Position by time: monthly performance of one or<br />
more underlyings<br />
• Position by symbol: total result per stock<br />
• Position by trade type: display of the number of<br />
trades long and short<br />
• Position by quantity: traded number of units per<br />
underlying<br />
• Position by price: average entry price per underlying<br />
• Position by risk: average risk per underlying<br />
• Position by market condition: display of the trading<br />
performance per market type and underlying<br />
• Position by mood: trading performance depending<br />
on the trader’s mood<br />
• Position by trading rules: following of the trading plan<br />
per underlying<br />
Based on these charts the trader can examine his trading<br />
behaviour and change it if necessary. It is very useful that<br />
you can always filter the trades by a specific underlying<br />
and therefore you can see quickly which markets or which<br />
stocks are traded successfully or unsuccessfully. «<br />
38
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STrATEGiES<br />
www.tradersonline-mag.com 04.2014<br />
Multi-Dimensional Trading<br />
The Ability to Take the Broader view<br />
Strategy traders often struggle with ways to see beyond the two-dimensional analysis of time and price.<br />
Although volume is often used to add a third dimension, there are other methods that employ analysis of<br />
additional markets related to the one being traded. Even with such multi-market methods, there can be a<br />
tendency to fall back on side-by-side time-price-volume analysis on the multiple data sets.<br />
Stanley Dash<br />
Stanley Dash holds the position of Vicepresident,<br />
Applied Technical Analysis, at<br />
TradeStation. His Wall Street career began in<br />
1975 and includes time as an active fl oor trader<br />
at one of the leading U.S. futures and options<br />
exchanges.<br />
SDash@TradeStation.com<br />
» The strategy presented here is designed to<br />
demonstrate a ‘multi-dimensional’ approach by<br />
using two measures of the relationship between two<br />
markets, DAX futures and the Euro (EUR/USD), to<br />
generate trading signals in the DAX futures. That is,<br />
the strategy becomes ‘multi-dimensional’ by analysing<br />
two measurements of the relationship between two<br />
40
strategies<br />
markets, Relative Strength (RS) and correlation, to<br />
find and filter trading signals.<br />
Simplicity is considered a desirable trait in a trading<br />
strategy and this style of analysis does carry the risk of<br />
having rules that are overly complex. A guiding principle<br />
in developing this idea was to fall on the side of simple<br />
and straightforward in the calculations and signals by<br />
restricting them to these two relationships.<br />
F1) FDAX and EUR/USD 6-Minute Bars with Relative Strength<br />
Relative Strength<br />
A Relative Strength (RS) line, also known as a Relative<br />
Strength ratio, is a simple technical tool used to compare<br />
the price action in two markets. It is calculated by dividing<br />
the price of one market by the price of the other. Although<br />
this is often done with, say, a stock price divided by an<br />
index, the RS line for this strategy is the result of dividing<br />
the DAX by the EUR/USD. The numeric value of an RS<br />
calculation is not important; rather, the direction and<br />
momentum of the RS line let us know if the first market<br />
is relatively stronger or weaker than the second, DAX and<br />
EUR/USD respectively in this case.<br />
It is not unusual to smooth an RS Line and that was<br />
done here as well. Again in pursuit of simplicity, the RS<br />
line was smoothed with a simple average. The length for<br />
this average was set to ten bars. None of the parameters<br />
in this strategy, including the length of this average, have<br />
been optimised. Ten is not only a common default for a<br />
calculation like this but, more importantly, it represents<br />
one hour of trading on 6-minute bars. There is a discussion<br />
of the bar interval later in this article.<br />
The direction of the average of the RS line is<br />
determined using a common momentum analysis of the<br />
average. Specifically, the strategy determines if the 5-bar<br />
momentum of the average is positive (for long entries) or<br />
negative (for short entries).<br />
During the test period, described more fully below,<br />
this approach was marginally profitable. The results<br />
were not strong enough to be convincing, yet some of the<br />
metrics were of interest and called for more refinement.<br />
It was encouraging that 39 per cent of the trades were<br />
profitable, with about the same percentage of long- and<br />
short-side trades being profitable. Of greatest concern,<br />
however, was the very large number of trades that the<br />
strategy generated, approximately 1690 or about seven<br />
trades per day during a 1-year test.<br />
Might it be possible to add another dimension to<br />
the analysis by examining another relationship between<br />
these two markets and use that to filter the trades The<br />
goal would be to improve profitability, of course, while<br />
reducing the number of trades.<br />
This chart contains both DAX futures and EUR/USD. The darker bars indicate<br />
the hours that correspond to cash DAX trading. The indicator is the 5-bar<br />
momentum of the 10-bar average of the relative strength line.<br />
Source: TradeStation<br />
F2) FDAX with Relative Strength, Correlation<br />
and Strategy Signals<br />
EUR/USD data has been hidden. The correlation study is red when the<br />
coefficient is less than -0.1 (not zero) to match the strategy rules. Any open<br />
trades are closed at the end of the cash session. See the text for details on<br />
the rules.<br />
Source: TradeStation<br />
Correlation<br />
Technical analysts use correlation studies to gauge<br />
how closely two markets track each other. Such studies<br />
generate a correlation coefficient, a value between +1 and<br />
-1. A correlation of +1 is a ‘perfect positive’ correlation<br />
– the two markets are in lockstep. A correlation of -1 is<br />
a ‘perfect negative’ correlation. Values near these, say,<br />
41
strategies<br />
www.tradersonline-mag.com 04.2014<br />
above +.7 and below -.7 are usually considered to be<br />
strong correlations and may be useful when interpreting<br />
market dynamics.<br />
F3) Performance Summary for this Backtest<br />
The backtest period was calendar 2013. Commissions were taken out at € 2.80<br />
round-turn.<br />
Source: TradeStation<br />
It is important to note that a correlation coefficient is<br />
non-directional; it tells us something about the directional<br />
movement of the two markets relative to each other but<br />
not about the past or potential future direction of absolute<br />
prices.<br />
For this strategy, a negative correlation is taken as a<br />
confirmation that the RS line signal has greater validity.<br />
That is, a buy (sell) signal is taken based on positive<br />
(negative) momentum in the DAX / EUR/USD RS line only<br />
when the DAX / EUR/USD correlation is negative. After<br />
all, if the RS line is used to point out relative movement<br />
then it is likely to be more reliable if the correlation study<br />
also shows the potential for divergent movement on an<br />
absolute basis.<br />
Note that negative correlation is the additional<br />
condition for both long and short entry signals.<br />
The addition of this rule had a dramatic effect on<br />
profitability while reducing the number of trades by 55<br />
per cent to 752, or about three per day during the one-year<br />
test period. The per cent of trades profitable improved<br />
slightly to 43 per cent and maintained the characteristic<br />
of having about the same per cent profitable for long and<br />
short side trades.<br />
Source: www.stockcharts.com<br />
John Murphy explains<br />
Relative Strength Ratio<br />
„The relative strength ratio or line<br />
is created by dividing the price<br />
of one market by the price of another... Any two markets<br />
can be compared with ratios… Absolute performance<br />
measures the actual trend of a market. Relative performance<br />
measures its performance against other markets…. Relative<br />
performance usually changes direction before absolute<br />
performance.“<br />
Correlation Coefficient<br />
“The correlation coefficient measures the strength of a<br />
relationship between two markets… The most important<br />
signals are given when the correlation line moves above or<br />
below the zero line… The correlation coefficient indicator is<br />
especially helpful in intermarket analysis…”<br />
John Murphy, „Trading with Intermarket Analysis“<br />
Other Considerations<br />
In practice, several basic conditions had to be selected<br />
before detailing the trading signals. First, when to trade<br />
Given that the intention was to create a day-trading strategy,<br />
trading was restricted to only the hours when the cash DAX<br />
index is trading despite the fact that the futures (and EUR/<br />
USD) trade for additional hours outside those times.<br />
The first possible entry each day is at 9 am CET,<br />
the open of the first bar that corresponds with the cash<br />
index trading hours. The last entry signal may be taken<br />
no later than the open of the 5 pm bar, allowing time for<br />
price action to develop before the end-of-session exit.<br />
In accord with a day-trading strategy the end-of-session<br />
exit rule closes any open positions at the open of the 5.30<br />
pm bar, corresponding to the last bar of the cash index<br />
trading hours.<br />
Second, the bar interval to be used had to be<br />
determined. The hours noted above mean that, for our<br />
purposes, the length of the trading day is 510 minutes.<br />
Six-minute bars were used, which means the session<br />
is divided into 85 bars. This allows for adequate data<br />
sampling and an ample number of trading opportunities<br />
each day. In addition, short-duration bars offer a<br />
manageable risk/range per bar, particularly in light of the<br />
size of the DAX contract.<br />
42
strategies<br />
It should also be noted that an unadjusted continuous<br />
contract data series was used for the DAX futures to<br />
minimise data anomalies caused by the back adjustments<br />
that are typical for a continuous contract series.<br />
Trading Rules<br />
The strategy is built on just a few core calculations:<br />
• Relative Strength line<br />
• 10-bar average of the Relative Strength line<br />
• 5-bar momentum of the 10-bar average of the Relative<br />
Strength line<br />
• 21-bar correlation coefficient<br />
Long entry signals are based on conditions in both<br />
Relative Strength and correlation.<br />
• Momentum of average RS line greater than zero<br />
(positive momentum)<br />
• Correlation coefficient less than -0.1 (negative<br />
correlation)<br />
Selecting a Bar Interval<br />
There is no ‘best’ intraday interval, and any selection<br />
of an interval for research purposes is subject to change<br />
as feedback is received from backtests. Consider these<br />
selection criteria.<br />
• Start with an interval that divides the day into enough<br />
data samples (bars) to generate useful analysis and an<br />
appropriate number of signals per day.<br />
• Experiment with intervals that tend to reflect a useful<br />
amount of price action for the strategy. Bars that contain<br />
too much or too little range may either hide information<br />
from the strategy or overwhelm it. A small amount of<br />
historical research will reveal the range tendencies of<br />
different bar intervals.<br />
• When using time-based bars, consider how the interval<br />
divides the day and that each bar be of the same length.<br />
That is, try an interval that is a whole-number factor of<br />
the length of the session.<br />
Short entry signals are based on conditions in both<br />
Relative Strength and correlation.<br />
margin requirement and maximum drawdown seen<br />
in the tests.<br />
• Momentum of average RS line less than zero (negative<br />
momentum)<br />
• Correlation coefficient less than -0.1 (negative<br />
correlation)<br />
Entry signals are restricted to 9 am until 5 pm CET,<br />
and any open positions are closed at 5.30 pm.<br />
No protective stops, profit targets or exits other than<br />
the end-of-session exit rule were used in the tests. Open<br />
positions are closed and reversed when new signals are<br />
generated during the day.<br />
Additional test parameters:<br />
• The period tested was the calendar year 2013. The<br />
first trades were on 2 Jan 2013 and the last trades<br />
were on 30 Dec 2013.<br />
• Position size was one contract only, with no<br />
pyramiding, add-ons or scaling.<br />
• Commissions were deducted at the rate of € 2.80<br />
round turn per contract, with no deduction for<br />
slippage.<br />
• Initial capital for backtest purposes was set to<br />
€40,000. This was chosen to cover the approximate<br />
Test Results and Observations<br />
The Total Net Profit for this test was almost € 46,000.<br />
While this is certainly an attractive number, the Profit<br />
Factor was only 1.28 so the margin-of-error was narrow.<br />
With 43 per cent of the trades profitable, 46 per cent<br />
of the long trades and 41 per cent of the short trades,<br />
there appears to be healthy bi-directional symmetry. It is<br />
interesting to note that the ratio of average winning trade<br />
to average losing trade is almost 1.7, a metric that goes<br />
well with a 43 per cent win rate.<br />
Nine of the twelve months were profitable, with the<br />
lowest percentage of profitable trades in any month<br />
coming in July (a losing month) at 35 per cent.<br />
Profitable trades were held 1.6 times longer than<br />
losing trades, despite the fact that no stop-loss orders<br />
were used and end-of-session exits were mandatory.<br />
This is an encouraging trait in itself but it may be<br />
most important when considering the conservation<br />
of psychological capital. It is rewarding to see holding<br />
periods skewed toward the better trades.<br />
Drawdowns and losing streaks experienced during<br />
this test would generally be considered unacceptable.<br />
The period from mid-June through late July 2013 was<br />
the period of notable drawdown, approximately €<br />
43
strategies<br />
www.tradersonline-mag.com 04.2014<br />
F4) Equity Curve for This Backtest<br />
18,000. Remember that there are<br />
no trade management techniques<br />
incorporated into this test. An<br />
examination of the individual<br />
signals and the trading history may<br />
yield ways to smooth the equity<br />
curve.<br />
In addition to favourable net results, the slope is positive overall. The drawdown period mentioned in the<br />
article, from mid-June through late July 2013, is clearly visible in the middle of the curve.<br />
Strategy Snapshot<br />
Strategy Name:<br />
Strategy Type:<br />
Time Horizon:<br />
Entry:<br />
Exit:<br />
Average Number of<br />
Signals:<br />
Average Hit Rate/<br />
Profit to Loss/Return<br />
per Month etc.:<br />
DAX/Euro Relative Strength<br />
Trend-following for DAX futures, using Relative<br />
Strength and correlation analysis between the DAX<br />
futures and EUR/USD<br />
Day-trading during cash DAX session, using<br />
6-minute bars<br />
Long entry: Momentum of average RS line greater<br />
than 0 (positive momentum) and correlation<br />
coefficient less than -0.1 (negative correlation)<br />
Short entry: Momentum of average RS line less<br />
than 0 (negative momentum) and correlation<br />
coefficient less than -0.1 (negative correlation)<br />
Positions reversed on new signals; all positions<br />
closed at end of cash DAX session, open of 5.30<br />
pm CET bar<br />
3 per day during the test period<br />
Percent Profitable 43%<br />
Ratio Avg Win: Avg Loss 1.67<br />
Profit Factor 1.28<br />
Average monthly return 7.21%<br />
(All results are from a backtest on calendar 2013 data.<br />
More information on test conditions is in the article)<br />
Conclusions<br />
The DAX/Euro Relative Strength<br />
strategy employs two measures<br />
of the price relationship between<br />
DAX futures and EUR/USD. Those<br />
measures are common technical<br />
analysis methods: Relative Strength<br />
and correlation. This is an approach<br />
that is not only multi-market, but<br />
also multi-dimensional in that it<br />
involves two distinct intermarket<br />
calculations.<br />
There are several aspects of<br />
Source: TradeStation<br />
this strategy that can and should be<br />
researched further, and even some<br />
missing elements that could be<br />
incorporated into the strategy. However, one should be<br />
careful not to be fall into the trap of overcomplicating the<br />
machinery.<br />
The most obvious missing element is a protective<br />
stop. Even a simple fixed stop-loss protocol may be<br />
helpful in preventing outsize losses on individual<br />
trades.<br />
As demonstrated here, the strategy has no exit rules.<br />
Can any of the calculations used to determine entries, or<br />
other technical analysis methods, be part of exit signals<br />
Can entries be filtered any further For example,<br />
entries require that correlation be less than -0.1 but<br />
there is no consideration given to the direction in which<br />
correlation is trending.<br />
Finally, the strategy’s time-in-market approaches<br />
100 per cent when considered against the trading hours<br />
as defined above. It is possible that performance and<br />
particularly the risk-adjusted performance measures<br />
would improve by identifying periods when there should<br />
be no positions. «<br />
44
STrATEGiES<br />
www.tradersonline-mag.com 04.2014<br />
The rSi return Strategy<br />
Simple Trading with an Established indicator<br />
The Relative Strength Index (RSI) is one of the oldest indicators and many traders use it. The<br />
following article shows how to use this classic indicator in a simple trading system. We’ll use the<br />
hourly DAX-chart as the basis.<br />
David Pieper<br />
David Pieper is a CIIA and has been interested<br />
in stock markets since the end of the Nineties.<br />
He concentrates on trading with CFDs and is a<br />
freelance author.<br />
david.pieper@traders-mag.com<br />
» The RSI was developed by Welles Wilder and is a<br />
momentum-oscillator. Because of its construction<br />
it moves in the area between zero and 100 and<br />
delivers anti-cyclical signals if it reaches its extremes.<br />
According to the classic interpretation, values above<br />
70 are overbought and below 30 they are oversold<br />
and therefore bullish. An analyst or a trader often<br />
46
strategies<br />
With a little observation and<br />
a bit of experimentation you can<br />
create a simple trading strategy.<br />
assumes that the “blind“ following of the standard<br />
parameters is not successful. The same goes with the<br />
RSI – ultimately the market can stay in extremes for a<br />
long time if it is a strong trend – and that can lead to<br />
losses in trading.<br />
Modification of the Standard Parameters<br />
With a little observation and a bit of experimentation you<br />
can easily create a simple trading strategy even with old<br />
indicators. In our case the RSI is calculated based on 21<br />
candles instead of 14. Therefore the oscillator becomes<br />
slower and less volatile. Below 40 is oversold and the<br />
overbought-level is reached at the RSI-value of 80. We<br />
trade this system only long in the hourly chart. We hold a<br />
position overnight if necessary.<br />
Entry, Stop and Re-Entry<br />
Signal-generating is very easy with<br />
the RSI return strategy: If the RSI<br />
is below 40 at the close of a 1-hour<br />
candle a long-signal is generated.<br />
But it is only activated if the RSI then<br />
closes above this line on the 1-hour<br />
basis. The results of past years<br />
confirm that the return of the RSI –<br />
hence the name “RSI Return“ – is a<br />
wise approach compared to direct<br />
entry upon reaching the extremes.<br />
Therefore you avoid to “catching a<br />
falling knife”.<br />
There is no profit target with this<br />
strategy. You close the long-position,<br />
if the RSI climbs above 80 and then<br />
drops below.<br />
A trading strategy is only<br />
complete if the stop-loss is defined<br />
to limit the losses and to secure<br />
the book profits. In this strategy<br />
we use a 21-period ATR stop. At<br />
the entry we place the stop at the<br />
F1) DAX with RSI(21) in April 2013<br />
double ATR (Average True Range). As soon as the<br />
trade has earned the “initial risk“ the stop is place at<br />
break-even and afterwards it is trailed at a distance of<br />
the simple ATR.<br />
Example 22nd April 2013<br />
Figure 1 shows a good demonstration of the strategy. We<br />
see the hourly chart of the DAX with the RSI(21). There<br />
was a small losing trade on 19th April 2013 (point 1)<br />
and on 22nd April 2013 there was a long-signal at 7484<br />
points as the RSI dipped below 40 and then returned<br />
above (point 2). The initial stop was placed at 7406 points<br />
(green) therefore there was an initial risk of 78 points.<br />
We can see that there was a slight drop at first. On the<br />
following day a strong increase began and at 2 pm we<br />
could place the stop at break-even. The next trading days<br />
showed a strong upwards movement. The RSI finally<br />
The RSI-Return strategy generated long-signals as soon as the RSI drops below 40 and returns above it again.<br />
Every trade has a volatility stop (green) that is calculated based on the ATR and that is trailed as soon as the<br />
trade runs into profit.<br />
Source: www.tradesignalonline.com<br />
47
strategies<br />
www.tradersonline-mag.com 04.2014<br />
Strategy Snapshot<br />
Strategy Name:<br />
Strategy Type:<br />
Time Frame:<br />
Setup:<br />
Entry:<br />
Stop-Loss:<br />
Trailing Stop:<br />
Target:<br />
Risk- and Money<br />
Management:<br />
Average Number of<br />
Signals:<br />
Average Hit Rate &<br />
Profit to Loss:<br />
RSI Return Strategy<br />
Swing trading<br />
Hourly chart<br />
Entry after a downtrend or correction, RSI(21) is<br />
the signal generator<br />
Entry long as soon as the RSI(21) drops below<br />
40 and afterwards closes above this level on the<br />
1-hour close<br />
Double ATR(21) as initial stop<br />
As soon as the trade has earned its risk<br />
the ATR(21) stop is placed<br />
RSI reaches the upper extreme (80)<br />
on the 1-hour close<br />
0.5% to 1% per trade<br />
2-6 per month<br />
Hit rate about 45%, profit/loss about 2<br />
trades (compared to the reaching of the upper extreme of<br />
the RSI). There was a false signal at first on 9th October<br />
2013 (point 1). After the position was stopped out, the<br />
RSI reached the level of 40 again on 10th October (close<br />
of the 1-hour-candle) and therefore a new long signal<br />
was triggered (point 2). The entry was at 8588 points.<br />
The initial stop was placed at 8532 points according to<br />
the ATR. Therefore the risk was 56 points. The trade<br />
developed nicely and we stayed in the position over the<br />
weekend until it was stopped out on 17th October at<br />
8775 points (point 3).<br />
Re-Entry Rule<br />
Considering the strong uptrend of the DAX the exit was<br />
again too early – there is potential for optimisation.<br />
Therefore we use a simple re-entry-rule: If a long trade<br />
is stopped out according to the ATR-systematics, we<br />
recommend re-entering with a stop-buy order as soon as<br />
the last swing-high in the hourly chart is broken.<br />
reached 80 on 6th May (point 2) and generated the exit<br />
signal at 8128 points with its return below this level.<br />
Example of 10th October 2013<br />
Another example is the trade of October 2013 shown in<br />
Figure 2 where you can see that the trailing stop causes<br />
the exit of the long position – and this is the case in most<br />
F2) DAX with RSI(21) in October 2013<br />
Other Markets, Other Parameters<br />
The RSI Return strategy has generated profitable results in<br />
the DAX in the past. But there are only two to four signals<br />
per month on average and therefore the signal-frequency<br />
is relatively low. It should be analysed if other markets that<br />
are not correlated with the DAX are suitable for this trading<br />
strategy. If you backtest the EUR/USD or the bund-future<br />
the results of the past few years are<br />
fairly decent. But an adaption of the<br />
RSI and the ATR-stop is necessary to<br />
take the particular characteristics of<br />
the market into account.<br />
In October 2013, there was a false signal; the trade was stopped out. Soon afterwards there was a long signal<br />
(point 2) which generated a nice profit in the following trading days.<br />
Source: www.tradesignalonline.com<br />
Conclusion<br />
The RSI Return approach introduced<br />
here is simple and successful and<br />
can be traded in different markets.<br />
With this strategy we try to use the<br />
countertrend after a strong drop<br />
in price that can last a few days. Of<br />
course you can adapt this system<br />
further to fit the individual beliefs<br />
of the particular trader. For example<br />
you can use a trend filter, another<br />
entry rule for short positions or<br />
you can determine the position size<br />
dynamically. But it is important to<br />
test every approach extensively<br />
before trading with real money. «<br />
48
Proprietary Trader<br />
Career Mentoring Program<br />
(PT – ca. M. P.)<br />
Trader Training and Development Ltd.<br />
Trader Training and Development Ltd.<br />
Traders are made, not born ©<br />
Trader Training and Development Ltd. is launching its 12-week flagship<br />
“Proprietary Trader Career Mentoring Program“ (P. T. – Ca. M. P.)<br />
Program Aim:<br />
The Program has been designed to train traders in quantified,<br />
rule-based trading technologies to manage one‘s portfolio across<br />
all time frames and all liquid global markets (Equity indices, Bonds,<br />
Commodities, Forex). The techniques can be applied across all<br />
instruments (futures, spot, CFD‘s, spread betting).<br />
Programme Duration:<br />
The Program consists of 12 weeks of intensive supervised training.<br />
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will be forming a pre-launch “Protégé Group“ of trainee traders,<br />
whereby we will train 12 people, for 12 weeks, without any cost.<br />
Trader Training and Development Ltd.<br />
after the completion of the Program will<br />
put the trainee traders of the Protégé Group<br />
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Each trainee will have the opportunity to win £12,000 in cash.<br />
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United kingdom
STrATEGiES<br />
www.tradersonline-mag.com 04.2014<br />
Buying Above and<br />
Selling Below the “Snake Line”<br />
A Strategy That Trades on the Cable<br />
This article has nothing to do with natural history, let alone the world of snakes. The term<br />
‘Snake Line,’ as coined by the author, is a line formed by two closely related Moving<br />
Averages, which could be used to generate simple but proficient trading signals. This is<br />
especially useful when used on the Cable (GBP/USD), since it tends to trend significantly<br />
more than most majors. Here is one way of trading profitably with the Snake Line.<br />
Azeez Mustapha<br />
Azeez Mustapha is a trading professional,<br />
an InstaForex offi cial analyst, a blogger at<br />
ADVFN.com, and a freelance author for trading<br />
magazines. He is working as a trading signals<br />
provider at some websites. His numerous<br />
articles are being posted on other websites like<br />
www.ituglobalforex.blogspot.com.<br />
azeez.mustapha@analytics.instaforex.com<br />
» The Snake Line Strategy – a Trading Epiphany<br />
According to one widely read magazine, researchers have<br />
determined that the average adult makes 35,000 decisions<br />
a day. With 86,400 seconds in a 24-hour day, that equates<br />
to a decision being made almost every other second.<br />
The determination to buy or sell is one of the numerous<br />
decisions an intraday trader would make repeatedly in a<br />
50
strategies<br />
trading day. These trading decisions F1) The Cable Gains Stamina<br />
can have impact on our financial<br />
welfare: Therefore we want to be<br />
sure that we are making rational<br />
decisions as intraday traders.<br />
We have always been fascinated<br />
by the lines of the least resistance<br />
and ways of pinpointing them early.<br />
You probably know that there are no<br />
guarantees in the markets, but there<br />
are stages of breakthroughs in the<br />
trading career of serious traders.<br />
On January 17, 2014, the Cable experienced a new lease of energy and crossed the Snake Line to the upside.<br />
Experience has shown that hard A long order was immediately initiated at 1.6348. The stop was put around the EMA 60 which was 1.6337<br />
trading methods do not necessarily (eleven pips from the entry price). The take profit was set at 1.6370 (22 pips from the entry price). The target<br />
was hit immediately and within 15 minutes the price shot upwards by over 90 pips.<br />
assist traders to achieve their goals.<br />
Source: www.metaquotes.com<br />
Easy cum effective strategies are<br />
what can help traders. Therefore,<br />
there is always a need to stay with<br />
a short-term market propensity with deftness. You see, pullbacks in the market, but it would affirm the ‘going<br />
going with the lines of the least resistance is not only the up’ with further northwards push. The northward push<br />
best trading method; it is also the most helpful. There is has some factors behind it. Some speculators are<br />
no need to go back to methods that do not bring lasting afraid of missing the northward push, while some who<br />
success, although going with the current biases would are already in the market would long for continuous<br />
not be profitable if it is not done the right ways. The northward push. The northward push would stop only<br />
Snake Line helps us trade the current biases more in an when too many speculators feel like the price has gone<br />
easy way.<br />
too far and could reverse. That is when a southward<br />
push may begin.<br />
Principles behind the Snake Line<br />
The Cable (GBP/USD) is the favourable currency<br />
The Snake Line consists of the EMAs 60 and 100. It acts trading instrument for this strategy since it tends to trend<br />
as a support zone in an uptrend and a resistance zone in a significantly more than most popular majors (except the<br />
downtrend. The Cable is above it in an uptrend and below EUR/JPY and the GBP/JPY). Its spread is comparatively<br />
it in a downtrend. Likewise, in an uptrend, the EMA 60 low – a good bargain for intraday traders. The Cable<br />
would be above the EMA 100. In a downtrend, the EMA 60 moves by over 90 pips during the American session. It<br />
would be below the EMA 100. The<br />
premise is that when a support zone<br />
or a resistance zone is challenged F2) The Cable Loses Stamina<br />
and violated by the price, the price<br />
would move significantly after it has<br />
crossed it to the other side. When the<br />
price is within or around the Snake<br />
Line, it shows an equilibrium phase<br />
in the market, and no trades would<br />
be taken.<br />
When the price goes up after<br />
some equilibrium zone, there would<br />
be bullish engulfing pattern candles<br />
or consistent bullish candles (at<br />
times, gap-ups). The price normally There was a bullish bias on the Cable on January 24, 2014. But suddenly, the price dropped like a stone,<br />
crossing the Snake Line to the downside and closing below it. A short order was immediately initiated.<br />
breaks the Snake Line upwards,<br />
Source: www.metaquotes.com<br />
although there may be negligible<br />
51
strategies<br />
www.tradersonline-mag.com 04.2014<br />
moves by over 120 pips during the European session, and<br />
it also moves by over 90 pips during the Asian session.<br />
According to Babypips.com, here is the average<br />
movement of the Cable in each trading day:<br />
• Sunday 73 pips<br />
• Monday 149 pips<br />
• Tuesday 172 pips<br />
• Wednesday 152 pips<br />
• Thursday 169 pips<br />
• Friday 179 pips<br />
These figures are mean calculation, but it shows<br />
that the Cable moves considerably during all important<br />
trading sessions. Can you now see why the Cable is the<br />
favourite instrument for this strategy<br />
You can see Strategy Snapshot for more details of the<br />
trading method. Always make sure that you stand to gain<br />
at least, twice your stake, i.e. if the difference between<br />
your stop and your entry price is 21 pips, then you would<br />
need to set a target of 42 pips. This attractive risk control<br />
method ensures that you are happy with only 50 per cent<br />
accuracy. It also makes sure that you can recover your<br />
losses (break-even) with only 33 per cent accuracy.<br />
Two Winners and a Flop<br />
We would like to point out that the space between the two<br />
EMAs could be coated/painted with some translucent<br />
colour to make the Snake Line looks more interesting.<br />
Nevertheless, the space has been left untouched in the<br />
figures below. All the trades in the examples below were<br />
taken on the Cable. The consideration for spreads was<br />
F3) A Flopped Order on the Cable<br />
not reflected. The red vertical line shows where a trade<br />
was initiated. Do not forget to close a trade that is more<br />
than twelve hours old, no matter whether it is positive<br />
or negative.<br />
A winner : On January 17, 2014, the Cable, which<br />
had been moving below the Snake Line, experienced a<br />
new lease of energy and crossed the Snake Line to the<br />
upside. The price closed above the Line and a long order<br />
was immediately initiated at 1.6348. The stop was put<br />
around the EMA 60 which was 1.6337 (eleven pips from<br />
the entry price). The take profit was set at 1.6370 (22 pips<br />
from the entry price). The target was hit immediately<br />
and within 15 minutes the price shot upwards by over<br />
90 pips!<br />
Order: Buy<br />
Entry date: January 17, 2014<br />
Entry price: 1.6348<br />
Stop-loss: 1.6337<br />
Take profit: 1.6370<br />
Exit date: January 17, 2014<br />
Profit/loss: 22 pips<br />
Another winner: There was a bullish bias on the Cable<br />
on January 24, 2014. But suddenly, the price dropped like<br />
a stone, crossing the Snake Line to the downside and<br />
closing below it. A short order was immediately initiated.<br />
The order panned out thus:<br />
Order: Sell<br />
Entry date: January 24, 2014<br />
Entry price: 1.6611<br />
Stop-loss: 1.6627<br />
Take profit: .6579<br />
Exit date: January 24, 2014<br />
Profit/loss: 32 pips<br />
Profitable trading is essentially dealing with momentary losses triumphantly. A sell signal occurred according<br />
to our entry requirement and an order was made. However, the trade was a flop, because the price regained<br />
stamina and skyrocketed.<br />
Source: www.metaquotes.com<br />
Note: Since the stop was placed<br />
around the EMA 60, it was 1.6627<br />
(16 pips from the entry price). This<br />
made us double the target to achieve<br />
the RRR of 1:2; and it was 1.6579 (the<br />
difference between our stop and our<br />
entry price multiplied by two). This<br />
gave us 32 pips in profits.<br />
A flop: We do not want to make<br />
everything look too rosy, since<br />
profitable trading is essentially<br />
dealing with momentary losses<br />
triumphantly. Here is an example of<br />
52
strategies<br />
one trade that did not work. The most important thing<br />
here is that the price did not go beyond the initial stop<br />
and the loss was insignificant. A sell signal occurred<br />
according to our entry requirement and an order was<br />
made. However, the trade was a flop, because the price<br />
regained stamina and skyrocketed.<br />
Order: Sell<br />
Entry date: January 22, 2014<br />
Entry price: 1.6460<br />
Stop-loss: 1.6471<br />
Take profit: 1.6438<br />
Exit date: January 22, 2014<br />
Profit/loss: -11 pips<br />
Conclusion<br />
The Snake Line strategy ensures that you go short on<br />
the Cable when it is weak enough and go long on it<br />
when it gains stamina, while you manage your risk<br />
effectively. This is real trading, not gambling. Just as<br />
water and oil do not mix, trading and gambling are<br />
polar opposites. «<br />
Strategy Snapshot<br />
Strategy Name: The Snake Line Strategy<br />
Strategy Type: Day trading<br />
Suitability:<br />
Intraday traders<br />
Instrument:<br />
The Cable (GBP/USD)<br />
Time Horizon: 15-minute chart<br />
Indicators:<br />
EMAs 60 (red line) and 100 (blue line)<br />
Long Order:<br />
Buy when the Cable crosses the Snake Line to<br />
the upside and closes above it<br />
Short Order:<br />
Sell when the Cable crosses the Snake Line to<br />
the downside and closes below it<br />
For a buy order, the EMA 60 would be the stoploss<br />
Stop-Loss:<br />
area. This is also true of a sell order, and it<br />
makes sure that the stop is sensibly tight enough<br />
The difference between your stop and your entry<br />
Target:<br />
price multiplied by two<br />
Position sizing: 0.01 lots for each $1000<br />
Risk/Reward Ratio: 1:2<br />
Break-Even:<br />
You may move your stop to break-even once you<br />
have recovered your initial risk<br />
Maximum Trades: 10 trades per week<br />
Maximum Trade<br />
Duration:<br />
12 hours<br />
Preview of the next issue<br />
COVERSTORY<br />
PEOPLE<br />
New Concepts for Timing the Market<br />
In our coverstory trader Faik Giese will discuss new<br />
concepts for analysing special situations for charts as<br />
well as for analyst ratings. Often there will be conflicts<br />
of interest when it comes to analysts deciding about<br />
their ratings which in turn enables traders to profit from<br />
these imbalances. In the article, we will discuss sell<br />
recommendations as well as downgrades in detail.<br />
interview Adam Jowett<br />
Many traders went through rough times in their<br />
careers. However, Adam Jowett even more so after<br />
he was disgnosed with cancer at age 30, when he<br />
had to fight a hard battle for his life. Today, he is<br />
trader, entrepreneur and triathlete. Stay tuned for<br />
an interview that’s more than just talking trading; an<br />
interview that’s also about the value of being alive.<br />
The May issue of TrADErS´ will be published on 24th April 2014.<br />
53
BASiCS<br />
www.tradersonline-mag.com 04.2014<br />
Darvas Boxes Analysis<br />
A Simple and Useful Tool Based on Support and resistance Theory<br />
Oscar Cuevas<br />
Oscar Cuevas is a computer engineer and<br />
provides online webinars on Expert Advisor<br />
programming. He has also been a content<br />
developer and trading strategies programmer in<br />
Visual Chart for more than fi ve years.<br />
sistemas@visualchart.com<br />
In the late 50s, Nicolas Darvas developed his famous boxes<br />
theory. According to this theory, prices move inside support<br />
and resistance channels that the author of the theory called<br />
Darvas Boxes. When price moves outside these boxes, the<br />
author claims that new support and resistance levels are<br />
going to be generated depending on the extreme price exit<br />
the boxes form.<br />
54
BASICS<br />
The strategy consists of waiting<br />
for the breakout of one of the box<br />
extremes and trade in this direction.<br />
» Darvas Boxes<br />
The Darvas Boxes study follows the basics of any<br />
other price channel patterns based study: While price<br />
remains inside the range, we assume that the price<br />
movement is going to follow its normal course for a<br />
while. However, if some of the extremes are broken by<br />
price action, the expected reaction will be a change in<br />
the price behaviour and probably the beginning of a<br />
new trend. In the following article we will explain the<br />
functioning of this tool and also the trading rules to be<br />
used with it.<br />
Calculating the Limits<br />
Before going into detail on the information provided by<br />
the Darvas boxes, we are going to explain their calculation<br />
procedures.<br />
The high and low levels formed by each of the boxes<br />
are obtained by following these<br />
steps:<br />
1. We establish the top price of the<br />
box at the high of the current<br />
session.<br />
2. Once this top has been obtained,<br />
we monitor price to see if this<br />
level is broken by the price<br />
action during the following two<br />
sessions. If this level is broken,<br />
we start again.<br />
3. If we find a top that has not<br />
been violated over the latest two<br />
sessions, we save it and store the<br />
low price of the current session<br />
as a base for the box.<br />
4. Now we note this base and<br />
monitor it over the following two<br />
sessions, in order to see if the<br />
base is violated or not. If the base<br />
is violated, we move back to step<br />
3, in other words, we update the<br />
base again. Likewise, if the top<br />
value of the box is violated by the price action, then<br />
we move back again to the beginning, this being step<br />
1.<br />
5. If step 5 is reached, a Darvas Box will be consolidated<br />
and will be formed by the duo TOP/BASE that has not<br />
been violated, at least, over the latest two sessions.<br />
After step 5 the process is repeated by keeping the<br />
last box until a new one appears.<br />
Figure 1 shows a calculation example with a daily<br />
chart of Google. The value top has been updating over<br />
the first three bars so we remain under step 2. On January<br />
24th top ($1167) remains active, and consequently<br />
we move to step three and start looking for the BASE,<br />
starting up in the low of the same day, this being $1123.<br />
However, the next day price breaks to lower lows so start<br />
over again with a new base at 1082. Two days later on<br />
F1) Darvas Boxes Calculation – Google Daily Chart<br />
The top keeps updating until the two sessions’ rule is fulfilled. This happens on January 24th (2 sessions<br />
after TOP). The box is completed on January 29, once the two sessions’ rule has been fulfilled for the BASE.<br />
Source: Visual Chart<br />
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ASICS<br />
www.tradersonline-mag.com 04.2014<br />
Not all breakouts are going to be<br />
considered as signals by Darvas.<br />
January 29th price action did not violate the new base for<br />
2 sessions, so we keep it as our reference and the Darvas<br />
Box is confirmed.<br />
This process can be automated with the use of technical<br />
indicators to be found in technical analysis software. At<br />
our website we provide you the code of the tool in Visual<br />
Chart. Please follow the link: www.tradersonline-mag.<br />
com/download/Code_DarvasBoxesAnalysis.txt<br />
In Figure 2, we can see an example of how the boxes<br />
look with a Visual Chart indicator: We notice that the<br />
indicator draws the boxes in the chart but only once<br />
they are confirmed, while it calculates internally the<br />
subsequent box.<br />
Signals Interpretation<br />
Basically, the Darvas Boxes strategy consists of waiting<br />
for the breakout of one of the box extremes and trade in<br />
F2) Signals Based on Darvas Boxes – Amazon Daily Chart<br />
this direction. However the author included an element<br />
to be taken into account for the strategy, this being the<br />
volume of the asset during the breakout. In fact, not<br />
all breakouts are going to be considered as signals by<br />
Darvas. Instead, the breakout has to come together with<br />
a volume peak (well above volume average).<br />
Each new trade comes with a stop-loss to cover the<br />
losses caused by false signals. If price moves in the proper<br />
direction and new box breakouts occur, the position<br />
is to be increased. Each new breakout comes with the<br />
corresponding position increasing. Concurrently, the<br />
stop-loss accompanies the change of boxes, at the level<br />
of the opposite side of the box.<br />
In Figure 2 we will monitor the signals provided by<br />
the method applied to Amazon. The functioning of the<br />
volume filter is evident in point B as the system does not<br />
give a signal because the breakout is not accompanied<br />
by a volume peak. However, the<br />
breakouts produced in the rest<br />
of the points match the volume<br />
conditions and consequently the<br />
long signal is given. Also in point<br />
D we observe the increasing of the<br />
position size with the new breakout<br />
in the direction of our positions. The<br />
strategy sets as an exit point the<br />
base of the box, allowing cutting of<br />
losses in the case of false signals (as<br />
happened at point A) or take your<br />
profits if the creation of new boxes<br />
accompanies the bullish movement<br />
(cases C and D).<br />
At point A, we notice a box breakout accompanied by volume increase. The stop is placed at the base of the<br />
box. Price changes its direction and the position is closed with losses. A new signal is given in point C. In this<br />
case, price moves in the direction of our position. At point D a new valid breakout occurs, so the size of our<br />
positions is increased. On December 29th price breaks the base and the system.<br />
Source: Visual Chart<br />
Conclusions<br />
Nicolas Darvas’ method is known<br />
for being very simple, as it is based<br />
in one of the main principles of<br />
technical analysis, price action and<br />
volume. Often best results come<br />
with the simplest strategies. «<br />
56
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BASiCS<br />
www.tradersonline-mag.com 04.2014<br />
Trading Journal:<br />
Steve Burns<br />
My SPy Trade Step by Step<br />
In the trading journal, traders – from beginners to professionals – present one of their<br />
trades that taught them a special lesson. This time it is Steve Burns, professional<br />
trader, author and blogger.<br />
» First Entry<br />
For the sake of simplicity all dollar amounts are rounded<br />
in this article. I was trading SPY which is the SPDR ETF<br />
on the S&P 500 Index (see Figure 1). SPDR funds belong<br />
to the ETF family of State Street Global Advisors (SSgA).<br />
My first entry spot was with a break above the 10 day<br />
on September 4th with $130,000 position size (50 per cent<br />
of the account). This was the first day out of 18 that price<br />
broke over the 10 day moving average line. In essence<br />
this was a breakout trade out of a range after the 100 day<br />
moving average held as support at $163. With 50 per cent<br />
of my account at risk then a big two per cent fall in the<br />
index would still have only been a one per cent total loss<br />
of trading capital keeping risk managed.<br />
58
BASICS<br />
Two days later I was able to hold<br />
through the volatility because I was using<br />
end of day stop losses.<br />
Scaling-In<br />
Two days later I was able to hold through the volatility<br />
because I was using end of day stop losses. My original<br />
stop was SPY closing below the 10 day moving average<br />
thus invalidating the break out. It sliced through but<br />
quickly recovered to close higher. Three days later SPY<br />
was able to close above the 50 day moving average with<br />
power. So I added the other half of my account ($130,000)<br />
to bring my position size to $260,000 total. I moved my<br />
end of day stop at this point to under the 50 day.<br />
I held as SPY gapped up and was in a price base for<br />
a few days. I then moved my end of day stop to the 5<br />
day exponential moving average. After a few days it<br />
then gapped up again to $170 and finished at the low of<br />
the day with a nasty black candle.<br />
I stayed in and kept my stop at the<br />
5 day exponential line. In my trading F1) SPY Trade<br />
I have not found one black candle to<br />
mean much, it usually even resumes<br />
the trend after a day like that. It did<br />
recover the next day after the black<br />
candle, I was still in.<br />
may go parabolic at that point I thought. No such luck,<br />
buyers were not coming in over $173 at all on Thursday<br />
and SPY was very extended over the 5 day exponential<br />
moving average. With most of my reward already having<br />
happened and more risk of a retracement back to the<br />
5 day line than possible gain to the upside I decided to<br />
take my profits and I would probably have a chance to get<br />
back in with a better entry as the 5 day line caught back<br />
up to price.<br />
Conclusion<br />
It was a great trading campaign and I ended with an<br />
almost $11,000 profit in two weeks of holding a very<br />
stable position in a low risk index. I’ll take it. «<br />
Exit<br />
Then came the FOMC day (Federal<br />
Open Market Committee). I had to<br />
follow the chart and stay long with<br />
it sitting right at all time highs with<br />
a catalyst on tap. Everyone that<br />
wanted risk off was likely out and<br />
waiting to get back in when the coast<br />
was clear. Everyone waited for the<br />
word “taper”, when it was steady<br />
as she goes the SPY exploded up<br />
to over $173 then came back to<br />
close at $173 on the day. I held, we<br />
The first mark shows the entry. The second mark shows where Steve Burns added to his position. Finally, the<br />
third mark shows where he exited the whole trade with a good profit.<br />
Source: www.tradesignalonline.com<br />
59
BASiCS<br />
www.tradersonline-mag.com 04.2014<br />
risk- and Money-Management<br />
Part 4: “Trading is Not About how Often you Win or Lose“<br />
In this series of articles we present a multi-level process to create a good,<br />
sophisticated risk- and money-management plan. The fourth part deals with the<br />
fact that trading is not about how often you win or lose.<br />
Jens klatt<br />
Jens Klatt is a market analyst at DailyFX.de and<br />
moderates the German DailyFX-forum. He has been<br />
in the financial sector for over seven years. Besides<br />
technical and fundamental observation of the<br />
markets, he focuses on sentiment analysis in the<br />
forex markets and develops his trading decisions<br />
based on this analysis.<br />
www.dailyfx.de<br />
» We assume you know two traders. Trader 1 is right 40<br />
per cent of the time and achieves profit. Trader 2 is right<br />
about 80 per cent of the time and is successful with his<br />
trades. What do you think – who is more profitable<br />
Actually you cannot tell which trader is more successful<br />
or if any of these two traders is profitable at all. For example,<br />
if we assume that trader 1 achieves 200 pips with every<br />
successful trade and limits his losses to 100 pips – then he<br />
60
BASICS<br />
would have earned about 200 pips<br />
after a series of ten trades:<br />
4 * 200 pips - 6 * 100 pips =<br />
800 pips - 600 pips = 200 pips<br />
If the second trader earns 25 pips<br />
with every successful trade but loses<br />
100 pips on every losing trade, then<br />
he would have reached break-even<br />
after ten trades:<br />
F1) Payoff Ratio Shows Reason for Falling Equity Curve<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
127<br />
122<br />
112 110<br />
105<br />
Average Profit Average Loss<br />
102<br />
98 96<br />
90 90 89<br />
84<br />
65<br />
60<br />
61<br />
52<br />
53 54<br />
50 49 47<br />
48<br />
44<br />
43<br />
78<br />
63<br />
60 60<br />
30<br />
51<br />
52<br />
94<br />
0<br />
8 * 25 pips - 2 * 100 pips =<br />
200 pips - 200 pips = 0 pips<br />
You can see why the majority of traders lose money trading, although they are right most of the time: The<br />
average profits (blue) are much smaller than the average losses (red).<br />
New traders are often impressed<br />
Source: DailyFX Research Department<br />
by the hit rate and are therefore<br />
often misled. Of course, it is exciting<br />
and it satisfies one’s ego if you earn<br />
money on most of your trades. But at the end of the day rates of 90 per cent or more. This seems appealing at first, but<br />
you should achieve a positive result, shouldn’t you there is no information about the profitability of the strategy.<br />
You should always keep this in mind – especially if you In other words: It is very simple to generate a high hit<br />
are confronted with trading strategies that claim to have hit rate. You trade without a stop-loss and close the position as<br />
Average<br />
61
ASICS<br />
www.tradersonline-mag.com 04.2014<br />
F2) One Year Hit Rates – Q4 2009 to Q3 2010<br />
100%<br />
90%<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
% Profit % Loss<br />
49% 54% 57% 58% 59% 60% 60% 61% 61% 62% 64% 64% 66% 71%<br />
position is stopped out or not. It is<br />
a fact that you cannot predict future<br />
market movements – therefore the<br />
risk of having a losing trade remains<br />
in place. However, it is possible<br />
to achieve long-term profits with<br />
trading. If this is your goal you should<br />
always remember that the hit rate is<br />
not that important. The relation of<br />
the average profit to average loss<br />
– the pay-off-ratio – should be your<br />
focus. The formula is:<br />
0%<br />
Payoff Ratio =<br />
The graphic shows the hit rate of FXCM retail traders during the fourth quarter 2009 to the third quarter 2010.<br />
Average Profit / Average Loss<br />
It illustrates that the hit rate in the currency pair AUD/JPY was the lowest with 49 per cent and it was the<br />
highest in the currency pair AUD/NZD with 71 per cent.<br />
Based on the facts mentioned<br />
Source: DailyFX Research Department<br />
above and the Figures 2 and 3 it is<br />
obvious that you should focus on the<br />
improvement of the average size of<br />
soon as it is one point in profit. The problem: The position<br />
that is not achieving a profit results in a horrendous loss<br />
– and the margin call and the wipe-out of the account<br />
is only a question of time. The logical protection is the<br />
placing of a stop-loss. But with the limitation of the size<br />
of the loss the trader loses his influence on the hit rate.<br />
Truth is, that wider stops reduce the probability of<br />
being stopped out and “tighter“ stops are hit more often.<br />
But at a higher level the market is now determining if a<br />
winners and losers – and not on the maximisation of the<br />
hit rate.<br />
The displayed graphics are especially interesting if<br />
you consider that the worst hit rate was 49 per cent, the<br />
best was 71 per cent – during the same period of time.<br />
However the profitability was negative – although the hit<br />
rate was very good – and the traders lost money.<br />
Therefore the author recommends targeting a payoff-ratio<br />
of 2:1. That means that the average profit<br />
should be twice as high as the<br />
average loss.<br />
F3) Average Profitability Q4 2009 to Q3 2010<br />
It is necessary to approach the<br />
subject of trading with a professional<br />
70%<br />
Q4 2009 Q1 2010 Q2 2010 Q3 2010<br />
perspective and therefore deal<br />
60%<br />
accordingly with loss-trades.<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0%<br />
The graphic shows the percentage of profitable retail traders of FXCM during the fourth quarter 2009 to the<br />
third quarter 2010. It illustrates that less than 50 per cent of the FXCM retail traders were profitable in the<br />
mentioned period (dotted red line) – despite the good hit rate (Figure 2).<br />
Source: DailyFX Research Department<br />
Conclusion and Outlook<br />
The hit rate plays only a minor part<br />
in professional trading. Whether a<br />
trader is profitable or not depends<br />
on the management and the relation<br />
of average profits and losses. The<br />
trader especially has control over<br />
the average size of a losing trade<br />
because he can use a stop-loss.<br />
The next part of this series of<br />
articles will deal with the reaction<br />
of trading newbies and trading<br />
professionals to loosing trades and<br />
what you can learn from it. «<br />
62
InTheMoneyStocks .com<br />
The Leader In Market Guidance
BASiCS<br />
www.tradersonline-mag.com 04.2014<br />
The Trader’s Technical Arsenal<br />
Common indicators in Meta Trader – Part 6<br />
Azeez Mustapha<br />
Azeez Mustapha is an offi cial analyst at Instaforex<br />
Companies Group, a blogger at Advfn.com, and<br />
a freelance author for trading magazines. He is<br />
working as a trading signals provider at some<br />
websites. He is a senior analyst at Paxforex.com.<br />
His articles are also available on other websites like<br />
www.ituglobalforex.blogspot.com.<br />
azeez.mustafa@analytics.instaforex.com<br />
In his last article (TRADERS´ 02/2014) Azeez Mustapha<br />
explained Fractals, the Gator Oscillator and the Ichimoku Kinko<br />
Hyo. This time he discusses the Moving Average Convergence<br />
Divergence (MACD), the Market Facilitation Index (MFI) and<br />
the Momentum indicator; as they work in MetaTrader, which<br />
continues to increase in popularity (especially version 4.0).<br />
In most cases, the indicators’ default parameters are used.<br />
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BASICS<br />
» The Moving Average Convergence Divergence (MACD)<br />
The MACD was created by Gerald Appel in the 1970s. This<br />
indicator is highly favoured by professionals and it is very<br />
easy to use. It shows the dominant bias as well as the<br />
momentum at a particular period of the market. Because<br />
of this, it is very good for trend identification/momentum<br />
identification. Trending markets are bifurcated into<br />
bullish and bearish ones. The MACD default parameters<br />
on MT4 go as follow:<br />
Fast EMA: 12<br />
Slow EMA: 26<br />
MACD SMA: 9<br />
All applied to close<br />
Note: EMA stands for Exponential Moving Average and<br />
SMA stands for Simple Moving Average.<br />
Computation:<br />
MACD Line: (12-day EMA - 26-day EMA)<br />
Signal Line: 9-day EMA of MACD Line<br />
MACD Histogram: MACD Line - Signal Line<br />
In Figure 1, you see how the MACD appears on the<br />
GBP/CAD 4-hour chart. In order to make things as easily<br />
understood as possible, the red line of the MACD is the<br />
signal line and the vertical grey lines are the histogram.<br />
The zero line is marked as 0.00. As you can see, either the<br />
signal line and the histogram are above the zero line or<br />
they are below it. The zero line plays the role of supply<br />
and demand zones of the MACD.<br />
Uses for the MACD<br />
1. MACD Crossovers:<br />
When both the MACD signal line<br />
and the histogram fall below<br />
the zero line, you consider short<br />
orders, for it means the market<br />
is falling. When both the MACD<br />
signal line and histogram go<br />
above the zero line, you can<br />
consider long orders only, for it<br />
means the market is rising. This is<br />
very noteworthy in that it makes<br />
you enter a trending market when<br />
it has been confirmed by the<br />
MACD. This is one advantage the<br />
MACD has over certain oscillators<br />
which make speculators dive<br />
into the ocean of the markets on<br />
bogus signals.<br />
F1) The MACD on the GBP/CAD<br />
2. MACD Convergence and Divergence:<br />
MACD Convergence occurs when the price is in a<br />
downtrend and the MACD signal line and histogram<br />
are rising towards the zero line or above it, it could<br />
signal the end of the downtrend and the beginning<br />
of a bullish trend. MACD Divergence occurs when<br />
the price is in an uptrend and the MACD signal line<br />
and histogram are falling towards the zero line or<br />
below it, it could signal the end of the uptrend and<br />
the beginning of a bearish trend. At that point, things<br />
may go sour for the bulls, but the conditions in the<br />
market may become propitious for the bears.<br />
3. Overextended Market Conditions:<br />
In an overextended bearish market, the MACD signal<br />
line and histogram will fall extremely significantly.<br />
This is an indication that there will soon be a rally<br />
in the market. The overextension of the market will<br />
be more significant on higher time frames than<br />
lower time frames; therefore the speculator should<br />
be careful. The quail does not claim to be wise,<br />
but it claims to be highly suspicious. This logic can<br />
be reversed for a bull market. In an overextended<br />
bullish market, the MACD signal line and histogram<br />
will rise extremely significantly. This is an indication<br />
that there will soon be a pullback in the market. It is<br />
like a kind of overbought and oversold conditions for<br />
oscillators.<br />
Market Facilitation Index (BW MFI)<br />
Introduced into the trading world by Bill Williams, the<br />
Market Facilitation Index (BW MFI) reveals the change of<br />
price per candle (or per bar). The indicator itself needs to<br />
When both the MACD signal line and histogram fall below the zero line, you consider short orders. When both<br />
the MACD signal line and histogram go above the zero line, you can consider long orders only, for it means<br />
the market is rising.<br />
Source: www.metaquotes.net<br />
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ASICS<br />
www.tradersonline-mag.com 04.2014<br />
F2) BW MFI Being Applied on the EUR/CAD Daily Chart<br />
A pink bar means that the BW MFI<br />
is falling, but the volume is rising.<br />
This means that the bears and the<br />
bulls are in cut-throat competition<br />
and there is no clear winning side.<br />
At last, either the bulls or the bears<br />
will dominate, which would lead to a<br />
continuation of the extant bias or its<br />
termination. The next histogram bar<br />
that comes up would determine the<br />
ultimate outcome.<br />
A brown bar means that both the<br />
The candles are deliberately enlarged so that you can easily understand how the colours of the histogram bars BW MFI and the volume are falling.<br />
work in conjunction with the formations of the candles, as explained.<br />
The market players have become<br />
Source: www.metaquotes.net<br />
apathetic and the price has entered<br />
an equilibrium phase, awaiting a<br />
future breakout which could be the<br />
work with volume before any meaningful interpretation beginning of another serious bias in the market. Biases<br />
could be deduced. In order to understand how this tend to begin in a significant manner. At times, the mania<br />
indicator works, we need to explain the meaning of each in the markets is revealed as gap-ups or gap-downs.<br />
of the four colours of the histogram bars in it.<br />
Sometimes, a bias may start when there is a bullish or a<br />
A green bar means that both the BW MFI and the bearish engulfing pattern candlestick.<br />
volume are rising. There are more bulls in the market and<br />
the market is very active. This shows that the bulls are Computation:<br />
passionate about driving the market further upwards, and BW MFI = Range * (high - low) / Volume<br />
therefore we can benefit when we follow the direction of<br />
the bulls.<br />
Whereas: Range is the factor for multiplication, which<br />
A blue bar means that the BW MFI is rising, but the brings the difference in points down to whole numbers.<br />
volume is falling. The price continues to go upwards, In Figure 2, you can see the BW MFI being applied<br />
albeit not supported by the volume. This shows that the on the EUR/CAD daily chart. The candles are deliberately<br />
bias may change, and therefore we can benefit when we enlarged so that you can easily understand how the<br />
tighten our stops, trail our stops, take partial profits or colours of the histogram bars work in conjunction with<br />
weigh the possibility of smoothing open orders.<br />
the formations of the candles, as explained above.<br />
F3) Momentum on the CAD/JPY 4-Hour Chart<br />
Momentum appears as a single line on the chart, and it is located at the bottom of the chart. You can see how<br />
the indicator moves in conjunction with price action.<br />
Source: www.metaquotes.net<br />
Momentum<br />
Momentum is a very simple indicator.<br />
It is used to gauge the swiftness<br />
and stamina of a given price. It also<br />
measures the weakness of a bias and<br />
probable mean reversion zones.<br />
Momentum appears as a single<br />
line on the chart, and it is located<br />
at the bottom of the chart. Please<br />
see Figure 3. You can see how the<br />
indicator moves in conjunction with<br />
price action. The default parameters:<br />
period 14 applied to the close.<br />
The indicator is used to pinpoint<br />
a bullish bias or a bearish bias,<br />
plus how much the market is going<br />
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BASICS<br />
Taking signals against the dominant<br />
trend does not fit good trend followers.<br />
north or south. It can also gauge overextended market<br />
conditions as well as equilibrium phases.<br />
Computation:<br />
Calculations for the Momentum indicator may vary<br />
slightly depending on the preferences of the trader who<br />
sets it. But in general, a current closing price is viewed in<br />
relation to a particular duration of the previous closing<br />
price.<br />
Current closing price: CP<br />
Previous closing price: CPn<br />
Therefore: M = CP - CPn Or M = (CP / CPn) * 100<br />
Basically, the momentum value is the latest closing<br />
price as a percentage of the previous closing price.<br />
does not fit good trend followers. What fits us is what<br />
fits us. A rope is not fit for a chicken’s neck. After taking<br />
a trade with this indicator, you may want to exit the trade<br />
when the indicator is going contrary to it. This can really<br />
save you from coming surprises when the market starts<br />
going against you.<br />
Though, the Momentum indicator can stand as a<br />
strategy on its own, it appears to work more powerfully<br />
when combined with another trend identifying<br />
indicator, for we want to take signals only in the<br />
direction of the overall bias. Figure 4 shows how the<br />
Momentum is combined with the MACD, which allows<br />
more convincing trend confirmation as well as taking<br />
signals in favour of the dominant trend only, even if the<br />
market is jumpy (volatile). This is what trend followers<br />
want.<br />
Conclusion<br />
Taking Signals from the Momentum Indicator<br />
In part 7 of this series we’ll discuss these indicators:<br />
This indicator is good for generating signals on Money Flow Index and Moving Average of Oscillator. «<br />
instruments that trend significantly<br />
and on instruments that move<br />
sideways. In a sideways phase F4) A Combination of the MACD with Momentum<br />
of a market, you may want to go<br />
long and set a short term target<br />
when there is a recent upturn of<br />
a particular trading instrument.<br />
This is OK when the indicator rises<br />
upwards after it seemed oversold.<br />
Similarly in a sideways phase of a<br />
market, you may want to go short<br />
and set a short-term target when the<br />
current price action is bearish. This<br />
is OK when the indicator falls after it<br />
seemed overbought. It just sounds This figure shows how Momentum is combined with the MACD. This allows trend confirmation as well as<br />
rational that signals are taken in taking signals in favour of the dominant trend only, even if the market is jumpy. The MACD is used for trend<br />
confirmation when Momentum is used for entries and exits.<br />
favour of the overall bias. Taking<br />
Source: www.metaquotes.net<br />
signals against the dominant trend<br />
67
People<br />
www.tradersonline-mag.com 04.2014<br />
» Hometown: Baltimore, Maryland USA. (“The Wire”’s hometown)<br />
» Interests: Photography, Cooking, Psychology, History, Travel<br />
» Trading Style: Equities, driven by fundamentals with input from both<br />
macro and technicals<br />
» Websites: www.howoftrading.com<br />
The Pro’s Process<br />
Part 18: Bruce Bower<br />
In this series we are asking Pro Traders about their psychological processes. Delving<br />
a little into how it feels to them when trading. The good and the bad. How this has<br />
changed over time and what preparation they do mentally for performing as a trader.<br />
One of the key features for us was that we wanted traders with experience who have<br />
been through the mill over the years and of course, we appreciate those who were<br />
kind enough to talk to us so candidly. We hope this gives developing traders more to<br />
learn from. Each interview in this series was conducted by Richard Chignell who is<br />
himself a trader. Please visit his blog at http://embracethetrend.com.<br />
» Richard Chignell: How long have you been trading<br />
Bower: I’ve been fascinated by the markets since I was<br />
a teenager. After working a couple summers, I saved up<br />
enough money to start trading when I was 18 – the year<br />
was 1999! At first, I tried to be a day trader like everyone<br />
else and to play short-term moves in the markets,<br />
principally bluechips. Instead of being rich overnight,<br />
I lost 50 per cent. After that, I took a step back and started<br />
to learn a lot more about markets and trading, which led<br />
me to develop a new approach with equities and also to<br />
start trading other instruments, like bonds and FX.<br />
After graduating from college, I worked as a prop<br />
trader at a big bank. Since 2005 I have been a portfolio<br />
manager at two Moscow-based hedge funds, managing<br />
more than one hundred million dollars in emerging<br />
market equities, primarily in Russia.<br />
Richard Chignell: What style of trading/investing<br />
do you practice<br />
Bower: As an equities investor, I am driven primarily<br />
by company fundamentals. This means meeting with<br />
the management, reading their financial statements,<br />
68
People<br />
The best-performing investments are ones<br />
where you catch a potentially big re-rating story<br />
at the right time, just as it starts its big move.<br />
constructing financial models and trying to get a read on<br />
whether or not it’s a good investment. In general, I find<br />
that the best-performing investments are ones where<br />
you catch a potentially big re-rating story at the right<br />
time, just as it starts its big move. There are three criteria:<br />
1) An attractive fundamental story with improvement in<br />
the underlying business, 2) A decent or better valuation,<br />
compared to peers and versus the Discounted Cashflow<br />
valuation, 3) A catalyst which cause the position to<br />
perform. I then follow the investment thesis and the<br />
performance; if I’m wrong about the thesis or if I hit a preset<br />
stop-loss, I get out.<br />
I do pay attention to charts when I am getting in and<br />
out of positions, as sometimes key levels can signal a<br />
good entry or exit point. If I’m bullish on a stock and long,<br />
if it breaks out of a six-month base, then I would use that<br />
chance to add to the position.<br />
My style is inspired by William J O’Neill’s work<br />
which has documented the ingredients that lead to big<br />
winners. However, I have had to adapt it heavily to the<br />
particular conditions of emerging markets. For instance,<br />
you have to do a lot of intense research to make financial<br />
projections for most companies. O’Neill would reject<br />
turnaround and deep value stories, but those can be<br />
incredibly profitable in emerging markets. Nonetheless,<br />
he was right on the money about the most important<br />
thing: Focus on winning stocks if you want to generate<br />
outsized performance.<br />
Richard Chignell: How do you feel when<br />
a trade goes against you<br />
Bower: Usually, I’m pretty calm about positions going<br />
against me. I will review my work as to why I got it and<br />
see if I did anything wrong or stupid; if so, I will get upset<br />
with myself. If not, then I am pretty dispassionate about<br />
following my plan.<br />
Richard Chignell: How do you feel when<br />
a trade goes for you<br />
Bower: I might feel a bit of validation and like patting<br />
myself on the back if I had a very strong view and it<br />
played out correctly. Overall, I don’t really feel much.<br />
If anything, I expect my trades to go my way so it’s my<br />
“default setting”.<br />
Richard Chignell: How have these feelings changed<br />
over your trading career<br />
Bower: When I first started trading, I was super excitable.<br />
I used to get all wrapped up in every tick and take loses<br />
personally, to the point of depression. As I developed as a<br />
trader through practice, reading a lot of books and talking<br />
with experienced traders, I realised several things. The<br />
first was that you had to be detached at some level from<br />
your trades. The second was that the best way to get to<br />
that point was to have a methodology that you followed<br />
rigorously and that you trusted fully. That way, you could<br />
think of trading more as a decision-making exercise,<br />
which allowed you to reframe the whole process away<br />
from “making money”, which is emotionally charged,<br />
towards “making good decisions”, which is much more<br />
detached. The third was that by adding in some additional<br />
tools, like visualisation, you could learn to really manage<br />
your emotional state and to put yourself into what “Flow”,<br />
as Mihaly Csikszentmihaly labelledit.<br />
Richard Chignell: Do you have any practices that you do<br />
away from the trading screen to help you mentally and<br />
emotionally handle trading<br />
Bower: I have a few. I am quite religious and go to church<br />
every day, in addition to doing mental prayer for up to an<br />
hour. While it’s a spiritual exercise, it does have a very<br />
Bruce Bower<br />
Bruce Bower manages a portfolio of emerging market<br />
equities at a hedge fund. He has a keen interest in markets,<br />
psychology and self-development.<br />
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People<br />
www.tradersonline-mag.com 04.2014<br />
Focus on winning stocks<br />
if you want to generate outsized performance.<br />
calming effect on me. I also like to read and write, both<br />
for my blog and also in my own journal, which helps me<br />
to process and expand any thoughts or feelings that I may<br />
be having. Lastly, I listen to guided visualisations that I<br />
created for myself, which help to manage my emotional<br />
state and also for goal-setting. Usually, I put them on<br />
before I go to sleep and drift off to the sound of the<br />
visualisation.<br />
Richard Chignell: Have you always done this<br />
Bower: Not all of those things. I have always been<br />
quite active in keeping a trading journal, which has<br />
been a critical resource for me from the beginning. The<br />
other stuff, like praying, have just grown over time as<br />
I found that they improved my overall life. The guided<br />
visualisation I’ve learned as a result of some unique<br />
training I’ve had.<br />
Richard Chignell: If not, how have you learnt to deal with<br />
the feelings that come up when trading<br />
Bower: The first is just experience. As you go through<br />
the ups and downs of the markets, you become gradually<br />
de-sensitized. The second way was through conscious<br />
training. I’ve actually studied two related psychology<br />
fields, NLP and Hypnotherapy. What piqued my interest<br />
was that if you read Market Wizards or New Market Wizards,<br />
it’s worth noting that all of the trading psychologists that<br />
they profiled had trained in those fields! And indeed<br />
those tools are used widely in other demanding fields like<br />
professional athletics. The third step was just learning to<br />
trust my methodology. It’s like jumping out of a plane –<br />
if you don’t believe in the parachute, you’re going to be<br />
very anxious, but if you trust that the parachute will work<br />
and focus on opening it properly, then you will be fine and<br />
even enjoy the ride.<br />
Richard Chignell: Can you describe a time in your trading<br />
life which really rammed home the point that so much of<br />
trading comes down to psychological factors<br />
Bower: As I once documented in a popular blog post<br />
called “What I Learned From the Best Trader at Citibank”,<br />
I started out my working career in a great seat – as a<br />
prop trader at a big bank. I sat next to a brilliant trader<br />
and learned as much as I could. Unfortunately, I was<br />
making lots of mistakes and lost money. By the end of<br />
that experience, I was actually quite depressed, because<br />
I knew that it was a golden opportunity and that I had<br />
screwed it up. I swore to learn everything I could to<br />
achieve complete mastery in this field, so as never to feel<br />
that way again.<br />
Richard Chignell: If you could give aspiring traders one<br />
piece of advice about emotionally handling the market<br />
what would it be<br />
Bower: As Dr. Steenbarger likes to point out, most<br />
trading psychology issues are actually trading issues.<br />
For instance, if you take too much risk, then your P&L<br />
will have big swings, leaving you more susceptible to<br />
greed and fear. Similarly, if you don’t have a consistent<br />
methodology, then you will end frustrated with trading.<br />
As glib as it sounds, the solution is to trade better. Focus<br />
on defining a methodology that works for you and to<br />
keep your risk limited, so that you know you can execute<br />
your methodology and you can’t blow yourself up. In<br />
the process, you will learn to trust your system and your<br />
emotions will naturally calm down.<br />
We’d like to thank Bruce Bower for sharing about the<br />
way he tackles the market from an emotional/mental side of<br />
things and for his willingness to allow me to post this as a free<br />
resource in the hope that traders who have been in the market<br />
for less time or are thinking of entering can perhaps pick up<br />
some A-HA’s.<br />
If you are interested in finding more out about Bruce<br />
Bower you can find him:<br />
» On twitter: @HowofTrading<br />
» At his website: www.howoftrading.com «<br />
70
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People<br />
www.tradersonline-mag.com 04.2014<br />
Perry Kaufman<br />
Mastering Systematic Trading<br />
Perry J Kaufman began his career as a “rocket scientist,” before becoming involved in the futures markets in 1971. His earliest<br />
systematic programs used exponential smoothing and moving averages. In the late 1970s he moved to New York where he<br />
developed the most successful in-house commodity investment program for Prudential-Bache. From 1980 through 1991 he<br />
headed the systematic trading for Transworld Oil, which traded the largest proprietary account in futures markets in the world.<br />
From 1992 to 1999, Mr Kaufman was a principal and Head of Research for Drapeau Advisors, a Commodity Trading Advisor<br />
focused on short-term trading. From 2000, Mr Kaufman’s consulting business served clients such as Cinergy’s proprietary<br />
trading group, Graham Capital Management, and Mizuho’s Alternative Investments. Mr Kaufman writes extensively on<br />
markets and strategies. He has published 13 books, of which “Trading Systems and Methods, 5th Edition” (2013) is the most<br />
recent. He is President of KaufmanSignals.com, a new business that serves retail investors (www.KaufmanSignals.com). He<br />
continues to lecture to economic forums, investor groups, and graduate students.<br />
72
People<br />
» TRADERS´: Financials markets are not exactly where your<br />
career started. When did you first hear about the markets<br />
and trading<br />
Kaufman: After leaving aerospace in 1970, I started<br />
my own computer company. We were automating<br />
government medical reimbursements (had I known, I<br />
should have stayed in that field!). Someone came to us<br />
and asked if we could research a way to hedge options.<br />
At that time there was really nothing done on a computer<br />
and the only options were London. IBM wasn’t interested,<br />
so they found someone with mathematical background.<br />
We did that and one thing led to another.<br />
TRADERS´: What was the reason to change your career and<br />
stay with financial markets<br />
Kaufman: After the options project we had a client who<br />
challenged us to beat him trading the market using<br />
mathematics. We were to get a large percentage of<br />
anything we could earn better than him. That was 1972.<br />
We did really well, hitting the Russian wheat deal in<br />
1973 that drove grains up 300 per cent. Unfortunately,<br />
we didn’t beat him because everyone does well in a bull<br />
market. But I was hooked on the markets by then and<br />
never looked anywhere else.<br />
TRADERS´: Over the years and with your growing expertise,<br />
what did you learn and how did you change in the way you<br />
approach the markets<br />
Kaufman: A big question. I’ve learned a lot about the markets<br />
but overall have come full circle. I’ve developed every type<br />
of system, fast and slow, done well<br />
with most, badly with a few, but in<br />
the end, I prefer trading the trend. I F1) Levels of Noise<br />
have learned that markets are more<br />
complex now. Well, actually they’re<br />
noisier. When I started in the 70’s<br />
you could make money with a 10-day<br />
moving average. Over the years the<br />
noise has increased and you need to<br />
trade slower and slower trends. And<br />
you capture less of the move. Still, the<br />
trend finds the big economic moves<br />
which always exist. It’s not the only<br />
method that works, but it’s the safest.<br />
the same technical systems that I offer to clients. I liked<br />
discretionary trading but, for me, it goes in streaks. I can<br />
make money for weeks at a time, then go off and can’t<br />
seem to get anything right. And it’s tiring. Since I’m lucky<br />
enough to be good at both math and computers, I’ve found<br />
that I’m happy to be the turtle and not the hare. Technical<br />
systems aren’t perfect but they are good over time, and<br />
have greater predictability. That’s enough for me.<br />
TRADERS´: From a systematic trading point of view, how do<br />
huge market participants play their game to keep an edge<br />
over their competition<br />
Kaufman: A good question. My experience is that the<br />
biggest players can be either discretionary or algorithmic,<br />
but the bulk of them are algorithmic. And, they are mostly<br />
trend followers. They can get the liquidity they need<br />
because long-term trends don’t change positions very<br />
often. And, they can average in over a week or more so<br />
they don’t push the market. They can also have a large<br />
number of faster strategies, because you can’t trade a lot<br />
on a faster strategy, but you can gain diversification.<br />
Keeping an edge is more difficult. You can see from<br />
the published performance that the big companies often<br />
have similar profits and losses each month. Some of them<br />
will put greater weight in one sector, say interest rates,<br />
but that also increases their risk. My own preference is<br />
equal weighting wherever possible, because I don’t know<br />
anyone who has successfully predicted which sector will<br />
be the best performer next time. So you need to take<br />
greater risk to separate yourself from the competition. Or,<br />
TRADERS´: Did you ever get into<br />
discretionary trading, as well<br />
Kaufman: Yes, I did discretionary<br />
trading early on and traded for<br />
myself. I still trade for myself but I use<br />
Figure 1 shows several paths for the exact same result (price rising from $440 to $475). The difference,<br />
however, is the volatility, or noise on the way.<br />
Source: www.kaufmansignals.com<br />
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People<br />
www.tradersonline-mag.com 04.2014<br />
F2) Noise Ranking of Asian Markets 2005-2010<br />
Kaufman: That would seem easy to<br />
answer: “Because it’s not making<br />
money!” but actually, that’s a<br />
difficult question. Theoretically, we<br />
design a trading program to have a<br />
specific level of risk, measured by<br />
the annualized volatility of returns.<br />
For the futures industry, that’s about<br />
14 per cent, equal to one standard<br />
deviation. So there is a 16 per cent<br />
chance (the left tail) that we’ll see a<br />
loss of more than 14 per cent during<br />
one year. It’s also possible that we<br />
could see a loss twice as large. The<br />
real problem is deciding if that’s<br />
a “normal” loss or whether the<br />
program is no longer working. To<br />
This figure shows several Asian markets sorted for their noise levels. The more mature markets (Japan and find that out, you need to dig deeper<br />
Hong Kong), are the noisiest while the less traded ones (Sri Lanka and Vietnam), are the trendiest.<br />
into the frequency of losses, the<br />
Source: www.kaufmansignals.com<br />
duration, and other statistics. I lean<br />
towards frequency of losses to tell<br />
me that something is wrong. In the<br />
if you’re really smart, you will be the first to find another end you could say “It still could be normal,” but I favour<br />
new way of trading, like high-frequency trading, but that deleveraging when I’m uncertain about the program,<br />
doesn’t happen often.<br />
or when we reach a 1.5 standard deviation loss. In that<br />
sense we manage the “business risk,” that is, both the<br />
TRADERS´: How do you recognise a system you’re using is investor and I want to stay in business. I will give up some<br />
not working profitably anymore<br />
potential profits until I either decide that the program is<br />
fine, or it continues to deteriorate. By<br />
the way, the solution to that problem<br />
F3) Information Ratio, Sorted Highest to Lowest, All Futures from 1990<br />
is still the most elusive.<br />
TRADERS´: In the way markets function,<br />
do you see any consistent edges for<br />
retail traders over the big guys<br />
Kaufman: Yes, retail traders are<br />
more flexible because they can get<br />
in and out of the market without<br />
anyone noticing. They can trade<br />
equal risk in stocks because their<br />
positions are small. The big traders<br />
can’t even trade some opportunities<br />
because they would move the<br />
market too much with the position<br />
size they need.<br />
The U.S. and European index markets are the noisiest. So you want to favour mean reversion systems for<br />
those markets on the right of the chart, and trend systems for those on the left.<br />
Source: www.kaufmansignals.com<br />
TRADERS´: You were already using<br />
moving averages in the 1970s. Many<br />
traders use these concepts today. Do<br />
you still see value in such methods<br />
74
People<br />
If the Efficiency Ratio is low,<br />
then a mean-reverting strategy is<br />
better than a trend method.<br />
Kaufman: Absolutely. Trends in general are what I call a<br />
“sound premise.” But they need to be long-term trends to<br />
pick up the direction of the economy, or the US dollar or<br />
euro, or major changes in supply and demand. I wouldn’t<br />
try faster trends because I don’t think they’re reliable.<br />
Prices can jump quite a bit on news, but it’s hard to<br />
capture that with a moving average, and most often you<br />
get false signals. Trend systems need to capture the fat<br />
tail to be successful. If you’ve studied the profile of trend<br />
performance, there are many more losses than profits, so<br />
the profits need to be bigger. I’m convinced that you need<br />
the rare, very large profit to win on balance.<br />
TRADERS´: What do you think about genetic programming<br />
Do you have experience in this field, and if so, which<br />
results did you attain<br />
Kaufman: I’ve created a portfolio program using a genetic<br />
algorithm, and I think I can beat the standard meanvariance<br />
approach that is used in the industry. On the<br />
other hand, I wouldn’t use either one because they are<br />
simply an exercise in over-fitting. These powerful tools<br />
are tempting, but I don’t think they work in the markets.<br />
And I haven’t read anywhere that they have predictive<br />
power. I still think the best solutions are simpler ones.<br />
TRADERS´: Young markets and old markets … this topic<br />
was originally addressed in your “Smarter Trading” book.<br />
Nowadays, which are the younger easier markets and<br />
which one the older<br />
Kaufman: That’s a good question and it goes back to why<br />
the smaller investor has an advantage. Newer markets,<br />
usually index markets, are much trendier and can be<br />
traded with faster moving averages, or whatever trending<br />
method you want. It’s the same as the way we traded<br />
in the 1970s before volume jumped up. New markets<br />
don’t have as much noise because there are far fewer<br />
participants. As they mature they get noisier, so the US<br />
index markets, followed by European, are the noisiest<br />
and need slower trends to be successful. So there is a<br />
window of opportunity for the retail trader to use a trend<br />
for new index markets.<br />
TRADERS´: What is the most reliable technical indicator in<br />
order to detect noise in a price series<br />
Kaufman: The only one I know that measures noise is<br />
my own “Efficiency Ratio,” which has also been named<br />
“fractal efficiency.” It’s simply the difference in price over<br />
n days divided by the sum of the path, which is the sum<br />
of absolute values of the daily changes over the same<br />
n days. The idea was that if you went in a straight line<br />
from point A to point B, then the efficiency was 1.0 (no<br />
noise). If you wander around then the efficiency goes<br />
down, and if you go nowhere then the efficiency is zero<br />
(all noise). Even though I did that in the early 1980s, the<br />
only useful application that I’ve found is for it is deciding<br />
which system to apply to each market. For example, if the<br />
ratio is high then there is a lot of trend and we can use a<br />
trend method. If the ratio is low, then a mean-reverting<br />
strategy is better. I was hoping for more but haven’t yet<br />
figured it out.<br />
I have two charts that I created for the Asian Financial<br />
Forum in 2012. One chart ranks the Asian markets by<br />
noise (Figure 2) and the other ranks a large number of<br />
futures markets the same way (Figure 3). You’ll see that<br />
the more mature Asian markets, the ones in Japan and<br />
Hong Kong, are the noisiest while the less traded ones,<br />
Sri Lanka and Vietnam, are the trendiest. And for futures,<br />
the U.S. and European index markets are the noisiest if<br />
you look past the agricultural products (seasonality fights<br />
with the long term trend). So you want to favour mean<br />
reversion systems for those markets on the right of the<br />
chart, and trend systems for those on the left.<br />
TRADERS´: From your experience, what seems to be the<br />
best filter ever for detecting a trend<br />
Kaufman: I would use a long-term trend as a filter for<br />
short-term trading. And it doesn’t really matter which<br />
method you use. I think that most trend calculations<br />
give you the same result over time. It’s really the market<br />
and not the method. If the market is trending then all<br />
the methods are profitable, and if it’s not trending then<br />
none of them are. There are some internal differences.<br />
For example, a moving average has a lot of small losses<br />
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I lean towards frequency of losses<br />
to tell me that something is wrong.<br />
and fewer larger profits. A breakout system is nearly the<br />
opposite, with more profits but larger losses. But in the<br />
long run, the returns are much the same. There are two<br />
charts that show this, one is the S&P and the other 5-year<br />
notes (both futures, see Figure 4 and 5). They show the<br />
profits using a 100-day calculation period for each of the<br />
three most popular methods, the moving average (MA),<br />
breakout (BO), and linear regression slope (LRS). We know<br />
that notes are trendier from the noise study, and you can<br />
see in the chart on the right that the returns over 24 years<br />
track very closely. For the S&P the pattern is similar but<br />
not as uniform. However, if I were to average the results<br />
of a large number of markets, you would have a difficult<br />
time deciding which trend was best.<br />
For those traders looking for more detail, Figure 6<br />
and 7 show the optimisation results for these three trends<br />
in terms of the profit factor (gross profits divided by<br />
gross losses). Both show a tendency to do better as the<br />
calculation period gets larger (shown along the bottom<br />
from ten to 150 days). For the 5-year Note, the breakout<br />
seems to be best and for the S&P it is mostly the slope.<br />
It’s important to view this as a big data problem when<br />
choosing which method to use.<br />
TRADERS´: In your huge last book about trading systems<br />
you developed hundreds of codes for TradeStation. Can you<br />
tell us which ones you’d recommend for 1) intraday trading<br />
and 2) overnight trading/swing trading<br />
Kaufman: Well, that’s asking a lot! If I wanted to do that<br />
I would have just published the one that I thought was<br />
the best system and be done with it. Actually, there are<br />
a lot of systems that make money and a lot of trading<br />
personalities that prefer faster trading, lots of small<br />
profits, big positions, arbitrage, and whatever else. More<br />
important, the book is intended to show technique. When<br />
you become familiar with different ways to view the price<br />
moves then you can create your own, or find the ones that<br />
match your personality.<br />
But to answer the question a little better, I would be<br />
looking for mean-reversion systems for intraday trading<br />
and possibly short-term breakout for trades that last a few<br />
days. Of course, there is pairs trading and divergence,<br />
which are also good methods.<br />
TRADERS´: Everybody complains about High Frequency<br />
Trading. But, does it really affect the big trends<br />
Kaufman: I don’t think so. If it’s profitable (and that’s not<br />
always the case), then it’s extracting profits from the<br />
market, which affects everyone. But it also adds liquidity<br />
and a bit of noise. The most effect may be that it takes<br />
a somewhat bigger move in one direction for a trend<br />
system to get a signal, and another bigger move to exit,<br />
but I see the effects as minimal for anyone holding trades<br />
for a few days or more.<br />
TRADERS´: Many traders start out trading via trial & error.<br />
What would you suggest these traders to do, assuming they<br />
do not really understand that having a process as well as<br />
risk management and proper position sizing is the name of<br />
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People<br />
the game Is it necessary to hit the<br />
wall first<br />
Kaufman: New traders should expect<br />
to lose money. It’s part of the initiation<br />
process. They should understand<br />
that they can make money if they do<br />
it the right way, but the excitement of<br />
getting started often causes them to<br />
rush into trading. My first rules would<br />
be to have a system. It doesn’t have<br />
to be computerised, but you need<br />
clear rules. The best discretionary<br />
traders are systematic, even though<br />
the systems are in their heads. And,<br />
when you have rules, follow them!<br />
You need to start small, really<br />
small. You can’t be worried about<br />
taking a loss. In fact, you need to be<br />
able to embrace a loss. It’s just part<br />
of the process. If you can’t cut a trade<br />
and take a small loss then you’ll<br />
never be a trader. And each trading<br />
system has its own profile, which I<br />
mentioned before. So you need to be<br />
comfortable with your rules.<br />
It’s also important that you don’t<br />
have too many rules. I’ve always<br />
gone by the philosophy that “loose<br />
pants fit everyone.” If I can apply the<br />
same rules to all stocks or all futures,<br />
then the results won’t look beautiful,<br />
but I’ll have robustness, which is<br />
the key to success for me. I want the<br />
trading system to work on all markets<br />
(well, most markets) even if it’s great<br />
on some and barely profitable on<br />
others. I don’t want a system that<br />
works on only one market.<br />
Always trade each position with<br />
equal risk. That is, for stocks, use the<br />
same investment for each position.<br />
Just divide the investment amount<br />
(say $10,000) by the share price to<br />
get the position size. It’s not perfect,<br />
F4) Popular Systems – S&P, 100-Day Trend<br />
The chart shows the profits using a 100-day calculation period for three popular systems: moving average<br />
(MA), breakout (BO), and linear regression slope (LRS). In the long-run, the returns are much the same.<br />
Source: www.kaufmansignals.com<br />
F5) Popular Systems – 5-Year Note, 100-Day Trend<br />
The chart shows the profits using a 100-day calculation period for three popular systems: moving average<br />
(MA), breakout (BO), and linear regression slope (LRS). In the long-run, the returns are much the same.<br />
Source: www.kaufmansignals.com<br />
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F6) Popular Systems – S&P Optimisation from 1990: Profit Factor<br />
The chart shows the profit factors for a variety of calculation periods for the systems: moving average (MA),<br />
breakout (BO), and linear regression slope (LRS). For most settings, the returns are much the same again.<br />
Source: www.kaufmansignals.com<br />
F7) Popular Systems – 5-Year Note Optimisation from 1990: Profit Factor<br />
The chart shows the profit factors for a variety of calculation periods for the systems: moving average (MA),<br />
breakout (BO), and linear regression slope (LRS). For most settings, the returns are much the same again.<br />
Source: www.kaufmansignals.com<br />
but you don’t want to trade 100<br />
shares of Apple and 100 shares of<br />
Bank of America. The Apple profits<br />
and losses will be so big that Bank<br />
of America will be unimportant.<br />
For futures you take an investment<br />
amount, say $25,000 per market<br />
and divide by the 20-day volatility<br />
to get the number of contracts.<br />
You can do that because of the<br />
leverage in futures. Once you find<br />
the position size for all futures, you<br />
can scale them equally to your actual<br />
investment size.<br />
Equal risk gives you maximum<br />
diversification, which means the<br />
best risk control. Of course, there are<br />
other important risk controls, but it’s<br />
the best place to start.<br />
TRADERS´: In one of your books, you<br />
describe how to put the process<br />
of research and development into<br />
a “cohesive framework.” Can you<br />
just briefly explain how this works,<br />
please<br />
Kaufman: The basic idea is to start<br />
with a sound premise, such as an<br />
economic trend or arbitrage. You<br />
can’t let the computer find a method<br />
for you. It just doesn’t work. Then you<br />
need to test it properly using lots of<br />
data, some in-sample and some outof-sample.<br />
You need to understand<br />
how to interpret the results. I favour<br />
looking at the results of all tests so<br />
that “success” means that 70 per cent<br />
of all tests were profitable. Then my<br />
expectation is the average result of<br />
all tests. I don’t believe you can pick<br />
one set of parameters and expect<br />
that to be the best next month, so I<br />
use multiple parameters in order to<br />
get an average result. That may be<br />
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PEOPLE<br />
too conservative for some investors, but it’s another case<br />
of the turtle and the hare.<br />
TRADERS´: Many Hedge Funds tend to hire more and more<br />
PhDs of physics, statistics, biology, cybernetics. In my own<br />
trading, however, I still find the easy methods do work best.<br />
What do you think about that<br />
Kaufman: That’s a sensitive issue in the Hedge Fund<br />
business. Firms that allocate money to hedge funds seem<br />
to hold value in the number of PhDs in the company,<br />
assuming they are going to keep the strategies on the<br />
“cutting edge.” My personal experience is that’s not<br />
true. You need someone with solid math skills but also<br />
market experience. You can’t create a good strategy by<br />
discovering it on a computer. It must be a sound premise,<br />
and that will only come from observing the market and<br />
understanding the fundamentals. So a new PhD is not likely<br />
to be productive until she gets real market knowledge.<br />
On the other hand, an experienced floor trader can tell a<br />
quant an idea about the way the market reacts to, say an<br />
earnings shock, and the quant can then implement that.<br />
But then so could a regular smart programmer. So it’s the<br />
concept, not the math, that’s most important.<br />
TRADERS´: If you were handling $100 million in trading<br />
capital, how would you manage it in order to produce<br />
absolute returns Which markets, strategies, time frames<br />
Kaufman: You must know that’s proprietary information!<br />
If I tell you how I would manage that now, I would no longer<br />
have a competitive edge. I will say that large amounts of<br />
capital require either many fast trading systems or a few<br />
slow trading ones. That’s why probably more than 60 per<br />
cent of all systems traded are long term trend following.<br />
It works over time and you can trade large amounts on it.<br />
The faster the system, the less liquidity, so if you’re a firm<br />
with $20 billion under management, you’ll favour slow<br />
and concentrate on risk management.<br />
TRADERS´: Is there any other piece of advice you’d like to<br />
share<br />
Kaufman: Yes, I want everyone to remember that the<br />
market keeps changing and that there are patterns that<br />
will occur in the future that we’ve not seen in the past. I<br />
highly recommend a book by Dietrich Doerner, “The Logic<br />
Book Info<br />
Trading Systems and Methods, Fifth Edition<br />
Author: Perry Kaufman Pages: 1232<br />
Publisher: John Wiley & Sons ISBN-10: 1118043561<br />
Language: English ISBN-13: 978-1118043561<br />
of Failure”, originally published in German (“Logik des<br />
Misslingens”). I’ll let the readers figure out the solution<br />
themselves, but the lesson learned will be important for<br />
trading.<br />
TRADERS´: Besides markets, what do you enjoy in your free<br />
time Also, any future projects you’re looking forward to<br />
Kaufman: Free time You think I have free time I used to<br />
play more tennis, go skiing, and diving but these days I<br />
seem to be in front of my computer more than I should.<br />
But then, I really enjoy developing systems and trading.<br />
I tried retiring twice and ended up starting a new company<br />
and writing another book. I guess I’m just lucky to do<br />
what I like. «<br />
The interview was conducted by Marko Graenitz.<br />
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www.tradersonline-mag.com 04.2014<br />
The Four Agreements<br />
for Traders<br />
» Don Miguel Ruiz, a Mexican author in the tradition of<br />
Carlos Castaneda, wrote a best-selling book called “The<br />
Four Agreements” in 1997. It sold millions of copies and<br />
has acted as a life-clarifying guide for many. How might<br />
these “four agreements” specifically apply to trading<br />
1. Be Impeccable with Your Word<br />
As down and dirty as Wall Street can be, there is a code<br />
of honour among traders. Floor traders and trading desks<br />
are known for confirming deals worth millions, or even<br />
tens of millions in profit or loss, on the strength of a verbal<br />
telephone commitment, a handshake, or even eye contact<br />
and a nod of the head. The whole system works because<br />
all true traders, while fierce competitors down to the last<br />
tick, are also honour-bound to their word. Those who break<br />
the code are rightly banished. Being impeccable means<br />
making damn sure you can deliver, and moving heaven<br />
and earth to come through. Developing a reputation<br />
like this has benefits internal as well as external, as you<br />
become the type of person who “gets it done” in the eyes<br />
of your subconscious as well as the eyes of others.<br />
2. Don’t Take Anything Personally<br />
When going through a rough patch the classic temptation<br />
is to think the market is out to “get you,” that the market<br />
is always opposing you. However, the market is far more<br />
like a force of nature than a personal entity. Does Mount<br />
Everest care who you are Does the ocean care who you<br />
are No. If a freak storm comes up while you are climbing<br />
or sailing, it has nothing to do with “you” – except to the<br />
extent you voluntarily exposed yourself to such risks. Many<br />
traders are smart enough to consciously reject the “market<br />
out to get you” point of view, yet subconsciously indulge in<br />
“woe is me” personalisation on a subtle level. Taking things<br />
personally is all too often a form of whining. As a general<br />
rule of thumb, whiners are losers. The winners are too busy<br />
getting it done – and this means addressing undesirable<br />
results in a detached, objective, wholly non-personal way.<br />
3. Don’t Make Assumptions<br />
Foolish assumptions have swallowed up entire oceans of<br />
profit. The habit of assumption is born of laziness – lack of<br />
due diligence, lack of proper investigation and verification.<br />
Justice ‘Jack Sparrow’ Litle has seventeen-plus years of experience in markets. He cut his teeth as<br />
an international commodity broker with clients on fi ve continents, including a large Russian hedge<br />
fund, and has traded virtually every asset class except real estate. His specialty is global macro.<br />
Contact: www.mercenarytrader.com; E-Mail: jack@mercenarytrader.com<br />
It also stems from a lack of creativity, e.g. the inability to<br />
see an alternative range of scenarios – and sometimes<br />
emotional bias, meaning irrational predisposition to an<br />
expected or demanded outcome.<br />
The number of questionable assumptions traders<br />
can make – and do make, on a routine basis – is veritably<br />
endless. From unexamined notions of how a market works,<br />
to blinding ideological zeal, to unjustified confidence in<br />
a methodology with substantial gaps in process, theory<br />
and execution, to casually misguided assignment of<br />
blame for a bad result (see agreement #2). This is why, in<br />
fact, more traders lose than win.<br />
4. Always Do Your Best<br />
A lot of people half-ass their way through life – and when<br />
they get into the trading arena, it only becomes natural and<br />
habitual and instinctive to do the same thing. Committing<br />
to risk management but not really... committing to a welldeveloped<br />
methodological process but not really... giving<br />
lip service to various aspects of trading excellence but<br />
not following through... As a point of motivation, stop<br />
and ask yourself what might be possible if you really and<br />
truly “always did your best,” every single day. What if you<br />
stopped futzing around completely and totally, committing<br />
to a higher level of focus and dedication than ever before<br />
What if you really and truly found the absolute best within<br />
yourself, and cultivated an iron-clad commitment to<br />
maximum trading excellence What would that look like<br />
What would it feel like How much pain would it require...<br />
and would the pain be worth it Furthermore, what if you<br />
could figure out how to sustain this level of excellence, day<br />
in and day out, not just as a touchy-feely resolution, but true<br />
transcendence to a higher path, as the framework for an<br />
enlightened and evolved way of life How would that impact<br />
your P&L, your success as a trader and your sense of life<br />
fulfilment on the whole How awesome would it be «<br />
80
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