publication

Interview: Perry Kaufman – Mastering Systematic Trading P. 72
The Pro’s
Process
Bruce Bower P. 68
Your Personal Trading Coach
Nr. 04, April 2014 | www.tradersonline-mag.com
Multi-Dimensional
Trading
The Ability to Take
the Broader View P. 40
Buying Above and Selling
Below the Snake Line
A Strategy that Trades
on the Cable P. 50
How Small Traders Can
Benefit from the Big Players
David vs
Goliath P. 6

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www.tradersonline-mag.com 04.2014
EDiTOriAL
ioannis kantartzis
Editor-in-chief
if it Feels Good, Don’t Do it
» in the last issue, i described a few ideas on how to gain a psychological advantage.
The key point there was to keep doing those things that you find difficult to do. This
means that you will be one step ahead of others who are either just incapable of
accomplishing those things or fall short of that. Not just in trading, but in many other
competitive areas of life, such as competitive sport, this can help you gradually gain
a psychological advantage and achieve significantly better results over time.
But there is even more to this connection, which is why i would like to pick up on
that topic again. Do you know the situation where you come home in the evening after
a hard day at work and then need to decide whether to watch Tv on the couch or go
for a jog in the park Compounding the problem, that run in the park had already been
scheduled whereas, as is so often the case, there is nothing but (often) rubbish offered
on television. To all intents and purposes, that means that the decision has already been
made for you. And yet, for a short period of time the thought of the cosy couch will cross
your mind. it would feel much better to relax there than to brave the cold and go jogging.
And that’s exactly where the problem is: More often than not, what we wish to do in the
long term doesn’t feel good in the short term. As a result, many people give up what they
really want (in this case, physical fitness) in exchange for what they would like to do at
this very moment (relax). But at the same time that is the very thing that runs counter to
your long-term objective! The upshot is that there are many people who for years have
wanted to get fit, but never make it or even get less fit.
Things may be similar in trading. you have resolved to trade only the best setups,
i.e. just a few swing trades a week. in the short term, you will be feeling bored since
the market is stagnating and you haven’t made any trades for three days (rightly so).
however, since it is much more exciting “to be in on the action“ and “not to miss
anything“, you will place a few short-term intraday trades, sooner or later risking losing
what you really want (swing trading) for what you happen to be wanting at that point in
time (“action“). This is also the reason why it is not enough to have a trading plan – most
importantly, you need to be able to stick to it. Make sure you work on implementing it.
When it gets really boring, go to the gym. And turn off the Tv, for goodness sake!
Enjoy the new issue of TrADErS’ magazine. For those who know that
sometimes you don’t have to go to great lengths to have your eyes opened. «
Good Trading,
3

TABLE OF CONTENTS
www.tradersonline-mag.com 04.2014
6
72
TABLE OF CONTENTS
April 2014
COVER STORY
6 David vs Goliath
In our cover story Gernot Daum discusses how individual traders
(David) may stand a chance against the big players (Goliath) in the
game of trading. In addition, he explores concepts that will help
traders to even gain an edge off the large, inflexible positions of
large institutions. Even more, the author provides some specific
real-trading examples of how to apply these concepts.
INSIGHTS
12 TRADERS´ Talk: Guy Simpkin
We discuss the latest developments in European clearing with
Guy Simpkin from BATS Chi-X Europe.
14 Hedge Fund Series – Part 2
In the second part Bruce Bower reveals what he learned by
working at a Hedge Fund.
18 Be(a)ware of Diversification – Part 2
This time Dirk VanDycke shows how to put the knowledge about
diversification in practise to your advantage.
22 Trading Seasonalities – Part 9
Thomas Bopp introduces a trade with Whole Foods Market and
currency-future AUD/USD.
40
24
News
Find the latest notes and
announcements from around the world
of trading in our “News“ section.
TOOLS
28 New Products
The Latest Trading Technology
30 Softwarereview
iView Charts
34 Book Review
“Inside the House of Money”
by Steven Drobny and
Niall Ferguson
36 Appreview
Trade Tuner
4

TABLE OF CONTENTS
PEOPLE
68 The Pro’s Process
Part 18: Bruce Bower
72 Perry Kaufman: Mastering Systematic Trading
Perry Kaufman is one of the early systematic traders who
started out researching systems back in the 1970s. Due
to his vast trading knowledge and writing many popular
trading books he is today a highly respected expert.
MASTHEAD
Publisher
Lothar Albert
Subscription Service
www.traders-mag.com;
www.tradersonline-mag.com;
abo@traders-mag.com; Tel: +49 (0) 931 45226-15
Address of Editorial
and Advertising Department
TRADERS´ Magazine Limited
The Black Church, St. Mary´s Place
Dublin 7
Ireland
Contact:
E-mail: ioannis.kantartzis@traders-mag.com
Phone: +44 (0) 7798631716
Mobile: +30 (0) 6932 315450
Fax: +49 (0) 9 31/4 52 26-13
STRATEGIES
40 A Multi-Dimensional Approach to Day-Trading DAX
Futures
Stanley Dash demonstrates a ‘multi-dimensional’ approach by
using two measures of the relationship between two markets.
46 The RSI Return Strategy
The RSI is an established indicator for trading. David Pieper
shows how to use it in a simple trading system.
50 Buying Above and Selling Below the Snake Line
Azeez Mustapha explains a Cable trade setup.
BASICS
54 Darvas Boxes Analysis
Nicolas Darvas developed his famous boxes theory in the late
50s. In this article Oscar Cuevas shows you how it works.
58 Trading Journal
U.S. trader and blogger Steve Burns explains one of his SPY
Trades from last year.
60 Risk and Money Management – Part 4
In the fourth part Jens Klatt deals with the fact that trading is
not about how often you win or lose.
64 The Trader’s Technical Arsenal – Part 6
Azeez Mustapha discusses the MACD, Momentum and other
indicators.
Editor-in-Chief
Ioannis Kantartzis, Anastasios Papakostas
Editors
Katharina Boetsch, Prof. Dr. Guenther Dahlmann-
Resing, Corinne Endrich, Marko Graenitz, Lena
Hirnickel, Sandra Kahle, Rodman Moore, Stefan
Rauch, Katja Reinhardt, Karin Seidl, Tina Wagemann,
Christine Weissenberger, Nadine Wiget
Articles
Thomas Bopp, Bruce Bower, Steve Burns,
Richard Chignell, Oscar Cuevas, Stanley Dash,
Gernot Daum, Jens Klatt, Azeez Mustapha,
David Pieper, Dirk Vandycke
Pictures
© Andrei, B.Stefanov, basketman23, bluedesign, Brian
Jackson, chairman, chones, DavidArts, ferkelraggae,
Frog 974, gavran333, Georg Preissl, Givaga, Horticulture,
IMaster, Nneirda, opicobello, Sashkin, sergey_p,
wmedien / www.fotolia.com
Price data
www.captimizer.de; www.esignal.com;
www.metaquotes.net; www.tradesignalonline.
com; www.tradestation.com
ISSN
1612-9415
Disclosure
The information in TRADERS´ is intended for
educational purposes only. It is not meant to
recommend, promote or in any way imply the
effectiveness of any trading system, strategy or
approach. Traders are advised to do their own
research and testing to determine the validity
of a trading idea. Trading and investing carry
a high level of risk. Past performance does not
guarantee future results.
© 2014 TRADERS´ Magazine Limited, The Black
Church, St. Mary´s Place, Dublin 7, Ireland
5

COvErSTOry
www.tradersonline-mag.com 04.2014
David vs Goliath
how Small Traders Can Benefit
from the Big Players
What does a trader need to complete his trades in a
disciplined way Confidence! And how can he get that By
knowing what he is doing and by completely understanding
the situation in which he happens to be trading and by
executing the very trades that match this understanding.
Read here how a retail investor can mentally adjust to the
“trading game”, in which he is pitted as a David against
the major investor Goliaths. What are the strengths and
weaknesses of the Goliaths and what are those of trader
David What is his slingshot and how can he use it best
» Amateurs and Professionals
The situation in the trading arena is as follows (and some
traders – especially neophytes – are not quite aware of
it): Alongside a small number of major investors (equity
funds, pension funds, and so on) that can safely be called
professionals, there is a large number of so-called retail
investors. Of these, most have not progressed beyond
the “amateur” status yet. And unlike in sports where
Gernot Daum
Gernot Daum, who is a trained computer scientist,
has been a swing trader for 14 years, also
focusing in recent years on the intraday trading of
futures and stocks. He uses his very own Statistikfuchs
software (www.statistikfuchs.de), which
he also offers as a Freemium fi nancial service.
email@GernotDaum.de
professionals and amateurs compete against each other
in separate leagues, amateur traders are, of necessity,
pitted against the professionals from the very beginning.
Major investors have a number of advantages:
• Well-trained staff: Portfolio managers can be
expected to have received the best possible training
and to have plenty of work experience.
• Technology: The latest software, good analysts to
use it properly, fast computers, high-speed lines.
• Sufficient capacity to conduct fundamental analyses.
While good fundamental analyses comes at high
cost, large investors can afford to meet them.
• Good contacts: The large investors’ money managers
have contacts in all directions of the financial sector,
which gives them sources of information that retail
investors can only dream of.
• Size: They can move the market.
6

ADvErTOriAL
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coverstory
www.tradersonline-mag.com 04.2014
Opportunities for Retail Investors
On the face of it, things look hopeless for retail investors,
don’t they To be sure, it’s important to be aware of the
situation. But this awareness allows ways to be found
even for small investors to graduate from amateurs
to professionals in order to finally make money on the
markets.
Let’s start with the last of the five items listed
above: Is it really advantageous for investors to be
capable of moving the market Doesn’t this also entail
disadvantages for large investors It certainly does.
Here is a list of them:
• Inflow and outflow of capital. Customers of the
funds are the ones responsible for timing. And these
are often amateurs who purposely delegate their
personal investment decisions. So the inflow and
outflow of capital is likely to occur at more or less the
wrong time for funds.
• Equity funds need to engage in marketing. This may
lead to constraints on the selection of investments
caused by the need to show for marketing purposes
“that you are doing everything right.”
• Successful equity funds continue to grow. But one
particular fund may have been successful mainly
because of good technical analysis. Starting from a
certain size, however, this does not work anymore,
making it necessary to switch to more fundamental
approaches. But in this case that is no longer part of
the special skills set of the fund managers.
• Is having many contacts always a good thing The
financial crisis of 2009 was primarily caused by the
F1) Software AG Stock on 29th Jan 2013
Outline of a day trade after a down gap. Entry was made shortly before 10 am upon the breakout of prices
below the 32 euro level. Shortly before the close, the position was smoothed below 29 euros near the daily
lows.
fact that everybody owning certain stocks (now
often referred to as “toxic assets”) was doing the
same thing simply “because they all were” – and
along the way everybody seems to have lost sight of
the overall risk.
• And now to the item of size: Moving the market is not
advantageous since that causes your own activities
to be visible making it possible for other participants
in the trading game to adjust to that. At bottom, the
entire trend-following approach is based on this idea.
So, there is hope then. I will elaborate on the latter
aspect of “visibility” in this article, resulting in trade
setups for the retail investor. This is the basic idea of
charting: Looking at what the big players are doing,
following suit and “taking advantage” of their problems.
First off, an example: It’s about a stock that in 2013
quite clearly resulted in constraints on large investors
that retail investors were able to benefit from – by trend
following, of course.
Day Trader David
In Figure 1 you can see a Software AG intraday chart
of 29th Jan 2013 on a 5-minute basis. On this day, the
company released figures showing that while its own
targets had been achieved or even slightly exceeded,
market expectations must have been much higher since
the stock opened with a large downward gap .
The stock had gone up by more than 60 per cent from
July 2012 to January 2013, doing significantly better than
the overall market. There were certainly fundamental
reasons for this. Large investors with good fundamental
analyses recognised this in time and
benefited from it. But what was the
situation now Apparently, there
were quite a few large positions
with a short time horizon in the
market, otherwise there would not
immediately have been the large
gap, considering the numbers. How
does a day trader behave in such a
situation He is going to wait and
see how the situation will develop in
the first one or two hours. After all,
it will become apparent soon how
serious the imbalances of the major
investors really are. There will then
be high pressure on them to reduce
those positions, which may very
soon lead to further sell-offs.
Source: Author‘s own Statistikfuchs software
8

Coverstory
That’s exactly what happened here. There was
important support at 32 euros and the price was able to
hold above it for an hour. A stop sell below 32 or below
the daily low was now a reasonable trading plan. The
trade was triggered shortly before 10 am. There was no
reason to close the trade before the end of the trading
session. This is the time for those who only do day trading
to close their trades. Since it was possible for the stop to
2012), and finally there was a clear trend counter-signal
at point 5.
So there were many shorting opportunities for
retail investors. And all that at the expense of large
investors who had lost sight of the fundamental
perspective and had used technical analysis (which
was inappropriate for their position sizes) to push
each other ever higher.
be placed on the daily high just above 32.50, the trade had
a fantastic risk/reward ratio.
David and Two Goliaths
The following example is a more complicated chart
Swing Trader David
pattern that shows several things:
Change of time level: We are leaving the day trader and
move on to a swing trader who holds his trades for days
or even weeks. The Software AG stock will also have
• What particular signs are there for major investors in
a market
surfaced on his radar. He will be looking closely at the
intraday chart and will figure out his chances. After such
• What are the large investors’ lines of thought and
what traces do these leave in the chart
a day with virtually no resistance to the gap, this trader
knows that many more sales can probably be expected
from large investors. In actual fact, things were going
slightly downhill for a few more days before the multiweek
• What are the consequences for the trading done by
David, our retail investor
While the chart pattern is for the “advanced” among
technical correction occurred which had been due.
After that, though, there were swing trading opportunities
on the short side. The chart in Figure 2 shows the
development in the months after the downward gap
shown in Figure 1.
A detailed discussion of trend-following tactics is
traders, it shows well in which direction you can develop
your thinking about the stock market if you’re looking to
understand the causes behind the patterns. This is all
about the “megaphone” continuation of a rectangular
pattern. The Bayer stock provided a fitting example of
this in early 2013 – see Figure 3.
not part of this article, which is why
the potential trading plans will only
be briefly outlined here: At point F2) Daily Chart of the Software AG Stock
1, a counter-cyclical entry into a
short trade was possible since a 50
per cent Fibonacci correction mark
was hit here. The following procyclical
entry opportunities for the
security-oriented trend trader have
been marked with point 2. At point
3a it was possible for the trade to be
strengthened. However, this partial
position would have been stopped
out at point 3b in any normal trade
management because of a false
signal. Point 4 shows another (this
time successful) opportunity to
strengthen the trade pro-cyclically.
From the end of June it was
possible to reduce the position
significantly since a reversal pattern
The chart shows several swing trading plans. At point 1, the 50 per cent Fibonacci retracement was twice hit
almost perfectly. Points 2, 3, and 4 show suitable spots to increase the short position. At point 3b, there would
have been a false trade of the short position that was opened at point 3a. At point 5, there was finally a clear
had formed above the “great”
counter-signal for the downward trend.
Source: www.tradesignalonline.com
support at 22 euros (low of July
9

coverstory
www.tradersonline-mag.com 04.2014
In December 2012 and January 2013, a rather narrow
rectangle had formed within the limits of 71 to 73.50
euros. In such a case, the probability of the following
scenario occurring is quite high: A strong buyer (Goliath 1)
bought at 71, a strong seller (Goliath 2) sold at 73.50
and the rest of the market participants provided the
fluctuation between these two price levels. “Strong” here
means: There is an interest on the part of a single market
participant (a major investor) in building up or reducing a
large position in the stock.
Then, on 25th January, there was a large upward bar
with a closing price above 76 euros (first marking). This
was a strong buy signal since the seller who had sold at
73.50 euros had apparently sold his holdings while the
strong buyer was still in the market. This is a suitable
signal for our trader David to open a long position. But
there are also false signals, and this was one of them.
Within just a few days the price dropped again below
73.50 euros.
Just on the strength of the many new buyers being
attracted by such a signal, this should actually not have
happened. So the seller was still there after all and
managed to get rid of some of his stocks at much higher
prices. So far, so bad for the breakout trader. False signals
are part and parcel of any trading system. That’s why you
need a stop management system that in case of loss stops
out a position again after a short period of time (second
marking). At this point, all you can do is just regret the
F3) Megaphone Pattern at Bayer in Early 2013
This pattern shows a “duel” between two major investors each of whom “pulled out” their sell orders upwards
(point 1) and their buy orders downwards (point 3) respectively, as described in the text.
loss. Or else try out an “advanced” way of looking at the
situation. And this is exactly where it gets exciting!
Pulling out as a Tactic to Increase the Average Selling Price
The seller had pulled out. He had suspended his sales
for a short time. Presumably, he had also been inspired
by some good news on the stock that came out on 25th
January. The buy signal caused many new buyers to
enter the market and on the following days the seller
started selling again, no doubt getting rid of some stocks
at higher prices than before. This is precisely the task of
a fund manager who needs to reduce a large position:
driving the average selling price upwards. The pulling-out
tactic helps him do that. Upon “coming back in”, however,
he promptly needs to put his cards on the table.
But what is going through David’s mind now that he
has just lost money If he is an experienced trader, he is
thinking one step further. And says to himself, ”The buyer
will now be pulling out too, which is only logical.” And
so it is now possible to turn the long position lost into
a short-term short position and have a good risk/reward
ratio.
Pulling out as a Tactic to Lower the Average Buying Price
Why is it logical for the buyer to also “pull out” Because
the latter knows, of course, that the apparent breakout
– which proved to be a false signal – has caused many
traders to be now in new long positions and that those
traders do not all operate with a tight
stop. And because, given the strength
of selling pressure shown by the
seller “coming back in”, even many
traders who have had their positions
for some time will now be giving up.
So the buyer will remove his bid at
71 euros, waiting for lower prices.
The big red bar on 6th Feb 2013 (third
marking in Figure 3) is an impressive
showing of this mechanism. That was
also the right day to close the shortterm
short position at 70 euros or
just below. Gambling further on this
position would have been risky since
pulling out is a short term tactic.
The buyer needs to come back in
very soon to collect his shares amid
all the panic and triggering of stops.
However, this time the price even
fell quite a bit lower in the following
days, eventually resulting in the chart
Source: www.tradesignalonline.com
10

Coverstory
revealing the line-plotted “megaphone” pattern caused However, the chart situation was the consequence of
by the expansion of the previously existing rectangle. a publicly known takeover bid by Fresenius for Rhoen-
But back to our experienced trader David who Klinikum in April. In Figure 4, the timing of this is
made the breakout trade, accepted his loss and then highlighted by the massive upward gap. This then is not a
implemented the short trade. That trade has probably “duel” between two large investors. In such a case the risks
not only compensated for his loss, but on balance has outweigh the opportunities. It is possible, for example, for
even made him a small profit. This is what flexibility in the takeover not to go according to plan, which was the
trading is. You can develop it by trying to understand the case here causing massive price losses.
situation and motives of those involved in the market – Such situations should be ignored by David and
and by taking advantage of your own “invisibility” as limited to cases where the duel between two Goliaths is
opposed to the visibility of large investors.
visible on the chart but is not accompanied by any news
or at least none that is of any significance.
David’s Trading Work
What will be the consequences now for the daily trading Conclusion
done by our retail investor David Using the example Competing against the large investor “Goliath”, the retail
of the Software AG stock, trades were shown in two investor “David” has a fighting chance if he chooses to
time levels suggesting an important aspect in the base his trading style on Goliath’s weaknesses. The latter’s
organisation of trading: Since a retail investor’s time principal weakness is his visibility which is due to the size
is limited, a strict selection of stocks is necessary. And of his positions. This is where David’s slingshot has an
this means shares where something “extraordinary” opportunity to strike. The Software AG stock was used as
is happening as was the case here with the Software an example to explain how David may benefit from any
AG stock. It’s these shares that you will be looking at false positioning on the part the Goliaths in two different
more closely, and you will then be working out different time levels. The example of the Bayer stock shows how
trading plans accordingly.
flexible trading evolves from an understanding of the way
The formation of a very narrow rectangle is also major market participants operate. The counter-example
something extraordinary. David can set up a scanner for provided by the Rhoen-Klinikum stock demonstrates
such patterns and use these as the starting points of his that it is absolutely necessary to research all the relevant
trading plans. Breakout setups are his first choice in such news that is happening. «
a case. It’s also important for him to
be open to new ideas if things don’t
develop as planned. In the case of F4) A Word of Caution Concerning Rectangular Patterns after Takeover Bids
narrow rectangles, David should
also check and see whether there is
a takeover bid at that price. Prices
especially of minor stocks may then
not move at all and the stock may not
be worth bothering with. However,
major DAX stocks are rather unlikely
to experience this and are easy to
research in any case. In the Bayer
stock, there was no such takeover
bid at that point in time.
A Word of Caution
Concerning Special Situations
Finally, here is a counter-example. In
the Rhoen-Klinikum stock (Figure 4),
a narrow rectangle had formed in
May 2012 and there was a potential
breakout trade (see marking).
The trading risk is too high for takeover scenarios, as is illustrated by the example of Rhoen-Klinikum. News
that the deal is unlikely to be reached caused the stock to plummet at the end of June.
Source: www.tradesignalonline.com
11

insights – TRADERS´ Talk
www.tradersonline-mag.com 04.2014
Guy Simpkin
Head of Business Develop. BATS Chi-X Europe
TRADERS´ Talk
How MiFID Will Affect the Way Clearing Operates in the Future
With barely a month since the ink dried on the new MiFID II text, European market
participants are now working through the details as they seek to derive further
understanding of how European markets could look by the end of the decade. We sit
down with Guy Simpkin, Head of Business Development for BATS Chi-X Europe, to
discuss the latest developments in European clearing.
» TRADERS´: What can we expect from the final,
agreed draft of MiFID II
Simpkin: Many of the measures – like dark pool caps,
or commercially reasonable data costs – that are
contained in the final text made headlines in the many
months beforehand and have remained largely unaltered
since. But in a final twist, the dialogue – comprising the
European Commission, Council and Parliament – agreed
to open up access to derivatives clearing in a last minute
compromise. If implemented in a manner that allows
venues and CCPs to compete with each other it would
deliver long-term benefits to Europe’s capital markets.
12

insights – TRADERS´ Talk
Listed derivatives contracts are more
complicated structures than equities.
TRADERS´: What does this mean in practice How will it
affect key market players
Simpkin: This will foster greater competition between
exchange and clearing venues and should serve to
drive costs down whilst increasing innovation. It will
challenge the ‘vertical silos’ operated by exchanges
like Deutsche Boerse, LSEG, ICE and the CME in which
listed derivatives are traded and cleared at the same
venue. Instead, contracts will be fungible across
exchanges with a clearing structure that’s more akin to
the equities model in which customers choose where
they clear.
TRADERS´: Is this unprecedented
Simpkin: MiFID II is not unique among its peers in
seeking to push clearing houses to act for numerous
venues: In the US, the Dodd-Frank Act has mandated
much the same process for over-the-counter derivatives
whilst the Options Clearing Corporation in the US has
very successfully provided fungible clearing of US equity
options to over 20 competing venues for many years.
TRADERS´: Can you really compare listed equities and
listed derivatives Surely different products require
different regulation
Simpkin: Listed derivatives contracts are more
complicated structures than equities. In linking
clearing houses under an interoperable model the
new risk, which lies between the CCPs, needs to be
effectively measured and managed. The CCPs will
need to understand and in some cases accept for
example: each-others margin methodology, acceptable
collateral and rules; legal differences in the event of
a member default need to be understood and the
commercial terms have to be fair, reasonable and nondiscriminatory.
Whilst presenting more complexity
that interoperating in cash equity clearing, this model
was implemented safely and successfully between
Stockholms borsen’s (now Nasdaq OMX) CCP and LCH.
Clearnet Ltd.
With MiFID also introducing the clearing of OTC
derivatives, the need to offer customers the choice
of where they clear becomes ever more important.
Given the size of the OTC markets the CCPs are being
asked to take on considerable new and additional
counterparty, liquidity, operational and market risk. If
these risks are properly measured and managed then
the move to liberalise clearing could not only increase
price transparency and competition but could also help
provide the capacity and diversification of risk that the
market will need.
TRADERS´: What’s the time frame on these measures
coming into force
Simpkin: This is where the picture becomes more
unclear. There will be a delay of at least 2.5 years on
opening access to clearing – with a further, negotiable
2.5 years per member state – and this could render the
measure toothless for the time being. This is frustrating,
but until the ‘Level 2’ text of MiFID II has been agreed –
i.e. the technical detail – we shouldn’t consider it a ‘done
deal’. We’re still hopeful that regulators choose more
competition over protectionism, as it benefits all market
participants.
TRADERS´: Is BATS Chi-X interested
in the listed derivatives space
Simpkin: It remains to be seen how this regulation looks
in its final, detailed form. We regularly review asset
classes beyond equities to determine which market could
prove to be an interesting addition to our business. Right
now, we’re very focused on growing our market share
of the European equities market, and fostering a better
environment for ETFs trading. «
13

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Hedge Fund Series
What I Learned Working at a Hedge Fund – Part 2
In the world of investing, hedge funds have an interesting reputation. They are well-known for
producing vast riches and famous fund managers, but their actual operations are still cloaked in
secrecy. This mismatch gives rise to some obvious questions. How do they function How do
they make money How did their founders become so wealthy And, most importantly for traders
everywhere: Could you or me become one of those fabulously successful individuals, like George
Soros or Ray Dalio In this series of articles, hedge fund trader Bruce Bower will shed some light
on these issues and explain what individual traders can learn from all that.
» It’s About Making Money, Not Being Right
Often, you’ll hear people on CNBC or in the press talking
about their positions and their reasons for investing
or holding on to it. They can offer a million different
rationales, such as thinking that “the stock is cheap” or
that “it’s a great long-term story” or that it “a fabulous
growth stock”. Often times, they repeat those rationales
without paying attention to the performance of the stock
or how the markets are moving. It’s fine to have reasons
for investing – actually, you should! But there’s more to it
than that. You have to make money.
The problem comes when they wrap bad trading
practices around it. For instance, if a stock is cheap and
then falls, the same person will come on TV and say “well,
14

insights
it’s even cheaper now and we’re averaging down”. Let
me translate: The position is losing money but we’re so
stubborn that we’re going to keep throwing money at.
While the sound bite does a good job of ignoring the loss
and preventing him from looking bad, the reality is at odds.
He lost money. His investment thesis or his timing, or both,
were wrong. The position is a dog and it should be cut.
At a hedge fund, people only care about one thing:
performance. Make money, cut losers and you’ll be OK.
This is how it goes:
• If you “had the right idea but were too early”, it means
one thing: you lost money.
• If you “had a good stock pick but the overall market
doesn’t care about fundamentals”, you lost money.
• If you “took a ton of ‘heat’ on your short but the
market finally caught on”, it means you should have
been stopped out.
• If you “picked a good long-term growth story that the
market finally woke up to”, it means you made money.
Profits and losses (P&L) are what matters, not
the story that you attach to your actions. And if you’re
relying on crutches like “I was early” or “the market just
doesn’t recognise my thesis” to excuse your losses,
then you’re too busy defending your ego and not busy
enough generating performance and practicing proper
risk management.
Focus on what matters most. Have an investment
process and stick to it. Proper solid risk management.
And above all, don’t worry about being right or looking
smart in front of TV audiences. Focus on making money.
You Absolutely Need a Process
If you talk to a trader who is starting out, they are often
grasping for something, anything that works reliably.
They are probably looking to find a style that fits their
personality and is profitable. While that is expected when
people are just starting out, this is absolutely unacceptable
when you work in an institutional environment.
If you are starting a hedge fund, then you should
already know what your “edge” is. After a few years of
working in the market, then you know what you need to
do to make money consistently. Instead of searching for
something that works, you possess all the confidence of
knowing that you have an advantage. If anything, like most
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If you don’t have or can’t define a process,
then you have an uncertain edge.
famous investors, you can simplify your process into a few
simple points on a checklist. You have documented it.
If you can’t document the process, then it means one
thing – you are not sure what your edge is. Maybe you
haven’t thought hard enough about it to define it properly.
Maybe you haven’t tested adequately or looked enough
at your records to make a real judgment. Or maybe it’s
become intuitive and you’re not really sure. Nonetheless,
if you don’t have or can’t define a process, then you
have an uncertain edge. When market conditions are
favourable, then you may do okay; when they are against
you, then you don’t have anything clearly defined to fall
back on.
Now think about if you had a lot of money to manage.
More capital, from more people. These people have to
know what the game plan is and where they fit into it.
This is where having a process is absolutely key. Having
one guy sit in front of the Bloomberg and punting can
be a lot of fun. It can even be profitable. But it’s not a
business. Besides, what would those other people do
What are their responsibilities How do they support
the senior investment professional And what happens
if, God forbid, he goes on vacation – let alone gets hit
by a bus! What game plan is everyone else to going
follow then Having one guy doing everything by the seat
of his pants can potentially be profitable, but it is most
assuredly not a business. And people are only going to
invest in a real business.
Another way of looking at it is to compare with a real
business. Imagine something basic like a dry cleaner.
Bruce Bower
Bruce Bower manages a portfolio of emerging
market equities at a hedge fund. He has
a keen interest in markets, psychology
and self-development, having trained as a
hypnotherapist.
www.howoftrading.com
If you go to drop off clothes, things get taken care of
with responsibilities clearly defined and divided up. One
person receives your clothes, discusses any potential
problems and issues you a pick-up slip. A second
person in the back takes all of the clothes in the space
and cleans them. A third takes them out of the cleaning
machine, shrink wraps them and gets them ready for
pickup. A fourth person mans the desk when you pick
it up. At every stage, it’s pretty clear who is doing
what and the overall plan is for rendering service and
generating profits. Why should a fund be any different
It’s a business after all.
As an investor or trader, you also need to get your
process in order. You need to figure out what your edge is
and try to write it down. If you’re not sure how to verbalise
it, then just the act of writing it down a few times will
help you to get closer to the mark. Even if a checklist
sounds simplistic, you will nevertheless want to reduce it
a simple list of bullets points to understand what matters
most and what you need to be doing.
Just understanding this has helped me in evaluating
investments and preparing my own strategies. If I am
thinking about a new strategy or approach and can’t
reduce it to a few bullet points or define a process,
then it’s a no go. This has also helped me to work with
analysts. I can tell them how to come up with ideas, what
the criteria are, how they should think about investments
– and then what I do on top of their work to figure out if
it’s a portfolio position or not.
Conclusion
While the inner working of hedge funds can seem
shrouded in mystery, they turn out to be mundane.
Surprisingly for outsiders, there is a real emphasis on
the business aspects. While there is so much more
than just this, hopefully this list gives the best of what I
learned at a hedge fund that can help you to be a better
trader.
Next month, it’s all about career advice from a Hedge
Fund Pro. Stay tuned! «
16

insights
www.tradersonline-mag.com 04.2014
Be(a)ware of Diversification
A Good Hard Look at Spreading the Eggs – Part 2
Spreading and its more sophisticated synonym ‘diversification’ is classically being heralded by the established financial
industry as being the right, and for that matter the only, way to cope with risk. Nevertheless this is done with little or no
nuance. All too often the disadvantages are underestimated, if mentioned at all. In this article series we’ll put on our analytical
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
wondering what the better alternatives are.
» In the first article we decided to drag profits and total
return into the picture of diversification, next to its
common risk lowering incentive. This gave us a more
realistic view on diversification. While the advantages
on the risk side are clear to practically everyone,
from the expert to the layman, we shifted focus to the
disadvantages, mostly on the profit side. Diversification
will spread risk, but at the cost of averaging returns. Let’s
see if we can put this knowledge to our advantage while
putting it in practice as well.
Diversification or Concentration
Expectancy, as depicted in Figure 1, first of all, tells us that we
have far more control over the average size of our winners
and losers, than we have over their frequency, which is what
all forms of analysis are all about. So instead of focusing
on increasing the number of winners, whilst decreasing the
number of losers, we should actually just try to minimise
the size of losers and maximise the size of winners. So
expectancy is the mathematical embodiment of the old
trader’s adage of cutting losses and riding winners.
Secondly, and of specific interest to us here, is
the fact that this also implies that resources will have
to flow from losers to ever fewer winners, eventually
concentrating a portfolio rather than spreading it! For
though it’s quite clear to most how to cut losses, i.e.
by selling them early on, before the proverbial mistake
becomes a problem, the answer to the question on how
to maximise profits more often than not doesn’t get
taken beyond holding on to winners. But winners can
be added to as well, even accelerating the speed with
winners get us more profits and as a consequence take
a bigger piece of the portfolio pie.
Thirdly, the mathematics of geometrical growth tell
us that diversification decreases the average return for
sure. Take the example of having nine winners of one per
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iNSiGhTS
cent and one winner of 25 per cent. Average return in that
case would be a mere ((1 + 0.01 x 9 + 1.25) - 1) / 10 or 3.4 per
Dirk vandycke
cent. If that were not so or the effect was negligible that
Dirk Vandycke has been actively and independently
studying the markets since 1995 with a focus on
could only mean that the original returns must be very
technical analysis, market dynamics and behavioural
finance. He writes articles on a regular basis and
close to each other in which case diversification didn’t
develops software partly available at his co-owned
change a thing other than perhaps increasing transaction
website www.chartmill.com. He teaches software
development and statistics at a Belgian University.
costs and again lowering return.
dirk@monest.net
To look at this another way if diversification is
contradictory to expectancy, then concentration seems
to be the only valid option.
Of course all this raises the question if this doesn’t return of both portfolios was captured. So the interval
increase risk to unacceptable levels Let’s leave that the reference portfolio got monitored depended on
question for later and first turn to experimental, well the moment the last stock of the pruning portfolio was
practical if you want, proof of all this. To address this we stopped out. Hence a period ‘specific to the test’. From
made use of a Monte Carlo simulation.
the thousands of tests that were run, some portfolio’s
only lasted a few weeks while others took more than a
A Huge Simulation
year to get stopped out of their last holdings. So of course
The experiment I ran gave diversification the benefit by now you must be wondering what the results of this
of the doubt. We used a database of several tens of experiment were. Here’s what we got.
thousands of stocks (excluding low volume stocks, very
low priced stock, non-regulated markets, overly volatile Results
stocks and the like). Stocks were monitored over several Take a look at the average return in Figure 2. There you
decades, including a wide range of market conditions. have 13 grey lines depicting the equity curves of all
The Monte Carlo simulator ran (and in the end averaged) 13 holdings in the pruning portfolio. As you will notice,
several thousands of tests, each one going like this. some got drawn over a longer time interval than others,
First a portfolio was made of 13 randomly chosen depending on how long they stayed in the portfolio. The
stocks over a period specific to that test (I’ll explain this un-interrupted black line is the equity curve of the pruning
in a moment). Initial capital was equally divided between portfolio becoming more and more concentrated, while
all 13 stocks. The computer then ran each portfolio in the dashed black line shows the equity curve of the
two copies. One copy was kept as a reference which was homogenously diversified reference portfolio. Keep in
called the homogenous diversified portfolio. One might mind that these are averaged equity curves of the actual
refer to this as an non-weighted index. The other copy did
something very simple to get rid of
the diversification and move over to
the side of a concentrated portfolio F1) Expectancy Depicted as Scales
gradually.
This pruning-portfolio, as we
named it, put a 3 Average True
Range (ATR) trailing stop underneath
all positions. The trailing stop was
of course only allowed to increase,
as the general good practice ideas
of using stops dictate. As soon as a
position got stopped out, the cash
was distributed evenly over the
remaining holdings in the portfolio.
Eventually only one stock would
Being profi table in the long run with trading, and all investing for that matter, is about cutting losses and
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
mathematically. It’s not about being right or wrong but handling both profi ts and losses well.
the portfolio’s resources. As soon
Source: www.chartmill.com
as this last one got stopped out, net
19

insights
www.tradersonline-mag.com 04.2014
equity curves of thousands of tests run on samples of Well the truth is, that never before in history have we
portfolios starting out with 13 randomly chosen stocks. been more able or have we had more tools at our disposal
Systematically concentrating funds in the winners/ to fine-tune and isolate risk than at present. Going in
survivors, seems to be the better way. Which makes a depth through all the tools and techniques available
great case for us warning against mindless diversification, would take at least another article and probably a whole
i.e. without thinking things through first. Apart from book. So let me just give an example in the above case
providing a better end result on average, the return of of having, on margin, 180 per cent of one’s portfolio into
the pruning portfolio stays on top of the diversified one stock. First of all, no one in his right mind would start
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.
cent, including transaction costs. And that’s even after Such a position would only make its appearance after
realising that in this setup the pruning portfolio has to scaling in a stock that is appreciating. The scaling indeed
make a lot of artificial costs just to un-spread itself. In accelerates the profits from the appreciation.
reality a concentrated portfolio doesn’t have to start from So to begin with the position would already have to
a diversified one. Instead of having 13 round-trip costs show quite a nice profit as the current stock price will
as in the experiment, in reality, a concentrated portfolio probably hold quite a distance from the average entry price.
could be built up nicely in three to four entries and only This would provide a first margin of safety. Of course if we
one exit. That leaves room for up to four dips in the water don’t want to indulge in ‘mental accounting’, paper profits
(eight round-trips) and cutting the loss short, before need to be cherished as much as initial capital or margined
starting to generate higher round-trip transaction costs capital. A stop can take us already a long way but only so
than the homogenous diversified portfolio would leave far. A simple technique for coping with this is to extract
you with.
cash from the position by actually selling part or whole
of the position, freeing up most of the cash and securing
But, But …
most of the profits, while exchanging a very small part of it
Isn’t that carelessly dangerous After all, spreading did for call options (in the case of a former long position).
lower the average risk, right Can you even imagine So instead of holding, say, 1000 shares worth $32.37 a
holding 180 per cent of your portfolio (that also implies piece, one could sell the shares, cashing them in for $32,370
the use of margin already) in one position No stop will while buying ten long to medium-term call contracts for
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,
news from the previous day.
cutting the downside to a fraction of what it was. No more
than the option premium can be lost
form there on. It’s like having a stop at
F2) Homogenous Diversified Portfolio vs Concentrated Pruning
9.27 per cent without having to worry
about the whole thing gapping down.
Next to cash extraction you can also
use, what we call, volume extraction,
trying to buy shares for the same
amount at a lower price after selling
on a new base breakout. By buying
for an equal amount at a lower price,
one can buy more shares without
investing more capital in the position.
Of course this will take more time to
manage the portfolio.
So to take this home, instead of
using diversification, pretty much
the only thing available in earlier
An average portfolio of 13 randomly chosen stocks is compared to its concentrated counterpart where the
cash freed up by positions getting stopped out are divided amongst the survivors. The grey lines show the days to minimise risk, we should
average returns from each individual (averaged stock) up until the point where they got stopped out. The black start using new ways of achieving
lines give the total return of both alternative portfolios.
this, without keeping on paying the
Source: www.chartmill.com
negative consequences it brings. «
20

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insights
www.tradersonline-mag.com 04.2014
Trading Seasonalities
Part 9: Whole Foods Market and AUD/USD-Future Should Increase
The first trading idea for this month is organic foods retailer Whole Foods Market that has recently
defended its support. In addition we take a closer look at the currency-future AUD/USD for a second
time. Readers of TRADERS´ already earned 300 to 500 ticks profit with this trading idea in September
2013. This currency pair can also be traded on the spot-market or with leveraged certificates.
B1) Trading Idea Whole Foods Market (WFM)
A holding period from 1st April to 7th May mostly paid off in the past with a price increase. The ideal
situation would be price exceeding the downward trendline at entry (green line).
Source: www.lp-software.de
» Trading Idea Whole Foods Market
Organic products are becoming more
and more popular. Therefore our
first trading idea for this month is
Whole Foods Market (WFM) which is
included in the NASDAQ100. In 1980
four businessmen established the
first US-supermarket for organic food
and over the years it has become the
world’s biggest organic supermarket
chain. With its headquarters in Austin,
Texas the company has about 76,000
employees in North America. This
year Whole Foods Market expects an
increase in sales of eleven per cent.
That also could boost the corporation
earnings, which were about ten per
cent higher in the first quarter than
22

insights
last year. Strategic new openings of stores should increase Signal Update
growth – the company plans to raise the current number of
You will find an article regarding these two trading ideas on
373 stores to 1000 in the next few years.
1st and 3rd April on www.tradersonline-mag.com. We will
After the publication of the previously mentioned
work on the entry points and the profit targets.
quarterly earnings at the beginning of this year, the
stock opened with a down-gap which had already
closed by the beginning of February. The stock is a buy
at this level. You can expect that the support, which The years 2011 and 2012 were characterised by
is shown by the blue line in Figure 1 will be defended a consolidation in the Australian dollar and by a
successfully.
correction in the year 2013. The new government of
The stock can be bought immediately on the first Australia may be the reason why the year 2014 could be
trading day of April. You could have achieved an average the year of strength for the Australian dollar. The prime
profit of eight per cent in the past 15 years if you would minister of Australia has stopped all initiatives for the
have held the stock until the 7th of May. The hit rate was introduction of renewable energies and the limitation of
93 per cent. Only in one year, 2011, there was a loss of two CO 2 -emissions. This might be not very environmentally
dollars, which is seven per cent. The stop-loss should be correct, but it will make the Australian economy more
placed six per cent below the entry or below the support competitive in the short term. The reasons are lower
line, currently at 51 USD.
production and energy costs.
Often the break in a trend attracts new buyers. The all Also the current strength of gold could lead to an
time high of about 66 USD would be the possible target. increase. The Australian dollar shows a correlation with
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
stock reaches this target if you enter at 52 USD.
100-per-cent synchronism in the past year.
Both introduced ideas can be traded with options as
Trading Idea AUD/USD Future
well. The duration of bought calls should be about two
The AUD/USD-future June 2013 should be traded long again weeks longer than the recommended seasonal duration.
– as we already did in September 2013. The ideal entry date If you are the writer, the duration may be shorter if the
is the 3rd April with a holding period until the end of April. premium is OK. The basis of the written option should be
The future increased 80 per cent of the time in the past clearly below the stop-loss. «
15 years. The result was an average
profit of 159 ticks or 1590 USD based
on a value of 1000 USD per contract B2) Trading Idea AUD/USD Future
– sometimes even more. The margin
for one futures-contract is 2013 USD.
A stop-loss could be placed 110 ticks
below entry.
The green line in Figure 2
shows the time of the entry with a
holding period to the red bar. The
downtrend started in April 2013 at
1.04 is still valid; the resistance at
0.904 was tested two times since
the beginning of the year and it is
still intact. It would be ideal if the
price of the future would be above
the blue downtrend line at the time
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
profit of more than 150 Ticks.
on technical analysis would be up
Source: www.lp-software.de
to 0.96.
23

iNSiGhTS – NEWS
www.tradersonline-mag.com 04.2014
carl icahn MaKes $600M in one DaY
Carl Icahn, the billionaire investor, made more than
$600m on Tuesday 18 February, after Dublin-based
pharmaceuticals giant Actavis agreed to buy rival Forest
Laboratories for $25bn. Mr Icahn, who is Forest’s second
largest shareholder with an 11.3 per cent stake in the
company, has spent years agitating the business to make a
deal, and appears finally to have got his way after securing
a seat on its board last summer.
Source: www.telegraph.co.uk
another Big win For lMax exchange
LMAX Exchange has been named “Best FX Trading Venue – ECN/MTF” and “Best
Infrastructure/Technology Initiative by Exchange/ATS” at this year’s Wall Street Letter (WSL)
Institutional Trading Awards. LMAX Exchange has been recognised alongside leading global
exchanges and financial services firms, including NASDAQ OMV, ICE NYSE Euronext, BNP
Paribas Securities. The award was presented at a gathering of FX industry leaders at 583 Park
Avenue in New York City on 25 February, and received by LMAX Exchange’s Chief Executive Officer
David Mercer.
The WSL Institutional Trading Awards honour excellence among providers to the institutional trading
industry, awarding exchanges, brokerages and financial technology companies for achievements
and innovation throughout the previous year.
Source: www.lmax.com
Fxstreet to teaM uP with M-Finance
to sell its Forex news
FXStreet has signed an agreement of partnership with m-finance,
the most experienced and dominant entrepreneur in Hong Kong
and Greater China for forex/bullion trading platforms and financial
information services. They will team up to sell FXStreet’s News in Simplified and Traditional Chinese and English to
m-finance’s network of brokers through their platform, applications and clients websites. This collaboration will open new
markets for FXStreet through m-finance’s extended network in Asia, in particular in China, while m-finance will enrich
its offer by adding this Forex news feed, a product already well implemented in the Western world but not in the East.
The Forex News feed of FXStreet is made of around 160 pieces of news per day in English and around 100 in Chinese. It
gives a technical radiography of the most traded currency pairs and the market’s latest movements, together with experts’
analysis and bank’s forecasts for making trading decisions. The product also includes stocks and commodities news as
well as some of the most important economic indicators, as Central Banks interest rate decisions or Non-Farm Payrolls for
example. FXStreet’s news are provided with technical studies and charts that can be integrated in any information website
or broker’s currencies platform and enterprise wide.
Source: www.fxstreet.com
24

Insights – news
Forex Person of the Year 2013
Laith Marmarchi and Nicole Elliott have been
named “Forex Person of the Year 2013” by
FXStreet, the independent Forex information
website, for their service “ForexTrading.TV”.
ForexTradingTV offers a real-time, technical and
educational service: both new and experienced
traders can go to get a clutter free view on the
markets without the over analysis and noise of
today’s trading environment.
FXStreet decided to give Laith Marmarchi and
Nicole Elliott
Laith Marmarchi
Nicole Elliott the title because they were able to convert their small startup business into a trusted service and collaborative
platform of very high value and quality and managed to gain the trust of both traders and brokers, in only one year.
Source: www.fxstreet.com
$316 Million in Bitcoin Presumably Stolen
$316 million in bitcoins, or six per cent of the outstanding
amount of the digital currency, seem to have been stolen.
The Tokyo based Mt.Gox, the once largest trading place
for the currency is insolvent as announced by Managing
Director Mark Karpeles in a recent press conference. In
seeking bankruptcy protection he blamed ‘weaknesses in
the computer system’ for allowing hackers to plunder the
company. Some 127,000 Bitcoin devotees are reported to
have lost their investment according to Coindesk, a bitcoin
website that aggregates bitcoin news and rates, as quoted
from an internal document. As a result, Mt.Gox has incurred
744,408 in bitcoin debt compared to $350 million before the
crisis broke out. As recently as January, bitcoin had climbed
from $575 to $939. Whether Mt.Gox was a victim of hackers
or unrecognized money was somehow stolen from the
company’s computers or if the company simply swiped its
customer’s money is yet to be determined.
Source: www.sueddeutsche.de
Just A Single Day of
Trading Losses in 1238 Days
Daily Adjusted Net Trading Income Distribution (in Millions)
In its IPO prospectus, High Frequency Trading
firm Virtu reveals it had just one losing trading
day in 1238 days of trading. HFT has become
increasingly controversial in recent years and this
new IPO shines light on an otherwise secretive
(and computerised) industry. Virtu is what’s called
a market maker. It doesn’t hold onto securities for
very long, but instead derives profit from bid/ask
spreads.
Virtu is a New-York based firm famous for trying
(and failing) to buy Knight Capital Group in 2012.
But things are definitely going well for the HFT
firm. Its founder and chief executive officer recently
purchased the Florida Panthers hockey team.
Source: www.businessinsider.com
The chart below illustrates the daily Adjusted Net Trading Income from January 1, 2009
through December 31, 2013. As a result of Virtu’s real-time risk management strategy and
technology, they had only one losing trading day during the period depicted, a total of 1238
trading days.
Source: www.businessinsider.com
25

insights – news
www.tradersonline-mag.com 04.2014
The Trading Show Chicago
The Trading Show Chicago 2014 is the only place you will
hear from leading CTOs, CEOs and experts in proprietary
trading, quant investing and exchange technology. Whether
you’re focused on new quantitative models, adopting
low latency systems or managing risk, The Trading Show
Chicago provides unparalleled opportunities to network
and ultimately do business with top trading firms, quant
funds, international exchanges, end investors, banks,
brokers and technology providers.
North America’s leading traders, funds and exchanges will
be there to:
• Discover what machine learning can predict about
future market behaviour
• Learn how to quantify unstructured news sources and
social media
• Understand how to integrate exchange technology
• Decipher the Dodd Frank and SEF regulatory landscape
• Compare the pros and cons for building or buying
your infrastructure
• Master quantitative portfolio construction and
forecasting
• Realise how volatility can become your strongest asset
• Discuss why it is time for a new non-profit wiki
exchange
• Identify the long-term future of the derivatives market
There are two different options for attending The Trading
Show Chicago – as a visitor, or as a VIP conference
attendee.
• Visitors get access to the on-floor seminars and
international exhibition free of charge.
Register as a visitor here: http://bit.ly/1iEu2p5
• VIP conference attendees get access to on-floor
seminars, the international exhibition, the VIP
conference sessions, networking, an Old Wall Street
themed cocktail party, and lunch and refreshments.
Register as a VIP attendee here: http://bit.ly/1iEu2p5
Additional discounts are available for groups of three or
more – for more information please contact Felipe Lima at
Felipe.Lima@Terrapinn.com or +1 212 379 6320
Download the brochure at http://bit.ly/1oPvoe3
Light beams mounted on the tops of buildings
could soon carry messages about rising and falling prices
A form of rapid-fire communication previously only available to the military is now
coming to the financial world. Lasers perched atop high-rise buildings will next month
allow the New York Stock Exchange’s data centre in Mahwah, NJ to communicate with
NASDAQ‘s data center in Carteret, NJ. Though these two data centers are only 35 miles
apart, the light will allow them to communicate with unprecedented speed. It is the
culmination of a quest for instantaneous trading that first utilised custom-built fiber-optic
cables, then microwave and later millimetre-wave transmissions, and the speed at which
traders’ orders are transmitted is rapidly approaching the speed of light. The technology
is expected to spread to the Stock Exchange’s trading clients as well, which are currently
offered a system that uses microwaves.
Source: www.psfk.com
26

iNSiGhTS – NEWS
news FroM Bats
BATS Global Markets (BATS) and Equinix,Inc., the global
interconnection and data centre company, announced
that BATS has selected Equinix as its primary data center
provider for all of the BATS exchange platforms, including
the Direct Edge Exchanges – EDGA and EDGX. The Direct
Edge Exchanges will remain at their current location at
Equinix’s NY4 data center in Secaucus, NJ until January
2015 when they will migrate to BATS’ technology in
Equinix’s NY5 data center. In the second quarter of 2015,
the BATS BZX and BYX Exchanges, and BATS Options,
will move to NY5 from their current location of NJ2 in
Weehawken, NJ.
In other news, BATS Chi-X Europe appointed Jill Griebenow
as chief financial officer. Ms. Griebenow joined from parent
company BATS Global Markets and is responsible for all
financial control and human resource functions at BATS
Chi-X Europe, including financial planning and reporting.
Jill is based in London, reporting directly to CEO Mark
Hemsley.
Source: www.bats.com
FxcM increases
FXCM reported revenues of $113.3 million for the final
quarter of 2013 (October through December). Compared
to the same period the previous year, this represents a five
per cent increase. For the full year, revenues rose 17 per
cent at $489.6 million compared to $417.3 million in 2012.
Source: www.fxcm.com
soros toPs historical heDge FunD PerForMers
The annual study from fund-of-funds firm LCH Investments found that the
manager, who closed his firm to outside investment a few years ago,
bests most of his peers over the long term. George Soros’ Quantum
Endowment Fund made $5.5 billion in profits last year, net of fees. This
suggests that Quantum Endowment gained between 22 and 23 per cent
in 2013. As a result, Quantum, managed by New York-based Soros Fund
Management, has now generated a total of $39.6 billion in net profits since
its 1973 inception, more than any other hedge fund, according to an annual
study performed by LCH Investments NV, a London-based fund-of-funds
firm. Soros’ strong performance in 2013 enabled his fund to move back into
first place as the most successful hedge fund of all time, by LCH Investments’
calculation. That’s slightly ahead of Raymond Dalio’s Bridgewater Pure Alpha,
which has made a total of $39.2 billion since its inception in 1975. Last year
it generated “just” $2.2 billion in net gains, according to LCH Investments.
The absolute dollar figures cited in the study are astounding and underscore
how much money has been created by the most successful hedge fund managers.
Altogether, hedge fund managers made $192 billion after fees for all investors in 2013, LCH
Investments calculated. The top 20 managers alone generated $55.4 billion in net gains. Since their inception, all hedge
funds have generated $847 billion in net gains, the firm found. Over the past five years, hedge funds have made an
estimated $709 billion, net of fees, for investors.
The current top 20 managers alone made $199 billion over the same time period. These gains more than made up for the
$28 billion loss suffered by the 20 managers during the 2008 financial crisis, according to LCH.
Source: www.institutionalinvestorsalpha.com, by Stephen Taub
27

TOOLS www.tradersonline-mag.com 04.2014
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
New Products
News from the World of Technology
» U.S. News & World Report, a publisher of consumer
advice and rankings, has released its U.S. News Advisor
Finder, a directory of 320,000 active investment advisors
and 10,000 advisory firms. The directory will offer
information about financial professionals and advisory
firms to consumers seeking advisors. The directory
features online tools that enable consumers to search
based on location, investment and planning needs,
advisor experience and other criteria. Information in the
Advisor Finder is provided by Financial Media Group and
is drawn from state and federal regulatory filings, which
are submitted to state regulators, the Financial Industry
Regulatory Authority (FINRA) and the Securities and
Exchange Commission (SEC). According to the publisher,
information from these filings will be updated quarterly
in the Advisor Finder. You can find more information on
http://money.usnews.com/financial-advisors.
U.S. News Advisor Finder
» Trading Technologies International (TT) announced
its X_TRADER software is now installed at more than 50
universities worldwide. Through its university program,
TT works with undergraduate and graduate educators
in business, financial engineering, math and computer
science programs to help prepare students for careers
in finance and the futures markets. Universities can
incorporate TT’s X_TRADER software and APIs, which
are donated to schools by TT, into coursework and oncampus
trading labs, allowing students to learn about and
experience trading and risk management in a simulated
environment using tools and market data similar to what
professionals use. Some of the schools in the program
include The Johns Hopkins University, Northwestern
University, Purdue University, Tulane University,
University of Chicago, University of Colorado Denver,
University of Illinois, and University of Virginia. Please visit
www.tradingtechnologies.com for more information.
» VectorVest announced the release of VectorVest
AutoTimer and Portfolio Genius, proprietary tools
designed to help the investor minimise time spent
on portfolio management and help eliminate trading
decisions that may be driven by emotion and deviate
from an investor’s trading plan. VectorVest AutoTimer
incorporates market timing signals into both historical
and real-time trading plans for investors to determine
separate portfolio-management rules based on market
direction, and then automatically implements these rules
without manual intervention. It can be used in historical
mode to create, test and refine automated trading
systems that include market timing, stock selection, stop
criteria and other portfolio-management options. It also
can be used in real time to implement an automated
trading plan through VectorVest Portfolio Genius, a
paper-trading tool that, when used with AutoTimer, allows
investors to set up their trading plans with long, short, or
neutral trading templates. For more details, please visit
www.vectorvest.com/AutoTimerRT.
» The CBOE Futures Exchange (CFE) announced the
launch of trading of futures with weekly expirations on
28

TOOLS
the new CBOE Short Term Volatility Index (VXSTSM). Like
CBOE’s CBOE Volatility Index (VIX Index), the Short Term
VIX Index (VXST Index) uses S&P 500 Index options in
its calculations. The VIX Index uses SPX monthly options
to measure expectations of 30-day volatility, while the
VXST Index uses SPX options that expire every week
(including SPX Weeklys) to gauge expectations of nineday
volatility. The VXST Index’s shorter time horizon
makes it responsive to short-term volatility triggered by
market events such as corporate earnings, government
reports, and Fed announcements. The 30-day VIX Index
and the nine-day VXST Index are highly correlated, but
the VXST Index is generally more volatile than the VIX
Index, according to the company. It stated it expects
professional traders could develop strategies to take
advantage of price differences between VIX and VXST
products. Find out more on www.cboe.com.
» Worden Brothers has released version 12.4 of its TC2000
online market analysis program, which features charting,
streaming data and analysis tools. This latest version offers
increased speeds, more flexible layouts, quicker access
to the daily notes and reports, Morningstar rankings,
WatchList additional features, real-time streaming
indicators, more data to plot simultaneously, trendline
alerts, new drawing boards and drawing tools and more.
Additional details can be found at www.worden.com.
» Thomson Reuters announced the roll out of a number
of new features for the buy-side on its flagship financial
markets desktop, Thomson Reuters Eikon. As part of
the ongoing evolution of Eikon, these enhancements
will provide portfolio managers, analysts, strategists
and economists with access to powerful analytics and
workflow. The new Microsoft Office add-in feature for
Eikon enables portfolio managers and analysts to leverage
the breadth and depth of Thomson Reuters content in
applications such as Excel and PowerPoint to produce
insightful models and superior presentations. This feature
includes Excel tools to facilitate deep analysis of premium
content sets including Datastream, fundamentals,
StarMine analytics, smart estimates and key performance
indicators. The addition of StarMine models to Eikon
leverages new visualisation technology to provide buyside
customers with greater insight to uncover actionable
opportunities and better understand credit risk.
Eikon portfolio analytics provides investment
professionals with an intuitive monitor of intra-day
performance across any number of portfolios and
benchmarks, allowing them to identify primary drivers of
absolute and relative performance at the sector/security
level. Eikon briefcase is another powerful workflow
capability that allows users to collect, manage and access
key content and documents via their mobile solution and
synchronise this with the desktop, allowing them to work
remotely from anywhere at any time.
Instead of a fixed home screen, Eikon now manifests
itself as a floating command bar at the top of a customer’s
screen, staying visible whatever application the customer
is currently using and enabling quick access to Eikon’s data
and tools. The floating command bar works seamlessly
with the Eikon plug-in for Google Chrome which installs
into the toolbar of Google Chrome’s browser interface and
on-demand allows Eikon to analyse information that is
being viewed on the internet and provide key related data
for any entities listed on the page. For more information,
please visit www.thomsonreuters.com.
Worden Brothers
29

TOOLS www.tradersonline-mag.com 04.2014
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
iview Charts
See the Markets through the Eyes of a Pro Trader
For the everyday trader there are 1000’s of trading systems, signal services and educational content out there to choose from.
Trading is a complex art form and there are many things to consider when making your market calls. MT4 (Meta Trader 4) is a
powerful charting tool that a lot traders choose to use for their charting and technical analysis. There are many systems you
can overlay in order to give you better trade signals and iView charts is one of them.
F1) Trade view » iView Charts is currently available
in two versions, the ‘starter’ and
‘professional’ package. This is a
brand new product in the market
and V1.0 is the first release openly
available to the public for purchase.
Developed by Steve Ruffley who
is the Chief Market Strategist
at Intertrader.com and CEO of
Tradermaker.com he has been
using iView for over 18 months to
make market calls via Twitter and
use for his market commentary
which has been featured on many
major sites like Reuters, Bloomberg
and the FT.
The ‘trade view’ window allows the user to see all the products MT4 has to offer. Set up with all the indicators
key to making trade calls. Pay particular attention to the iView bias and ‘hover’ over the arrow to see the trade
call idea and supporting video.
Source: iView Charts
The Packages
In the starter package you will
have full access to the ‘trade view’
window and all the MT4 indicators
and templates that will work on every
time frame on MT4. What makes the
30

tools
’trade view’ stand out is that it uses the technical analysis
self-fulfilling prophecy theory. This theory states that
if the majority of market participants are looking at an
indicator for a signal, the signal will then generally work
with the majority. iView is set to tell the user what other
market participants are basing their trade calls on. All the
key indicators are displayed such as Delta volume, DeM,
RSI and Delta ATR are all set so that the user can clearly
see if the markets are over bough or oversold. These are
all widely available and indicators that are typically used
by traders to identify both market trends and possible
reversals.
The ‘trade view’ window is run from the indicator
list in the MT4 menu. This will run on any time frame of
chart you attach it to, but hourly is recommended. This
means you can use iView on the higher monthly, weekly
and daily time frames for longer term trading decisions,
right down to the 1- and 5-minute chart for intraday
scalps. Once you have grasped this you can then use
the ‘iView bias’ see what Steve, the creator, thinks the
trade scenario for that product may be. There are seven
main trades that Steve has identified from how the bias
is calculated.
0-10 Imminent Bull reversal
10-30 Increasing Bear sentiment – leading to reversal
30-45 Low edge directional bias
45-55 Strong range breakout chance
55-70 Low edge directional bias
70-90 Increasing Bull sentiment – leading to reversal
90-100 Imminent Bear reversal
Once you have decided on the product and iView bias
you think fits in with your view, you
simply double click on that product to
bring up the chart with all the attached
indicators ready to use. This means
that you can set iView running on any
time frame to give you information
and trade calls on every product that
your MT4 broker version supports.
For the ‘professional’ package
you will also get access to real
time trade calls via the Expert tab
in the Trade view window, button
‘analysis’, in which Steve and other
noted professional traders and
analysts are actually trading.
F3) Expert
F2) Sample Chart
This is a sample of the chart you will see when you double click on a product
in the ‘Trade view’ window. The template will show all the indicators, support
and resistance, Fibonacci retracement lines you need to make your trading
judgements.
Source: iView Charts
Pricing
What’s included:
• Three custom MT4 indicators
• Ten custom time frame templates
• Free access to Steve’s webinars
The ‘Expert’ window is where you will see all the trades made by experts traders like Steve Ruffley and other
well-known traders and analysts.
Source: iView Charts
31

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www.tradersonline-mag.com 04.2014
iView charts is designed to be both a mentor
and a system that compliments your own trading style.
• 100’s of archived trade examples and educational
webinars
Starter package: $79 per month / $699 per year
Professional package: £129 per month / $999 per year
Complete package: – Professional package & one to one’s
with Steve $199 per month / $1999 per year
The Technical Analysis behind the Indicators
All Time Frame Trading
Once of the most popular questions Steve was asked
on his webinars is what time frame does he use to
trade His answer as always was that ‘I use all of
them’. He states, “when trading the markets you have
to understand that the participants, will be made up
of all type of traders and investors. You will have day
traders, hedge funds, banks, central banks, the list
goes on. All of these will have a different view and
also different tolerances to volatility and directional
moves.” The system takes calculations on monthly,
weekly and daily points of attraction. These are then
disabled throughout all the charts and templates
giving the user a support and resistance frame work
to use.
Fibonacci
What goes up must come down. In keeping to the selffulfilling
prophecy of technical analysis one of most
commonly used technical analysis tools is Fibonacci. It is
often misused and the key to working with Fibonacci is
using it with the correct market conditions.
iView uses the principle of overextended markets
and break out candles with other oscillators to make sure
when the Fibonacci levels are drawn onto the chart they
are of maximum value. The system clearly indicates the
50 per cent retracement level which is a key level when
trading with over extended moves.
Pivots
There are certain aspects of technical analysis that just
work in trading and pivot points are one. Most traders
will use pivots in some way, just as most traders will use
moving averages.
iView is set to give R1 R2 & S1 S2 (support and
resistance) based upon when a certain criteria of volume
and volatility are met. This indicator will work on any time
frame and I again recommend that you use a combination
of time frames to get your own view of the product you
trade and the entry levels you pick.
F4) Trade View in Action
Open as many products as you like to correlate your trading calls, and see how different products perform
against each other with the pre-set iView template.
Source: iView Charts
Conclusion
iView charts is designed to be both a
mentor and a system that compliments
your own trading style. Indicators
and templates are clean and easy to
interpret. With the ‘trade view’ window
your potential to analyse countless
markets may bring an unexpected
addition to the instruments you have
considered trading in the past.
The draw back may be that
you might not want to know how a
professional trader interprets what
he sees and also how he perceives
other trader’s view of the markets. The
fact of the matter is that trading in a
percentage game, so anything that
can give you that confidence to both
enter and remain in trades has to be
worth the investment. «
32

TOOLS www.tradersonline-mag.com 04.2014
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
inside the house of Money
Top hedge Fund Traders on Profiting in the Global Markets, revised and Updated
by Steven Drobny and Niall Ferguson
» This updated paperback edition of “Inside the House
of Money” lifts the veil on the typically opaque world
of hedge funds offering a rare glimpse at how today’s
highest paid money managers approach their craft. Now
with new commentary, author, Steve Drobny takes the
reader even further into the hedge fund industry. He
demystifies how these star traders make billions for their
well-heeled investors, revealing their theories, strategies
and approaches to markets.
About the Author
Steven Drobny is the founder and CEO of Drobny Global
Asset Management, an independent investment advisory,
asset management and consulting firm focused on global
macro and commodity hedge fund strategies. He is also
the author of “The Invisible Hands: Top Hedge Fund Traders
on Bubbles, Crashes, and Real Money” (Wiley). Mr Drobny
holds an MSc in finance and accounting from the London
School of Economics and Political Science and a BS/BA from
Bucknell University. Please visit www.drobnycapital.com for
more information on Drobny and this book.
Whereas some still maintain that rationality
permeates financial markets, Drobny captures a different
dimension, showing how the unquantifiable human
forces of emotion and intuition are also at play. Along
the way, readers get an inside look at firsthand trading
experiences through some of the major world financial
crises of the last few decades.
Written by respected industry expert Steven Drobny,
the book discusses how no market or instrument is out of
bounds for elite global macro hedge fund managers. In
addition, the book offers unique and illuminating insight
into the inaccessible and sometimes downright secretive
world of hedge fund investing. Highly accessible and filled
with in-depth expert opinion, this updated paperback
edition of “Inside the House of Money” is a must-read
for financial professionals and anyone else interested in
understanding how greed, fear, and the human forces of
emotion drive world markets.
Content
The foreword is written by famous Niall Ferguson. Then,
after the prefaces of former editions, there are 15 chapters
altogether.
34

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In the first chapter there is an introduction to Global
Macro Hedge Funds written by Joseph G. Nicholas of HFR
Group. The next chapter describes the history of Global
Macro Hedge Funds, followed by some prospects about
the future of Global Macro Hedge Funds. Then the book
describes several prominent trading styles in detail.
Chapter 4 discusses Family Offices and was written
by Jim Leitner of Falcon Management. Next are the
Prop Trader (Christian Siva-Jothy of SemperMacro),
the Treasurer (Dr. John Porter by Barclays Capital), the
Central Banker (Dr. Sushil Wadhwani by Wadhwani
Asset Management), the Dot-Commer (Peter Thiel by
Clarium Capital) and the Floor Trader (Yra Harris by
Praxis Trading).
Chapter 10 is about the Pioneer (Jim Rogers), chapter 11
describes the Commodity Specialist (Dwight Anderson by
Ospraie Management) and chapter 12 is about the Stock
Operator (Scott Bessent of Bessent Capital).
The final three chapters are about the Emerging
Market Specialist (Marko Dimitrijevic´ of Everest Capital),
the Fixed Income Specialists (David Gorton and Rob
Standing of London Diversified Fund Management) and
the Currency Specialist (anonymous author).
Bibliography
Title: Inside the House of Money
Subtitle: Top Hedge Fund Traders on Profiting in the
Global Markets, Revised and Updated
Author: Steven Drobny, Niall Ferguson
Pages: 368
Price: $12.99, Paperback; $8.99, E-Book
ISBN: 978-1-118-84328-4
Release: April 2014
Publisher: John Wiley & Sons, Inc.
Conclusion
Altogether, the book provides great insights in the thinking
of these great minds and their strategies (in parts). The
book is absolutely worth the read as Steve Drobny once
again shows his ability to find the best managers in the
industry, relate to them and conduct great interviews
readers can learn a lot from. «
35

TOOLS www.tradersonline-mag.com 04.2014
NEW PRODUCTS WEBREVIEW SOFTWAREREVIEW BOOKREVIEW APPREVIEW
Trade Tuner
Trading Journal App
A company without decent book keeping will not be successful in the long run. The
same goes for traders: If you do not have an overview of your current and closed
trades and – even more important – if you do not learn from past mistakes, you will not
grow as a trader and miss out on an essential tool for your trading success. All traders
who are looking for a simple, easy-to-use trading-journal-app should take a look at
Trade Tuner.
» Step 1: Trade Parameters
You can keep a trading journal in different ways:
handwritten or with simple software like Excel or an app.
We already introduced a professional solution for all
iPad-users in TRADERS’ 08/2013. In the following we test
a ‘liter’, but also less expensive solution. Let’s start.
After the download from the App store the starting
screen opens and explains all important functions. On the
left side you see the menu options and from there the
entry of the first trades is very easy. Figure 1 shows the
entry mask. Here you enter the following information for
your entries and exits:
• Name of the security
• Trading direction
• Number of stocks
36

tools
• Commission
• Entry and exit price
• Entry and exit date and time
• Market situation
• Mood of the trader
(15 pre-defined characteristics)
• Stop
B1) Entry Mask
Furthermore you can enter
individual notes in a separate box.
Therefore every trader can remember
the trades even after a longer period
of time and he can analyse them and
make improvements. Finally the user
can enter whether or not he followed
his trading plan. The entry of the
parameters is very quick on the iPad.
The entry of the trades is easy and can be adapted individually. You can comment every trade in the notes box.
Source: Trade Tuner
Step 2: Filtering and
Display of the Trades
After the trader entered the activities
he now uses the “Trader Viewer”. This screen fulfils same goes for the display of the trades. Therefore we’ll
two essential tasks. First, the trader can display a list test the visualisation of Trade Tuner in the next step. The
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
clearly structured and includes all essential information, trader sees his trading results as a bar chart.
profitable and losing trades are highlighted. If you want to The most important thing is the display of
have more details on a certain trade you only need to click the performance, which you can see in Figure 3.
on the trade and the total overview of all parameters is Unfortunately you can only see the result on a monthly
displayed on the right side of the screen. The risk/reward basis, which is ok for medium- and long-term analysis.
ratio is calculated automatically. You
can adjust the sorting of the trade
list individually and therefore every B2) Trade List in Detail
trader gets an overview of his own
preferences.
Especially if you have a high
number of trades it is very annoying
to search for a specific trade. The
developers recognised this problem
and have included an extensive
filter-option. If the user wants to
filter only winning trades or losing
trades or only trades that executed
in a certain mood it can be done with
a few clicks. Furthermore filtering
by certain periods of time or certain
markets is also possible.
Step 3: Visualisation
There is a saying that goes: A picture
is worth a thousand words. The
The overview of all entered trades is a good tool. You see a short overview or you can click on a specific trade
to see all parameters in detail.
Source: Trade Tuner
37

tools www.tradersonline-mag.com 04.2014
You can display the results of the trades
based on different criteria.
B3) Visualisation of the Trading Results
You can display the results of the trades based on different criteria; with that you have a good basis to
recognise mistakes and ways to improve your trading.
Source: Trade Tuner
A display of all single trades would
be helpful to identify anomalies.
However, the ability to “zoom” into a
month is lacking – which is too bad,
because a detailed inspection of a
certain month can be interesting if
one result differs heavily from the
average. You can also display the
trading direction (long/short), the
number of trades, the markets and
the risk and the number of stocks.
These graphs are also displayed on
a monthly basis.
The “position graphs” are also
interesting. These are charts that
display trading in different facets
which can then be analysed. You can
choose the following display options
for different time periods (twelve
months at maximum):
Solid Trading Journal with Room for Improvement
Account summaries will be available soon!
All in all there is room for improvement at Trade Tuner. It
would be very important to include the usual key figures
like hit rate, profit factor, maximum drawdown and so
on – they are not offered yet, but should be available
soon according to the developer. Trade Tuner fulfils the
requirement of a clearly structured documentation and
sorting for traders who do not want to use Excel or Access.
The Trade Tuner app costs 26.99 EUR and can be extended
by an unlimited number of trading journals for a small fee
– for example to separate a daytrading journal from a long
term trading journal.
• Position by time: monthly performance of one or
more underlyings
• Position by symbol: total result per stock
• Position by trade type: display of the number of
trades long and short
• Position by quantity: traded number of units per
underlying
• Position by price: average entry price per underlying
• Position by risk: average risk per underlying
• Position by market condition: display of the trading
performance per market type and underlying
• Position by mood: trading performance depending
on the trader’s mood
• Position by trading rules: following of the trading plan
per underlying
Based on these charts the trader can examine his trading
behaviour and change it if necessary. It is very useful that
you can always filter the trades by a specific underlying
and therefore you can see quickly which markets or which
stocks are traded successfully or unsuccessfully. «
38

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STrATEGiES
www.tradersonline-mag.com 04.2014
Multi-Dimensional Trading
The Ability to Take the Broader view
Strategy traders often struggle with ways to see beyond the two-dimensional analysis of time and price.
Although volume is often used to add a third dimension, there are other methods that employ analysis of
additional markets related to the one being traded. Even with such multi-market methods, there can be a
tendency to fall back on side-by-side time-price-volume analysis on the multiple data sets.
Stanley Dash
Stanley Dash holds the position of Vicepresident,
Applied Technical Analysis, at
TradeStation. His Wall Street career began in
1975 and includes time as an active fl oor trader
at one of the leading U.S. futures and options
exchanges.
SDash@TradeStation.com
» The strategy presented here is designed to
demonstrate a ‘multi-dimensional’ approach by
using two measures of the relationship between two
markets, DAX futures and the Euro (EUR/USD), to
generate trading signals in the DAX futures. That is,
the strategy becomes ‘multi-dimensional’ by analysing
two measurements of the relationship between two
40

strategies
markets, Relative Strength (RS) and correlation, to
find and filter trading signals.
Simplicity is considered a desirable trait in a trading
strategy and this style of analysis does carry the risk of
having rules that are overly complex. A guiding principle
in developing this idea was to fall on the side of simple
and straightforward in the calculations and signals by
restricting them to these two relationships.
F1) FDAX and EUR/USD 6-Minute Bars with Relative Strength
Relative Strength
A Relative Strength (RS) line, also known as a Relative
Strength ratio, is a simple technical tool used to compare
the price action in two markets. It is calculated by dividing
the price of one market by the price of the other. Although
this is often done with, say, a stock price divided by an
index, the RS line for this strategy is the result of dividing
the DAX by the EUR/USD. The numeric value of an RS
calculation is not important; rather, the direction and
momentum of the RS line let us know if the first market
is relatively stronger or weaker than the second, DAX and
EUR/USD respectively in this case.
It is not unusual to smooth an RS Line and that was
done here as well. Again in pursuit of simplicity, the RS
line was smoothed with a simple average. The length for
this average was set to ten bars. None of the parameters
in this strategy, including the length of this average, have
been optimised. Ten is not only a common default for a
calculation like this but, more importantly, it represents
one hour of trading on 6-minute bars. There is a discussion
of the bar interval later in this article.
The direction of the average of the RS line is
determined using a common momentum analysis of the
average. Specifically, the strategy determines if the 5-bar
momentum of the average is positive (for long entries) or
negative (for short entries).
During the test period, described more fully below,
this approach was marginally profitable. The results
were not strong enough to be convincing, yet some of the
metrics were of interest and called for more refinement.
It was encouraging that 39 per cent of the trades were
profitable, with about the same percentage of long- and
short-side trades being profitable. Of greatest concern,
however, was the very large number of trades that the
strategy generated, approximately 1690 or about seven
trades per day during a 1-year test.
Might it be possible to add another dimension to
the analysis by examining another relationship between
these two markets and use that to filter the trades The
goal would be to improve profitability, of course, while
reducing the number of trades.
This chart contains both DAX futures and EUR/USD. The darker bars indicate
the hours that correspond to cash DAX trading. The indicator is the 5-bar
momentum of the 10-bar average of the relative strength line.
Source: TradeStation
F2) FDAX with Relative Strength, Correlation
and Strategy Signals
EUR/USD data has been hidden. The correlation study is red when the
coefficient is less than -0.1 (not zero) to match the strategy rules. Any open
trades are closed at the end of the cash session. See the text for details on
the rules.
Source: TradeStation
Correlation
Technical analysts use correlation studies to gauge
how closely two markets track each other. Such studies
generate a correlation coefficient, a value between +1 and
-1. A correlation of +1 is a ‘perfect positive’ correlation
– the two markets are in lockstep. A correlation of -1 is
a ‘perfect negative’ correlation. Values near these, say,
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www.tradersonline-mag.com 04.2014
above +.7 and below -.7 are usually considered to be
strong correlations and may be useful when interpreting
market dynamics.
F3) Performance Summary for this Backtest
The backtest period was calendar 2013. Commissions were taken out at € 2.80
round-turn.
Source: TradeStation
It is important to note that a correlation coefficient is
non-directional; it tells us something about the directional
movement of the two markets relative to each other but
not about the past or potential future direction of absolute
prices.
For this strategy, a negative correlation is taken as a
confirmation that the RS line signal has greater validity.
That is, a buy (sell) signal is taken based on positive
(negative) momentum in the DAX / EUR/USD RS line only
when the DAX / EUR/USD correlation is negative. After
all, if the RS line is used to point out relative movement
then it is likely to be more reliable if the correlation study
also shows the potential for divergent movement on an
absolute basis.
Note that negative correlation is the additional
condition for both long and short entry signals.
The addition of this rule had a dramatic effect on
profitability while reducing the number of trades by 55
per cent to 752, or about three per day during the one-year
test period. The per cent of trades profitable improved
slightly to 43 per cent and maintained the characteristic
of having about the same per cent profitable for long and
short side trades.
Source: www.stockcharts.com
John Murphy explains
Relative Strength Ratio
„The relative strength ratio or line
is created by dividing the price
of one market by the price of another... Any two markets
can be compared with ratios… Absolute performance
measures the actual trend of a market. Relative performance
measures its performance against other markets…. Relative
performance usually changes direction before absolute
performance.“
Correlation Coefficient
“The correlation coefficient measures the strength of a
relationship between two markets… The most important
signals are given when the correlation line moves above or
below the zero line… The correlation coefficient indicator is
especially helpful in intermarket analysis…”
John Murphy, „Trading with Intermarket Analysis“
Other Considerations
In practice, several basic conditions had to be selected
before detailing the trading signals. First, when to trade
Given that the intention was to create a day-trading strategy,
trading was restricted to only the hours when the cash DAX
index is trading despite the fact that the futures (and EUR/
USD) trade for additional hours outside those times.
The first possible entry each day is at 9 am CET,
the open of the first bar that corresponds with the cash
index trading hours. The last entry signal may be taken
no later than the open of the 5 pm bar, allowing time for
price action to develop before the end-of-session exit.
In accord with a day-trading strategy the end-of-session
exit rule closes any open positions at the open of the 5.30
pm bar, corresponding to the last bar of the cash index
trading hours.
Second, the bar interval to be used had to be
determined. The hours noted above mean that, for our
purposes, the length of the trading day is 510 minutes.
Six-minute bars were used, which means the session
is divided into 85 bars. This allows for adequate data
sampling and an ample number of trading opportunities
each day. In addition, short-duration bars offer a
manageable risk/range per bar, particularly in light of the
size of the DAX contract.
42

strategies
It should also be noted that an unadjusted continuous
contract data series was used for the DAX futures to
minimise data anomalies caused by the back adjustments
that are typical for a continuous contract series.
Trading Rules
The strategy is built on just a few core calculations:
• Relative Strength line
• 10-bar average of the Relative Strength line
• 5-bar momentum of the 10-bar average of the Relative
Strength line
• 21-bar correlation coefficient
Long entry signals are based on conditions in both
Relative Strength and correlation.
• Momentum of average RS line greater than zero
(positive momentum)
• Correlation coefficient less than -0.1 (negative
correlation)
Selecting a Bar Interval
There is no ‘best’ intraday interval, and any selection
of an interval for research purposes is subject to change
as feedback is received from backtests. Consider these
selection criteria.
• Start with an interval that divides the day into enough
data samples (bars) to generate useful analysis and an
appropriate number of signals per day.
• Experiment with intervals that tend to reflect a useful
amount of price action for the strategy. Bars that contain
too much or too little range may either hide information
from the strategy or overwhelm it. A small amount of
historical research will reveal the range tendencies of
different bar intervals.
• When using time-based bars, consider how the interval
divides the day and that each bar be of the same length.
That is, try an interval that is a whole-number factor of
the length of the session.
Short entry signals are based on conditions in both
Relative Strength and correlation.
margin requirement and maximum drawdown seen
in the tests.
• Momentum of average RS line less than zero (negative
momentum)
• Correlation coefficient less than -0.1 (negative
correlation)
Entry signals are restricted to 9 am until 5 pm CET,
and any open positions are closed at 5.30 pm.
No protective stops, profit targets or exits other than
the end-of-session exit rule were used in the tests. Open
positions are closed and reversed when new signals are
generated during the day.
Additional test parameters:
• The period tested was the calendar year 2013. The
first trades were on 2 Jan 2013 and the last trades
were on 30 Dec 2013.
• Position size was one contract only, with no
pyramiding, add-ons or scaling.
• Commissions were deducted at the rate of € 2.80
round turn per contract, with no deduction for
slippage.
• Initial capital for backtest purposes was set to
€40,000. This was chosen to cover the approximate
Test Results and Observations
The Total Net Profit for this test was almost € 46,000.
While this is certainly an attractive number, the Profit
Factor was only 1.28 so the margin-of-error was narrow.
With 43 per cent of the trades profitable, 46 per cent
of the long trades and 41 per cent of the short trades,
there appears to be healthy bi-directional symmetry. It is
interesting to note that the ratio of average winning trade
to average losing trade is almost 1.7, a metric that goes
well with a 43 per cent win rate.
Nine of the twelve months were profitable, with the
lowest percentage of profitable trades in any month
coming in July (a losing month) at 35 per cent.
Profitable trades were held 1.6 times longer than
losing trades, despite the fact that no stop-loss orders
were used and end-of-session exits were mandatory.
This is an encouraging trait in itself but it may be
most important when considering the conservation
of psychological capital. It is rewarding to see holding
periods skewed toward the better trades.
Drawdowns and losing streaks experienced during
this test would generally be considered unacceptable.
The period from mid-June through late July 2013 was
the period of notable drawdown, approximately €
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www.tradersonline-mag.com 04.2014
F4) Equity Curve for This Backtest
18,000. Remember that there are
no trade management techniques
incorporated into this test. An
examination of the individual
signals and the trading history may
yield ways to smooth the equity
curve.
In addition to favourable net results, the slope is positive overall. The drawdown period mentioned in the
article, from mid-June through late July 2013, is clearly visible in the middle of the curve.
Strategy Snapshot
Strategy Name:
Strategy Type:
Time Horizon:
Entry:
Exit:
Average Number of
Signals:
Average Hit Rate/
Profit to Loss/Return
per Month etc.:
DAX/Euro Relative Strength
Trend-following for DAX futures, using Relative
Strength and correlation analysis between the DAX
futures and EUR/USD
Day-trading during cash DAX session, using
6-minute bars
Long entry: Momentum of average RS line greater
than 0 (positive momentum) and correlation
coefficient less than -0.1 (negative correlation)
Short entry: Momentum of average RS line less
than 0 (negative momentum) and correlation
coefficient less than -0.1 (negative correlation)
Positions reversed on new signals; all positions
closed at end of cash DAX session, open of 5.30
pm CET bar
3 per day during the test period
Percent Profitable 43%
Ratio Avg Win: Avg Loss 1.67
Profit Factor 1.28
Average monthly return 7.21%
(All results are from a backtest on calendar 2013 data.
More information on test conditions is in the article)
Conclusions
The DAX/Euro Relative Strength
strategy employs two measures
of the price relationship between
DAX futures and EUR/USD. Those
measures are common technical
analysis methods: Relative Strength
and correlation. This is an approach
that is not only multi-market, but
also multi-dimensional in that it
involves two distinct intermarket
calculations.
There are several aspects of
Source: TradeStation
this strategy that can and should be
researched further, and even some
missing elements that could be
incorporated into the strategy. However, one should be
careful not to be fall into the trap of overcomplicating the
machinery.
The most obvious missing element is a protective
stop. Even a simple fixed stop-loss protocol may be
helpful in preventing outsize losses on individual
trades.
As demonstrated here, the strategy has no exit rules.
Can any of the calculations used to determine entries, or
other technical analysis methods, be part of exit signals
Can entries be filtered any further For example,
entries require that correlation be less than -0.1 but
there is no consideration given to the direction in which
correlation is trending.
Finally, the strategy’s time-in-market approaches
100 per cent when considered against the trading hours
as defined above. It is possible that performance and
particularly the risk-adjusted performance measures
would improve by identifying periods when there should
be no positions. «
44

STrATEGiES
www.tradersonline-mag.com 04.2014
The rSi return Strategy
Simple Trading with an Established indicator
The Relative Strength Index (RSI) is one of the oldest indicators and many traders use it. The
following article shows how to use this classic indicator in a simple trading system. We’ll use the
hourly DAX-chart as the basis.
David Pieper
David Pieper is a CIIA and has been interested
in stock markets since the end of the Nineties.
He concentrates on trading with CFDs and is a
freelance author.
david.pieper@traders-mag.com
» The RSI was developed by Welles Wilder and is a
momentum-oscillator. Because of its construction
it moves in the area between zero and 100 and
delivers anti-cyclical signals if it reaches its extremes.
According to the classic interpretation, values above
70 are overbought and below 30 they are oversold
and therefore bullish. An analyst or a trader often
46

strategies
With a little observation and
a bit of experimentation you can
create a simple trading strategy.
assumes that the “blind“ following of the standard
parameters is not successful. The same goes with the
RSI – ultimately the market can stay in extremes for a
long time if it is a strong trend – and that can lead to
losses in trading.
Modification of the Standard Parameters
With a little observation and a bit of experimentation you
can easily create a simple trading strategy even with old
indicators. In our case the RSI is calculated based on 21
candles instead of 14. Therefore the oscillator becomes
slower and less volatile. Below 40 is oversold and the
overbought-level is reached at the RSI-value of 80. We
trade this system only long in the hourly chart. We hold a
position overnight if necessary.
Entry, Stop and Re-Entry
Signal-generating is very easy with
the RSI return strategy: If the RSI
is below 40 at the close of a 1-hour
candle a long-signal is generated.
But it is only activated if the RSI then
closes above this line on the 1-hour
basis. The results of past years
confirm that the return of the RSI –
hence the name “RSI Return“ – is a
wise approach compared to direct
entry upon reaching the extremes.
Therefore you avoid to “catching a
falling knife”.
There is no profit target with this
strategy. You close the long-position,
if the RSI climbs above 80 and then
drops below.
A trading strategy is only
complete if the stop-loss is defined
to limit the losses and to secure
the book profits. In this strategy
we use a 21-period ATR stop. At
the entry we place the stop at the
F1) DAX with RSI(21) in April 2013
double ATR (Average True Range). As soon as the
trade has earned the “initial risk“ the stop is place at
break-even and afterwards it is trailed at a distance of
the simple ATR.
Example 22nd April 2013
Figure 1 shows a good demonstration of the strategy. We
see the hourly chart of the DAX with the RSI(21). There
was a small losing trade on 19th April 2013 (point 1)
and on 22nd April 2013 there was a long-signal at 7484
points as the RSI dipped below 40 and then returned
above (point 2). The initial stop was placed at 7406 points
(green) therefore there was an initial risk of 78 points.
We can see that there was a slight drop at first. On the
following day a strong increase began and at 2 pm we
could place the stop at break-even. The next trading days
showed a strong upwards movement. The RSI finally
The RSI-Return strategy generated long-signals as soon as the RSI drops below 40 and returns above it again.
Every trade has a volatility stop (green) that is calculated based on the ATR and that is trailed as soon as the
trade runs into profit.
Source: www.tradesignalonline.com
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Strategy Snapshot
Strategy Name:
Strategy Type:
Time Frame:
Setup:
Entry:
Stop-Loss:
Trailing Stop:
Target:
Risk- and Money
Management:
Average Number of
Signals:
Average Hit Rate &
Profit to Loss:
RSI Return Strategy
Swing trading
Hourly chart
Entry after a downtrend or correction, RSI(21) is
the signal generator
Entry long as soon as the RSI(21) drops below
40 and afterwards closes above this level on the
1-hour close
Double ATR(21) as initial stop
As soon as the trade has earned its risk
the ATR(21) stop is placed
RSI reaches the upper extreme (80)
on the 1-hour close
0.5% to 1% per trade
2-6 per month
Hit rate about 45%, profit/loss about 2
trades (compared to the reaching of the upper extreme of
the RSI). There was a false signal at first on 9th October
2013 (point 1). After the position was stopped out, the
RSI reached the level of 40 again on 10th October (close
of the 1-hour-candle) and therefore a new long signal
was triggered (point 2). The entry was at 8588 points.
The initial stop was placed at 8532 points according to
the ATR. Therefore the risk was 56 points. The trade
developed nicely and we stayed in the position over the
weekend until it was stopped out on 17th October at
8775 points (point 3).
Re-Entry Rule
Considering the strong uptrend of the DAX the exit was
again too early – there is potential for optimisation.
Therefore we use a simple re-entry-rule: If a long trade
is stopped out according to the ATR-systematics, we
recommend re-entering with a stop-buy order as soon as
the last swing-high in the hourly chart is broken.
reached 80 on 6th May (point 2) and generated the exit
signal at 8128 points with its return below this level.
Example of 10th October 2013
Another example is the trade of October 2013 shown in
Figure 2 where you can see that the trailing stop causes
the exit of the long position – and this is the case in most
F2) DAX with RSI(21) in October 2013
Other Markets, Other Parameters
The RSI Return strategy has generated profitable results in
the DAX in the past. But there are only two to four signals
per month on average and therefore the signal-frequency
is relatively low. It should be analysed if other markets that
are not correlated with the DAX are suitable for this trading
strategy. If you backtest the EUR/USD or the bund-future
the results of the past few years are
fairly decent. But an adaption of the
RSI and the ATR-stop is necessary to
take the particular characteristics of
the market into account.
In October 2013, there was a false signal; the trade was stopped out. Soon afterwards there was a long signal
(point 2) which generated a nice profit in the following trading days.
Source: www.tradesignalonline.com
Conclusion
The RSI Return approach introduced
here is simple and successful and
can be traded in different markets.
With this strategy we try to use the
countertrend after a strong drop
in price that can last a few days. Of
course you can adapt this system
further to fit the individual beliefs
of the particular trader. For example
you can use a trend filter, another
entry rule for short positions or
you can determine the position size
dynamically. But it is important to
test every approach extensively
before trading with real money. «
48

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United kingdom

STrATEGiES
www.tradersonline-mag.com 04.2014
Buying Above and
Selling Below the “Snake Line”
A Strategy That Trades on the Cable
This article has nothing to do with natural history, let alone the world of snakes. The term
‘Snake Line,’ as coined by the author, is a line formed by two closely related Moving
Averages, which could be used to generate simple but proficient trading signals. This is
especially useful when used on the Cable (GBP/USD), since it tends to trend significantly
more than most majors. Here is one way of trading profitably with the Snake Line.
Azeez Mustapha
Azeez Mustapha is a trading professional,
an InstaForex offi cial analyst, a blogger at
ADVFN.com, and a freelance author for trading
magazines. He is working as a trading signals
provider at some websites. His numerous
articles are being posted on other websites like
www.ituglobalforex.blogspot.com.
azeez.mustapha@analytics.instaforex.com
» The Snake Line Strategy – a Trading Epiphany
According to one widely read magazine, researchers have
determined that the average adult makes 35,000 decisions
a day. With 86,400 seconds in a 24-hour day, that equates
to a decision being made almost every other second.
The determination to buy or sell is one of the numerous
decisions an intraday trader would make repeatedly in a
50

strategies
trading day. These trading decisions F1) The Cable Gains Stamina
can have impact on our financial
welfare: Therefore we want to be
sure that we are making rational
decisions as intraday traders.
We have always been fascinated
by the lines of the least resistance
and ways of pinpointing them early.
You probably know that there are no
guarantees in the markets, but there
are stages of breakthroughs in the
trading career of serious traders.
On January 17, 2014, the Cable experienced a new lease of energy and crossed the Snake Line to the upside.
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
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
was hit immediately and within 15 minutes the price shot upwards by over 90 pips.
assist traders to achieve their goals.
Source: www.metaquotes.com
Easy cum effective strategies are
what can help traders. Therefore,
there is always a need to stay with
a short-term market propensity with deftness. You see, pullbacks in the market, but it would affirm the ‘going
going with the lines of the least resistance is not only the up’ with further northwards push. The northward push
best trading method; it is also the most helpful. There is has some factors behind it. Some speculators are
no need to go back to methods that do not bring lasting afraid of missing the northward push, while some who
success, although going with the current biases would are already in the market would long for continuous
not be profitable if it is not done the right ways. The northward push. The northward push would stop only
Snake Line helps us trade the current biases more in an when too many speculators feel like the price has gone
easy way.
too far and could reverse. That is when a southward
push may begin.
Principles behind the Snake Line
The Cable (GBP/USD) is the favourable currency
The Snake Line consists of the EMAs 60 and 100. It acts trading instrument for this strategy since it tends to trend
as a support zone in an uptrend and a resistance zone in a significantly more than most popular majors (except the
downtrend. The Cable is above it in an uptrend and below EUR/JPY and the GBP/JPY). Its spread is comparatively
it in a downtrend. Likewise, in an uptrend, the EMA 60 low – a good bargain for intraday traders. The Cable
would be above the EMA 100. In a downtrend, the EMA 60 moves by over 90 pips during the American session. It
would be below the EMA 100. The
premise is that when a support zone
or a resistance zone is challenged F2) The Cable Loses Stamina
and violated by the price, the price
would move significantly after it has
crossed it to the other side. When the
price is within or around the Snake
Line, it shows an equilibrium phase
in the market, and no trades would
be taken.
When the price goes up after
some equilibrium zone, there would
be bullish engulfing pattern candles
or consistent bullish candles (at
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,
crossing the Snake Line to the downside and closing below it. A short order was immediately initiated.
breaks the Snake Line upwards,
Source: www.metaquotes.com
although there may be negligible
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www.tradersonline-mag.com 04.2014
moves by over 120 pips during the European session, and
it also moves by over 90 pips during the Asian session.
According to Babypips.com, here is the average
movement of the Cable in each trading day:
• Sunday 73 pips
• Monday 149 pips
• Tuesday 172 pips
• Wednesday 152 pips
• Thursday 169 pips
• Friday 179 pips
These figures are mean calculation, but it shows
that the Cable moves considerably during all important
trading sessions. Can you now see why the Cable is the
favourite instrument for this strategy
You can see Strategy Snapshot for more details of the
trading method. Always make sure that you stand to gain
at least, twice your stake, i.e. if the difference between
your stop and your entry price is 21 pips, then you would
need to set a target of 42 pips. This attractive risk control
method ensures that you are happy with only 50 per cent
accuracy. It also makes sure that you can recover your
losses (break-even) with only 33 per cent accuracy.
Two Winners and a Flop
We would like to point out that the space between the two
EMAs could be coated/painted with some translucent
colour to make the Snake Line looks more interesting.
Nevertheless, the space has been left untouched in the
figures below. All the trades in the examples below were
taken on the Cable. The consideration for spreads was
F3) A Flopped Order on the Cable
not reflected. The red vertical line shows where a trade
was initiated. Do not forget to close a trade that is more
than twelve hours old, no matter whether it is positive
or negative.
A winner : On January 17, 2014, the Cable, which
had been moving below the Snake Line, experienced a
new lease of energy and crossed the Snake Line to the
upside. The price closed above the Line and a long order
was immediately initiated at 1.6348. The stop was put
around the EMA 60 which was 1.6337 (eleven pips from
the entry price). The take profit was set at 1.6370 (22 pips
from the entry price). The target was hit immediately
and within 15 minutes the price shot upwards by over
90 pips!
Order: Buy
Entry date: January 17, 2014
Entry price: 1.6348
Stop-loss: 1.6337
Take profit: 1.6370
Exit date: January 17, 2014
Profit/loss: 22 pips
Another winner: There was a bullish bias on the Cable
on January 24, 2014. But suddenly, the price dropped like
a stone, crossing the Snake Line to the downside and
closing below it. A short order was immediately initiated.
The order panned out thus:
Order: Sell
Entry date: January 24, 2014
Entry price: 1.6611
Stop-loss: 1.6627
Take profit: .6579
Exit date: January 24, 2014
Profit/loss: 32 pips
Profitable trading is essentially dealing with momentary losses triumphantly. A sell signal occurred according
to our entry requirement and an order was made. However, the trade was a flop, because the price regained
stamina and skyrocketed.
Source: www.metaquotes.com
Note: Since the stop was placed
around the EMA 60, it was 1.6627
(16 pips from the entry price). This
made us double the target to achieve
the RRR of 1:2; and it was 1.6579 (the
difference between our stop and our
entry price multiplied by two). This
gave us 32 pips in profits.
A flop: We do not want to make
everything look too rosy, since
profitable trading is essentially
dealing with momentary losses
triumphantly. Here is an example of
52

strategies
one trade that did not work. The most important thing
here is that the price did not go beyond the initial stop
and the loss was insignificant. A sell signal occurred
according to our entry requirement and an order was
made. However, the trade was a flop, because the price
regained stamina and skyrocketed.
Order: Sell
Entry date: January 22, 2014
Entry price: 1.6460
Stop-loss: 1.6471
Take profit: 1.6438
Exit date: January 22, 2014
Profit/loss: -11 pips
Conclusion
The Snake Line strategy ensures that you go short on
the Cable when it is weak enough and go long on it
when it gains stamina, while you manage your risk
effectively. This is real trading, not gambling. Just as
water and oil do not mix, trading and gambling are
polar opposites. «
Strategy Snapshot
Strategy Name: The Snake Line Strategy
Strategy Type: Day trading
Suitability:
Intraday traders
Instrument:
The Cable (GBP/USD)
Time Horizon: 15-minute chart
Indicators:
EMAs 60 (red line) and 100 (blue line)
Long Order:
Buy when the Cable crosses the Snake Line to
the upside and closes above it
Short Order:
Sell when the Cable crosses the Snake Line to
the downside and closes below it
For a buy order, the EMA 60 would be the stoploss
Stop-Loss:
area. This is also true of a sell order, and it
makes sure that the stop is sensibly tight enough
The difference between your stop and your entry
Target:
price multiplied by two
Position sizing: 0.01 lots for each $1000
Risk/Reward Ratio: 1:2
Break-Even:
You may move your stop to break-even once you
have recovered your initial risk
Maximum Trades: 10 trades per week
Maximum Trade
Duration:
12 hours
Preview of the next issue
COVERSTORY
PEOPLE
New Concepts for Timing the Market
In our coverstory trader Faik Giese will discuss new
concepts for analysing special situations for charts as
well as for analyst ratings. Often there will be conflicts
of interest when it comes to analysts deciding about
their ratings which in turn enables traders to profit from
these imbalances. In the article, we will discuss sell
recommendations as well as downgrades in detail.
interview Adam Jowett
Many traders went through rough times in their
careers. However, Adam Jowett even more so after
he was disgnosed with cancer at age 30, when he
had to fight a hard battle for his life. Today, he is
trader, entrepreneur and triathlete. Stay tuned for
an interview that’s more than just talking trading; an
interview that’s also about the value of being alive.
The May issue of TrADErS´ will be published on 24th April 2014.
53

BASiCS
www.tradersonline-mag.com 04.2014
Darvas Boxes Analysis
A Simple and Useful Tool Based on Support and resistance Theory
Oscar Cuevas
Oscar Cuevas is a computer engineer and
provides online webinars on Expert Advisor
programming. He has also been a content
developer and trading strategies programmer in
Visual Chart for more than fi ve years.
sistemas@visualchart.com
In the late 50s, Nicolas Darvas developed his famous boxes
theory. According to this theory, prices move inside support
and resistance channels that the author of the theory called
Darvas Boxes. When price moves outside these boxes, the
author claims that new support and resistance levels are
going to be generated depending on the extreme price exit
the boxes form.
54

BASICS
The strategy consists of waiting
for the breakout of one of the box
extremes and trade in this direction.
» Darvas Boxes
The Darvas Boxes study follows the basics of any
other price channel patterns based study: While price
remains inside the range, we assume that the price
movement is going to follow its normal course for a
while. However, if some of the extremes are broken by
price action, the expected reaction will be a change in
the price behaviour and probably the beginning of a
new trend. In the following article we will explain the
functioning of this tool and also the trading rules to be
used with it.
Calculating the Limits
Before going into detail on the information provided by
the Darvas boxes, we are going to explain their calculation
procedures.
The high and low levels formed by each of the boxes
are obtained by following these
steps:
1. We establish the top price of the
box at the high of the current
session.
2. Once this top has been obtained,
we monitor price to see if this
level is broken by the price
action during the following two
sessions. If this level is broken,
we start again.
3. If we find a top that has not
been violated over the latest two
sessions, we save it and store the
low price of the current session
as a base for the box.
4. Now we note this base and
monitor it over the following two
sessions, in order to see if the
base is violated or not. If the base
is violated, we move back to step
3, in other words, we update the
base again. Likewise, if the top
value of the box is violated by the price action, then
we move back again to the beginning, this being step
1.
5. If step 5 is reached, a Darvas Box will be consolidated
and will be formed by the duo TOP/BASE that has not
been violated, at least, over the latest two sessions.
After step 5 the process is repeated by keeping the
last box until a new one appears.
Figure 1 shows a calculation example with a daily
chart of Google. The value top has been updating over
the first three bars so we remain under step 2. On January
24th top ($1167) remains active, and consequently
we move to step three and start looking for the BASE,
starting up in the low of the same day, this being $1123.
However, the next day price breaks to lower lows so start
over again with a new base at 1082. Two days later on
F1) Darvas Boxes Calculation – Google Daily Chart
The top keeps updating until the two sessions’ rule is fulfilled. This happens on January 24th (2 sessions
after TOP). The box is completed on January 29, once the two sessions’ rule has been fulfilled for the BASE.
Source: Visual Chart
55

ASICS
www.tradersonline-mag.com 04.2014
Not all breakouts are going to be
considered as signals by Darvas.
January 29th price action did not violate the new base for
2 sessions, so we keep it as our reference and the Darvas
Box is confirmed.
This process can be automated with the use of technical
indicators to be found in technical analysis software. At
our website we provide you the code of the tool in Visual
Chart. Please follow the link: www.tradersonline-mag.
com/download/Code_DarvasBoxesAnalysis.txt
In Figure 2, we can see an example of how the boxes
look with a Visual Chart indicator: We notice that the
indicator draws the boxes in the chart but only once
they are confirmed, while it calculates internally the
subsequent box.
Signals Interpretation
Basically, the Darvas Boxes strategy consists of waiting
for the breakout of one of the box extremes and trade in
F2) Signals Based on Darvas Boxes – Amazon Daily Chart
this direction. However the author included an element
to be taken into account for the strategy, this being the
volume of the asset during the breakout. In fact, not
all breakouts are going to be considered as signals by
Darvas. Instead, the breakout has to come together with
a volume peak (well above volume average).
Each new trade comes with a stop-loss to cover the
losses caused by false signals. If price moves in the proper
direction and new box breakouts occur, the position
is to be increased. Each new breakout comes with the
corresponding position increasing. Concurrently, the
stop-loss accompanies the change of boxes, at the level
of the opposite side of the box.
In Figure 2 we will monitor the signals provided by
the method applied to Amazon. The functioning of the
volume filter is evident in point B as the system does not
give a signal because the breakout is not accompanied
by a volume peak. However, the
breakouts produced in the rest
of the points match the volume
conditions and consequently the
long signal is given. Also in point
D we observe the increasing of the
position size with the new breakout
in the direction of our positions. The
strategy sets as an exit point the
base of the box, allowing cutting of
losses in the case of false signals (as
happened at point A) or take your
profits if the creation of new boxes
accompanies the bullish movement
(cases C and D).
At point A, we notice a box breakout accompanied by volume increase. The stop is placed at the base of the
box. Price changes its direction and the position is closed with losses. A new signal is given in point C. In this
case, price moves in the direction of our position. At point D a new valid breakout occurs, so the size of our
positions is increased. On December 29th price breaks the base and the system.
Source: Visual Chart
Conclusions
Nicolas Darvas’ method is known
for being very simple, as it is based
in one of the main principles of
technical analysis, price action and
volume. Often best results come
with the simplest strategies. «
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BASiCS
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Trading Journal:
Steve Burns
My SPy Trade Step by Step
In the trading journal, traders – from beginners to professionals – present one of their
trades that taught them a special lesson. This time it is Steve Burns, professional
trader, author and blogger.
» First Entry
For the sake of simplicity all dollar amounts are rounded
in this article. I was trading SPY which is the SPDR ETF
on the S&P 500 Index (see Figure 1). SPDR funds belong
to the ETF family of State Street Global Advisors (SSgA).
My first entry spot was with a break above the 10 day
on September 4th with $130,000 position size (50 per cent
of the account). This was the first day out of 18 that price
broke over the 10 day moving average line. In essence
this was a breakout trade out of a range after the 100 day
moving average held as support at $163. With 50 per cent
of my account at risk then a big two per cent fall in the
index would still have only been a one per cent total loss
of trading capital keeping risk managed.
58

BASICS
Two days later I was able to hold
through the volatility because I was using
end of day stop losses.
Scaling-In
Two days later I was able to hold through the volatility
because I was using end of day stop losses. My original
stop was SPY closing below the 10 day moving average
thus invalidating the break out. It sliced through but
quickly recovered to close higher. Three days later SPY
was able to close above the 50 day moving average with
power. So I added the other half of my account ($130,000)
to bring my position size to $260,000 total. I moved my
end of day stop at this point to under the 50 day.
I held as SPY gapped up and was in a price base for
a few days. I then moved my end of day stop to the 5
day exponential moving average. After a few days it
then gapped up again to $170 and finished at the low of
the day with a nasty black candle.
I stayed in and kept my stop at the
5 day exponential line. In my trading F1) SPY Trade
I have not found one black candle to
mean much, it usually even resumes
the trend after a day like that. It did
recover the next day after the black
candle, I was still in.
may go parabolic at that point I thought. No such luck,
buyers were not coming in over $173 at all on Thursday
and SPY was very extended over the 5 day exponential
moving average. With most of my reward already having
happened and more risk of a retracement back to the
5 day line than possible gain to the upside I decided to
take my profits and I would probably have a chance to get
back in with a better entry as the 5 day line caught back
up to price.
Conclusion
It was a great trading campaign and I ended with an
almost $11,000 profit in two weeks of holding a very
stable position in a low risk index. I’ll take it. «
Exit
Then came the FOMC day (Federal
Open Market Committee). I had to
follow the chart and stay long with
it sitting right at all time highs with
a catalyst on tap. Everyone that
wanted risk off was likely out and
waiting to get back in when the coast
was clear. Everyone waited for the
word “taper”, when it was steady
as she goes the SPY exploded up
to over $173 then came back to
close at $173 on the day. I held, we
The first mark shows the entry. The second mark shows where Steve Burns added to his position. Finally, the
third mark shows where he exited the whole trade with a good profit.
Source: www.tradesignalonline.com
59

BASiCS
www.tradersonline-mag.com 04.2014
risk- and Money-Management
Part 4: “Trading is Not About how Often you Win or Lose“
In this series of articles we present a multi-level process to create a good,
sophisticated risk- and money-management plan. The fourth part deals with the
fact that trading is not about how often you win or lose.
Jens klatt
Jens Klatt is a market analyst at DailyFX.de and
moderates the German DailyFX-forum. He has been
in the financial sector for over seven years. Besides
technical and fundamental observation of the
markets, he focuses on sentiment analysis in the
forex markets and develops his trading decisions
based on this analysis.
www.dailyfx.de
» We assume you know two traders. Trader 1 is right 40
per cent of the time and achieves profit. Trader 2 is right
about 80 per cent of the time and is successful with his
trades. What do you think – who is more profitable
Actually you cannot tell which trader is more successful
or if any of these two traders is profitable at all. For example,
if we assume that trader 1 achieves 200 pips with every
successful trade and limits his losses to 100 pips – then he
60

BASICS
would have earned about 200 pips
after a series of ten trades:
4 * 200 pips - 6 * 100 pips =
800 pips - 600 pips = 200 pips
If the second trader earns 25 pips
with every successful trade but loses
100 pips on every losing trade, then
he would have reached break-even
after ten trades:
F1) Payoff Ratio Shows Reason for Falling Equity Curve
140
120
100
80
60
40
20
127
122
112 110
105
Average Profit Average Loss
102
98 96
90 90 89
84
65
60
61
52
53 54
50 49 47
48
44
43
78
63
60 60
30
51
52
94
0
8 * 25 pips - 2 * 100 pips =
200 pips - 200 pips = 0 pips
You can see why the majority of traders lose money trading, although they are right most of the time: The
average profits (blue) are much smaller than the average losses (red).
New traders are often impressed
Source: DailyFX Research Department
by the hit rate and are therefore
often misled. Of course, it is exciting
and it satisfies one’s ego if you earn
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
you should achieve a positive result, shouldn’t you there is no information about the profitability of the strategy.
You should always keep this in mind – especially if you In other words: It is very simple to generate a high hit
are confronted with trading strategies that claim to have hit rate. You trade without a stop-loss and close the position as
Average
61

ASICS
www.tradersonline-mag.com 04.2014
F2) One Year Hit Rates – Q4 2009 to Q3 2010
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
% Profit % Loss
49% 54% 57% 58% 59% 60% 60% 61% 61% 62% 64% 64% 66% 71%
position is stopped out or not. It is
a fact that you cannot predict future
market movements – therefore the
risk of having a losing trade remains
in place. However, it is possible
to achieve long-term profits with
trading. If this is your goal you should
always remember that the hit rate is
not that important. The relation of
the average profit to average loss
– the pay-off-ratio – should be your
focus. The formula is:
0%
Payoff Ratio =
The graphic shows the hit rate of FXCM retail traders during the fourth quarter 2009 to the third quarter 2010.
Average Profit / Average Loss
It illustrates that the hit rate in the currency pair AUD/JPY was the lowest with 49 per cent and it was the
highest in the currency pair AUD/NZD with 71 per cent.
Based on the facts mentioned
Source: DailyFX Research Department
above and the Figures 2 and 3 it is
obvious that you should focus on the
improvement of the average size of
soon as it is one point in profit. The problem: The position
that is not achieving a profit results in a horrendous loss
– and the margin call and the wipe-out of the account
is only a question of time. The logical protection is the
placing of a stop-loss. But with the limitation of the size
of the loss the trader loses his influence on the hit rate.
Truth is, that wider stops reduce the probability of
being stopped out and “tighter“ stops are hit more often.
But at a higher level the market is now determining if a
winners and losers – and not on the maximisation of the
hit rate.
The displayed graphics are especially interesting if
you consider that the worst hit rate was 49 per cent, the
best was 71 per cent – during the same period of time.
However the profitability was negative – although the hit
rate was very good – and the traders lost money.
Therefore the author recommends targeting a payoff-ratio
of 2:1. That means that the average profit
should be twice as high as the
average loss.
F3) Average Profitability Q4 2009 to Q3 2010
It is necessary to approach the
subject of trading with a professional
70%
Q4 2009 Q1 2010 Q2 2010 Q3 2010
perspective and therefore deal
60%
accordingly with loss-trades.
50%
40%
30%
20%
10%
0%
The graphic shows the percentage of profitable retail traders of FXCM during the fourth quarter 2009 to the
third quarter 2010. It illustrates that less than 50 per cent of the FXCM retail traders were profitable in the
mentioned period (dotted red line) – despite the good hit rate (Figure 2).
Source: DailyFX Research Department
Conclusion and Outlook
The hit rate plays only a minor part
in professional trading. Whether a
trader is profitable or not depends
on the management and the relation
of average profits and losses. The
trader especially has control over
the average size of a losing trade
because he can use a stop-loss.
The next part of this series of
articles will deal with the reaction
of trading newbies and trading
professionals to loosing trades and
what you can learn from it. «
62

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The Leader In Market Guidance

BASiCS
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The Trader’s Technical Arsenal
Common indicators in Meta Trader – Part 6
Azeez Mustapha
Azeez Mustapha is an offi cial analyst at Instaforex
Companies Group, a blogger at Advfn.com, and
a freelance author for trading magazines. He is
working as a trading signals provider at some
websites. He is a senior analyst at Paxforex.com.
His articles are also available on other websites like
www.ituglobalforex.blogspot.com.
azeez.mustafa@analytics.instaforex.com
In his last article (TRADERS´ 02/2014) Azeez Mustapha
explained Fractals, the Gator Oscillator and the Ichimoku Kinko
Hyo. This time he discusses the Moving Average Convergence
Divergence (MACD), the Market Facilitation Index (MFI) and
the Momentum indicator; as they work in MetaTrader, which
continues to increase in popularity (especially version 4.0).
In most cases, the indicators’ default parameters are used.
64

BASICS
» The Moving Average Convergence Divergence (MACD)
The MACD was created by Gerald Appel in the 1970s. This
indicator is highly favoured by professionals and it is very
easy to use. It shows the dominant bias as well as the
momentum at a particular period of the market. Because
of this, it is very good for trend identification/momentum
identification. Trending markets are bifurcated into
bullish and bearish ones. The MACD default parameters
on MT4 go as follow:
Fast EMA: 12
Slow EMA: 26
MACD SMA: 9
All applied to close
Note: EMA stands for Exponential Moving Average and
SMA stands for Simple Moving Average.
Computation:
MACD Line: (12-day EMA - 26-day EMA)
Signal Line: 9-day EMA of MACD Line
MACD Histogram: MACD Line - Signal Line
In Figure 1, you see how the MACD appears on the
GBP/CAD 4-hour chart. In order to make things as easily
understood as possible, the red line of the MACD is the
signal line and the vertical grey lines are the histogram.
The zero line is marked as 0.00. As you can see, either the
signal line and the histogram are above the zero line or
they are below it. The zero line plays the role of supply
and demand zones of the MACD.
Uses for the MACD
1. MACD Crossovers:
When both the MACD signal line
and the histogram fall below
the zero line, you consider short
orders, for it means the market
is falling. When both the MACD
signal line and histogram go
above the zero line, you can
consider long orders only, for it
means the market is rising. This is
very noteworthy in that it makes
you enter a trending market when
it has been confirmed by the
MACD. This is one advantage the
MACD has over certain oscillators
which make speculators dive
into the ocean of the markets on
bogus signals.
F1) The MACD on the GBP/CAD
2. MACD Convergence and Divergence:
MACD Convergence occurs when the price is in a
downtrend and the MACD signal line and histogram
are rising towards the zero line or above it, it could
signal the end of the downtrend and the beginning
of a bullish trend. MACD Divergence occurs when
the price is in an uptrend and the MACD signal line
and histogram are falling towards the zero line or
below it, it could signal the end of the uptrend and
the beginning of a bearish trend. At that point, things
may go sour for the bulls, but the conditions in the
market may become propitious for the bears.
3. Overextended Market Conditions:
In an overextended bearish market, the MACD signal
line and histogram will fall extremely significantly.
This is an indication that there will soon be a rally
in the market. The overextension of the market will
be more significant on higher time frames than
lower time frames; therefore the speculator should
be careful. The quail does not claim to be wise,
but it claims to be highly suspicious. This logic can
be reversed for a bull market. In an overextended
bullish market, the MACD signal line and histogram
will rise extremely significantly. This is an indication
that there will soon be a pullback in the market. It is
like a kind of overbought and oversold conditions for
oscillators.
Market Facilitation Index (BW MFI)
Introduced into the trading world by Bill Williams, the
Market Facilitation Index (BW MFI) reveals the change of
price per candle (or per bar). The indicator itself needs to
When both the MACD signal line and histogram fall below the zero line, you consider short orders. When both
the MACD signal line and histogram go above the zero line, you can consider long orders only, for it means
the market is rising.
Source: www.metaquotes.net
65

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www.tradersonline-mag.com 04.2014
F2) BW MFI Being Applied on the EUR/CAD Daily Chart
A pink bar means that the BW MFI
is falling, but the volume is rising.
This means that the bears and the
bulls are in cut-throat competition
and there is no clear winning side.
At last, either the bulls or the bears
will dominate, which would lead to a
continuation of the extant bias or its
termination. The next histogram bar
that comes up would determine the
ultimate outcome.
A brown bar means that both the
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.
work in conjunction with the formations of the candles, as explained.
The market players have become
Source: www.metaquotes.net
apathetic and the price has entered
an equilibrium phase, awaiting a
future breakout which could be the
work with volume before any meaningful interpretation beginning of another serious bias in the market. Biases
could be deduced. In order to understand how this tend to begin in a significant manner. At times, the mania
indicator works, we need to explain the meaning of each in the markets is revealed as gap-ups or gap-downs.
of the four colours of the histogram bars in it.
Sometimes, a bias may start when there is a bullish or a
A green bar means that both the BW MFI and the bearish engulfing pattern candlestick.
volume are rising. There are more bulls in the market and
the market is very active. This shows that the bulls are Computation:
passionate about driving the market further upwards, and BW MFI = Range * (high - low) / Volume
therefore we can benefit when we follow the direction of
the bulls.
Whereas: Range is the factor for multiplication, which
A blue bar means that the BW MFI is rising, but the brings the difference in points down to whole numbers.
volume is falling. The price continues to go upwards, In Figure 2, you can see the BW MFI being applied
albeit not supported by the volume. This shows that the on the EUR/CAD daily chart. The candles are deliberately
bias may change, and therefore we can benefit when we enlarged so that you can easily understand how the
tighten our stops, trail our stops, take partial profits or colours of the histogram bars work in conjunction with
weigh the possibility of smoothing open orders.
the formations of the candles, as explained above.
F3) Momentum on the CAD/JPY 4-Hour Chart
Momentum appears as a single line on the chart, and it is located at the bottom of the chart. You can see how
the indicator moves in conjunction with price action.
Source: www.metaquotes.net
Momentum
Momentum is a very simple indicator.
It is used to gauge the swiftness
and stamina of a given price. It also
measures the weakness of a bias and
probable mean reversion zones.
Momentum appears as a single
line on the chart, and it is located
at the bottom of the chart. Please
see Figure 3. You can see how the
indicator moves in conjunction with
price action. The default parameters:
period 14 applied to the close.
The indicator is used to pinpoint
a bullish bias or a bearish bias,
plus how much the market is going
66

BASICS
Taking signals against the dominant
trend does not fit good trend followers.
north or south. It can also gauge overextended market
conditions as well as equilibrium phases.
Computation:
Calculations for the Momentum indicator may vary
slightly depending on the preferences of the trader who
sets it. But in general, a current closing price is viewed in
relation to a particular duration of the previous closing
price.
Current closing price: CP
Previous closing price: CPn
Therefore: M = CP - CPn Or M = (CP / CPn) * 100
Basically, the momentum value is the latest closing
price as a percentage of the previous closing price.
does not fit good trend followers. What fits us is what
fits us. A rope is not fit for a chicken’s neck. After taking
a trade with this indicator, you may want to exit the trade
when the indicator is going contrary to it. This can really
save you from coming surprises when the market starts
going against you.
Though, the Momentum indicator can stand as a
strategy on its own, it appears to work more powerfully
when combined with another trend identifying
indicator, for we want to take signals only in the
direction of the overall bias. Figure 4 shows how the
Momentum is combined with the MACD, which allows
more convincing trend confirmation as well as taking
signals in favour of the dominant trend only, even if the
market is jumpy (volatile). This is what trend followers
want.
Conclusion
Taking Signals from the Momentum Indicator
In part 7 of this series we’ll discuss these indicators:
This indicator is good for generating signals on Money Flow Index and Moving Average of Oscillator. «
instruments that trend significantly
and on instruments that move
sideways. In a sideways phase F4) A Combination of the MACD with Momentum
of a market, you may want to go
long and set a short term target
when there is a recent upturn of
a particular trading instrument.
This is OK when the indicator rises
upwards after it seemed oversold.
Similarly in a sideways phase of a
market, you may want to go short
and set a short-term target when the
current price action is bearish. This
is OK when the indicator falls after it
seemed overbought. It just sounds This figure shows how Momentum is combined with the MACD. This allows trend confirmation as well as
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
confirmation when Momentum is used for entries and exits.
favour of the overall bias. Taking
Source: www.metaquotes.net
signals against the dominant trend
67

People
www.tradersonline-mag.com 04.2014
» Hometown: Baltimore, Maryland USA. (“The Wire”’s hometown)
» Interests: Photography, Cooking, Psychology, History, Travel
» Trading Style: Equities, driven by fundamentals with input from both
macro and technicals
» Websites: www.howoftrading.com
The Pro’s Process
Part 18: Bruce Bower
In this series we are asking Pro Traders about their psychological processes. Delving
a little into how it feels to them when trading. The good and the bad. How this has
changed over time and what preparation they do mentally for performing as a trader.
One of the key features for us was that we wanted traders with experience who have
been through the mill over the years and of course, we appreciate those who were
kind enough to talk to us so candidly. We hope this gives developing traders more to
learn from. Each interview in this series was conducted by Richard Chignell who is
himself a trader. Please visit his blog at http://embracethetrend.com.
» Richard Chignell: How long have you been trading
Bower: I’ve been fascinated by the markets since I was
a teenager. After working a couple summers, I saved up
enough money to start trading when I was 18 – the year
was 1999! At first, I tried to be a day trader like everyone
else and to play short-term moves in the markets,
principally bluechips. Instead of being rich overnight,
I lost 50 per cent. After that, I took a step back and started
to learn a lot more about markets and trading, which led
me to develop a new approach with equities and also to
start trading other instruments, like bonds and FX.
After graduating from college, I worked as a prop
trader at a big bank. Since 2005 I have been a portfolio
manager at two Moscow-based hedge funds, managing
more than one hundred million dollars in emerging
market equities, primarily in Russia.
Richard Chignell: What style of trading/investing
do you practice
Bower: As an equities investor, I am driven primarily
by company fundamentals. This means meeting with
the management, reading their financial statements,
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People
The best-performing investments are ones
where you catch a potentially big re-rating story
at the right time, just as it starts its big move.
constructing financial models and trying to get a read on
whether or not it’s a good investment. In general, I find
that the best-performing investments are ones where
you catch a potentially big re-rating story at the right
time, just as it starts its big move. There are three criteria:
1) An attractive fundamental story with improvement in
the underlying business, 2) A decent or better valuation,
compared to peers and versus the Discounted Cashflow
valuation, 3) A catalyst which cause the position to
perform. I then follow the investment thesis and the
performance; if I’m wrong about the thesis or if I hit a preset
stop-loss, I get out.
I do pay attention to charts when I am getting in and
out of positions, as sometimes key levels can signal a
good entry or exit point. If I’m bullish on a stock and long,
if it breaks out of a six-month base, then I would use that
chance to add to the position.
My style is inspired by William J O’Neill’s work
which has documented the ingredients that lead to big
winners. However, I have had to adapt it heavily to the
particular conditions of emerging markets. For instance,
you have to do a lot of intense research to make financial
projections for most companies. O’Neill would reject
turnaround and deep value stories, but those can be
incredibly profitable in emerging markets. Nonetheless,
he was right on the money about the most important
thing: Focus on winning stocks if you want to generate
outsized performance.
Richard Chignell: How do you feel when
a trade goes against you
Bower: Usually, I’m pretty calm about positions going
against me. I will review my work as to why I got it and
see if I did anything wrong or stupid; if so, I will get upset
with myself. If not, then I am pretty dispassionate about
following my plan.
Richard Chignell: How do you feel when
a trade goes for you
Bower: I might feel a bit of validation and like patting
myself on the back if I had a very strong view and it
played out correctly. Overall, I don’t really feel much.
If anything, I expect my trades to go my way so it’s my
“default setting”.
Richard Chignell: How have these feelings changed
over your trading career
Bower: When I first started trading, I was super excitable.
I used to get all wrapped up in every tick and take loses
personally, to the point of depression. As I developed as a
trader through practice, reading a lot of books and talking
with experienced traders, I realised several things. The
first was that you had to be detached at some level from
your trades. The second was that the best way to get to
that point was to have a methodology that you followed
rigorously and that you trusted fully. That way, you could
think of trading more as a decision-making exercise,
which allowed you to reframe the whole process away
from “making money”, which is emotionally charged,
towards “making good decisions”, which is much more
detached. The third was that by adding in some additional
tools, like visualisation, you could learn to really manage
your emotional state and to put yourself into what “Flow”,
as Mihaly Csikszentmihaly labelledit.
Richard Chignell: Do you have any practices that you do
away from the trading screen to help you mentally and
emotionally handle trading
Bower: I have a few. I am quite religious and go to church
every day, in addition to doing mental prayer for up to an
hour. While it’s a spiritual exercise, it does have a very
Bruce Bower
Bruce Bower manages a portfolio of emerging market
equities at a hedge fund. He has a keen interest in markets,
psychology and self-development.
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www.tradersonline-mag.com 04.2014
Focus on winning stocks
if you want to generate outsized performance.
calming effect on me. I also like to read and write, both
for my blog and also in my own journal, which helps me
to process and expand any thoughts or feelings that I may
be having. Lastly, I listen to guided visualisations that I
created for myself, which help to manage my emotional
state and also for goal-setting. Usually, I put them on
before I go to sleep and drift off to the sound of the
visualisation.
Richard Chignell: Have you always done this
Bower: Not all of those things. I have always been
quite active in keeping a trading journal, which has
been a critical resource for me from the beginning. The
other stuff, like praying, have just grown over time as
I found that they improved my overall life. The guided
visualisation I’ve learned as a result of some unique
training I’ve had.
Richard Chignell: If not, how have you learnt to deal with
the feelings that come up when trading
Bower: The first is just experience. As you go through
the ups and downs of the markets, you become gradually
de-sensitized. The second way was through conscious
training. I’ve actually studied two related psychology
fields, NLP and Hypnotherapy. What piqued my interest
was that if you read Market Wizards or New Market Wizards,
it’s worth noting that all of the trading psychologists that
they profiled had trained in those fields! And indeed
those tools are used widely in other demanding fields like
professional athletics. The third step was just learning to
trust my methodology. It’s like jumping out of a plane –
if you don’t believe in the parachute, you’re going to be
very anxious, but if you trust that the parachute will work
and focus on opening it properly, then you will be fine and
even enjoy the ride.
Richard Chignell: Can you describe a time in your trading
life which really rammed home the point that so much of
trading comes down to psychological factors
Bower: As I once documented in a popular blog post
called “What I Learned From the Best Trader at Citibank”,
I started out my working career in a great seat – as a
prop trader at a big bank. I sat next to a brilliant trader
and learned as much as I could. Unfortunately, I was
making lots of mistakes and lost money. By the end of
that experience, I was actually quite depressed, because
I knew that it was a golden opportunity and that I had
screwed it up. I swore to learn everything I could to
achieve complete mastery in this field, so as never to feel
that way again.
Richard Chignell: If you could give aspiring traders one
piece of advice about emotionally handling the market
what would it be
Bower: As Dr. Steenbarger likes to point out, most
trading psychology issues are actually trading issues.
For instance, if you take too much risk, then your P&L
will have big swings, leaving you more susceptible to
greed and fear. Similarly, if you don’t have a consistent
methodology, then you will end frustrated with trading.
As glib as it sounds, the solution is to trade better. Focus
on defining a methodology that works for you and to
keep your risk limited, so that you know you can execute
your methodology and you can’t blow yourself up. In
the process, you will learn to trust your system and your
emotions will naturally calm down.
We’d like to thank Bruce Bower for sharing about the
way he tackles the market from an emotional/mental side of
things and for his willingness to allow me to post this as a free
resource in the hope that traders who have been in the market
for less time or are thinking of entering can perhaps pick up
some A-HA’s.
If you are interested in finding more out about Bruce
Bower you can find him:
» On twitter: @HowofTrading
» At his website: www.howoftrading.com «
70

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Perry Kaufman
Mastering Systematic Trading
Perry J Kaufman began his career as a “rocket scientist,” before becoming involved in the futures markets in 1971. His earliest
systematic programs used exponential smoothing and moving averages. In the late 1970s he moved to New York where he
developed the most successful in-house commodity investment program for Prudential-Bache. From 1980 through 1991 he
headed the systematic trading for Transworld Oil, which traded the largest proprietary account in futures markets in the world.
From 1992 to 1999, Mr Kaufman was a principal and Head of Research for Drapeau Advisors, a Commodity Trading Advisor
focused on short-term trading. From 2000, Mr Kaufman’s consulting business served clients such as Cinergy’s proprietary
trading group, Graham Capital Management, and Mizuho’s Alternative Investments. Mr Kaufman writes extensively on
markets and strategies. He has published 13 books, of which “Trading Systems and Methods, 5th Edition” (2013) is the most
recent. He is President of KaufmanSignals.com, a new business that serves retail investors (www.KaufmanSignals.com). He
continues to lecture to economic forums, investor groups, and graduate students.
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» TRADERS´: Financials markets are not exactly where your
career started. When did you first hear about the markets
and trading
Kaufman: After leaving aerospace in 1970, I started
my own computer company. We were automating
government medical reimbursements (had I known, I
should have stayed in that field!). Someone came to us
and asked if we could research a way to hedge options.
At that time there was really nothing done on a computer
and the only options were London. IBM wasn’t interested,
so they found someone with mathematical background.
We did that and one thing led to another.
TRADERS´: What was the reason to change your career and
stay with financial markets
Kaufman: After the options project we had a client who
challenged us to beat him trading the market using
mathematics. We were to get a large percentage of
anything we could earn better than him. That was 1972.
We did really well, hitting the Russian wheat deal in
1973 that drove grains up 300 per cent. Unfortunately,
we didn’t beat him because everyone does well in a bull
market. But I was hooked on the markets by then and
never looked anywhere else.
TRADERS´: Over the years and with your growing expertise,
what did you learn and how did you change in the way you
approach the markets
Kaufman: A big question. I’ve learned a lot about the markets
but overall have come full circle. I’ve developed every type
of system, fast and slow, done well
with most, badly with a few, but in
the end, I prefer trading the trend. I F1) Levels of Noise
have learned that markets are more
complex now. Well, actually they’re
noisier. When I started in the 70’s
you could make money with a 10-day
moving average. Over the years the
noise has increased and you need to
trade slower and slower trends. And
you capture less of the move. Still, the
trend finds the big economic moves
which always exist. It’s not the only
method that works, but it’s the safest.
the same technical systems that I offer to clients. I liked
discretionary trading but, for me, it goes in streaks. I can
make money for weeks at a time, then go off and can’t
seem to get anything right. And it’s tiring. Since I’m lucky
enough to be good at both math and computers, I’ve found
that I’m happy to be the turtle and not the hare. Technical
systems aren’t perfect but they are good over time, and
have greater predictability. That’s enough for me.
TRADERS´: From a systematic trading point of view, how do
huge market participants play their game to keep an edge
over their competition
Kaufman: A good question. My experience is that the
biggest players can be either discretionary or algorithmic,
but the bulk of them are algorithmic. And, they are mostly
trend followers. They can get the liquidity they need
because long-term trends don’t change positions very
often. And, they can average in over a week or more so
they don’t push the market. They can also have a large
number of faster strategies, because you can’t trade a lot
on a faster strategy, but you can gain diversification.
Keeping an edge is more difficult. You can see from
the published performance that the big companies often
have similar profits and losses each month. Some of them
will put greater weight in one sector, say interest rates,
but that also increases their risk. My own preference is
equal weighting wherever possible, because I don’t know
anyone who has successfully predicted which sector will
be the best performer next time. So you need to take
greater risk to separate yourself from the competition. Or,
TRADERS´: Did you ever get into
discretionary trading, as well
Kaufman: Yes, I did discretionary
trading early on and traded for
myself. I still trade for myself but I use
Figure 1 shows several paths for the exact same result (price rising from $440 to $475). The difference,
however, is the volatility, or noise on the way.
Source: www.kaufmansignals.com
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F2) Noise Ranking of Asian Markets 2005-2010
Kaufman: That would seem easy to
answer: “Because it’s not making
money!” but actually, that’s a
difficult question. Theoretically, we
design a trading program to have a
specific level of risk, measured by
the annualized volatility of returns.
For the futures industry, that’s about
14 per cent, equal to one standard
deviation. So there is a 16 per cent
chance (the left tail) that we’ll see a
loss of more than 14 per cent during
one year. It’s also possible that we
could see a loss twice as large. The
real problem is deciding if that’s
a “normal” loss or whether the
program is no longer working. To
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
Hong Kong), are the noisiest while the less traded ones (Sri Lanka and Vietnam), are the trendiest.
into the frequency of losses, the
Source: www.kaufmansignals.com
duration, and other statistics. I lean
towards frequency of losses to tell
me that something is wrong. In the
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
new way of trading, like high-frequency trading, but that deleveraging when I’m uncertain about the program,
doesn’t happen often.
or when we reach a 1.5 standard deviation loss. In that
sense we manage the “business risk,” that is, both the
TRADERS´: How do you recognise a system you’re using is investor and I want to stay in business. I will give up some
not working profitably anymore
potential profits until I either decide that the program is
fine, or it continues to deteriorate. By
the way, the solution to that problem
F3) Information Ratio, Sorted Highest to Lowest, All Futures from 1990
is still the most elusive.
TRADERS´: In the way markets function,
do you see any consistent edges for
retail traders over the big guys
Kaufman: Yes, retail traders are
more flexible because they can get
in and out of the market without
anyone noticing. They can trade
equal risk in stocks because their
positions are small. The big traders
can’t even trade some opportunities
because they would move the
market too much with the position
size they need.
The U.S. and European index markets are the noisiest. So you want to favour mean reversion systems for
those markets on the right of the chart, and trend systems for those on the left.
Source: www.kaufmansignals.com
TRADERS´: You were already using
moving averages in the 1970s. Many
traders use these concepts today. Do
you still see value in such methods
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If the Efficiency Ratio is low,
then a mean-reverting strategy is
better than a trend method.
Kaufman: Absolutely. Trends in general are what I call a
“sound premise.” But they need to be long-term trends to
pick up the direction of the economy, or the US dollar or
euro, or major changes in supply and demand. I wouldn’t
try faster trends because I don’t think they’re reliable.
Prices can jump quite a bit on news, but it’s hard to
capture that with a moving average, and most often you
get false signals. Trend systems need to capture the fat
tail to be successful. If you’ve studied the profile of trend
performance, there are many more losses than profits, so
the profits need to be bigger. I’m convinced that you need
the rare, very large profit to win on balance.
TRADERS´: What do you think about genetic programming
Do you have experience in this field, and if so, which
results did you attain
Kaufman: I’ve created a portfolio program using a genetic
algorithm, and I think I can beat the standard meanvariance
approach that is used in the industry. On the
other hand, I wouldn’t use either one because they are
simply an exercise in over-fitting. These powerful tools
are tempting, but I don’t think they work in the markets.
And I haven’t read anywhere that they have predictive
power. I still think the best solutions are simpler ones.
TRADERS´: Young markets and old markets … this topic
was originally addressed in your “Smarter Trading” book.
Nowadays, which are the younger easier markets and
which one the older
Kaufman: That’s a good question and it goes back to why
the smaller investor has an advantage. Newer markets,
usually index markets, are much trendier and can be
traded with faster moving averages, or whatever trending
method you want. It’s the same as the way we traded
in the 1970s before volume jumped up. New markets
don’t have as much noise because there are far fewer
participants. As they mature they get noisier, so the US
index markets, followed by European, are the noisiest
and need slower trends to be successful. So there is a
window of opportunity for the retail trader to use a trend
for new index markets.
TRADERS´: What is the most reliable technical indicator in
order to detect noise in a price series
Kaufman: The only one I know that measures noise is
my own “Efficiency Ratio,” which has also been named
“fractal efficiency.” It’s simply the difference in price over
n days divided by the sum of the path, which is the sum
of absolute values of the daily changes over the same
n days. The idea was that if you went in a straight line
from point A to point B, then the efficiency was 1.0 (no
noise). If you wander around then the efficiency goes
down, and if you go nowhere then the efficiency is zero
(all noise). Even though I did that in the early 1980s, the
only useful application that I’ve found is for it is deciding
which system to apply to each market. For example, if the
ratio is high then there is a lot of trend and we can use a
trend method. If the ratio is low, then a mean-reverting
strategy is better. I was hoping for more but haven’t yet
figured it out.
I have two charts that I created for the Asian Financial
Forum in 2012. One chart ranks the Asian markets by
noise (Figure 2) and the other ranks a large number of
futures markets the same way (Figure 3). You’ll see that
the more mature Asian markets, the ones in Japan and
Hong Kong, are the noisiest while the less traded ones,
Sri Lanka and Vietnam, are the trendiest. And for futures,
the U.S. and European index markets are the noisiest if
you look past the agricultural products (seasonality fights
with the long term trend). So you want to favour mean
reversion systems for those markets on the right of the
chart, and trend systems for those on the left.
TRADERS´: From your experience, what seems to be the
best filter ever for detecting a trend
Kaufman: I would use a long-term trend as a filter for
short-term trading. And it doesn’t really matter which
method you use. I think that most trend calculations
give you the same result over time. It’s really the market
and not the method. If the market is trending then all
the methods are profitable, and if it’s not trending then
none of them are. There are some internal differences.
For example, a moving average has a lot of small losses
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I lean towards frequency of losses
to tell me that something is wrong.
and fewer larger profits. A breakout system is nearly the
opposite, with more profits but larger losses. But in the
long run, the returns are much the same. There are two
charts that show this, one is the S&P and the other 5-year
notes (both futures, see Figure 4 and 5). They show the
profits using a 100-day calculation period for each of the
three most popular methods, the moving average (MA),
breakout (BO), and linear regression slope (LRS). We know
that notes are trendier from the noise study, and you can
see in the chart on the right that the returns over 24 years
track very closely. For the S&P the pattern is similar but
not as uniform. However, if I were to average the results
of a large number of markets, you would have a difficult
time deciding which trend was best.
For those traders looking for more detail, Figure 6
and 7 show the optimisation results for these three trends
in terms of the profit factor (gross profits divided by
gross losses). Both show a tendency to do better as the
calculation period gets larger (shown along the bottom
from ten to 150 days). For the 5-year Note, the breakout
seems to be best and for the S&P it is mostly the slope.
It’s important to view this as a big data problem when
choosing which method to use.
TRADERS´: In your huge last book about trading systems
you developed hundreds of codes for TradeStation. Can you
tell us which ones you’d recommend for 1) intraday trading
and 2) overnight trading/swing trading
Kaufman: Well, that’s asking a lot! If I wanted to do that
I would have just published the one that I thought was
the best system and be done with it. Actually, there are
a lot of systems that make money and a lot of trading
personalities that prefer faster trading, lots of small
profits, big positions, arbitrage, and whatever else. More
important, the book is intended to show technique. When
you become familiar with different ways to view the price
moves then you can create your own, or find the ones that
match your personality.
But to answer the question a little better, I would be
looking for mean-reversion systems for intraday trading
and possibly short-term breakout for trades that last a few
days. Of course, there is pairs trading and divergence,
which are also good methods.
TRADERS´: Everybody complains about High Frequency
Trading. But, does it really affect the big trends
Kaufman: I don’t think so. If it’s profitable (and that’s not
always the case), then it’s extracting profits from the
market, which affects everyone. But it also adds liquidity
and a bit of noise. The most effect may be that it takes
a somewhat bigger move in one direction for a trend
system to get a signal, and another bigger move to exit,
but I see the effects as minimal for anyone holding trades
for a few days or more.
TRADERS´: Many traders start out trading via trial & error.
What would you suggest these traders to do, assuming they
do not really understand that having a process as well as
risk management and proper position sizing is the name of
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People
the game Is it necessary to hit the
wall first
Kaufman: New traders should expect
to lose money. It’s part of the initiation
process. They should understand
that they can make money if they do
it the right way, but the excitement of
getting started often causes them to
rush into trading. My first rules would
be to have a system. It doesn’t have
to be computerised, but you need
clear rules. The best discretionary
traders are systematic, even though
the systems are in their heads. And,
when you have rules, follow them!
You need to start small, really
small. You can’t be worried about
taking a loss. In fact, you need to be
able to embrace a loss. It’s just part
of the process. If you can’t cut a trade
and take a small loss then you’ll
never be a trader. And each trading
system has its own profile, which I
mentioned before. So you need to be
comfortable with your rules.
It’s also important that you don’t
have too many rules. I’ve always
gone by the philosophy that “loose
pants fit everyone.” If I can apply the
same rules to all stocks or all futures,
then the results won’t look beautiful,
but I’ll have robustness, which is
the key to success for me. I want the
trading system to work on all markets
(well, most markets) even if it’s great
on some and barely profitable on
others. I don’t want a system that
works on only one market.
Always trade each position with
equal risk. That is, for stocks, use the
same investment for each position.
Just divide the investment amount
(say $10,000) by the share price to
get the position size. It’s not perfect,
F4) Popular Systems – S&P, 100-Day Trend
The chart shows the profits using a 100-day calculation period for three popular systems: moving average
(MA), breakout (BO), and linear regression slope (LRS). In the long-run, the returns are much the same.
Source: www.kaufmansignals.com
F5) Popular Systems – 5-Year Note, 100-Day Trend
The chart shows the profits using a 100-day calculation period for three popular systems: moving average
(MA), breakout (BO), and linear regression slope (LRS). In the long-run, the returns are much the same.
Source: www.kaufmansignals.com
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F6) Popular Systems – S&P Optimisation from 1990: Profit Factor
The chart shows the profit factors for a variety of calculation periods for the systems: moving average (MA),
breakout (BO), and linear regression slope (LRS). For most settings, the returns are much the same again.
Source: www.kaufmansignals.com
F7) Popular Systems – 5-Year Note Optimisation from 1990: Profit Factor
The chart shows the profit factors for a variety of calculation periods for the systems: moving average (MA),
breakout (BO), and linear regression slope (LRS). For most settings, the returns are much the same again.
Source: www.kaufmansignals.com
but you don’t want to trade 100
shares of Apple and 100 shares of
Bank of America. The Apple profits
and losses will be so big that Bank
of America will be unimportant.
For futures you take an investment
amount, say $25,000 per market
and divide by the 20-day volatility
to get the number of contracts.
You can do that because of the
leverage in futures. Once you find
the position size for all futures, you
can scale them equally to your actual
investment size.
Equal risk gives you maximum
diversification, which means the
best risk control. Of course, there are
other important risk controls, but it’s
the best place to start.
TRADERS´: In one of your books, you
describe how to put the process
of research and development into
a “cohesive framework.” Can you
just briefly explain how this works,
please
Kaufman: The basic idea is to start
with a sound premise, such as an
economic trend or arbitrage. You
can’t let the computer find a method
for you. It just doesn’t work. Then you
need to test it properly using lots of
data, some in-sample and some outof-sample.
You need to understand
how to interpret the results. I favour
looking at the results of all tests so
that “success” means that 70 per cent
of all tests were profitable. Then my
expectation is the average result of
all tests. I don’t believe you can pick
one set of parameters and expect
that to be the best next month, so I
use multiple parameters in order to
get an average result. That may be
78

PEOPLE
too conservative for some investors, but it’s another case
of the turtle and the hare.
TRADERS´: Many Hedge Funds tend to hire more and more
PhDs of physics, statistics, biology, cybernetics. In my own
trading, however, I still find the easy methods do work best.
What do you think about that
Kaufman: That’s a sensitive issue in the Hedge Fund
business. Firms that allocate money to hedge funds seem
to hold value in the number of PhDs in the company,
assuming they are going to keep the strategies on the
“cutting edge.” My personal experience is that’s not
true. You need someone with solid math skills but also
market experience. You can’t create a good strategy by
discovering it on a computer. It must be a sound premise,
and that will only come from observing the market and
understanding the fundamentals. So a new PhD is not likely
to be productive until she gets real market knowledge.
On the other hand, an experienced floor trader can tell a
quant an idea about the way the market reacts to, say an
earnings shock, and the quant can then implement that.
But then so could a regular smart programmer. So it’s the
concept, not the math, that’s most important.
TRADERS´: If you were handling $100 million in trading
capital, how would you manage it in order to produce
absolute returns Which markets, strategies, time frames
Kaufman: You must know that’s proprietary information!
If I tell you how I would manage that now, I would no longer
have a competitive edge. I will say that large amounts of
capital require either many fast trading systems or a few
slow trading ones. That’s why probably more than 60 per
cent of all systems traded are long term trend following.
It works over time and you can trade large amounts on it.
The faster the system, the less liquidity, so if you’re a firm
with $20 billion under management, you’ll favour slow
and concentrate on risk management.
TRADERS´: Is there any other piece of advice you’d like to
share
Kaufman: Yes, I want everyone to remember that the
market keeps changing and that there are patterns that
will occur in the future that we’ve not seen in the past. I
highly recommend a book by Dietrich Doerner, “The Logic
Book Info
Trading Systems and Methods, Fifth Edition
Author: Perry Kaufman Pages: 1232
Publisher: John Wiley & Sons ISBN-10: 1118043561
Language: English ISBN-13: 978-1118043561
of Failure”, originally published in German (“Logik des
Misslingens”). I’ll let the readers figure out the solution
themselves, but the lesson learned will be important for
trading.
TRADERS´: Besides markets, what do you enjoy in your free
time Also, any future projects you’re looking forward to
Kaufman: Free time You think I have free time I used to
play more tennis, go skiing, and diving but these days I
seem to be in front of my computer more than I should.
But then, I really enjoy developing systems and trading.
I tried retiring twice and ended up starting a new company
and writing another book. I guess I’m just lucky to do
what I like. «
The interview was conducted by Marko Graenitz.
79

COLUMN
www.tradersonline-mag.com 04.2014
The Four Agreements
for Traders
» Don Miguel Ruiz, a Mexican author in the tradition of
Carlos Castaneda, wrote a best-selling book called “The
Four Agreements” in 1997. It sold millions of copies and
has acted as a life-clarifying guide for many. How might
these “four agreements” specifically apply to trading
1. Be Impeccable with Your Word
As down and dirty as Wall Street can be, there is a code
of honour among traders. Floor traders and trading desks
are known for confirming deals worth millions, or even
tens of millions in profit or loss, on the strength of a verbal
telephone commitment, a handshake, or even eye contact
and a nod of the head. The whole system works because
all true traders, while fierce competitors down to the last
tick, are also honour-bound to their word. Those who break
the code are rightly banished. Being impeccable means
making damn sure you can deliver, and moving heaven
and earth to come through. Developing a reputation
like this has benefits internal as well as external, as you
become the type of person who “gets it done” in the eyes
of your subconscious as well as the eyes of others.
2. Don’t Take Anything Personally
When going through a rough patch the classic temptation
is to think the market is out to “get you,” that the market
is always opposing you. However, the market is far more
like a force of nature than a personal entity. Does Mount
Everest care who you are Does the ocean care who you
are No. If a freak storm comes up while you are climbing
or sailing, it has nothing to do with “you” – except to the
extent you voluntarily exposed yourself to such risks. Many
traders are smart enough to consciously reject the “market
out to get you” point of view, yet subconsciously indulge in
“woe is me” personalisation on a subtle level. Taking things
personally is all too often a form of whining. As a general
rule of thumb, whiners are losers. The winners are too busy
getting it done – and this means addressing undesirable
results in a detached, objective, wholly non-personal way.
3. Don’t Make Assumptions
Foolish assumptions have swallowed up entire oceans of
profit. The habit of assumption is born of laziness – lack of
due diligence, lack of proper investigation and verification.
Justice ‘Jack Sparrow’ Litle has seventeen-plus years of experience in markets. He cut his teeth as
an international commodity broker with clients on fi ve continents, including a large Russian hedge
fund, and has traded virtually every asset class except real estate. His specialty is global macro.
Contact: www.mercenarytrader.com; E-Mail: jack@mercenarytrader.com
It also stems from a lack of creativity, e.g. the inability to
see an alternative range of scenarios – and sometimes
emotional bias, meaning irrational predisposition to an
expected or demanded outcome.
The number of questionable assumptions traders
can make – and do make, on a routine basis – is veritably
endless. From unexamined notions of how a market works,
to blinding ideological zeal, to unjustified confidence in
a methodology with substantial gaps in process, theory
and execution, to casually misguided assignment of
blame for a bad result (see agreement #2). This is why, in
fact, more traders lose than win.
4. Always Do Your Best
A lot of people half-ass their way through life – and when
they get into the trading arena, it only becomes natural and
habitual and instinctive to do the same thing. Committing
to risk management but not really... committing to a welldeveloped
methodological process but not really... giving
lip service to various aspects of trading excellence but
not following through... As a point of motivation, stop
and ask yourself what might be possible if you really and
truly “always did your best,” every single day. What if you
stopped futzing around completely and totally, committing
to a higher level of focus and dedication than ever before
What if you really and truly found the absolute best within
yourself, and cultivated an iron-clad commitment to
maximum trading excellence What would that look like
What would it feel like How much pain would it require...
and would the pain be worth it Furthermore, what if you
could figure out how to sustain this level of excellence, day
in and day out, not just as a touchy-feely resolution, but true
transcendence to a higher path, as the framework for an
enlightened and evolved way of life How would that impact
your P&L, your success as a trader and your sense of life
fulfilment on the whole How awesome would it be «
80

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