Interview: Ralph Acampora – Godfather of Technical Analysis P. 72 Y our Personal T rading Coach Nr . 08, August 2013 | www.tradersonline-mag.com Trading with Seasonalities Opportunities for Profit in August with the EUR/USD and GoldP. 20 How to Enter a Trade Before the Big Move Starts The Volatility-Breakout Strategy P. 56 TradingAccordi ng toPlanP . 6 Strategies to Give You an Edge in the Markets N e w S e r i e s : T h e T r a d i n g J o u r n a l P .6 4
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» A house with a garden is a nice thing – if it weren’t for the neighbour ’s lawn. It just
so happens that the lat ter somehow is always greener than your own. And if it is not
the colour of the lawn, then it is the size of the house. Or i t is the neighbour’s car
that ’s more expensi ve. Or his wi fe is more beauti ful.
You will have noticed by now what I‘m driving at . Sometimes it jus t looks as though
other people are simply better off and you are the only one to lose out. This is a
feeling that may also surface in trading, especially when you communicate with
other traders via social media. After all, that is where everybody posts their trades
and opinions, which means that they keep track – more or less consciously – of
how those positions might have developed. And soon enough, you’ll find yourself
just focussing on other people’s winning trades – the classic “the-grass-is-greener
on-the-ot her-side“ syndrome. Any examples? Sure, I have three of them right here,
and you can follow up each of them with this sentence: “And I‘ve lost out again“:
• “Trader X was right to go long on EUR/ USD, he’s already 50 pips ahead now.“
• “Trader Y’s third successive short with gold that is way in the black.“
• “Trader Z has again managed to enter just prior to the big move.“
You know what? These thoughts are just nonsense and nothing but a product of your
imagination since you’re having a bad day and keep thinking negatively. So you don’t
have to feel sorry for yourself. The grass is not greener on the other side. Or maybe
just for the odd day or week when there is more sunshine there or your lawn happens to be waterlogged – figuratively speaking. But don’t let that impress you. Long term, the
grass will still be growing best if you consistently deal with all the necessary work that is
required. The others also have bad days and may have to struggle with problems you know
nothing about. Stop seeing only what others have, and make sure that you also see what
they don’t have. All of a sudden, your own lawn will then look a whole lot better.
You have decided on a very specific trading style and that’s what you will need to
keep focussing on. On good days and bad. And by the way, that’s no different from
statisticians with their sophisticated software systems.
The first move is headed towards equity markets, which
resemble a zoom-in on details. You’ll be leaving the level
of anonymity and will raise the curtain on a play thatincludes a wide variety of characters who breathe life
into the stock market. No computer program in the world
can make a judgment on whether,
for example, the latest Samsung
Galaxy phone has the potential for
competing with the iPhone. However,
human beings can. They can form an
opinion and wait for situations where
the market and their own opinion
are in complete sync. This means
that the stock is developing exactly
according to its own price scenario.
These are the moments where you
should be following the trends
in an aggressive and determined
manner. The second move is to trade
whenever the trading algorithms of
statistical traders pause to adapt to
new circumstances. That is the case,
for example, right after any explosive
news that suspends all the statisticalrules of behaviour in one fell swoop.
Or whenever prices move away from
the statistical norm.
It’s not often that candles are formed completely outside the Bollinger bands. This is frequently an indication
that there is an unjustified exaggeration and a backlash is imminent.
Source: www.traderfox.de
F1) Lonely Warrior Signal
If right at the star t of trading there is selling pressure in the market and significant price losses have occurredin advance, this is often an indication of irrational and emotional behaviour on the part of other market
participants.
Source: www.traderfox.de
F2) Expansion Down Gap
on the basis of chart patterns without taking into account
any additional information, we might as well be competing
against Usain Bolt in the 100-metre dash. Our chances
of success are the same in either case. Throughout theworld, the most powerful financial-market players are
busy studying the EUR/USD. There is no such thing as a
Exact Rules Governing the Lonely Warrior Short Signal
1. Yesterday a complete candle was formed above the
Bollinger bands. Alternatively, a candle was formed
with a trading range of more than three per cent with
90 per cent of the prices being outside the Bollinger
bands.
2. The signal trigger is yesterday’s daily low. Once the
price falls below the low, a short position will be
opened.
3. The trade has a stop with a small risk tolerance of two
to four per cent.
Expansion Down Gap (Long Version)
Emotions are rarely a good counsel when making trading
decisions. In other words, if a wild herd of panicky market
players give away their shares, that will be the right time
to enter. Panic is an emotion that needs to mature on
the stock market. It is like a good meal that only reaches
its full flavour after a long period of simmering. At the
beginning of a price panic there are usually moderate
losses. These will then be more severe, and at some point
there will be a double-digit loss on the books within very
few days, which makes shareholders incredibly nervous
and causes them to make irrational decisions. In terms
of our signal, the irrational decision is the unlimited saleright at the start of trading.
Translated into technical analysis, this results in the
criterion that the share price must
have fallen sharply within a short
period of time. More precisely, the
prerequisite for the expansion down
gap signal is that the price loss of
the last five trading days is greater
than three ATRs. If this downward-
movement criterion is met, one will
have to wait and see whether there
is a supply overhang right at the
opening of the next trading day or
whether there is a down gap. Such
a supply overhang could be an
important indication of emotions,
that is irrational actions. That will
be the right time to open a long
position. Prior to that, it is absolutely
necessary for the news ticker to
be checked. If there is any badnews such as a profit warning, for
example, it will be better to refrain
from opening a position.
Exact Rules Governing the Expansion Down Gap Long Signal
1. On the last five trading days, the stock’s share price
lost more than three ATRs.
2. Today, a supply overhang weighs on the stock right at
the opening. The stock opens with a loss of more than
1.5 per cent.
3. If there isn’t any extremely bad news (for example
hefty profit warning), a long position will be entered
immediately after the opening.
4. The long position is given a risk tolerance of two to
four per cent.
Momentum High Break (Long Version)
There are certain points in a chart that almost every trader
keeps an eye on. These certainly include the local highs
or local lows that are V-shaped. Many traders place their
stops at such prominent points or buy pro-cyclically into
a position – quite in the spirit of the classical literature on
such charts. Any experienced trader will often have had
the experience of prices just once – for a tiny fraction of
time – taking out such a point as described above only
to then move in the opposite direction. This kind of price
behaviour is no accident. It is the outcome of a market
process that lets as many market participants as possible
go the way of the worst pain.“Place stop-loss orders!” That’s what everybody
keeps preaching all day long – in stock-market magazines,
For quite a while, the electric cars made by Tesla Motors were taken seriously by German car manufacturers.
But independent test repor ts confirmed Tesla’s enormous range of up to 500 kilometres. After Tesla Motors
then announced that sales of its Model S had been well above expectations, there was no stopping the stock.Incidentally, Tesla Motors sold more of its Model S cars in the first quarter of this year than Daimler did with
We are looking for situations in the chart that show a
strong rally momentum in the immediate run-up to a
new 52-week high. It is as though the chart is screaming,
“Look here, there is something happening here.” If
screened for on a daily basis, the chart pattern only
occurs for a small number of stocks. These are the
ones that are worth doing more in-depth research on.
In particular, the question should be raised whether
the strong momentum is triggered by pivotal news or
a euphoric sentiment in a particular sector. In the latter
case, counter-cyclical positioning might be promising.
If corporate news was published, downright forcing a
revaluation potential, a long position will be the logical
conclusion.
Exact Rules Governing the Expansion 52-Week High
1. Today, a new 52-week high is reached.
2. The price increase for one day is greater than 1.4
ATRs. Or: The price increase since two days ago is
greater than 2.4 ATRs. Or: The price increase since
three days ago is greater than three ATRs.
Pivotal News Point
Contrary to all the nonsensical claims usually made bymarket players worldwide who have just been taught
a bitter lesson by Mr Market, stock quotes have, in the
long run, always something to do with the fundamental
development of the company. Share prices will follow
the trend of corporate profits, and from a long term
perspective market values originate on a par with
increased profitability. It is no coincidence that many
strong upward trends are initiated after the publication
of company news.
Whenever breaking news is thrown into the market
system, this sets into motion a chain of decision-making
processes to be engaged in by market players. Will the
new realities match our own expectations? If not, trades
will be made. An increase in the earnings forecasts,
for example, may lead to an investment-fund analyst
presenting his new target-price prediction at a meeting
and the decision being made to build a significant position
in the double-digit millions.
Whenever the new realities emerging after pivotal
news pulverise long-held opinions and ideas, the
capital-market players are deprived of their calculationbases. People and, more importantly, management
structures in companies are such that opinions that have
long been voiced cannot be revised overnight. When
Apple’s iPhone was launched and the first gigantic
sales successes were achieved, most analysts probably
suspected that Nokia’s days were numbered for the time
being. But virtually no analyst dared at the time to utter
this insight immediately. It takes time for new realities
to be accepted. This is shown in the stock markets in
periods of strong outperformance or underperformance
of shares following pivotal news.
The Exact Rules Governing the Pivotal News Point
1. Today, a news item is published that at a stroke
throws out the existing calculation bases regarding
the future profits of a company and outlines a
new development path that in this shape has not
previously been considered possible by most marketparticipants. The first price after publication of the
news is the pivotal news point.
2. Buying starts immediately after the publication of the
pivotal news.
Your Next Few Steps
You should take the time to think at length about whether,
objectively speaking, you have an edge in the markets,
and if so, what exactly it is. In the long term, this criterion
is the basic prerequisite for success in the stock market.
Thereafter, make a trading plan in which you explain your
strategy in detail and respond to all contingencies in the
form of scenarios — how to proceed when you are winning
and how do you act in the event of a loss, what to do with
surprising news, and what if there is a sudden market
crash? Anything can happen in the markets, and you need
to have a ready answer to everything. Otherwise, there is
a danger of you having to respond at short notice, deciding
emotionally, and making exactly the wrong decision in
the heat of the moment (which other traders who are
better prepared will benefit from). Professional marketparticipants have worked intensively ahead of time to be
prepared for all eventualities and when it matters know
just what to do – and so should you. «
Simon Betschinger
Mr Simon Betschinger holds a master’s degree ineconomics and has been trading since 1998. He is apartner and founder of TraderFox GmbH (ww w.trader-
fox.de), a real-time stock-market software program forthe systematic trading by chart patterns. In addition,he trades with a real-money portfolio on the tradingportal Master Traders (www.mastertraders.de).
New US-Dollar IndicesDetermining a fair valuation for the US dollar, or any other currency, has proven to be a difficult task. Several US dollar indices have
been created with the goal of finding the most accurate and representative valuation of the US dollar. However, considering the many
international currencies competing in the global marketplace, dollar indices appear to disregard an important piece of the puzzle.
» The global consumer-based society is accustomed
to using a base currency for all transactions. People
instinctively use their domestic currency unless they are
frequent travellers or engaged in international commerce.
The same denominator is being used, automatically
making life much easier. Apples never have to be
compared to oranges.
However, currencies also change in value. That value
is determined in the foreign exchange (forex) market,
which allows, for instance, a comparison of the euro to
the dollar. The Euro-Dollar could rise in value but how
would one answer the following question: Is the Euro
strengthening or is the US dollar weakening?
The two main variables for formulating a dollar index
are the selection of currencies and the weights assigned
to each. The standard US Dollar Index, also known by itsticker symbol USDX, has been in use since March 1973
when created by US commodity exchange operator
IntercontinentalExchange (ICE). The USDX measures
the value of the US dollar against a basket of six foreign
currencies (euro, Japanese yen, pound sterling, Canadian
dollar, Swedish krona, and Swiss franc). Unlike two of the
more recently-created dollar indices, the USDX is heavily
skewed towards the value of the euro. The weight given to
each currency was derived from their share of US foreign
trade back in the 1970s. This index has only been updated
once, in 1999, when the euro was adopted. Several
European currencies were replaced by the single currency,
which now has a 57.6 per cent weight on the index.
The IC E takes pride in the stability of the index despite
having maintained the same trade-weights over the
years. The USDX matches relatively close to the Federal
Reserve’s own Trade Weighted U.S. Dollar Index, leading
the ICE to argue that trade flows are not a major driver
of the Dollar Index. The USDX allowed traders to usethe index for trading purposes whereas the Fed’s index
was an ‘after-the-fact’ index based on annually changing
By looking at recent trends in the US dollar, one can make
a comparison between commonly-used US dollar indices
and the performance of the US dollar to other currencies.
From April to mid-June, three major US dollar trends
can be detected. In the first trend, from April 1st to May
1st, the US dollar was bearish versus most currencies,
with a few exceptions. This was followed by a period
of remarkable US dollar strength from May 1st to May
22nd across all currencies, developed and emerging
alike. Standard US dollar indices did a fairly good job of
reflecting those trends.
The third period presents a discrepancy. That
period was characterised by strong dollar strength
versus emerging currencies and weakness versus the
majors. However, the US dollar indices very closely
match the dollar weakness seen in the majors and
disregard the emerging country currencies. This
discrepancy is visible in the chart. The red-shaded
lines represent dollar weakness versus the majors
and the green-shaded lines represent dollar strength
versus emerging currencies. The black lines, which
represent the dollar indices, should be somewherecloser to the middle. However, they are closely tied to
the red lines.
The shortcoming of the
dollar indices is that they lack
any indications of dollar strength,
although the dollar was remarkably
strong versus emerging currencies.
Conclusions
A broader dollar index would have
helped capture the dollar strength
that was not reflected on the popular
indices. Emerging markets play an
important and growing role in the
global market; however, they have
yet to make any substantial impact
on the commonly-used measures of
the US dollar.
As seen above, many dollar
indices have been created,
especially in recent years with anincreasingly globalised economy.
Although countless of variations
have been created, a popular broad
The third period presents a discrepancy. It was characterised by Dollar strength versus emerging currencies(green lines) and weakness versus the majors (red lines). However, the US Dollar indices (black lines) very
closely match the Dollar weakness seen in t he majors and disregard the emerging countr y currencies.
Source: www.fxmania.com
F2) Divergence of US Dollar Strength against Majors and Emerging Currencies
of the value of the U.S. dollar, an essential benchmark
for traders and corporate treasurers who need to discern
the true measure of investing abroad or domestically.”
They highlighted that their methodology sets it apart
from the rest by basing the weights of seven currencies
on forex trading volumes as reported by the Bank for
International Settlements. The use of trading volumes
aims at measuring the right relationship between
currencies.
Whether to use forex trading volume or international
trade data is debatable. By using forex trading volume,
the euro weighs about 41 per cent of the WSJ dollar
index compared to 57 per cent for the DXY. However,
this index may also be too skewed towards the euro
in a global economy where emerging markets have a
rising stake.
Exchange-Traded Funds Search for a Perfect Dollar Index
Many currency ETFs (exchange-traded funds) were
created in late 2007 ahead of the financial crisis to
capitalise on the growing role of emerging markets.
With the growth of the ETF market, many investment
banks tried to develop their own products that
tracked the performance of the US dollar versus other
currencies. Most of the time, however, these can be
divided into developed and emerging market funds.While there is an abundance of different combinations
and 10K AUD. Final settlement price based on settlements in thesix component currency futures.
June 2010The CME and
Dow Jones
Yes, as a futures
contract on the
CME.
Approx. 1
million in
total FX
futures
T1) Overview: Dollar Indices
Source: www.fxmania.com
dollar benchmark has not emerged. Some tools are not
commonly or publicly made available by data vendors.
Perhaps, the ‘right’ US index has not been developed yet.
While the main US dollar indices are fairly accurate
in measuring the direction of the US dollar, the timing
and the size of the moves can vary significantly. The
Federal Reserve’s broad trade-weighted dollar index is a
much more complete index as it includes 26 currencies,
all weighted according to trade data. In comparison to
the other indices, this index does a better job of valuing
the dollar because it includes a fairer representation of
emerging currencies, which play a growing role in the
global economy.
According to the International Monetary Fund’s (IMF)
World Economic Outlook, emerging economies’ share in
global output has increased from less than 20 per cent
in the early 1990s to more than 30 per cent measured at
market exchange rates. Accounting for differences in the
cost of living, that share is even greater and is expected
to surpass 50 per cent in 2013. Most US dollar indices
disregard an important part of the global economy in
measuring the value of the USD.
As can be seen on Figure 1, all indices follow the same
general direction. However, only the Fed’s index showed
the USD dollar reaching new annual highs in June. The
Fed’s index cannot be used for trading purposes because
it is an after-the-fact index that is re-balanced on an annual
basis using trade data. However, an index that includes
a better representation of emerging country currencies
would perform more closely with the Fed’s index.«
Jose M Piñeiro
Jose M Piñeiro started in the forex industryin 2002 as an Operations Specialist and thenCompliance Officer for FXCM in New York when
the online retail forex market was still getting offthe ground and expanding rapidly. He has spentthe last seven years working for Web FinancialGroup (WFG), based in Madrid. He is now forexanalyst for WFG’s forex website, f xmania.com.
When Shinzo Abe was elected as Prime Minister of Japan investors looked forward
to a new era of growth and recovery for the G8 nation, thanks to his heralded
Abecomics plan. Instead of stability investors are faced with fresh uncertainty.
Private investment guru Clem Chambers, CEO of ADVFN.com and author of “The
Death of Wealth: The Economic Downfall of the West” looks into Abemonics,
what went wrong and argues that inflation and the Bank of Japan point towards the
country’s economic decline.
Clem Chambers
Clem Chambers is CEO of ADVFN (www.advfn.com)and author of several books such as “101 Ways toPick Stock Market Winners” and “A Beginner‘s Guideto Value Investing“.
Most Likely Abe’s Economic Revolt Is Already Crushed
» Last month saw the likely death of Abenomics. It is not
a foregone conclusion but Prime Minister Shinzo Abe will
need to come out fighting in a very un-Japanese way to
save his program of national regeneration. In a few shortweeks he has gone from hero to zero.
Most likely, Abe will soon be the umpteenth one-year
Japanese leader in a line of political failure. Japanese
In our new section “Trading Seasonalities”, we are now starting to introduce trades to you that offer a potential tradingopportunity on the long or short side, based on seasonal and technical behaviour patterns. In this first article, we will be
considering two trading ideas for the month of August. Traders can implement these, using the respective futures or options
contracts. They may also trade the setups via the interbank market (for EUR/USD) or by using warrants, certificates or CFDs.
Part 1: Short Idea for EUR/USD and Long Idea for Gold
From 8th August, the EUR/USD will again be pointing to declining prices. Building a short position at this timecontinues to be supported by the activities of commercial market participants who are already net short (red
bars in the lower sub-graph). The position will be closed on 5th September.
Source: www.trackntrade.com
F1) Trading Idea EUR/USD December Contract Short » Trading Idea EUR/USD Future
After the US dollar the euro is the
most traded currency and is the
second most important reserve
currency next to the US dollar. A
seasonal opportunity on the short
side is offered by the EUR/USD on
8th August. With a holding period
until 5th September, traders can use
the last period of seasonal weakness
prior to things moving upwards
again later. While Forex traders can
be active directly in the interbank
market – even with a small position
size – futures are traded on the
Chicago Mercantile Exchange (CME).In the chart of the December contract
Following the most recent shift “away” from a USD-
centric world (with the China-Australia direct currency
convertibility), it seems the possibility of China’s Yuan
as the next global reserve currency is getting closer. The
British, Germans, and now the Swiss (who just signed a
free-trade-agreement with China) are all actively vying to
become Europe’s Yuan trading hub as it seems the long
line of developments to internationalise the currency over
the past two years. The Chinese currency is well on its way
to becoming one of the future global reserve currencies.
Although, the USD is still the most commonly-used
currency for settling trade with China; from virtually zero
in 2010, the Yuan is used to settle over twelve per cent of
trading transactions now and is likely to increase further.
Source: www.zerohedge.com
Electric car maker Tesla Motors (TSLA) entered
the NASDAQ-100 Index on the 15th of June
having experienced surprisingly positive, throughthe roof figures during the last several months.
Simultaneously, Oracle`s (ORCL) shares have dropped
out of the index.Tesla most recently had a market
capitalisation of around 13 Billion dollars.
Source: www.globenewswire.com
Investors are becoming increasingly bullish about
the U.S. dollar in anticipation of a stronger economy
later this year. The newfound enthusiasm for the buck
follows a choppy period as investors prepare for the
Federal Reserve to eventually unwind its stimulus
program. Depending on how the economy performs,
the central bank could begin tapering its bond buying
program by the end of this year. The remarks sent the
dollar higher against its main trading partners as stocks
fell and bond yields rose. Although the Fed trimmed
its outlook for economic growth this year, traders seemed to take Bernanke’s comments as confirmation that therecovery is gaining momentum. At the same time, market volatility is expected to remain high for now, which
to the developer you could also trade it with less money
using CFDs. That shows that it is possible to earn money
with the scenarios and that they are not theoretical results.
Every user has the ability to create a scenario for each
of the 25,000 shares and to combine those to generate
trading orders. The developers also deliver, for example,
catalogues for sector-indices to analyse individual shares
within these sectors. Therefore a trading system is
possible that generates signals, for example, based on
the 30 DAX-shares or the shares in the NASDAQ100.
Furthermore, the user can create buying- and selling-
scenarios for all important commodity futures to build
call-write positions after the signal. Another feature is
the so-called “crystal-ball”. It is used to create a list that
shows if the particular day is bullish, bearish or neutral
for the chosen title based on the vector analysis. The
system predicts the next five days and in addition there
is a total prognosis including the evaluation of the trend
strength.
VectorBull-Realtime Offers Intraday-Prognosis
A completely different thing is the Vector-Bull-Realtime-
version. It might be the same name, but it is designed
for a completely different user group. In contrast to the
stock-edition the program does not generate entry- and
exit signals, but a prognosis line for the next 24 timeunits is created – based on a database of up to 15 years
of tick data. If you opt for the software to calculate in
the 4-hour chart, you will know what
may happen in the next 96 hours.
The smaller the time frame, the more
detailed the prognosis. Short term
traders could compare the 5-minute
chart with their own strategy and
trade positions accordingly. Here
as well are no additional costs after
purchasing, because Spring Techno
delivers the necessary realtime-
price-data for free. In total there are
60 DAX stocks, Dow Jones Index,
40 currency pairs and 25 indices,
futures and commodities.
We tested the software non-
stop and the price development
was predicted very well. But there
are difficulties if there is important
economic news. Figure 3 shows ablue prognosis-line in the 30-minute
chart for gold, EUR/USD, DAX-
future, crude oil and bund-future.
A blue prognosis line offers hints how the analysed instrument may develop if the price will develop similarto the past. T he chart shows the prognosis and the actual price development of five markets. T he line shows
96 time units.
Source: www.vectorbull.com
F3) Real-time Version for Daytraders
result. The software displayed 1121 profitable systems
out of 9521 calculations. We terminated early to avoid
over-optimisation. We search for a system that shows an
increasing equity curve even with the missing third of data
and sort it by the profit factor. The system recalculates and
updates the equity curve by the last third of the history
that was not included in the first calculation. Although
Apple showed considerable price loss in the recent
past, the price losses of the chosen system are limited.
According to the developer, the software learns with new
data and therefore the pattern analysis is adapted. The
trading system parameters of the system chosen are then
saved as a scenario and are only valid for the Apple stock.
This process has to be done once for each stock that
you want to add to your preferred trading universe. The
AutoTradeAdvisor checks the single scenarios and adds it
as an order for the user.
Trading Systems in Real Practice
Of course we asked if such scenarios could be traded
real time as well. Figure 2 is an example that clients of a
German broker have used on their own trading accounts
for over a year now. Spring Techno determined scenarios
of 14 US-stocks with a holding period of five days. The
result is impressive: The account size was 14,000 euros
and the risk per trade was 0.5 per cent at maximum. Itbegan at the beginning of 2012. The total performance
was 15 per cent or a total profit of 2100 euros. According
two per cent per trade. This includes all trades. It is the
number of winning trades times their average gain minus
the losing trades times their average loss divided by the
total trades. So, if the system has a total of 100 trades and
60 per cent make two per cent on average and 40 per cent
lose one per cent on average you have 120 per cent minus
40 per cent divided by 100. In this example the average
gain per trade is 0.80 per cent.
We now look at the top 20 returns per variation of The
Long Pullbacks Strategy (Table 1). These are the returns
for the eleven year period 2001 to 2011. The gains and
edges have been substantial, especially for the largest
intra-day pullbacks; those which have pulled back eight
and ten per cent.
The first column shows the number of trades that
triggered during that period of time. To assume a fill was
made in the testing the stock had to trade at least one
cent under its limit price (it need to trade through the
simulated order).
Column 2 shows you the average
gain per trade (the average edge) of
all trades. As we just mentioned 0.5 to
two per cent are considered excellent.
In the Long Pullbacks strategy, the top
20 variations all have edges above
5.70 per cent per trade!Column 4 is the percentage of
trades which were profitable. Most
traders like to get to 55 to 60 per cent
correct. The majority of the top 20
variations here are above 75 per cent
correct.
Column 6 is the Moving Average
used. We ran this test using a 4-, 5-,
and 6-day simple Moving Averages.
As you can see, all are valid.
Column 7 is the percentage
distance the stock closed under its
Moving Average. We used four per
cent below the MA, five per cent
below the MA, and six per cent
below the MA. Again, as you can see,
all are valid.
Column 8 is the percentage
distance from the close that the limit
order is placed. So if a stock qualifies
as a set-up the night before, youplace in your limit order the next
morning. We tested four, five, six,
seven, eight, nine, and ten per cent.
had historical volatility and ADX readings above 30. We use
a 4-period MA (for parameter X), a close at least five per cent
below the MA (for Y), and a buy limit order seven per cent
below the previous day’s close (for Z). This is what happened:
• Point 1: MAKO closes down two days in a row and
more than five per cent below its 4-period Moving
Average. The next day, we will look to buy on a limit
order seven per cent below today’s close.
• Point 2: The stock sells off more than seven per cent
from the previous day’s close and a Long Pullbacks
signal is triggered.
• Point 3: MAKO moves sharply higher and closes with its
2-period RSI above 70. Lock in your gains on the close.
Test Results
When traders ask what is a good edge (meaning the
average gain per trade) on a short term basis, meaning
under a week, the rule of thumb is 0.5 per cent up to
These are the best 2 0 setups based on average profit for the eleven year period 2001 to 2011. The gains andedges have been substantial, especially for the largest intraday pullbacks; those which have pulled back eight
and ten per cent.
Source: Connors, L./Alvarez, C., “The Long Pullbacks Strategy”, Connors Research, LLC, 2012
Buy the stock on the open tomorrow if setup is met
on a fur ther intraday-limit Z% below yesterday’s
close
Stop-loss: None; use of options recommended
Take profit:RSI(2) > 70, RSI(2) > 50, Close > MA(3), first up
close, intraday exit
Trailing stop: –
Risk and money
management:
1-2% risk per trade as a percentage of trading
capital
Average hit rate: 61.19%-78.29%
Average trade: 1.61%-6.75%
Strategy SnapshotIt should come as no surprise that the higher the
limit order, the greater the fear, and the greater the
edge. Larger limit orders get filled less often, especially
in low volatility, quiet markets but tend to thrive in high
volatility markets where fear is the greatest. When you
decide which variation to use for your own trading you
may want to adjust the size of the pullback to reflect the
current market conditions. In low volatility markets, you
may want to look at six, seven, or eight per cent. In high
volatility markets nine and ten per cent may be the most
appropriate.
Please note though that these tests here do not
differentiate between market conditions. Each individual
variation assumed these were the rules you used no
matter what the year was. It simulated all trades for
eleven years and as you can see the edges have been
extremely large.
In Table 2 we see the 20 highest performing variations
sorted by per cent correct. The
numbers are extremely high with
the 20th best performing variation
on a per cent correct basis coming
in at 77.12 per cent all the way up
to the best coming in at 78.29 per
cent. A common theme again is
the size of today’s limit order. Thelarger the limit order, the greater the
performance.
The Role of Exits
Different exits will give different test
results. The first place traders look is
the size of the edge and use the exit
that provides the greatest edge. But
another factor is how long you want
to tie your money up. RSI 70 exits
often give the highest edges but tie
the money up the longest.
Three-day exits and especially
first-up-close exits often show (on
average) smaller edges but get out
of positions quicker, lessening the
overnight risk. The Long Pullbacks
strategy is extremely robust and it
was created to allow every trader to
decide for themselves which entry
and exit variations they want to usebased upon their own personal style
of trading. Table 3 shows the top 20
test results for each exit type.
In Table 2 we see the 20 highest performing variations sorted by per cent correct. The numbers are extremely
high with the 20th best per forming variation on a per cent cor rect basis coming in at 77.12 per cent all the wayup to the best coming in at 78.29 per cent . A common theme again is the size of today’s limit order. The larger the
limit order, the greater the per formance.
Source: Connors, L./Alvarez, C., “The Long Pullbacks Strategy”, Connors Research, LLC, 2012
No. of
Trades
Avg. %
Profit
Avg. Trading
Days Held% Winners
Exit
Methodology
MA
LengthStretch
Limit
Entry %
820 5.55% 2.49 78.29% C>MA3 6 6% 10%
1092 5.24% 2.41 78.11% C>MA3 6 6% 9%
959 5.40% 2.47 78.10% C>MA3 5 5% 10%
1276 5.56% 3.46 77.98% RSI2>50 5 5% 9%
1282 5.06% 2.41 77.85% C>MA3 5 5% 9%
1086 5.73% 3.49 77.81% RSI2>50 6 6% 9%
1679 4.95% 3.39 77.67% RSI2>50 5 5% 8%
1430 5.16% 3.41 77.55% RSI2>50 6 6% 8%
1284 4.55% 1.66 77.49% Up Close 5 5% 9%
960 4.84% 1.71 77.40% Up Close 5 5% 10%
839 4.82% 1.66 77.35% Up Close 6 6% 9%
823 4.97% 1.70 77.28% Up Close 6 6% 10%1096 4.67% 1.65 77.28% Up Close 6 6% 9%
5. Intraday Exit This means exiting the position on the close of the
same day they were entered. The edges with Long
Pullbacks on an intra-day basis are not as large as
they are when holding positions overnight but they
have healthy intra-day edges and these edges are
significantly higher than most day traders are used to
having. Most day traders are very happy with 0.25 to
0.50 per cent edges per trade. The top Long Pullback
Strategy variations go far beyond that. The edges
range from above 1.61 per cent per trade all the way
up to 1.87 per cent gain per trade. «
Laurence Connors
Larry Connors is the chairman and founder ofConnors Research. He is also the founder ofTradingMarkets.com which has been providing
traders with cutting edge trading research forover a decade now. He has over 30 years in thefinancial markets industry. His opinions have beenfeatured in the Wall Street Journal, Bloomberg,Dow Jones, & many others. For over 15 years, Lar ryConnors and now Connors Research has providedthe highest-quality, data-driven research on tradingfor individual investors, hedge funds, proprietarytrading firms, and bank trading desks around theworld. He has also recently co-authored a new bookof statistically-backed trading strategies called“How Markets Really Work, 2nd Ed.”
Cesar Alvarez
Cesar Alvarez is Director of Research and Managing Partner of Connors Research aswell as a private trader. He also co-authored several books on trading including “HowMarkets Really Work, 2nd Ed.” and “Short Term Trading Strategies That Work.”
Connors Research is a financial markets research company.
It owns a proprietary core database of over 8.4 million
equity trades – a unique, hand-groomed repository of
data on short term market behaviour that underlies all of
its products. Connors Research continually adds to and
improves this data, and uses it to create model-driven,
quantitatively validated trading methodologies aimed at
giving traders a professional edge.
Connors Research
Table 3 for each exit type shows the setups with the highest average profit. Traders should use the exit
strategy that best fits into their daily trading plan.
Source: Connors, L./Alvarez, C., “The Long Pullbacks Strategy”, Connors Research, LLC, 2012
T3) Top 3 of Each Exi t Type (Based on Average Prot)
No. of
Trades
Avg. %
Profit
Avg. Trading
Days Held
% WinnersExit
Methodology
MA
Length
StretchLimit
Entry %823 4.97% 1.70 77.28% Up Close 6 6% 10%
638 4.92% 1.73 77.12% Up Close 4 6% 10%
960 4.84% 1.71 77.40% Up Close 5 5% 10%
820 5.55% 2.49 78.29% C>MA3 6 6% 10%
638 5.48% 2.50 77.27% C>MA3 4 6% 10%
759 5.48% 2.51 77.21% C>MA3 5 6% 10%
638 6.12% 3.66 77.27% RSI2>50 4 6% 10%
757 6.06% 3.67 76.62% RSI2>50 5 6% 10%
816 6.03% 3.64 77.08% RSI2>50 6 6% 10%
808 6.75% 6.24 75.62% RSI2>70 6 6% 10%
751 6.55% 6.35 74.17% RSI2>70 5 6% 10%
948 6.41% 6.26 74.89% RSI2>70 5 5% 10%
977 1.87% 0 63.05% Day Trade 4 5% 10%
1,069 1.84% 0 64.27% Day Trade 4 5% 10%
850 1.84% 0 64.12% Day Trade 5 6% 10%
1. Up Close
The average gain per trade is lower than what we
have seen up to now. But the length of time in the
trade is extremely short. For those traders who do
lower premium for the versions 1a and 2a is “bought”
by the options used being relatively far in the money.
While this effectively causes more capital to be risked
than is the case in the hedging-version options, there
is still far less capital invested than in the case of a
direct exposure to the underlying. Tables 1 and 2 show,
how each of the versions develops in various scenarios
when compared to a direct investment. For the sake of
simplicity, the tables are invariably based on the end of
the term of the options.
Conclusion
Basically, many investors are familiar with the possibility
of achieving a limitation of risk by combining a position
in the underlying with a hedging position in options on
this underlying. The purpose of this article, however, was
to prove that it is also possible for any risk to be limited
by exclusively investing in options – as an alternative to
the exposure in the underlying. The only prerequisite is
that the leverage effect of the options not be exploited
for speculative use, but – in keeping with leverage – for
reducing the capital invested. Compared to the direct
investment in the underlying – if necessary, combined
with hedging options – significantly less capital will
be tied up. The remaining free capital can be investedelsewhere. Indirectly, this diversification will lead to a
further risk reduction. Compared to the classic version of
using options to hedge a position in the underlying asset,
that strategy appears to be attractive. Instead of having to
make another hedging transaction alongside the original
trade, solely investing in options as an alternative to
direct investment already offers a “built-in” self-defence
– and does so at much lower cost and with less capital
tied up than is the case with hedging using at the money
options.
However, it should be kept in mind that in the
strategy presented by versions 1a and 2a more capital
will be risked than in the classic hedging model –
despite less capital being tied up. This is what traders
need to pay attention to in their risk management. In
addition, investors will have to forgo possible dividend
payments that will not materialise in a sole investment
in options without any investment in the underlying
existing alongside it. As with any investment in options,
it should, of course, be kept in mind that, unlike the
direct investment, this is a long term investment. So fora trade to be successful, the targeted performance of
the underlying needs to be achieved within the term of
the options. «
Alexander Mantel
Mr Mantel is a lawyer who has been studying
the financial markets since the age of 17. Whilethe focus of his interest is on derivative productsand new developments in the financial industry,he is always open to any interesting challenges.
The cyclical progress of the volatility of financial markets plays
an important role for every trader. Especially the change of
phases of low movements (low volatility) to phases of strong and
unpredictable movements (high volatility) offers good possibilitiesto active market participants for opening positions. Of course it
is necessary to have a systematic approach to recognise such
situations. The historical volatility ratio can be of great help.
How to Enter a Trade Before the Big Move Starts
David Pieper
David Pieper is a CIIA and has been interested instock markets since the end of the Nineties. Heconcentrates on trading with CFDs and is a freelance author.
» The historical volatility measures the fluctuations of
an underlying stock within a certain period of time.
It provides information about the past fluctuations
based on the statistical value standard deviation,
where the fluctuation of a price around an average
value is measured. There will be extreme deviations
now and again to the upside or to the downside that
predict a reversal movement – a concept that is used
with the Bollinger bands. The glance in the rear-view
mirror alone offers no advantage for the trader – only
if you compare the current volatility, for example over
ten periods, with the long term “usual” volatility over
for example 100 days, you can make a statement, if
a stock is in a phase of unusually high respectively
low volatility. It is interesting to compare the two
periods of volatility to define clearly, what “high” or
“low” means. An established indicator is the so-called
“historical volatility ratio”, short HVR.
Step 1: Identify Low Volatility Ratios
This HVR key figure is especially
useful to determine short term
breakouts of volatility and
therefore it is the basis for a
trading strategy. We measure the
historical volatility of two different
periods and calculate it as a
quotient. If the short term volatility
differs strongly from the long
term volatility, the indicator will
increase or decrease considerably.
A strong increase of the volatility
ratio shows that the trading
ranges of the current periods are
considerably larger than those
measured over a longer period
of time. A strong decrease of this
ratio signalises the calming of the
trading ranges. The latter signalshall be the basis of our trading
strategy. A value of 0.5 or smaller
is in general a good threshold.
The historical volatility ratio shows the relation of the current volatility (ten days) to the long term volatility(100 days). If the indicator reaches a value of 0.5 it is a signal for an imminent breakout. From the end of April
to the beginning of May 2013 there were three signals for long trades (see marks).
Source: www.tradesignalonline.com
F1) DAX Hourly Chart with HRV (10/100)
Historical volatility – which means the realised volatility of
the past days and weeks – is measured in two different
time frames and calculated as quotient. If the short term
volatility differs considerably from the long term volatility,
the indicator will increase or decrease considerably. Our
strategy is implemented if a strong decrease of the ratio
signals a slow-down of the trading ranges.
Historical Volatility Ratio (HVR)
That means the current volatility is half of the long-
term volatility – a good sign that price dynamic may
increase shortly.
Step 2: Trade-Planning
If the trader has found an underlying with a low volatility
ratio he can plan the trade precisely. The direction of
the breakout cannot be predicted for sure in advance,
therefore the trader should place stop orders long and
The direction of the breakout cannot be predicted for sure in
advance, therefore the trader should place stop orders long and
signals and limit the risk. Therefore, it is important
that you place a stop-loss below the low of the
signal candle when buying. If your short signal wastriggered, the stop should be placed above the high
of the signal candle. If the trade runs into profit, you
should trail the stop to break-even first and then trail
it – as a suggestion – according to the general rules
of market mechanics on a lower time frame to protect
book profits.
Example DAX
Figure 1 shows the hourly chart of the DAX from 24th
April to 7th May 2013. Below the candlestick chart you see
the historical volatility with the settings 10/100 and the
threshold of 0.5 (red line) which is the signal line. During
the shown period there were three situations where the
short term volatility was only half of the long term one
– a good sign for a future breakout. Let us take a closer
look at the first signal on 24th April. After the 2 pm-candle
the HVR reached the signal level and therefore a breakout
was “in the air”. Therefore we placed a stop-buy order
above the high of the signal candle at 7710 as well as a
stop-sell order at 7675.
The glance at the lower time frame (Figure 2)shows, that the breakout took place shortly after wards
and therefore the long order was executed (Point
E). The big candle confirmed the buying signal and
The glance at the shorter time frame – trade 1 in Figure 1 – enables the precise stop placement during the
trade. After the entr y (E) the stop was trailed twice. We closed the position at the end of the trading day (A).
Source: www.tradesignalonline.com
F2) DAX 10-Minute Chart
You can use tools like stockfetcher.com to enter individual screening filters torecognise attractive trading candidates. The picture shows the filter-code for
the HVR with the settings 6/100 and 10/100.
Source: www.stockfetcher.com
F3) Screening Results US Stocks (10th May 2013)
short to profit from the coming impulse. In detail this
means:
• Stop-buy above the high of the signal candle • Stop-sell below the low of the signal candle
In the 03/2013 TRADERS’ cover story, Norman Welz, a leading expert in applied trading
psychology, described the basics for success in the stock markets. Here he continues and
observes other important effects that a trader need to be clear about. First he deals with
the importance of knowledge and how the selfish mind works. After a sidebar about the
disadvantages of trading-gurus, Welz eyes one’s weaker self and finally concludes that
learning to trade affords a change in personality.
Norman Welz
Mr Norman Welz is a trading psychologist atGodmodeTrader and is a fully-trained trader whoalso runs a private psychotherapy practice inHamburg. He is the producer of the “Better mind
Coaching Program for Traders” and the TRADERSTALK CD box of intervie ws. His book “TradingPsychology” has made him a best-selling author.
www.bettermind.de, www.godmode-training.de
» We Are Not Able to Do
Something That’s Not Part of Our Brain
The human being can only implement what is firmly
grounded in its neural network. One example: You are abusinessman and travel in China on business. Your mind
might say: “Oh yes, if I talk to Chinese business partners,
I should speak Chinese.”. But if you have not learned how
come: The daily chart showed a so-called “W-formation” and the signal
line has already been exceeded.
The whole market showed a trend
BASICS
64
www.tradersonline-mag.com08.2013
Trading Journal:Thomas Bopp
In our new feature “Trading Journal” traders – beginners
or professionals – present actual trades which taught them
something special. It is Thomas Bopp’s turn this time.
26th April 2013 – Call-Write Trade FTSE 100
F1) Sell of a Put on the FTSE 100
A W-formation in the index has to be confirmed by the sentiment. Only then do we get a signal based onthis technical setup. We sold a put with a strike price of 5950 points (green line) below the upper 80 0-days
envelope (blue line). The target was at 66 96 points.
to that chart; you would see that the bias is strong
whenever the ADX line is above the level 30 or more.
In addition, you would notice that the market is coming
down when the -DI is above the +DI, and vice versa. You
would have noticed that the most favourable positions
would have been taken when the ADX line is above level
30 while there is a ‘sell’ signal or ‘buy’ signal as given bythe positions of the -DI and +DI. It is noteworthy that there
is not much movement whenever the ADX line is below
the level 30.
Example 2: Another way of using the ADX is to
confirm what the other indicators are saying. In this
example, we examine the use of
the ADX with a Moving Average.
In Figure 2 (on the same GBP/JPY
4-hour chart), the 20-period Simple
Moving Average is used. Basically,
a bullish bias is assumed when the
price crosses the SMA 20 (colour
red) to the upside, and a bearish bias
is assumed when the price crosses
the SMA 20 the downside. Looking
at the chart, you would see when a
trade signal could be taken and when
it should be ignored, considering all
the above rules.
The Average True Range (ATR)The ATR was introduced by Welles
Wilder, and it has become a valuable
indicator since then. One needs
You can see how the ADX is used as a complete trading system on the GBP/JPY 4-hour chart. T he ADX period
14 was coloured blue, while the +DI green and the -DI red. You see that the bias is strong whenever the ADX
line is above the level 30 or more. In addition, notice that the market is coming down when the -DI is above
the +DI, and vice versa.
Source: www.metaquotes.net
F1) The ADX as a Complete Trading System
Another way of using the ADX is to use it to confirm what the other indicators are saying. In this example,
we examine the use of the ADX with a Moving Average. Basically, a bullish bias is assumed when the pricecrosses the SMA 20 (colour red in chart above) to the upside, and a bearish bias is assumed when the price
crosses the SMA 20 the downside.
Source: www.metaquotes.net
F2) The ADX Used to Conrm the Signals on the SMA
to note that the ATR gives an indication of the market
volatility rather than the direction. This means that, unlike
Moving Averages and the ADX, the ATR only showcases
the intensity of the current volatility, rather than showing
whether the main trend is bearish or bullish. Significant
biases in the markets tend to come with significant
ranges (or significant True Ranges, hence the indicatorname). The ranges tend to become narrow in noiseless
markets. Therefore the ATR gauges the significance of a
bias – giving a range increase during an extremely volatile
bullish outbreak or a range increase during an extremely
For the sake of simplicity, this controversial indicator
will be explained in the simplest possible manner, for if
the details of the AO indicator are conveyed as they are
documented in highly technical trading jargon (which
would appear ostentatious to beginners and certain
advanced traders), they may fail to achieve our desired
ambition – which is to make every trader understand the
signals generated by the indicator. Like most indicators,the Awesome Oscillator simply generates long and
short signals. The AO has a bar graph of green and red
bars, with a zero line. Looking at the Figure 4, you would
see the AO on the AUD/USD daily chart, with default
parameters, just as they are in the MT4. When you move
your chart forwards, you would see
how the indicator shows long and
short biases.
Here is the computation for the AO:
It is a Simple Moving Average (SMA)
period 24, plotted through the central
points of the bars (High + Low) / 2,
and subtracted from the SMA period
5, graphed across the central points
of the bars (High + Low ) / 2.
MEDIAN PRICE (MP) = (HIGH+LOW)/2
AO = SMA(MP, 5) - SMA (MP, 34)
The Awesome Oscillator under FireThe AO indicator has come under
fire by its critics. Detractors say that
it is just another indicator, and so
The default parameters of the ATR on the MT4 is usually period 14 (14 days on daily chart or 14 candles on a
lower time frame), plus we can see how a default ATR looks on the GBP/AUD 4-hour chart.
Source: www.metaquotes.net
F3) The Default ATR on the GBP/AUD Chart
Like most indicators, the Awesome Oscillator simply generates long and short signals. The AO has a bar graph
of green and red bars, with a zero line. Here, you would see the AO on the AUD/USD daily chart, with defaultparameters, just as they are in the MT4. When you move your chart forwards, you would see how the indicator
indicates long and short biases.
Source: www.metaquotes.net
F4) The Awesome Oscillator on the MT4
The True Range
The True Range is described as being the most significant
of the methods below:
• Method 1: Current high less the current low
• Method 2: Current high less the previous close (total
value)
• Method 3: Current low less the previous close (total
value)
Total values are useful for positive numbers, for the
creator of the ATR initially had it in mind to measure the
distance between two extremities not a directional bias.
According to one study, if the current period’s high is
arbitrage type trades, repurchase agreements versus
commercial paper all over night and took over seven
years before moving to equities.
Richard Chignell: What style of trading do you practice?
Harmon: I am a top down technical trader. So I start with
identifying the trend and then look for how inter-market
activity can influence that trend. With a grasp of the big
picture I then search for technical set ups within myuniverse of about 1000 names. When I see something
very interesting I then determine whether to play the
trade in the stock or in options.
I am CMT, CFA, and founder of Dragonfly Capital Management, LLC providing dailytrade ideas, technical analysis of securities markets and consulting services to themarketplace, and I’m Chief Investment Officer at Presidium Capital. Prior to that I traded
in the securities markets since 1986. I have held senior positions including Head of GlobalTrading, Head of Product Development, Head of Str ategy, and Director of Equity andPortfolio Swaps Trading at Chase Manhattan, State Street Corporation and BNP Paribas.I earned an MBA in Finance from NYU Stern School of Business and BS in MechanicalEngineering from Cornell University.
Gregory W. Harmon
» Richard Chignell: How long have you been trading?
Harmon: I have been trading one way or another since
Ralph Acampora launched the Market Technicians Association (MTA) about 40 years ago and was also the founder of the
International Federation of Technical Analysts (IFTA) whose members today include the Association of Technical Analysts
in Germany (VTAD). Ralph Acampora boasts nearly 50 years of market experience and has witnessed many a bull and bear
market during this time. And it is this very experience that is invaluable when it comes to correctly interpreting the recurring
cycles of the stock market. To this day, Ralph Acampora teaches at the prestigious New York Institute of Finance. He is alsoManaging Director of Technical Analysis at Altaira, a Swiss wealth-management firm. Marko Graenitz has interviewed Ralph
Acampora over the telephone, talking to him about his career and the nature of his analyses as well as his assessment of the
market. This is a very special interview with one of the living legends of technical analysis. Enjoy!
continue to not be in on the action. And there is a similar
situation in other countries of the world. For example,
Germany or the DAX, is the engine in Europe, and it’s doingvery well – just as a Mercedes would (laughs).
TRADERS´: Are there any other
signs to indicate that the first phase
of the bull market is already over?
Acampora: Recently, “safe” stocks
with high dividend yields have
been shown to underperform, such
as utility stocks, for example. This
shows that investors are already
becoming somewhat less risk-
averse, which is a sign of Phase 2
TRADERS´: Is it also possible
for the bull market to get out of
control?
Acampora: In theory, this would
be possible. Since so many big
investors are not in on the action,
fund managers, for fear of losing
their jobs, may well be swiftlyentering the market in a big way. That
in turn could trigger a buying panic,
but this is anything but healthy for
The 1-year chart shows the development of the ET F on the financial sector (symbol: XLF), which is in a clear
uptrend. Most recently, the situation was highly overbought in the wake of the ever steeper rise, which
increased the risk of pullbacks.
Source: www.tradesignalonline.com
F3) Daily Chart of US Financial Sector
The monthly chart of the E TF on the financial sector (XLF) confirms the long term bullish assessment by Ralph
Acampora and puts the overbought situation of the daily chart in Figure 3 in perspective. The latter hererepresents the last twelve candles which produced the successful breakout from a multi-year consolidation.
According to Acampora, larger pullbacks along the way are to be interpreted as buying opportunities.
Source: www.tradesignalonline.com
F4) Monthly Chart of US F inancial Sector
TRADERS´: You have been very bullish since early
2013. What is your current long term assessment?
Acampora: We are in a major bull market. Psychologically,the situation is the same as after 1982: After so many
the markets of the world that you think are attractive?
Acampora:ETFs today are a great way of doing this. These
products have really made it easy to invest globally.
TRADERS´: Do you also use ETFs
for sector analysis?
Acampora: Yes, and I have two fine
examples of that. The first is the
financial sector or the corresponding
ETF with the symbol XLF (Figure 3).
The daily chart is clearly overbought.
But that does not change my long
term bullish assessment. If we look
at the monthly chart (Figure 4),
we can see that there was a clean
breakout from a huge base. There is
no evidence of any large tops on the
monthly chart, quite the opposite.
Every major pullback should be
viewed as a buying opportunity.
TRADERS´: That’s an unequivocal
statement. What’s the second
example?Acampora: The monthly chart of the
technology ETF (symbol: XLK) shown
in Figure 5 reveals a solid performance.
The chart shows the development of the ET F on the technology sector (symbol: XLK). While the sector has not
outperformed the market recently, it has consistently been on the rise for quite some time – most recently
with new 10-year highs, which have moved a long-lasting base upwards.
Source: www.tradesignalonline.com
F5) Monthly Chart of US Technology Sector
In late May, the closing price of the Veeco stock marked a new high on the daily chart (see top mark). This
was confirmed by the breakout from the large base, which had developed since early 2012. The share is anexample of a stock that until very recently was at t he very top of Ralph Acampora’s watch list. The upward
trend was confirmed with pullbacks representing buying opportunities.
Source: www.tradesignalonline.com
F6) Breakout at Veeco
While the sector has not outperformed the market recently,
it has consistently been on the rise for some time – most
recently, the sector has made new 10-year highs, alsoleaving a long-standing base by moving upwards.
Acampora: One part is science and one part is art. And
the art part is to find the right interpretation. But you
can always rely on price, which is a fact that will not
be changed in hindsight (unlike earnings estimates or
sometimes even corporate-earnings figures that have
already been reported). The price just keeps pricing in
information and expectations of the future, which makes
it the ideal construct to analyse the strength of the buyers
vis-à-vis the sellers.
TRADERS´: Do you have an example of such an
interpretation?
Acampora: Let’s look at the last few months or even
years. Time and again, we get a wave of bad news on
several fronts, but the markets still go up. If bad news
does not bring the market down, then that is good news.
This is a very classical interpretation. There will be good
times at some point in the future, and that is already being
anticipated now. Five or maybe eight years from now,
the US could be independent of oil and perhaps even be
promoted to being an exporter of natural gas. President
Obama has already laid the foundation for this. Such
things are so-called game changers that today nobody
talks about yet but that create
completely new opportunities.
TRADERS´: How important is the
concept of relative strength?
Acampora: The markets are driven
primarily by the institutions.
Especially for funds, it is important
to outperform. But if those funds are
behind on the benchmark index, they
are going to have a problem since
customers will be withdrawing their
funds. The upshot then is that, more
often than not, especially markets
that have gone up significantly will
again be bought widely – by investors
who had missed the movement. This
may again fuel the relative strength
of this market for some time to come.
TRADERS´: Do you also use stop
prices for your investments?
Acampora: Yes, from a certain level
on I need to exit, which is what Ihave mental stops for. However, it
all depends on which investment is
involved and what time level time
This shows the development of the yields on 10-year US Treasuries over the last five years. Ralph Acampora
believes that the most recent increase above the two per cent mark could have confirmed the turnaround ininterest rates. That would mean that the huge rally in the bond markets that has been going on since 1982 is
coming to an end and that yields will go up again in the long run.
Source: www.bigcharts.com
F7) Has the Big Turnaround in Interest Rates Already Materialised?
TRADERS´: So the big decisions are ultimately always
made on the basis of the long term charts, aren’t they?
Acampora: Yes, they are. In the short term, there is
a lot of market noise and confusion. In view of that,
it is tremendously helpful to take a step back and
look at the long term charts. And that’s what I would
recommend to anyone who doesn’t know where to go
on the markets and who is looking for guidance. And
if you do that – looking at a monthly chart of the stock
market –, you will know where things are most likely
to be headed.
TRADERS´: But such simplistic approaches are rarely
discussed in the media.
Acampora: The problem is that it’s always easier to
talk about problems and scare people since this causes
the media to be more present amongst the people. It is
perfectly natural for threats to be perceived more widely.
This is one of the reasons for ignoring the media as much
as possible and relying on your own analyses.
TRADERS :́ So technical analysis is something you can
I trade at. More often than not, for example, pullbacks
in an uptrend – that we can currently witness in stocks
– represent additional buying opportunities where I can
further increase my position.
TRADERS´: What’s the maximum amount you would
use from your investment capital to invest in a position?
Acampora: Again, it depends on the situation but ten
per cent would certainly be a very large position which I
might describe as an upper limit.
TRADERS´: Can you remember any analysis that you
are upset about in retrospect?
Acampora: Yes, absolutely. Prior to the crash of 1987,
there was an article in Barron’s where several analysts
were being surveyed. Some said that they expected a
crash. I wasn’t quite as bearish as that and spoke of an
early correction. I now wish I had been more bearish at
the time since that could well have been deduced from
the analyses. “Correction” was clearly the wrong word to
describe what followed.
TRADERS´: Which of your analyses do you remember
that was particularly successful?
Acampora: In June 1995, the Dow was at 4500 points
(Figure 8) and I published a 58-pageresearch report where I suggested
that a rise to 7000 points would be
possible. Over the short term, this
was received with a great deal of
ridicule, but in February 1997 that
target was reached and prompted
my then employer to give me a red
Corvette, which I had always wanted
to have.
TRADERS´: Not a bad reward!
Where did you get the idea that the
Dow might go up that much?
Acampora: The entire analysis was
based on a conversation I had with an
investor by the name of Ken Wood,
who was 85 years old at the time
and had practically seen every bull
and bear market of the 20th century.
I asked him what his most difficult
time had been and I thought he wouldanswer by mentioning the Great
Depression after 1929. But instead
he said that the years from 1963 to
1965 had been the most difficult. The reason he cited was:
During that time, the markets were overbought all the time
without forming a real correction. And that’s exactly what
it seemed to look like in early 1995, which then made it
possible for me to come up with this bullish interpretation.
Who knows, maybe it’s the same again this time.
TRADERS´: When you look back on your successful
career, what are you particularly proud of?
Acampora: In those days when my friend John Brooks and
I laid the foundation for MTA, technical analysis enjoyed
as little recognition as voodoo. I knew that this would
change at some point, but did not think that I would live
to see it. I am particularly proud that we have managed
to establish the Chartered Market Technician (CMT) as an
alternative to the classical CFA certificate – and also of the
fact that the SEC officially recognised that qualification in
2005. That was really a major breakthrough for technical
analysis. Unfortunately, the IFTA refused to follow suit
because they had fallen out with the MTA internally. But
I am confident that this old dispute will be settled in the
future. After all, technical analysts need to hold together
(laughs).
The interview was conducted by Marko Graenitz “
In June 1995, the Dow was at 4500 points (see arrow), having almost doubled since the low in 1991. At
that time Ralph Acampora published a 58-page research report where he suggested that a rise to 7000
points might be in the offing. Hardly anyone thought at the time that this could possibly materialise sinceprices already seemed to be “high”. But as early as February 1997 – just 20 months later –, the target was
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1. Traders must have the perseverance to stick to trading
until they break through to success. Many of the best
traders are just the ones that had the strength to gothrough the pain, learn, and keep at it until they learned
to be a success.
2. Great traders cut losing trades short. The ability to
accept that you are wrong when a price goes to a place
that you were not expecting is the skill to push the ego
aside and admit you are wrong.
3. Letting a winning trade run as far as it can go in your
time frame is crucial to having big enough winners to
pay for all your small losing trades.
4. Avoiding the risk of ruin by risking only a small portion of
your capital on each trade. It is a skill to not get arrogant
and trade too big; if you risk it all enough times, you will
lose it all eventually.
5. Being reactive to actual price action instead of predictive
of what price action will be is a winning principle I have
seen in many wealthy traders. Letting price action give
you signals is trading reality. Trading your beliefs about
what price should be is wishful thinking.
6. Great traders are bullish in bull markets and bearish in
bear markets, until the end when the trend turns.
7. Great traders care about making money more thanany other thing. Proving they are right, showing off, or
predicting the future is not as important as hearing
the register ring. «
Steve Burns has been an active and successful trader forover 13 years. He is t he author of “New Trader, Rich Trader“,
“Show Me Your Options“ and “How I Made Money Usingthe Nicolas Darvas Syste m“. He has also been a contributorto ZenTrader.ca and Business Insider. Steve blogs at w ww.
NewTraderU.com and twitters as @SJosephBurns. He lives inNashville, TN with his wife, five children, and granddaughter.
7 Habits of HighlySuccessful Traders
» There are seven things that I believe are pretty common
in the successful traders I have known, read about, and
seen in action. Whether it is stock trader Nicolas Darvas in
the sixties, commodity trader Ed Seykota in the twentiethcentury, or Jesse Livermore at the turn of the last century,
many of these principles hold true. The closer I get to
these principles the better I trade, the farther I stray, the
worse I do. In trading, discipline pays.
Effective habits consist of internalised principles and patterns of behaviour.