Traders September 2015

Interview: J. C. Parets How I Trade False Signals P.
74
o Get
How t
in
a Job
ding
a
r
T
p
Pro
P. 14
Your Personal Trading Coach

September 2015 | www.traders-mag.co.uk
The Best of
Both Worlds
Trading for Short Term &
Longer Term Gains P. 46
Narrow Range
Breakout
The Silence Prior
to the Big Move P. 50
Do You Need Life Insurance in the Markets?
The Stop-Loss Controversy
P. 24
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EDITOrIAL
www.traders-mag.co.uk 09.2015
Marko graenitz
Deputy Editor-in-chief
what Trading is About (Apart From Money)

It is true, trading is particularly about making money. Nevertheless I am convinced
that there is more to it than that. Sometimes, it can even turn out to be a hindrance
seeing your trading account in terms of real money. The reason for that are our
emotions, which can keep us from taking the right actions. But what else is trading
about?
In the long run, it is hard to endure the tough lessons of trading only being motivated
by money, because there will always be difcult times. In order to invest necessary
time and energy to keep going, it takes something else.
I am talking about the fascination of trading. The sophisticated challenge of
surviving and pro ting in the markets. The curiosity of nding out how to be
successful in the stock market and of course, enjoying adapting to the constantly
changing conditions that the market presents.
It is just like in any other job. Is your work only about earning money, or do you really
enjoy it and see a purpose in what you do? Over the years one will feel apathetic if
the only motivation is earning money. And this is not a trivial problem, since we will
be spending a decent amount of our lifetime doing this work.
But there is even more that trading is about: personal development. with every
win or loss on your trading journey, you will make progress. The stock market is
an instrument that will make you humble over time. It is an instrument that helps us
to appreciate the things we have other than our career. Above all, life is precious,
and because in the end, it is not the money that makes us happy. It is the people,
experiences and memories. whereas money is a means to an end, we should not
let it control us.
The stock market is mans invention that has humbled him the most. (Alan Shaw)
good Trading,
Maximise your opportunity with

our wide range of products
On our award-winning* platform, you can choose to trade from over 10,000
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TABLE OF CONTENTS
24
14
60
TABLE OF CONTENTS
September 2015
INSIGHTS
12
TRADERS Talk
We talked to Chris Weaver, CEO of My Trading Zone, about
his idea of teaching others how to coach traders, and about
coaching traders in general.
14
How to Get a Job in Proprietary Trading

Trader Rayner Teo discusses the traits you need to get a foot
in the door at a prop trading firm.
18
Portfolio Metrics
Dirk Vandycke explains why looking at returns is a very bad
idea when it comes to estimating ones long term potential in
financial markets.
22 Trading Seasonalities
Thomas Bopp trades coffee shares and the DAX.
8
News
Find the latest notes and
announcements from around the world
of trading in our News section.
TOOLS
34 New Products
The Latest Trading Technology
36 Web Review
www.optionslam.com
COVER STORY
24
Frontier
The Stop-loss Controversy
A stop is an order that is triggered automatically when the
price reaches a preset adverse level. However, it is not a
perfect risk control tool. Azeez Mustapha discusses the
controversy surrounding this enigmatic instrument.
40 Book Review
42 App Review
CBOE Mobile
TABLE OF CONTENTS
Publisher
Lothar Albert
74
STRATEGIES
46 The Best of Both Worlds

Dave Landry wants to capture both short term and

longer term gains.
50 Narrow Range Breakout

David Pieper teaches you what is important and how to

develop a trading strategy based on below-average prices.
54 Generate Monthly Cash Flow by Selling Stock Options

In this article Alan Ellman discusses cash-secured puts..
BASICS
60 Performance Analytics

Regarding the ever more complex financial data analysis, Dan

Valcu takes a look at Open-source R-packages.
64 The Physical Game

Stu Whisson explains how to develop your trading with the

help of physical fitness.
66 Why Choose the Short Term?

Alvaro Echeverri shows why the short term time frame offers
the most trading opportunities.
Subscription Service
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Tel: +49 (0) 931 45226-15
Address of Editorial
and Advertising Department
TRADERS media GmbH
Barbarastrasse 31a
97074 Wuerzburg, Germany
Contact:
E-mail: simone.kirksey@traders-mag.com
Phone: +49 (0) 931 45226-17
Editor-in-Chief
Lothar Albert
Editors
Katharina Boetsch, Leanne Chesterman,
Prof. Dr. Guenther Dahlmann-Resing,
Marko Graenitz, Carmen Hellmann,
Sandra Kahle, Simone Kirksey, Inessa Liss,
Rodman Moore, NajiaRasuli, StefanRauch,
Katja Reinhardt, Markus Schneider, Karin Seidl,
Tina Wagemann, ChristineWeissenberger
Articles
Thomas Bopp, Richard Chignell, Alvaro Echeverri,
Alan Ellman, AzeezMustapha, DaveLandry,
David Pieper, Rayner Teo, DanValcu, Dirk Vandycke,
Stu Whisson
Pictures
Africa Studio, Svyatoslav Lypynskyy, md3d, psdesign1, Brian
Jackson, Matej Kastelic, Andrew Ostrovsky, Andrew Bayda,
IMaster, Massimo Cavallo, lassedesignen, Bjoern Wylezich, lev
dolgachov, Wrangler, DenisNata, Stefan Yang/ www.fotolia.com,
Sandra Binder
Price data
www.captimizer.de; www.esignal.com;
www.metaquotes.net; www.tradesignalonline.com;
www.tradestation.com
ISSN
1612-9423
PEOPLE
70 The Pros Process Larry Tentarelli

74 J. C. Parets How I Trade False Signals

J. C. Parets is the founder and president of Eagle Bay

Capital, LLC. He earned the Chartered Market Technician
designation (CMT) and is the New York City Chapter
Chair of the Market Technicians Association (MTA). He
is a regular guest on CNBC, Bloomberg, Business News
Network and in the Wall Street Journal.
Distributor / Retail:
DPV GmbH, www.dpv.de , lange.guido@dpv.de
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.
2015 TRADERS media GmbH,
Barbarastrasse 31a, 97074 Wuerzburg, Germany
INSIghTS NEwS
iNtErNAtioNAL tECHNiCAL ANALySiS CoNFErENCE IN TOKYO

The International Federation of Technical Analysts (IFTA)
will hold its 28th annual conference from 2nd to 4th
October 2015 in Tokyo, Japan, hosted by the Nippon
Technical Analysts Association (NTAA). The IFTA annual
conference is an event for technical analysts, traders, fund
managers, asset allocators, and investors. Presentations,
debates, and panel discussions for this years conference
will include many different lectures and a panel discussion
on how technical analysis is being used at leading
investment management organisations around the world.
More events and schedule details can be found at the
website.
Source: www.ifta.org
oiL PriCES AT NeW 6.5 YeAr LOWS

Oil prices have fallen to a fresh 6.5 year low in
August, amid continued worries of high global oil
supply while investors expect the demand from
China to remain weak due to its growth slowdown.
Brent crude has declined below $45 per barrel, while
WTI crude has come down below $40.
Source: www.ibtimes.co.uk
FIBONACCI eXTeNSION S&P 500

The high of the S&P 500 almost exactly hit
the 161.8 per cent Fibonacci extension. The
initial range for the extension was from
the low of 2009 to the old high of 2007.
Source: www.tradesignalonline.com
Insights news
CFD Spoofers Fined over 7 Million by UK Court

A UK court ruled that the Financial Conduct Authority
The large layered orders, which were never intended
(FCA) is entitled to permanent injunctions and penalties
to trade and which were used to stimulate the price
totalling 7,570,000 against three Hungarian traders and a
movement of the relevant shares, were then cancelled
Swiss investment firm for unfair trading practices.
and the process would start over again, typically aimed at
The technique consisted of entering and trading of
moving the share price in the opposite direction. In this
orders in relation to shares traded on the London Stock
way the actions consistently resulted in buying shares at
Exchange in such a way as to create a false or misleading
lower prices and selling shares at higher prices than would
impression as to the supply and demand for those shares,
have been the case had the strategy not been employed.
enabling them to trade those shares at an artificial price.
The traders accessed the relevant trading platforms via
The traders typically used a mixture of large and small
Direct Market Access (DMA) brokers. DMA allows clients
orders entered on one side of the LSEs order book to
direct access to exchanges and other trading platforms.
create a false impression of supply or demand in a
They did not trade directly in shares but used a derivative
particular stock. These orders were not intended to be
instrument called a Contract for Difference (CFD), the price
traded. The large orders were carefully placed at prices
of which precisely matches the price of the underlying share.
close enough to the best bid or offer prevailing on the
Source: www.financemagnates.com, written by Avi Mizrahi
LSE at the time to give a false impression of supply and

demand, but far away enough to minimize the risk that
they would be traded.
The small share orders (typically around 100 shares) were
used to improve the best bid or offer price. As the price
improved, further large orders were strategically placed at
prices close to the new best bid or offer in order to support
the improved price. In this way the traders systematically
sought to manipulate the share price up and down. These
orders had the effect of moving the share price as the
market adjusted to the apparent shift in the balance of
supply and demand. Once the price had been moved to
an advantageous level, they initiated a trade on the other
side of the order book in order to profit from the price
movement that they had created. These trades took place
either on the LSE or on a competing venue in order to take
advantage of available liquidity.
STOCK-PICKING CHALLENGE
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INSIghTS NEwS
HiGH FrEQUENCy trADiNG AND MArKeT SPIKeS

HFT is typically 50 per cent of overall volume, but they have
to walk away in a heightened volume event such as on
24th August. This dramatically reduces liquidity. Hightened
volatility was mainly unwinding of hedges, not panic.
Anyone who actually trades knows that this precisely what
happens every time there is a spike in market volatility:
HFTs simply walk away leading to the dreaded HFT
STOP moment, creating a feedback loop of even less
liquidity, and even more volatility, until circuit breakers
are finally hit or asset prices hit limits. On 24th August,
for the first time in history, not only the S&P 500, but the
Nasdaq and the Dow Jones all hit their particular limit
down triggers. HFTs had an amazingly profitable day because as a result of the total chaos, they were able to frontrun
block orders from a mile away and as a result of soarking bid/ask spreads, raking in millions by simply capitalising on the
chaos it and its peers have created.
Source: www.zerohedge.com
DoW JoNES iN tiGHtESt rANGE

ever JUST BeFOre CrASH
A few days short of the crash, on 18th August Ryan Detrick
posted a fascinating statistic. Until that point in time (more
than half into the year) the Dow traded in just a 6.44 per cent
range since January. Then, in the crash on 24th August, it
fell 1089 points at the lows, largest 1-day decline ever.
Source: Ryan Detrick, FactSet. Stockcharts
NOTHING BUT Hot Air?

As the chart on the left shows, it seems as if almost all
the gains of the stock market took place after some sort
of Quantitative Easing was announced. That said, we
may see tough times soon in case the era of QE finally
comes to an end, and monetary policy begins to tighten.
Source: Charlie Bitello, Stockcharts
10
Brokers Corner
Saxo Bank announced the appointment of Sren Kyhl as Chief
GAIN Capital limits omnibus accounts for institutional clients.
Operating Officer (COO) and member of the Management Board
The company will scrap the Dealbook 360 platform, while
effective from 1st January 2016. His appointment will further
supporting institutional white labels via City Indexs Advantage
strengthen the organisation and streamline the banks digital and
Trader. After completing a string of acquisitions in the retail
operational value chain. In this newly created role, Sren Kyhl will
space over the past few years, GAIN Capital is poised to
assume responsibility for daily operations and execution including
consolidate its institutional foreign exchange business and to
overseeing the banks digital experience, marketing, data science
calibrate its partnerships to claim greater visibility and exposure.
and Saxo Privatbank. He joins Saxo Bank with significant senior
The NYSE-listed brokerage envisions a limited role for the
experience most recently as Head of Transaction Banking and COO
omnibus accounts it is operating on its platform, where trades
in C&I (Corporates and Institutions) at Danske Bank. During his
are facilitated for other brokers clients, such as Ameritrade and
13-year career at Danske Bank Kyhl also served as co-head
the German headquartered FXFlat.
and global head of sales of Danske Markets and global head of
Source: www.financemagnates.com
research, quant and business development. Sren Kyhl, who holds

a PhD in economics from University of Copenhagen, brings to the
role significant expertise and a strong track record of performance,
which together with his unique financial sector experience will
further strengthen Saxo Banks focus on its core business.
Interactive Brokers has revealed its volumes for the month
Source: www.saxobank.com
ending August 2015, showing a higher performance in a few

notable metrics compared with July but overall mixed results.
For the month ending August 2015, the number of Daily
Average Revenue Trades (DARTs) were reported at 652,000,
corresponding to a jump of 13 per cent from July 2015 and 49
In the first half of 2015, Swissquote increased net revenues by 5.2
per cent higher from August 2014. These gains were partly pared
per cent year-on-year to CHF 74 million. Despite this growth, pre-
by the equity balance in customers accounts totaled just $62.9
tax profit decreased by 11.1 per cent to CHF 11.7 million, due largely
billion in August 2015, which represents a decline of four per
to higher marketing costs. Showing a loss of CHF 10.6 million,
cent from $65.8 billion in July 2015. As is the case with most
Swqissquotes current half-year report is the first not to present a
of its business however, 2015 has been a more fruitful year for
net profit. This loss is attributable to the extraordinary provision of
Interactive Brokers, with equity balance rising 13 per cent from
CHF 25 million (announced in January) created to cover the negative
August 2014.
balances incurred by clients as a result of the Swiss National Bank
decision to remove the floor against the Euro. Net new monies
increased by 27.1 per cent year-on-year to CHF 580.2 million.
Source: www.swissquote.ch
Shares of Plus500 will be delisted from the London Stock

Exchanges Alternative Investments Market (AIM) after the
conclusion of the merger deal with Playtech. Both companies
IG Group has officially launched its Dubai office. This marks
have recently reported their earnings for the second quarter of
the second regulatory license received by the company in a
2015. The brokerage reported revenues higher by 20 per cent
new jurisdiction within a year after the broker obtained a Swiss
as profit declined 25 per cent. Playtech expects to conclude
banking license last September. Commenting on the opening
the merger with Plus500 not earlier than September according
of IGs Groups Dubai office at the Al Fatan Currency House, the
to its earnings report. After the conclusion of the deal the
Interim CEO of IG Group, Peter Hetherington, said, Dubai is a
owner of the company will be a subsidiary established by the
thriving hub for commerce and trade and given its geographic
gaming company under the name Brighttech. The merger is still
location, investors are in the perfect position to access a variety
pending the formal approval from the U.K. Financial Conduct
of markets in real time using our tried and tested online platform..
Authority (FCA).
11
insights TRADERS Talk
Chris Weaver
CEO of My Trading Zone
TRADERS Talk
Coaching Is about Listening
We talked to Chris Weaver, CEO of My Trading Zone, about his idea of

teaching others how to coach traders and about coaching traders in general.
TRADERS: Your idea of teaching someone how to coach
finds value in the session and is more likely to buy more
other traders is new what is your motivation behind

My Trading Zone?
coaching.
Weaver: Coaching is about listening. A lot of trading

coaches are very keen to demonstrate their expertise in
TRADERS: What is the most important thing

when you want to be a coach in the financial market?
an attempt to impress the coaching candidate enough
Weaver: Online infrastructure and product strategy. We
that they will want to buy more coaching. On the surface
are very big on the sales funnel which is the process of
this makes sense, but in reality it does not work. Clients
taking a client who is unknown to your product or brand
normally have a very strong idea of what they actually
and moving them all the way up to a premium customer.
want to learn or get out of a coaching session. It is critical
How your trading and coaching products are displayed
that the coach identifies what the candidate would like
and accessed are directly related to the success of your
to learn and address it during the session. The candidate
business.
12
insights TRADERS Talk
I believe there is a strong demand for quality coaching

with well thought out and professionally presented products.
TRADERS: Are there common mistakes

a coach should avoid?
Weaver: My Trading Zone is an online resource centre for
Weaver: Do not talk too much and do not assume that you
providers. We provide websites for individuals and
know what the candidate wants to learn. I am stressing
organisations who would like to run their own trading
this point as I feel it is such a common error that trading
education businesses. We also offer custom and/or white
coaches make. We suggest having a very thorough fact
labelled courses and presentations for trading education
finding document filled in by the client before the series
companies, as well as free initial consultations and product
of coaching sessions begin. This is a great way to get to
demonstrations to anyone interested in our services.
both private trading coaches and larger trading education
know your customer and portrays a very professional

image.
TRADERS: Webinars are now a common thing. What do you

prefer an online coaching or a personal coaching?
TRADERS: What do you think about the coaching market?

Is there a backlog of demand? What is a trader looking for
when he/she is interested in coaching courses?
Weaver: I prefer convenience and comfort. Whichever is

best for the client and the coach to be productive makes
sense to me. They can both work extremely well.
Weaver: I believe there is a strong demand for quality

presented products. More and more retail traders are
TRADERS: What can we expect from the coaching market

in the future?
coming to the market every day and they are interested
Weaver: I believe that the cream will rise to the top.
in learning. There are plenty of amateurs out there but I
As I stated earlier, the amateur coaches and trading
believe they will be forced to either increase the overall
organisations who are not properly structuring their
quality of their offering or exit the market.
marketing, product offering and presentation will be
coaching with well thought out and professionally
forced out by those who are. I think there will be some real
TRADERS: So, what can My Trading Zone offer?

Are there special products?
quality coaching companies that seize the opportunity

over the next few years and generate heavy profits.
13
Insights
How to Get a Job

in Proprietary Trading
Critical Traits to Possess in Order to Make it
Trader Rayner Teo discusses the traits you need in order to land a job at a prop firm. In addition to a
passion for trading, there are things like having grit and being good at numbers. And the list goes on.
Proprietary trading is when a bank, firm or other any
from seasoned traders, and still get a share of profits if
financial institution trades on its own account rather than
they make money. Thus it is no surprise to see many fresh
on behalf of a customer. The instruments traded can be
graduates applying for such a role.
anything from options, futures, currencies, derivatives
But the interesting aspect about trading is that your
etc. Proprietary trading involves risking the firms capital,
IQ has little to do with successful trading. We have seen
thus any profits or losses are borne entirely by the firm.
traders who made millions with a zero level education,
It is a highly sought after job as traders do not need to
and traders who failed even with a masters degree.
cough up with initial capital, receive professional training
Because of this fact, proprietary trading firms are not
14
INSIghTS
looking to hire candidates with the best educational
about trading and are not just walking the talk. This will
background or the highest IQ. So what does it take to get
make you stand out from the thousands of applicants you
a job in proprietary trading?
are competing with.
Passion for Trading
Because it tells them you are accepting your current
Just like anything else in life, if you have no passion in
status (a losing trader) and want to improve your trading
whatever you are doing you will not be able to give your
by joining a proprietary trading firm.
Even if you are a losing trader, it does not matter.
100 per cent. And the same goes for trading, you must
If you want to take it further, bring along your trading
have passion for it to have a chance of succeeding at it.
journal and charts during the interview to explain your
So what is passion?
thought processes behind your trades. Which interviewer
It is not reading a few books on trading and thinking
would dislike a candidate like this?
you can make money by clicking your mouse. Neither is

it going to forums looking for the best trading strategy.
Grit
These are hobbies and hobbies cost money.
Grit means firmness of character, indomitable spirit
Rather, passion for trading is devoting countless
(dictionary.com). Passion alone is not enough to succeed,
hours each day, week, month and even years to improve
studies have shown that Grit plays an important factor as
yourself. To get better and better each day yet staying
well. So what is grit?
humble all the way.
Grit is the ability to keep moving forward even when
You will be reading hundreds of books, spending
crap hits the fence. Most traders will quit and stay away
infinite hours on Youtube watching trading videos, and
from trading after blowing up a few trading accounts. But
keeping a trading journal to record your progress as a
those with grit will constantly reflect upon their actions
trader. Sounds like hard work? That is passion for trading.
and seek to better themselves, which separates the

winners from the losers.
Prove it
The author spent close to four years learning how
When you are interviewing for a proprietary trading job,
to trade but still was not profitable. It was depressing
you want to convince the interviewer about your passion
as he knew so much about trading and yet he could not
for trading and your ability to persevere. What is the best
turn his knowledge into profits. Many times he felt that
way?
profitable trading was an illusion but never once did he
We feel the best way to go about it is to start trading
consider giving up. There was always something in him
on your own retail account. By showing the interviewer
that pushed him forward, and today he realizes it is none
your own trading records, it tells them you are passionate
other than grit.
15
INSIghTS
You must convince the interviewers

you are passionate about trading and have
the grit to see through the tough days ahead.
If you do not believe, check out this book, Pit Bull:
a mathematical test before granting you an interview.
Lessons from Wall Streets Champion Day Trader about
You may even be asked to play a game of poker with the
a trader called Martin Schwartz who lost money for nine
other candidates.
years before making millions every year.
You can consider doing mathematical speed test a

few weeks prior to your interview to improve your mental
Minimal Liabilities
calculation.
It would be ideal to come into proprietary trading with as

little liabilities and commitment as possible. It is best you
Commonly Asked Questions
are not married with kids, have no outstanding loans or
The author has been through a number of interviews at
any form of financial liabilities. Why is that so?
different proprietary trading firms, and here are some
Because most proprietary trading firms operate on
commonly asked questions:
the basis of giving their traders a basic allowance and a

profit sharing scheme. Not forgetting that trading has a
Why do you want to be a trader?
steep learning curve which can take a trader anywhere
Can you survive without a fixed pay?
from six to 18 months to be consistently profitable.
How long are you willing to give yourself?
This means you will be living on a shoestring budget
What trading books have you read?
for a period of time till you are consistently profitable.
What is your trading approach to the markets?
Thus it makes perfect sense to reduce or have no liabilities
How much money do you want to make?
at all.
Where did you learn how to trade?
Most proprietary trading firms will look out for this
Solve the Monty Hall problem
factor, and this explains why they tend to hire fresh
What is 32 x 32?
graduates who are below 30 years old.
Tell a Story
Quick with Numbers
For every interview the author will highlight his passion
The trading approach of most proprietary trading firms
for trading, show evidence to prove it and explain his
is scalping, arbitraging or day trading. Because you are
determination to succeed. He does it by sharing his story
trading on such low time frames, you need to think fast
with the interviewer from childhood till present. He loves
and act fast. So how do they test you?
to share his story because it engages the interviewers and
During
the
interviews
they
would
ask
you
gives them an idea of personal traits and characteristics.
mathematical questions (48 x 67) or solve some

statistical puzzle (Monty Hall). Some proprietary trading
Conclusion
firms take it one step further by requiring you to pass
In Singapore, proprietary trading jobs are usually

advertised four to six times a year on jobs portal like
Jobstreet, Jobsdb and Efinancialcareers. If you want a
rayner Teo
Rayner Teo is a trader, blogger and founder
of TradingWithRayner.com. He has threads
featured in Forexfactory and Hardwarezone.
Traders around the world have benefi ted from his
sharing, and he is widely followed on YouTube
and ForexFactory. When he is not trading, he hits
the gym or reads a book.
www.tradingwithrayner.com
career in proprietary trading, always keep a look out for

such openings.
When granted an interview, you must convince the
interviewers you are passionate about trading and have
the grit to see through the tough days ahead. You can
consider telling a story like the author does to illustrate
the key characteristics proprietary trading firms are
looking for.
16
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INSIghTS
Portfolio Metrics
An Abnormal Fixation on return
Dirk vandycke
Dirk Vandycke has been actively and independently
studying the markets since 1995 with a focus on
technical analysis, market dynamics and behavioural
finance. He writes articles on a regular basis and
develops software partly available at his co-owned
website www.chartmill.com. He teaches software
development and statistics at a Belgian University.
dirk@monest.net
Trading and investing are done with one major purpose in

mind: making profits. Even though preventing losses are part
of the package as well, ones returns seem to be the ultimate
(dis)proof of ones ability. In this article we are going to take a
shot at convincing you of why looking at returns is a very bad
idea when it comes to estimating ones long term potential in
financial markets. And of course, we will end up suggesting
what better indicators there might be.
18
insights
We see way too many

patterns and causal relationships.
Making it alive running through a dynamite factory with
in the former case and dumb luck in the latter. For an
a burning match in your hand does not mean you are not
individual occasion we are talking (four) possibilities, but
an idiot. More accurately, it does not mean deciding to do
in a repetitive frame, sticking to good decisions will on
so was a good idea to begin with. Welcome to our biased
average have good results as output. That is probability
world.
taking over. Having four possibilities does not mean they

will share equal likelihood (25 per cent).
The Third Monkey
Judging decisions on their outcome, although not all
As evolutionary biologists well know by now, we are a
that is known now was known at the time the decision
species (not the only one) of overactive pattern seekers.
had to be made, is what is called outcome bias. Its close
During our evolution, this started out with physical
friend, hindsight bias, states that we are prone to estimate
patterns but quickly turned into looking for causal
what we knew or how we felt making the decision. The
relationships as well. All of this is good, because it has put
I knew effect. Well, you probably did not know it then!
us where we are today. The sons and daughters of a very
While similar to the outcome bias, the two phenomena
impressive chain of survivors harnessing those powers
are markedly different. The hindsight bias focuses on
along the way. However, falsely recognising something
memory distortion to favour the actor, while the outcome
that is not there, does not diminish our survival chances.
bias focuses exclusively on weighting the past outcome
Not seeing what actually is there, almost guarantees not
heavier than other pieces of information in deciding, if a
handing over genetic material to the next generation. So
past decision was a good one.
up until today, we see way too many patterns and causal

relationships.
Biases in Abundance
F1) On Decisions and Outcomes
The relationship relevant in the search for where our
decision (process)
obsession with returns comes from, is the one between

the decisions we make (process) and the outcomes we
possibility
eventually get. To most it is crystal clear that with good

decisions must come good results. And while affirming
good
bad
good
deserved
success
dumb
luck
bad
bad
luck
poetic
justice
probability
the antecedent we wrongly turn this upside down into

good results having to be proof of good decisions made.
Unfortunately there is a lot wrong with this default view.
Figure 1 shows that with good and bad decisions on
one side and good and bad outcomes on another, there
are four, not two, possible combinations. So on any
individual occasion, good decisions may unfortunately
turn into bad outcomes while good outcomes may spring
from even bad decisions. That is what we call bad luck
outcome
This table shows how outcomes might relate to decisions made.

Source: www.chartmill.com
19
INSIghTS
Profi t (De)bunk(ing)
F2) Expectancy Depicted as Scales
There is no shortage of fishermans

yarn
in
the
financial
industry.
One way to defuse the excessive

importance we put on returns (after
all the good outcome we are looking
for), is to put them in perspective
on a larger time scale. We present
you Table 1, a table of long term
compound returns. In blue, we have
the average risk free return over
the past 53 years. In red Warren
Being profitable in the long run with trading, and every investing enterprise for that matter, is about cutting
losses and letting profits run. Although this is a hearsay thing of ages, statistical expectancy actually proofs
the saying mathematical. It is not about being right or wrong but handling both profits and losses well.
Buffetts net worth is shown, while

in green and yellow we have the
GDP of Belgium (a small country)
and the USA (a very large country).
Now that should put it into
perspective, a few of the examples
A colleague once tried to convince me of the fact that
of great returns. For instance on the lowest row we have
it seemed obviously a good idea, at least to him, having
the winner of a one-month guru competition. Simple math
bought shares of a tumbling bank in 2008 a week before
indicates that these examples are highly probably just
breaking news. Having made a whopping 200 per cent out
plain luck (or fraud) and very likely impossible to be even
of it, he was all confused and surprised by my question, if
an average sustainable return. Another one is a service
it had seemed a good idea at the moment when he made
stating it is easy to achieve a 200 bucks earning a day on a
the decision. Mind the fact that good decisions are not
10,000 portfolio. Of course you cannot compound or this
restricted to knowing what stock to buy. There is far more
would make too much money, we were told criticising this
important decisions a good trader can make, in the absence
scam with the same numbers of Table 1.
of knowing what the outcome will be. Selling losers before

a mistake turns into a problem is just one of them.
Repetitiveness and scalability are key in turning your

traders mind around such examples. If something sounds
T1) Cumulative Effect of returns

Return Per Month
Return Per Year
Return Over 10 Years
100 Over 10 Years
100 Over 60 Years
0.21%
2.50%
28%
128
440
0.47%
5.84%
76%
176
3009
1.00%
12.68%
230%
330
129238
2.00%
26.82%
977%
1077
155640877
2.84%
39.99%
2789%
2889
58200000000
3.00%
42.58%
3371%
3471
174904823971
3.13%
44.83%
3960%
4060
447599831447
3.65%
53.70%
7260%
7360
15889960045023
4.00%
60.10%
10966%
11066
183655650658859
5.00%
79.59%
34791%
34891
180424425186733000
10.00%
213.84%
9270807%
9270907
63494091560654900000000000000000
15.00%
435.03%
1921944400%
1921944500
5040168486422420000000000000000000000000000000
So this is what to expect when cumulating profits (given both on a per month as well as a per year base) over ten and up to 60 years. As Einstein put it: Compound interest
is the eighth wonder of the world. He who understands it, earns it ... he who does not, pays it.
20
insights
too beautiful to be true, it probably is. If they promise you
of losers against the average size of winners but also
quick wealth, quick is how you need to get out.
the average holding period of losers against that of

winners. Also having a rising equity curve with small
New Quality Metrics
drawdowns and more losers than winners is a strong
If returns are not the way to measure achievement, then
indication of a good trader.
what is? Well, in true science we have to keep track of the
One remarkable psychological study even showed
misses, not just the hits! Likewise a good trader is to be
how long term performance of traders was, to a certain
spot by looking at his losses.
extent,
inversely
correlated
with
how
frequently
Take Figure 2. A picture we frequently (re)use
performance was measured (by return). So the more
to explain that profits come from balancing the
traders look at their returns, the less they seem to have
average size of profits and losses over their relative
them. But we cannot deduce any causality from this
frequency. Since we have far more control over the
without further study. It could just as well be that bad
average size of our profits and losses than we have
traders look at their returns more. But even then it is a
over their frequency, we should focus on minimising
correlative indicator, nevertheless.
losses and maximising gains. From this it follows

that a good portfolio or trader must be recognisable
In Conclusion
from an overall historical picture showing (lots of)
Returns, in the end, will be the result of being a consistent
small losses and (probably fewer) big winners. In
trader focusing on self reflection while keeping a
contrast though, with each momentarily look at such
constant eye on risk management and position sizing.
a portfolio, chances are that you will find just the
So as bad as metric returns are on short time scales,
opposite. For there will be few small losses and almost
as inevitable they will be in the long run as the ultimate
only (big) winners. Because losses need to be weeded
proof of being able to do the right things instead of
out quickly. So metrics might include the average size
doing things right.
21
insights
Trading Seasonalities
Seasonal Low for a Coffee Stock and the German DAX
In September and October there is a
F1) Trading Idea Keurig Green Mountain
good chance that many stocks and

indices will end their correction. In this
issue we show you the ideal entry date
for an American stock and the German
DAX.
Trading Idea Keurig Green Mountain

The US-stock Keurig Green Mountain (GMCR), formerly known as
Green Mountain Coffee Roaster,
is the first seasonal trading idea.
The stock may be a long candidate
on 30th September, with a holdKeurig Green Mountain has lost heavily during the past months. The seasonal analysis recommends a buy
on 30th September with a holding period until 7th February of the following year. In the past, you could have
achieved a profit of 32 per cent on average with an average loss of 17 per cent.
Source: www.lp-software.de
22
ing period until 4th February 2016.

Based on the data of the past 16
years you could have achieved an
average profit of 32 per cent during
insights
these 127 days. One year there was
F2) Trading Idea German DAX
even a profit of over 200 per cent.

The stop-loss should be placed 17
per cent below the entry price. The
stock has dropped considerably
during the past months and as the
quarterly earnings at the beginning
of August did not fulfil the expectations, the stock lost another 30 per
cent overnight. Figure 1 shows the
price development of the stock with
several seasonal lines as well as
the entry and exit dates displayed
with vertical lines in green and red.
The chart shows, that a lower down
trend line was touched and a small
reversal started. The stock shows
The DAX has been in a strong correction during the past months. We suggest to use the touch of the triple
support at the area of 9,070 on the entry date 10th October to buy until 4th January of the following year.
Source: www.lp-software.de
a bottom formation starting at the

entry date and therefore we should
look for an entry. The maximum potential is the uptrend line, where you can find the 200-
traded indices. It lost about 15 per cent and even closed
day line as well. Another interesting entry would be the
well below the 10,000 level. Figure 2 shows that buyers
support from the years 2011 and 2012 at the level of $34.
used the opportunity of the low prices to buy. Another
In August of the previous year, Coca-Cola closed a long
pullback to the lower downtrend line on 10th October
term deal with the company and bought ten per cent of
would be an ideal entry date to trade the seasonal strat-
the shares. The low prices could challenge Coca-Cola to
egy. The DAX may quote at about 9,070 points at that
buy further stocks and to eventually take over the com-
time. Then you would achieve a risk-reward-ratio of
pany. That could possibly lead to increasing prices.
3.65, which is very good. Both trading ideas could also

be implemented with leveraged instruments (options,
Trading Idea German DAX
futures and CFDs).
The second trading idea is one of the darlings of Europes traders the German DAX. Based on seasonalities the ideal entry date for a long position would be
10th October with a holding period until 4th January
T1) Seasonal Trades of the Month
2016. Based on the data of the past 27 years you would
Instrument
Keurig Green Mountain
German DAX
have achieved a profit of ten per cent with a hit ratio
Direction
Bullish
Bullish
of 86 per cent. The risk of loss was 2.64 per cent. The
Entry
30.09.2015
10.10.2015
maximum profit was over 22 per cent. The stop-loss
Exit
04.02.2016
04.01.2016
should be placed about 22 per cent below the entry.
%-Win
94.00%
86.00%
The DAX started a correction like most of the active
History in years
16
27
Average profit
32.00%
9.32%
Maximum profit
219.00%
22.91%
Average loss
17.00%
2.64%
Update
We will publish an update on 1st and on 13th October
Maximum loss
58.00%
4.92%
2015 on our TRADERS website and on facebook, with an
Holding period
127 days
86 days
analysis based on the current chart. The profit targets and

stop-losses will be calculated as well.
Table 1 shows the entry- and exit-dates of the introduced trading ideas.
Source: www.captimizer.com
23
COvEr STOry
The Stop-Loss Controversy

Do you Need Life Insurance in the Markets?
A stop-loss is an order that is triggered automatically when the price reaches a preset adverse level.
However, it is not a perfect risk control tool (there is no perfect risk control tool). And that is the reason
why certain professionals are preaching against it. On the other hand, some veterans, each with decades
of experience, vehemently advocate the use of stops. Who should you believe? Should you use stop-loss
in your trading? This article discusses the controversy surrounding this enigmatic risk control tool.
Arguments Against Stops
feel one can become profitable without the use of stops,
Those who preach against stop-loss believe that it has
since there are profitable traders who do not use stops.
negative effects on the performance of their trading
They make people realise that every stop stands for either
systems. They believe the only smart thing they can do is
a loss of capital or a loss of profits.
to avoid the use of stops, for it increases negative orders

in the account history, including trades that could have
Problems with Trading Methodologies that Do Not Use Stops
won, but which were stopped out at losses, for volatility
When the author was a neophyte, he once came across
invariably affects the initial stop and price target. They
an institutional trader who advised him against the use
24
cover story
to act until the inevitable happens
F1) Sustained Bearish Movement on Silver
to your account. Why would you

lose a colossal amount of money
in a trade when it could simply be a
negligible loss? Do you want to be like
those gamblers who call themselves
pros? Those who treat trading like a
business use stops, gamblers do not!
Why would someone lose tens
of thousands of dollars or hundreds
of thousands of dollars or millions
of dollars before they learn a simple
lesson? Why can they not limit
their loss with stops in order to
avoid the harrowing consequences
of stupidity? If you are already a
speculator and right now you do not
In 2013 and 2014, Silver fell in an established downtrend. The bull should have cut his loss at a negligible
amount and looked for another trading opportunity. But what might have happened to a so-called professional
who refused to use a stop?.
use stops, then the best favour you

can do for yourself is to stop the no
stop-loss mentality and set stops
with your positions.
The only life insurance that can
guarantee your permanent success
of stops. He thought she was giving him good advice,
in the markets is stop-loss. Please check what happened
without knowing that he would suffer for believing her.
to JPY pairs in October and November 2014. Good profits
The majority of those professionals once thought that
would have been made if you were in the right direction,
they could survive without stops; whereas you would
but if you got caught in the wrong direction, what would
hardly come across sane forex traders who do not use
you have done? We pity those large institutions that do
stops. Many professionals have learned bitter lessons as
not currently believe in stops. Obviously, they fail to learn
a result of their past failure to use stops to safeguard all
lessons from large institutions that crashed and burned
their trades. You might even need to find out the truth
in the past.
yourself. Open a demo account with a broker that does
When your portfolio experiences severe roll-downs,
not allow their demos to expire, as long as a few trades
we know you are not going to be happy. Your main
per month are placed. Trade with such a demo account
preoccupation is how to recover the roll-downs, which
without using stop-loss in all your trades. Do that for two
is more difficult than preventing it in the first case. There
years and then report to us, showing us your account
is a probability that your portfolio will never recover
history.
when another roll-down drives it further into more
Believe us, when you receive margin calls, you will
negative territory, while you are trying to recover from
not experience the gains enjoyed by stop-loss users. Any
the first roll-down. A margin call can follow. So why did
trading methodology that does not use stops, or that
you not prevent this in the first place by using objective
recommends the use of mental stops should be monitored
stops? You can only enjoy higher probability of survival
more closely, simply for the benefit of the doubt. With such
with stop-loss. Stop-loss is mandatory as you give
a methodology, traders may transiently appear cute when
your winning trades some leeway. One professional
some drawdowns are recovered and when losing positions
even declares, without mincing words that anyone who
eventually break even or become positive positions, but it is
would argue against risk control by discouraging the
inevitable that an event will happen, like natural disasters,
use of stops is a fool indeed. In effect, they are saying
high frequency trading disasters, unprecedented volatility
you should put your capital at unlimited risk. It should
in some pairs, et cetera. which will make your mental stops
become clear to yourself which one is sensible for you
useless or make you freeze in terror. You will be unable
limited risk or unlimited risk.
26
Cover story
Some Recent Examples
forced to cut those losses at much larger losses. In a bull
Remember the 6th May 2010 Flash Crash, in which the
or a bear market, some accumulation and distribution
Dow Jones Industrial Average plunged about 1,000 points
territories can be respected. The occasional respect,
(about nine per cent), only to recover those losses within
however, is not always dependable, and only stops can
minutes. Because of that, some people argued against
rescue our portfolios when a strong trend continues
the use of stops, while some argued in favour of stops.
against us. If you are over the age of 60, then the cable may
Some experts thought that they would not suffer losses
not see the supply level at 2.0000 again in your generation.
because the market bounced back quickly. What if the
The author is tired of seeing the self-professed gurus
market had not bounced back quickly? In fact, the hope
suffering from a quick and speedy financial ruin, not only
that the market will at some point in the future bounce
because of high lot sizes in proportion to their account
back quickly is the only seemingly rational explanation
sizes, but also because of their failure to use stops. Those
behind sermons against stops. Stop deniers preach
who encourage you not to use stops have other sources of
against stops because it is not a perfect risk control tool.
income that can sustain them in case of receiving margin
Although there are disadvantages in using risk control
calls; and their portfolios are probably not risk capital. Do
tools, you need to know that the disadvantages pale in
you want to imitate them? They preach against the use of
insignificance when compared with the advantages.
stops, but they will not tell you what happened to them
Please see Figure 1, from 14th July 2014 to
when their preferred methodologies go through a baptism
5th November 2014, silver fell by 6,200 points. While a
of fire. Your stop may not be hit but a margin call will
position trader, who likes to go with the flow of the market
force you out of the market. If this advice has given you
would have made some heartwarming gains, a bull that
cause to think, then you have taken a huge step in your
got caught in a wrong direction would have suffered a
evolution as a super trader, knowing the inherent dangers
significant loss. The bearish trend on silver as a worse-
and problems that come with illogical trading methods
case scenario at that period is one of the worst-case
that do not use stops. A great trader who has made tens
scenarios experienced by the bull. The bull should have
of millions of dollars from the stocks and commodities
cut his loss at a negligible amount and looked for another
markets told me the one individual universal reason for
trading opportunity. But what could have happened to a
failure is the inability to take a loss.
so-called professional who refused

to use a stop? That professional
would have tried to cut his loss with
F2) Flash Crash 6th May 2010
the hope that the market would

reverse that week, or the following
one, or the following month; but
the hope would be dashed as the
person got to his office every day,
sorrowing over his own stupidity. A
small position size could amount to
a gargantuan loss if the loss was not
contained.
Nobody can predict the future.
A Harvard PhD and a high school
dropout
have
equal
skills
at
prophecy. The GBP/USD suffered a

massive plunge in the year 2008 and
since then, the pair is far from seeing
the distribution level at 2.0000 again.
What would have happened to those
who failed to cut their losses on
GBP/USD as a result of their long
trades? They would eventually be
The chart shows the Flash Crash in a one hour time frame. In that scenario, stops were run but the losses were
recovered quickly. This is often used as an argument against the use of stops. What, however, if prices had
not rebounded and the decline continued as it did the days after?
27
cover story
not respect mental stops because
F3) USD/JPY Bull Run in 2014
of the heat of emotion. The markets

have a knack for moving faster
against us than we think.
It is much more satisfying to
control our urge to ignore stops.
In the end, is it worth losing your
entire portfolio because you want
to satisfy momentarily irrational
thoughts? Is the use of stop-loss
unduly
restrictive?
Not
at
all!
To disregard its use is to invite

problems and unhappiness in your
trading experience. Heeding the
advice to use stops and other risk
limiting tools adds peace of mind to
your career. Furthermore, you have
Anybody not using a stop when trading short against the trend in USD/JPY could easily have been killed if the
position size had been sufficiently large. When breaking out above 110, price did not bounce back as is often
assumed will happen.
the prospect of enjoying lasting

survival in the markets, whereas
those who cultivate emotional and
irrational trading styles lose out
on both happiness and money.
Perhaps you might go scot-free in
Further Arguments for Stops
other types of financial markets without stops, but you
The author has experienced the wonders of stops all
cannot emerge unscathed out of forex if you do not use
through his career as a trader. At some point, you will
stops.
suffer limited losses if you use stops and unlimited

losses if you do not use stops. Your stop may stop
The Greatest Achievement in Trading
you out of a trade that could have ended up being a
The greatest skill in trading is your ability to cut losses.
winner, but you are safer with the stop in place (you
This has nothing to do with what or who you are. The
are vulnerable without one). We are not talking about
greatest achievement in trading is controlling the
mental stops, but physical stops. Even a veteran may
treacherous statistics called drawdowns, not making

profits, for profits are easy to make but difficult to
control. For example, if you made a profit of ten per cent
Stop-Loss Order
in this month, you could start experiencing losses in the
A stop-loss order is an order placed with a broker to sell

a security when it reaches a certain price. A stop-loss
order is designed to limit an investors loss on a position in
a security. Although most investors associate a stop-loss
order only with a long position, it should also be used for
a short position, in which case the security will be bought,
if it trades above a defined price. A stop-loss order takes
the emotion out of trading decisions and can especially
be handy when one is on holiday or cannot watch his/her
position. However, execution is not guaranteed, particularly
in situations where trading in the stock is interrupted or
gaps down (or up) in price.
Source: Investopedia.com
first or the second week of the next month (as is true of

any trading approach you might adopt). Proof of your
proficiency then lies in your ability to lose as little money
as possible, going down by, say, three per cent to six per
cent maximum. This way it is easier for you to bounce
back when the strategy enters another encouraging
winning streak. However, a bad trader would lose from
ten to 40 per cent or even more, during such a transitory
losing streak. What is the benefit of gaining 20 per cent
this month and losing 40 per cent the next?
Your ability to cut your losses when they are still
insignificant is the most important aspect of your trading
career. It is the greatest determinant to your everlasting
success, your ability to survive losing streaks (which all
28
COvEr STOry
proficient traders must inevitably face occasionally), and
Azeez Mustapha
the possibility of ending up being profitable.
Azeez Mustapha is an official 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.
Final Thoughts
Many pragmatic traders advise that stop-loss is
extremely crucial (not mental stops). Please enter a stop
before or after you enter a trade. You cannot afford to
azeez.mustafa@analytics.instaforex.com
be married to your screen because every movement in

price whether significant or moderate will cause you
anguish if your position is negative. Every movement
can run you mad.
On the battlefield of the financial markets, the most
common factor that will demoralise you or kill your
The ability to use and respect stop-loss is the foundation

of your progress in trading. If you fail to do this, other
things are completely useless.
portfolio is your inability to respect your stops. Every
Like in real life, doing the right things does not always
trader must decide to use stops when trading, for this is
make you appear smart. In fact, you may sometimes look
part of the rock solid discipline required for successful
stupid by doing the right things. A trader that uses a stop
trading. Some people think that they can set stop-loss
may appear stupid when they are stopped out on a trade
some hours or days later (too wide stops), and at last, the
that eventually reverses and turns positive. A trader may
plan to use stops is abandoned. There are also traders,
appear stupid when a position they are trying to ride fails
who widen their stops more and more because they want
to meet its target, turning from positivity to negativity.
to give losing positions more leeway. When the use of
But in the end, we will reap the benefits by doing the right
stops becomes a part of you, you are already triumphant.
things.
29
COvEr STOry
Professionals
r
u
O
m
o
fr
e
ic
v
Ad
what is your Life Insurance in the Markets?

When you hear the word trading the first thought that may spring to mind
is profit. In Forex trading a popular function is a take profit order, which is
an automated order to close a profiting trade.
The words take profit may make your eyes shine when you hear them, but
what if the market goes against you and you start losing, and you wish
you had closed your position earlier
Well, thank the man who invented the take profit order, as he also
invented the stop-loss order which is designed to limit an investors loss
on an open position when trading a security.
You may ask yourself: what can the benefit of a loss be? I will answer
your question with a question: why would you ignore the word stop?
When you use a stop-loss order you avoid liquidation, minimise your
loss, close positions if the market goes against you, and remove the
need to monitor your position on a daily basis .
A popular theory says if you open ten positions, seven become losing
positions and three become winning ones, your total will be positive if
you place a stop-loss for each.
A final note to all traders is: do not open any order without protecting
your positions!
Wissam Al Sallakh, Business Development Manager at ICM Capital
When placing an order I limit a single trade to one or two per cent of my
account balance and use the entry to stop distance to calculate the contract
size. By using this approach the underlying volatility of the market is taken
into consideration, so higher volatility in the market results in a wider stop
but smaller contract size, whilst a lower volatility market results in a tighter
stop and higher contract value.
When choosing my stop placement I try to find less obvious places
because too many stops in the same place (like, say, a swing high or low)
attracts price like a magnet and usually ends with you being stopped
out before the price reverses. Instead I will go for a wider stop behind
a cluster of technical levels, allowing so called breathing room for
market noise.
Additionally I limit myself to two new positions of uncorrelated markets,
and only seek to add positions if my original orders have been moved
to break-even.
By using smaller positon size and limiting my market exposure to
uncorrelated markets I have significantly reduced my chances of a
margin call should an unexpected and extreme move force me out of
my positions.
Matt Simpson, Senior Market Analyst at ThinkForex
30
Since 2001, TradeStation Institutional has provided customized trading solutions for
both international and domestic institutions. Our comprehensive and tailored
approach provides our clients with high touch service and multi-asset electronic
Our clients consist of a diverse base of institutional investors, including:
Hedge Funds
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We offer bespoke brokerage services to Institutional Clients such as mutual funds,

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We offer the following services to institutional clients:
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See what real traders are talking about.

international@tradestation.com
www.tradestation-international.com/services-en
divisions of IBFX, Inc. (Member NFA) and IBFX Australia Pty Ltd, ABN 84 142 210 179, holder of AFSL #363972. 2014 TradeStation. All rights reserved.
ADvErTOrIAL
QuantAnalyzer
Trading Performance research Tool
QuantAnalyzer is a tool that allows you to import your backtest or real trading results and analyse them, to find potential
weak points and possibilities for improvement, test different money management ideas or portfolio combinations.
StrategyQuant is announcing release of their new
Monte Carlo module allows you to run Monte Carlo
QuantAnalyzer tool that allows traders to analyse their
simulations that can help you estimate the risk and
trading results (demo, live or backtests), find potential for
profitability of your trading strategy more realistically
improvement and perform advanced money management
using statistical methods. Monte Carlo simulation can be
and portfolio simulations.
also used to predict the future performance or verify
QuantAnalyzer 4 is an open and extensible platform.
if the recent trading results fall into the expected range.
It supports import of results/reports from platforms
What if scenarios can be used to quickly verify some
like MetaTrader, Tradestation, NinjaTrader, MultiCharts,
trading or filtering idea without the need for running a
JForex and others.
backtest. For example, what if you avoid trading on

a particular days of week? Or how would your trading
QuantAnalyzer could answer questions like:
results look like if you had missed the ten most profitable
trades?
How will your strategy perform in a portfolio with

other strategies?
Money Management Simulation module allows
What is the quality of the strategy? How does it
you to simulate trading your strategy with different
compare to another strategies you have?
position sizing approaches and choose the optimal one.
What is the longest period the strategy stagnated
For example, compare the trading results by using fixed
before growing to more profits?
contracts vs risking given per cent of an account with
What position sizing model is the most optimal?
different risk options.
What are the realistic risk and profitability
Portfolio Master is an unique QuantAnalyzer module
expectations of your strategy based on Monte Carlo
that can be used to find an optimal portfolio of strategies.
simulation?
For example let us say you have 20 different

strategies, but your account size or sector/symbol
QuantAnalyzer Modules
diversification approach allows you to trade only five of
The programme uses modular approach, the basic
them. Portfolio Master can find you an optimal portfolio
module is its rich analytics. After loading your trading
of these five strategies, it can consider also correlation
history you will be able to see and filter the equity charts,
so that portfolio does not contain strategies that are too
periodic results, trade analysis charts, correlation of
correlated and sectors so that portfolio does not contain
your strategies in the portfolio. All the analytics parts
too many strategies from the same sector or symbol.
are extendable, so if you are missing something you can

write your own code that computes new statistical value
Try QuantAnalyzer here:
or prints a chart.
www.StrategyQuant.com/QuantAnalyzer/
32
is now available as print magazine!

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es at a
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Subscribe today to the digital version for 27 GBP.

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including the digital version.
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News from the world of Technology
Seoul-based financial technology firm SYSTRA has
features and added functionality incorporate earnings
launched a product that allows common traders to
reports; IPO news; and daily reports from CNBC, Barrons,
implement their own algorithmic trading strategies. With
and Wall Street Journal. It also displays indices and offers
the technology, traders can build a complex algorithm,
basic charting. The relaunched app, which was originally
without writing a single line of code. FXTraBox is a modular-
developed by Eli Engelman in 2013 when he was still a high
based FX algorithm builder that allows independent,
school student, now includes brokerage account integration
interchangeable, reusable modules such as Conditions and
with E*Trade, TD Ameritrade, Fidelity, Scottrade, and
Actions. As there are some solutions on the market which
Schwab, so the user can trade stocks while staying in the
already address this segment of the market, FXTraBox aims
iStockAlerts platform to complete the transaction. The new
to deliver a multi-asset solution. The product is offered on
version also offers access to market newsfeeds, analyst
a monthly subscription basis, with a free version dubbed
ratings, and more. The mobile and desktop versions are
Lite offering a number of the features for usage. SYSTRA
free. More advanced and customisable versions have
is initially positioning the product towards the OTC Forex
an annual subscription rate of $89.99. You can get more
trading market with back testing of the strategies available
information at www.istockalerts.com.
for MT4. For more information visit www.fxtrabox.com.
MetaQuotes
has
made
an
important
product
iStockAlerts has relaunched its stock trading app for
announcement. The companys flagship MetaTrader 4
Apple or Android tablets, phones, and desktop computers.
platform is getting web trading support in the latest
The application constantly monitors financial data and
build of the beta version of the platform. With the
issues buy, sell, and hold recommendations for equities on
new solution in beta, we are still months away from
the NYSE and NASDAQ. iStockAlerts uses a proprietary
seeing an officially available product, but the news that
algorithm based off a set of technical indicators and sends
MetaQuotes is working on a web-based solution should
real-time alerts based on a customised watch list. New
please a number of brokers. All of the features of the

platform will be available for traders from a web browser
of their choice within a secure environment. The trading
iStockAlerts
account number and passwords will be encrypted and

stored locally in the browsers settings, minimising
any risks of hacking. The new feature is available for
all owners of an MQL5 community account. Users may
test the web platform under the newly available Trade
section. The running version of the new MetaTrader 4, is
currently working only with demo accounts. Currently
the features included in the beta version of the webbased MetaTrader 4 solution include placing market
and pending orders, getting real-time market quotes,
customisable price charts on nine time frames and basic
analytical objects such as horizontal, vertical and trend
lines, equidistant channels and Fibonacci levels. If you
want to read more, visit www.metaquotes.net.
34
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http://w ww.optionslam.com
www.optionslam.com
A Must for Every Options Trader
There are a lot of websites with statistics for stocks, but not so many for options.
Many options expire worthlessly and therefore historical analysis was nearly
impossible because there was not data. But that has changed. At least the analysis
of price movements after the publication of quarterly earnings is now available
thanks to the US website optionslam.com.
Option traders will enjoy www.optionslam.com; it is not
Option Movement Statistics
only possible to test strategies with a test portfolio but
Figure 1 shows the starting screen. If the user opens
this website also offers a list of stocks where the option
the website, there are several tables. Every table
premium is high enough that option-writer strategies
is based on analysis of current option prices. If the
could be profitable. But the main focus of this website
implied volatility is high, a strong movement of the
is the analysis of movements after the publication of
share is expected. The statistics cover several years
quarterly figures.
for most stocks and an internal key figure is calculated,
36
TOOLS
the so-called Earnings Volatility
F1) Starting Screen
Rating, short Optionslam EVR.

You can find this key figure for
every stock. It means the following:
The higher the figure, the stronger
the movement after the publication
of the quarterly figures in the
past. Based on these tables the
professional
option
trader
can
analyse a share more closely and he

can create strategies for the most
important dates of the company.
A single instrument is introduced
each day in the lower part of the
main page to show the user how
to analyse the tables. You can see
in Figure 1 that on this particular
day the stock of First Solar, short
FSLR, is introduced. The left chart
shows the price development of
the past year as well as the dates
of the publication of the quarterly
earnings. Therefore you can see
the particular movement on the
following day. On the right you can
see the Ichimoku chart. Below you
can see the particular statistics.
If you click on the stock the
analysis page opens. In Figure 2
you see the chart in the upper area
and the Optionslam EVR below.
Based on the past 31 quarterly
The website offers many tables for option traders. The paid option price is analysed and a key figure is deduced
based on the implied volatility. The main focus of Optionslam is the publication of quarterly figures and trading
these news with options.
Source: www.optionslam.com
earnings the calculated value is 4.6

and therefore a stronger movement
is expected at the next publication.
The option trader can analyse the statistics further on
Key words options
the lower half of the screen.
At-the-money: Option, where the strike price is at the
Straddle Statistics
The website only analyses US stocks (more than 4,000)
which can be traded with options. Guests can only access
the historical data for the past two quarters, whereas
inside members can access historical data for the past
five years. The yearly cost is $99.
Optionslam uses options as the money to deduce
an expected price movement of the stock. You can find
these data on the website in monthly and weekly
straddle.
The trader buys a call and a put at the money at a long
straddle, whereas he sells the same position at a short
current price of the underlying.

Out-of-the-money: Option with the inner value zero and
the strike price is not at the current price of the underlying.
In-the-money: Option with an inner value greater zero.
Option writer strategy: An option writer sells options to
achieve profit with the received premium. He hopes that
the price of the underlying (stock, ETF, future) will not
exceed the strike price of the sold option (call) until the
end of duration respectively the price of the underlying
will not fall below the strike price of the sold option (put).
He is interested in the loss of value of the option until
expiration.
37
tools
It is important for newbies to

understand the movements of options
first before risking real money.
straddle. The developer of the website assumes that the
publication of the quarterly figures. If a stock trades at
paid option price covers the maximum movement that
$50 and the straddle costs $4.50 a movement to $45.50
professional option traders expect for the day after the
or $54.50 is assumed.
After the prices are statistically
determined the website checks if the
user had earned money with the so-
F2) First Solar and Quarterly Earnings
called Straddle Earnings Strategy

if he had sold the next day.
Figure 3 shows the analysis
for First Solar. The event was on
5th August 2014. In the upper area
you see the cost of the straddle
during the four days prior to the
publication. On the right side the
expected price movement (column
Implied move) based on the option
premium is calculated.
In the lower part you see the
Tracking Statistics. If you had
bought the straddle on 5th August
you would have paid $5.38 per option
combination. On the following day
First Solar opened with a gap of 8.41
per cent to the upside. Regardless
the straddle lost more than 42 per
cent overnight if you had closed the
position at the open. This is important
for option traders. Often it is better
to sell the option combination than
to buy it. In this case the trader
could have achieved a profit with the
There are statistics about the particular movement on the day following the publication of quarterly earnings
for every chosen value. The trader can deduce if it is profitable to buy or sell a straddle at the money.
38
decrease of the price of the options.

The stock of First Solar is not
representative
of
this
strategy,
tools
but the longer the history of the
F3) Straddle Analysis First Solar
statistics, the better the possibility

to deduce the best strategy for the
option trader.
Inside Members Have Advantages

If you are a member at Optionslam
you can send the results (based on
the predefined scanner) via email.
High EVR, implied volatility and
other date- and price-based data
can be combined. The user only
has to analyse the share after he
receives the email. Furthermore, he
can test option strategies based on
real prices in the test portfolio. The
Options Strategy Testing is still in
the Beta-phase, but it works without
problems.
Figure 4 shows several open
positions
including
the
current
profit or loss based on real-time

prices. Especially if you are new
to the options market, this is an
There are extensive statistics of the past years. In the upper part you see the cost of the straddle at the
money, whereas in the lower area you see the profit or loss after the publication of the quarterly earnings.
inexpensive way to test your trading

system without real money. It is
important for novices to understand
the movements of options first
F4) Test Portfolio for Inside Members
before risking real money.
Conclusion
Optionslam is one of the few
websites for option traders and
it
offers
historical
prices
for
options. For the first time it is

possible to test strategies based
on the announcement of quarterly
earnings with historical data and
to check if they would have been
profitable. A yearly price of $99
is affordable in former times
you had to pay a similar fee for a
roundturn.
If the user paid the yearly fee of $99, he can test his option strategies with real-time prices. Profits and losses
are calculated in real time. You can also implement complicated strategies with several single options.
39
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Frontier
Exploring the Top Ten Emerging Markets of Tomorrow
by gavin Serkin
In a quest for the most profitable investment
nevertheless achieved impressive returns in the past
opportunities, Gavin Serkin journeyed deep into the
several years. But how to invest in them safely is the
world of emerging markets. What he found travelling
challenge.
alongside money managers who achieved some of the
In this compelling travelogue, Frontier: Exploring the
best fund returns globally in their categories for the past
Top Ten Emerging Markets of Tomorrow, takes the reader
five or ten years was an exotic collection of countries
on a vivid journey from the poorest slums to the glass
and markets that went beyond the concept of emerging
towers of billionaires as Serkin encounters corruption,
and into a realm most investors do not typically consider,
police brutality and state-sponsored violence first hand
namely frontier markets.
as well as some inspirational breakthroughs. Traveling

from democracy to communist to Islamic regimes,
Serkins Travelogue
from Africa to Asia to eastern Europe, the Middle East
From Myanmar, Ghana, Sri Lanka, to Nigeria and
and Latin America, he puts top money managers face-
Romania, to name a few countries frequently associated
to-face with government ministers and central bankers
with conflict or poverty or other seemingly impenetrable
and calls corporate executives to account all the while
barriers to investment. These destinations, characterised
putting boots on the ground to convey a reporters and
by smaller market capitalisation and liquidity, have
experienced travellers sense of place and purpose.
The Worlds Most Dangerous Places to Invest

Author
Gavin Serkin is the Emerging Markets Editor-at-Large,
working with reporters and editors worldwide. He joined
Bloomberg in 2000 as Europes investing reporter, before
specialising in emerging markets in 2001. Serkin was
previously the Editor of Portfolio International and the News
Editor for a group of nine weekly newspapers in London
and Southeast England
40
The result is an exhilarating yet practical guide for

investors in how to spot opportunities, avoid pitfalls and
minimise risk in some of the worlds most dangerous
places an invaluable opportunity to learn volatility
assessment and valuation techniques from some of the
biggest-name fund managers, including Templetons
Mark Mobius and frontier markets experts from Morgan
Stanley,
Deutsche
Asset
&
Wealth
Management,
Aberdeen Asset Management, and several more.
TOOLS
The book includes solid data readers can readily

apply: the investors provide rankings of their top frontier
countries, stocks and bonds on a ten-year horizon,
analysis of the opportunities and risks, and triggers to
watch that might signal whether to buy or sell.
Frontier is for professional money managers on
the lookout for promising new markets, those already
active in emerging markets who seek more information,
or everyday investors wanting to understand their own
pension or estate choices better.
Frontier
helps
investors
successfully
navigate
markets that are yet to emerge, with expert advice on

spotting opportunities and minimising risks. With firsthand insights into frontier markets as we travel with
big-name fund managers from Mark Mobius to Morgan
Stanley, this practical guide ranks countries, stocks and
bonds on a five- to ten-year horizon to steer investors
Bibliography
toward the most promising destinations. Written in a
Title:
Frontier
Subtitle:
Exploring the Top Ten Emerging Markets of
compelling and accessible travelogue narrative, each

chapter covers a specific country, providing invaluable
market analysis and a deep understanding of the political,
economic, and social background of those most likely to
outperform. The key focus is on fresh ideas, based on
the assessments from top performing money managers
when meeting challenges, hostilities or adversity, and
observations after interviewing high-level government
officials and executives.
Tomorrow
Author:
Gavin Serkin
Pages:
424 pages
Price:
29.99
ISBN:
978-1-11882-373-6
Release:
April 2015
Publisher:
Wiley
41
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The App for All Option Traders
The Chicago Board Options Exchange (CBOE) has developed an interesting app for options fans
for the iPhone and iPad. It combines market news, option prices, data as well as an interactive
educational package, which should be really interesting for beginners. In the following article we
put the app to test and discover the advantages and disadvantages.
There are ever more apps for traders and investors
Let us dive right in. After downloading from the Apple
every day and they offer many helpful tools for our work
App Store and logging in, we first open the Market
this is true for options as well. CBOE mobile is a free
menu. CBOE mobile offers extensive market data on the
app that offers many features, and the newest version
go but delayed by 15 minutes. Figure 1 shows the pre-
has been available since mid October 2014.
defined overview of all important US-indices including
42
tools
If you are looking for a certain put or call

with a certain expiration date and strike price,
you can find it in a few steps.
the VIX on an intraday basis. If you click on an instrument,
secret for many stock market fans because of the high
its particular history is shown as well. This should be
complexity, so the apps educational area is especially
sufficient for rough analysis, but for detailed analysis it is
valuable. Whether just starting out, refreshing or
clearly lacking.
extending your knowledge the clear explanations will
Another feature in the Market menu is the obligatory,
be helpful for everybody. A click on Education opens a
easy-to-do watchlist for the keeping track of your individual
three-step information and quiz program that covers all
portfolio instruments or interesting candidates. It enables
important topics:
access to important information that we will discuss later

(see Figure 2). If you are particularly thirsty for knowledge
Level 1 (Basic Level)
and want to receive multimedia information on the go, the
Terminology,
market
participants,
capital
asset
app offers current videos under CBOE TV, which can be
pricing models, Covered Calls, Indices, volatility et
filtered by different fields of interest, for example videos
cetera
for certain option strategies or market news. There is also

educational content available that you can select with a
filter as well.
F1) Market Overview
If that is not enough, you should take a look at the

Social Hub information from social media is shown
here, including the internal CBOE blog and twitter channel
as well as external blogs regarding options trading. In
short: Good and useful information regarding options is
available aplenty.
Option Search Made Easy

In addition to the extensive information another thing is
offered from the CBOE app: convenient and quick searches
for options. If you are looking for a certain put or call
with a specific expiration date and strike price, you can
find it in a few steps. Figure 2 shows an example of an
option overview for Apple. We chose expiration dates in
December 2014 and we filtered for options in the money.
The option chain is displayed in table form if you
click on the option, another window opens showing all the
details regarding bid/ask, volume and so on.
Options from A to Z The Educational Area

Trading stocks, CFDs or futures attract many private
traders and investors, whereas option trading is still a
The pre-defined index-overview offers an intraday performance chart of all

important US-indices including the VIX.
Source: CBOE mobile
43
tools
Level 2 (Medium Level)
lessons and it aids in remembering the content. New
Components of option price, Greeks, Credit Spreads,
lessons and the reaching of the next level is only possible
calendar Spreads et cetera
once you have earned enough points.
Level 3 (Advanced Level)
Conclusion
This update adds usable functionality. The option
Index options, Spreads for advanced, SPX & VIX
search as well as the Education area are strongly

The theory behind the 75 lessons is to keep things short
recommended because they offer the ability to learn
and understandable and they are complemented with
about options in a fun way especially for beginners.
graphics so efficient learning is guaranteed. Every topic
And if you just want to stay updated on the most traded
has an introductory video offering a good orientation.
stocks, the intraday development of the markets or the
The interrogation of the knowledge with multiple-choice
newest blog and video entries, you will also be very
questions is fun and motivates the user to learn the next
happy with this app for free.
F2) Product Search
F3) Lesson Overview
With the help of search tools the user can find the correct option within seconds.
The option chain is displayed in table form if you click on the option, another
window opens that has all the details regarding bid/ask, volume and so on.
There are 75 lessons including questions available for all traders who want to
start or extend their knowledge of options.
Source: CBOE mobile
Source: CBOE mobile
44
Get in touch with

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rice of
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STrATEgIES
Trading for Short Term & Longer Term gains
The Best of Both worlds

The authors trend based methodology seeks to capture both short term and longer term gains by using a hybrid approach in
both the patterns and money & position management. In this series of articles, the methodology will be explained including
recognising both established and emerging trends, strategies to enter those trends, and money & position management
to help mitigate losses and maximise profits. And last, but certainly not least trading psychology will be discussed. No
methodology will work unless you are able to develop the proper mindset to follow it.
Dave Landry
Ground Rules
Dave Landry has been actively trading the

markets since the early 90s. In 1995 he founded
Sentive Trading, LLC, a trading and consulting
firm. He is the author of three books that have
been translated into six languages. He has made
several television appearances, has written
articles for several magazines and has spoken
at trading conferences both nationally and
internationally.
Before we dive into the methodology, let us look at some
www.davelandry.com
46
ground rules. Knowing these will help you to understand

the authors philosophy towards the markets and trading.
1.
Technical analysis leads the way. If a market is going

from A to C and A < B < C, then it will have to pass
through B on its way to C. In contrast, there are no
strategies
hard and fast rules when it comes to fundamental

analysis. Schabacker said it the best: the
5. Keep it simple. Other than the occasional moving

average, no indicators are used.
fundamental factors suggest what ought to happen
6. Only the short term can be predicted when it comes
in the market, while the technical factors suggest
to markets. However, positions can be held longer
what actually is happening in the market (Richard
term if a longer term trend materialises.
Schabacker in Technical Analysis and Stock Market

Profits).
2. Considering #1, all news and all fundamentals
7. Money & position management are key. You must

position yourself for both shorter term and longer term
gains. No matter how great a trade might look, there is
are ignored. Price and only price leads the way.
always a risk of loss. Therefore, stops must be used.
Remember: All of the financial theories and all of
8. Although a good defence is crucial, a good offense
the fundamentals will never be any better than what
is often your best defense. Pick the best and leave
the trend of the market will allow (Gregory Morris in
the rest. Markets traded should trade cleanly (i.e.
Investing With The Trend).
not chop around), be in an obvious trend or have an
3. Trade only in the direction of the established or
obvious emerging trend, ideally have bigger picture
developing trend. Regardless of the methodology, all
patterns (i.e. classical technical analysis), and of
successful trades must capture a trend. So, why not
course, be set up. Do not take mediocre trades. Do
start with a trend to begin with?
not try to make something happen in less than ideal
4. It is not my way or the highway. There are many
conditions. Do not invent trades.
ways to trade. If you are already a successful trader,
9. The methodology is repeatable. There are no
then use only what you feel will improve your own
secret formulas. Execution is not crucial on getting
trading. If you are not currently successful, then
everything to the penny. With some experience, you
consider the methodology since it is a simple and
should be able to recognise trends/emerging trends
straightforward approach.
and the patterns to get on board them.
47
strategies
next week or next month. Similarly, although market
F1) Probability Cone
forecasts are based on probabilities, predicting short

term moves is much easier than predicting the longer
term. Furthermore, the longer you are in a market, the
better the chances are that you are going to get soaked.
Short term trading keeps risks relatively small due to
limited length of exposure.
Where the Money is
Although short term trading has its advantages, it also
has its disadvantages. The biggest disadvantage is that
gains are limited by the brief exposure to the market. Big
trends often take time to develop. The real money is in
longer term moves.
Based on historical volatility, a prediction into the future illustrates how
uncertainty increases with the length of the forecast.
The Problems with Longer Term Trading

Although the real money is in longer term trading,
it is not without its pitfalls. Longer term trends are
impossible to predict with any degree of accuracy.
Again, the longer your forecast the more certainty
10. Embracing your own emotions is key. Understanding
decreases. This can be best illustrated with a
the methodology, trading at a reasonable but
probability cone using historical (aka statistical)
consistent size, only trading the best of the best
volatility. Referring to Figure 1, notice that the cone
setups, and planning will help you to keep your
widens the further you look out.
emotions in check. You need to obsess before you get

into a trade, not afterwards.
Keep in mind that markets are not normally distributed

(i.e. do not adhere strictly to statistics) and the author is
only using the probability cone to illustrate a point. If a
The Dilemma
market has been volatile in the past, it will likely continue
Only the Short Term Can Be Predicted
to be volatile in the future.
When predicting the weather, the longer your forecast,
Even if the trend does continue in the intended
the tougher it will be to get it right. If it is cloudy and
direction, the market will still be prone to deeper
thundering, chances are it is going to rain soon. However,
corrections over extended time. Therefore, wider stops
this obviously does not mean it will be raining this time
must be used to ride out these corrections. The longer

you intend on holding the trade the wider your stop will
have to be to compensate for the increasing cone of
uncertainty.
F2) Overbought/Oversold
The combination of wide stops with low accuracy is

a recipe for large drawdowns. Books have been written
Reality
Overbought
about many famous longer term trend followers who

amass great sums of money. What is often left out of the
story is that many have subsequently blown up.
The Best of Both Worlds A Hybrid Approach
If long term trading has bigger opportunities but risks too
Ideal
much, and short term trading has smaller risks but does
Oversold
not make enough, what is a trader to do? Simple, it is not

a mutually exclusive decision. Why not trade for short
Markets often vacillate between overbought and oversold but not in an ideal
fashion.
Source: www.davelandry.com
48
term gains, but also be willing to stay with a portion of

the position as long as the market moves in your favour?
This allows you to have your cake and eat it.
strategies
Considering the above, the author seeks out stocks and
mean moves in the direction of the underlying trend. Again,
other markets that have the potential for both a shorter and
he trades pullbacks. This is illustrated in Figure 3. Notice the
longer term gain. If the market moves in his favour, he locks
trend (as illustrated by the arrow) continues until the market
in a short term partial profit (half of the position) and then
corrects from its overbought condition to become oversold.
keeps the remainder on as long as the market continues to
A buy is triggered when the market begins to revert back to
move in his favour. The stop is then gradually widened in
the mean in the direction of the underlying major trend. On
order to make the transition from a short term to a longer-
a similar vein, a sell short signal is triggered in a downtrend
term trade. Before we break this down further, let us look at
from trend resumption from an overbought condition.
how to predict both short and longer term moves.

Predicting the Longer Term
Boiling It Down
Trend followers seek out markets that have been trending
Most trading methods can be boiled down to either contra-
with the hopes that the trend will continue. Therefore, in
trend (trading reversion to the mean) or trend trading. There
order to follow a trend, one must first recognise when an
are many approaches to these methods but essentially you
existing trend is in place. We will devote the next article in
are either a contra-trend trader or you are a trend trader.
this series on bar patterns and techniques for qualifying
The authors approach to the markets is to look for
existing and emerging trends including the concept of
an established trend or an obvious emerging new trend
persistency, measuring acceleration with trend lines, and
and then enter that market after it has corrected. In other
using moving averages. For now, just know that the best
words, he trades pullbacks. The idea is to capture a short
way to determine an existing trend is to simply eyeball a
term move as the market reverts back to its mean, which
chart. Keep it simple. The trend should be obvious. The
is hopefully followed by a longer term move as the longer
author believes that if there is a trend, then you should be
term trend resumes.
able to draw a big arrow on the chart.

By combining a developing or established uptrend
Predicting the Short Term
with an oversold condition, you position yourself to
Referring to Figure 2, markets tend to vacillate between
capture a fairly certain short term move as the market
overbought (OB) and oversold (OS). This can be akin
reverts to its mean, and hopefully, a less certain
to walking a dog on a leash. When the dog reaches the
longer term move as the longer term trend resumes.
end of the leash at the edge of the sidewalk, he tends to
Metaphorically, you are looking for the overbought leash
wander back to the other side of the sidewalk.
to break in the direction of the longer term uptrend. The
In an ideal world, the vacillation between OB and

OS would take on an appearance of a perfect sine wave.
Obviously, with markets, no one knows exactly where the
end of the leash is. Overbought can always become
same principle applies to the short side by combining a

downtrend with an overbought market.
In Part 2 of this article, Dave Landry will explain the
specific rules for his trade setup. Stay tuned.
even more overbought. Likewise,

oversold can also become even
more oversold. Metaphorically, the
leash does occasionally break (a
propensity we actually use to our
advantage). This is why trading an
F3) Mean Reversion within Higher Time Frame Trend

Buy Signal
Sell Short Signal

Downtrend
Overbought
OB/OS system in and of itself is not
Overbought
a good idea.
Sell
Short
Buy
Combining Reversion
to the Mean with Trend
The odds of capturing a reversion
to the mean type of move can be
increased even further by trading in
the direction of the major trend. And,
this is exactly what the author does.
He seeks to capture reversion to the
Oversold
Uptrend
Oversold
The strategy seeks to capture reversion to the mean moves in the direction of the underlying trend. A buy is
triggered when the market begins to revert back to the mean in the direction of the underlying major trend.
Short vice versa.
Source: www.davelandry.com
49
STrATEgIES
Narrow range Breakout

The Silence Prior to the Big Move
For private investors and traders who do not have time intraday but want to achieve
high yields with active trading, the daily chart is ideal. The analysis and the placing of
buy or sell orders can be done easily after the close of the stock exchange and therefore
intraday live-monitoring is not necessary. Breakouts from below average price ranges are
especially good for entries. In the following article you will learn what is important and
how to develop a trading strategy based on this knowledge.
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 idea is very old but still relevant. The stock

market often shows changes in volatility calmer
days and smaller trading ranges often follow days of
bigger moves. The same goes vice versa: a dynamic
move up or down often follows calmer days. Wellknown trader Toby Crabel introduced different trading
strategies based on the so-called Narrow-Range
50
strategies
NR3 describes a daily candle with

the lowest price range (high to low)
of the last three periods.
(NR) days combined with the change in expansion and
in this trading strategy: the simple ATR distance is the
contraction of volatility in the early nineties. We want
initial stop. Successful trades often reach the profit target
to continue this idea and use it to develop a trading
directly and therefore confirm the traders idea. We want
strategy step by step.
such trades to stay in the profit zone after reaching a

certain book profit and therefore we add a break-even
Chart Setup and Entry Rules
stop. The rule is: If the index increases by 0.5 per cent or
We will start with the setup and the necessary indicators
more to the desired direction, the stop is placed at break-
that will be explained shortly. The following setup is
even. Finally we add a profit target of twice the ATR.
required to generate signals:
Example 1: EURO STOXX 50

Daily chart of a stock market index
We take a look at a real example. Figure 1 shows the
Moving Average of 250 days (MA250)
EURO STOXX 50 on the daily chart. On 26th of March
Average True Range (ATR) of ten days (ATR10)
2014 a NR3 pattern formed. Because of the positive trend
The pattern is known as NR3. It

describes a daily candle with the
F1) EURO STOXX 50 with Narrow Range Breakout
lowest price range of the last three

periods the difference between
high and low is measured. If such
a candle appears, the breakout is
traded the following day with a stopbuy order. Now the MA comes into
play, which acts as a simple trend
filter: If the market is above the
MA250, we trade long signals only.
The high of the NR3 candle is the
stop-buy trigger. But if the index is
below the MA250, we only enter
short signals. The trigger is the low
of the NR3 candle.
Exit Rules
Of course we need more than only
entry rules whether we achieve a
profit or loss depends on the exit.
There are two elements for the exit
On 26th of March a Narrow Range pattern formed and it was triggered two days later (point 1). The initial stop
was placed at the high minus the Average True Range and it was closed on 4th of April in profit (point 2). The
placing of the stop is shown in red.
51
strategies
Example 2: DAX
F2) DAX with Signals and Equity Curve
This trading strategy can be traded

with all major, liquid stock market
indices. We recommend using it with
several indices to smooth the capital
curve (diversification).
Another
piece
of
evidence
that the strategy works in difficult

phases as well, is shown in Figure 2.
You see the DAX with all entry and
exit signals and the corresponding
equity curve in the chart below.
Whereas the DAX did not make any
progress since the beginning of the
year, the trading strategy delivered
seven transactions with the result
The trading strategy convinced last year during the volatile sideways trend. The DAX was nearly unchanged
whereas the strategy gained more than 800 points.
of more than 800 points. Backtests

over 20 years covering all market
phases confirm the efficiency
of
the
strategy,
the price was clearly above the MA250 at that time
Narrow
Range
independent
Breakout
of
which
stock market index was chosen.
there was only one action for the trader: to place a stopbuy order at the daily high at 3141 points. You can see that
Modifications
the trade was triggered only two days later at the open
Of course you can modify the strategy and adapt it to your
(point 1). Because of the positive market reaction the stop
own individual requirements. One thing is sure: a trading
could be placed at break-even quickly. On 4th April 2014
strategy that is not adapted to the traders individual
the profit target was reached and the trade was closed
preferences concerning philosophy, trading frequency or
(point 2).
time exposure will not generate profits simply because it

will not be followed.
The number of candles that form the Narrow Range
Strategy Snapshot
pattern can influence the frequency of signals. For

example you could use ten days (NR10) instead of three
Strategy Name:
Narrow Range Breakout
Strategy Type:
Swing Trading
placing of the stop or you could implement an oscillator
Time Frame:
Daily chart
to add another filter to the strategy.
Setup:
High and low of the trading day with the lowest

trading range of the past three days for entry,
trading only in direction of the main trend (MA250)
Entry:
Long at breakout above the high of the NR3-day,

short at breakout below the low of the NR3-day
Stop-Loss:
1 ATR as initial stop, at 0.5% or more book profit

placing at break-even
Take Profit:
2 ATR
Exit:
Reaching take profit or stop-loss
Risk and Money

Management:
0.5% to 1% of the trading capital
Average Number
of Signals:
About 20 signals per year per index
Profit Factor:
About 2 to 2.5
days (NR3) or even more days. You could also change the
Conclusion
You can find trading candidates based on the interaction
of expansion and contraction of the volatility and the
Narrow Range pattern by Toby Crabel. Trading this
strategy is simple and not overly time-consuming
therefore it is suitable for working stiffs as well.
We used this strategy on different international
indices successfully and therefore can confirm that it
is a simple but solid strategy that takes advantage of
short term moves with a holding period of a few days.
Therefore you can achieve a long term attractive yield
no matter, if the market rises or decreases.
52
strategies
Generate Monthly Cash Flow

by Selling Stock Options
Selling Cash-Secured Puts
Retail investors are always seeking ways to generate higher-than-risk-free-returns and still
maintain capital preservation as a key component to the strategy. For most of us, the thought
of combining the stock market with stock options is far too speculative and not for the average
blue-collar investor. In this article, this myth will be debunked and you will be presented with a
set of specific rules and guidelines geared towards enhancing your annualized returns. Selling
cash-secured puts will be highlighted, a strategy similar to covered call writing but with certain
distinguishing differences.
What is Selling Cash-Secured Puts?
underlying security should the put holder choose to
Selling cash-secured puts is a strategy that combines
exercise the option. We are selling some unknown person
the selling of put options while simultaneously placing
(trading is done online) the right but not the obligation to
enough cash in our brokerage account to purchase the
sell shares to us at a price that we determine (= the strike
54
STrATEgIES
It is important that we all become proficient

at reading price charts to have the ability to maximize
returns when selling stock options.
price), by a date that we determine (= the expiration date).
b. Outcome, if Stock Price Moves Below $30
In return for undertaking this obligation, we are paid a
The option holder will exercise the option and sell shares
cash premium that is determined by the market (= the
to us at $30, currently higher than market value. This
option premium).
means that we have purchased the shares at a cost basis
Let us breakdown the four words in the phrase
of the strike price less the put premium. In this scenario,
selling cash-secured puts:
the stock was purchased at a cost basis of $30 - $1 = $29,
Selling: This means that we are writing or initiating
a discount of 9.4 per cent from the original stock price of
the contract. This is called selling-to-open (STO).
$32 when the put trade was entered.
Cash-secured: We place a certain amount of cash in

our brokerage account to pay for a possible future
What is the Risk?
stock transaction.
If the stock price should drop below our break-even or
Puts: This is the type of option we are selling. The
cost basis of $29, we will start to lose money. This brings
buyer of the put has the right, but not the obligation,
to light the three aspects of put-selling that will ultimately
to sell shares to us at a specified price by a specified
determine the degree of success we will have:
date.
Stock selection
Option selection
Position management
Preview Example
Let us assume that BCI Corp. is trading at $32 per
share. If we sold an out-of-the-money $30 put (strike
Three Skills Essential to Master this Strategy
price lower than current market value), we are agreeing
Before risking even one penny of our hard-earned money,
to buy 100 shares of BCI per contract for $30 by the
we must master all three aspects of this strategy: stock
expiration of the contract. Let us also assume that
selection (you can also use exchange-traded funds or
the expiration date was in one month. In return for
ETFs), option selection (strike price and expiration date with
undertaking this obligation, we are paid an option
calculations) and position management (exit strategies).
premium. Let us estimate that the premium was one

dollar per share or $100 per contract (leaving out the
Stock Selection
small commissions of an online discount broker). The
Since we may have the underlying shares put to us,
amount of cash required to secure this put trade is
we should only use securities that we would otherwise
the cost of 100 shares ($3,000.00) less the put premium
want to own. Therefore, in our 30-day obligation period
received ($100). To calculate our initial or unexercised
we want to utilise shares least likely to go down in value.
returns we use the following formula:
This means that our screening process must be rigorous

and not based on option returns but rather on the quality
initial/unexercised returns = $100 / $2900 = 3.4%

a. Outcome, if Stock Price Remains Above $30
The option buyer (holder) will not elect to exercise the
option and sell shares to us at $30 when they can be sold
at market for a higher price. In this scenario, the option
expires worthless and we keep the 3.4 per cent, 1-month
return. The cash that was used to secure the original put
is now freed up to secure another put option sale the
Dr. Alan Ellman

Alan Ellman is president of the Blue Collar Investor
Corp. He holds a Series 65 and is a national speaker
for The Stock Traders Expo, The Money Show and
the American Association of Individual Investors.
Alan has published five books on stock and option
investing as well as over 300 journal articles and
has produced more than 200 educational videos.
alan@thebluecollarinvestor.com
following contract month.
55
strategies
1. For trend identification, we can
F1) Technical Chart for Starbucks Corp.
use the 20-day and 100-day

Exponential Moving Averages
(EMAs).
2. For
trend
and
Momentum
identification, we can use the

MACD histogram.
3. For Momentum identification,
we
can
use
the
Stochastic
Oscillator.
4. Volume
is
used
to
confirm
changes in the other indicators

as well as detect divergences.
It is important that we all become
proficient at reading price charts to
have the ability to maximize returns
when selling stock options. Although
Figure 1 demonstrates the use of four technical indicators used to identify trend and Momentum in order to
select the best underlying securities for option selling. This chart shows a bullish technical picture which will
assist in determining strike price and exit strategy choices.
Source: www.stockcharts.com
it may be intimidating initially (it

was for me), reading a price chart
becomes
quite
easy
and
time
efficient as we become familiar with

the selected parameters.
of the underlying security. As a result, we demand stocks
c. Common Sense Principles
that are fundamentally and technically (price chart) sound
The final set of screens we use in selecting the best
as well as meeting certain common sense requirements
candidates for option-selling fall into the category of
like industry diversification. Let us have a look at the
common sense screens. The most important of these
screening process:
screens is the rule that we never sell an option when there

is an earnings report due out prior to expiration of the
a. Fundamental Analysis
contract. This means that we will only hold a stock for a
In this first screen, we demand stocks with strong
maximum of two consecutive months in our put-selling
sales and earnings growth. There are some excellent
portfolio since most companies report on a quarterly
proprietary screens like Investors Business Dailys IBD 50
basis. Other common sense screens include minimum
and SmartSelect screens as well as some free screening
trading volume (250,000 shares per day), proper stock
sites like finviz.com.
and industry diversification (no one stock or industry

should represent more than 20 per cent of our portfolio)
b. Technical Analysis
and cash allocation (allocate a similar amount of cash to
Since we are undertaking a 1-month obligation it is
each position).
important to identify trend and Momentum and to have
Table 1 demonstrates the screening process (blue
volume confirmation of these indicators. There are a
row on top) we provide for our premium members on
myriad of useful technical indicators such as the ones
a weekly basis: The screening process for selecting the
presented in Figure 1 for Starbucks Corp. (Nasdaq:
most elite option-selling underlying securities should
SBUX)
include fundamental, technical and common sense
Figure 1 demonstrates the use of four technical

indicators used to identify trend and Momentum in
screens as demonstrated in the BCI Weekly Stock Screen

of 23rd January 2015.
order to select the best underlying securities for optionselling. This chart shows a bullish technical picture which
Option Calculations and Formulas
will assist in determining strike price and exit strategy
As discussed in the preview example, there are two
choices.
major outcomes when selling cash-secured puts, one
56
strategies
when the option is unexercised and expires worthless
Net cost of stock =
and the other when the option is exercised and shares
(strike price x 100) (put premium x 100)
are assigned to us. Next we will detail the calculations

for both scenarios as well as one where the position is
Break-even = strike price put premium
closed mid-contract.
Accessing the Options Chain

General Formulas
In order to calculate our returns, we must first access
a. Put is not Exercised
an options chain which is a price list of options for a
If the price of the stock at expiration is above the strike
particular security as shown in Figure 2.
price, the option holder will not choose to exercise the
In this example, SBUX was trading at $88.11 and the
option and sell shares to us at a price lower than current
out-of-the-money $87.50 strike is highlighted. The bid
market value. The put expires worthless and we keep the
price is $2.10.
option premium. To calculate our returns, we divide the

put premium by our cost basis:
a. Calculations, if not Assigned

If the price of SBUX remains above the $87.50 strike price
ROO (return on our option) =
by expiration, the option holder will not exercise and the
Put premium x 100 / (strike price premium) x 100
option will expire worthless. Using the BCI Put Calculator,

we determine our 7-week return per contract:
b. Put is Exercised and Shares Assigned to us

If the price of the stock at expiration is below the strike
$210/ ($8,750 - $210) = 2.5% = 18.4% annualized
price, the option holder will exercise the option and sell
shares to us at a price higher than current market value.
b. Calculations, if Assigned
We calculate our net cost of our new stock position
Should the price of SBUX dip below the $87.50 strike price
(also our break-even) as the strike price minus the put
by expiration, the shares will be assigned to us assuming
premium:
we do not initiate any exit strategy manoeuvres. Our cost
T1) Screening Process for Selecting the Best Option-Selling Candidates
Symbol
Company Name
Weekly
Rank or
Other
Source
Price
Opts
Avail
(Y/N)
Report
Same Store
Sales (Y/N)
Pass Fundl
And Techl
Screens
(Y/N)
Avg. Vol.:
>250K
Sh/Day
(Y/N)
Pass Risk
vs. Reward
(Rank 5 or
Higher)
Chart: Price
Bar above 20
EMA above 100
EMA (Y/N/@)
Tech Ind.
OK: MACD
& Stoch.
(Y/N/?)
Earn.
Report In
This Option
Month (Y/N)
10
Passed All Screens - ELIGIBLE CANDIDATES

AVGO
Avago Technologies
106.98
Other
151.87
40
72.07
AYI
Acuity Brands Inc
DLTR
Dollar Tree Inc
ITC
I T C Holdings Corp
Other
43.91
KR
Kroger Co
Other
67.96
MNST
Monster Beverage
SBUX
Starbucks Corp
11
119.31
Other
88.22
TSM
Taiwan Semiconductor
32
23.99
10
ULTA
Ulta Salon Cosm&Frag
135.34
VRX
Valeant Pharma
12
159.66
WSM
Williams Sonoma Inc
Other
79.45
ZBRA
Zebra Tech Corp CI A
Other
84.19
The screening process for selecting the most elite option-selling underlying securities should include fundamental, technical and common sense screens as demonstrated
in the BCI Weekly Stock Screen of the 23rd January 2015.
Source: Blue Collar Investor
57
strategies
basis and breakeven are calculated using the BCI Put
writers, who simply wait for expiration to see how their
Calculator:
positions fared, are missing out on huge opportunities

to elevate returns to the highest possible levels. Position
$8,750 - $210 = $8,540/contract or $85.40 per share.
management or exit strategies is the third skill that

must be mastered to become an elite option seller. The
This represents a 3.1 per cent discount from the price of
first two are stock selection and option selection and
SBUX when the put trade was initiated.
calculations.
c. Calculations When Closing a Position Mid-Contract
buy back the option or close the short position. Once that
Let us view a situation when we may close our put
is accomplished, we no longer have an option obligation
position before expiration of the contract. In this
and we are in a position to mitigate losses, turn losses
hypothetical, we will set up a trade where a stock is
into gains or enhance gains.
The first step in the execution of any exit strategy is to
trading at $32 and the out-of-the-money $30 put is old

for one dollar. We will further make the assumption
Exit Strategy Opportunities in the First Half of the Contract
that share price moves up significantly to $36 causing
Our main concern while managing put-selling trades
the put value to decline to $0.10. When share value
is the decline in share price of the underlying security.
rises, long put positions decline in value. If we closed
In my book, Selling Cash-Secured Puts, I include two
our position by buying back the option for $0.10, our
such categories: one, if share price drops more than
profit for the trade becomes:
three per cent from the strike price, and another where
the stock price gaps down dramatically. The need for
Profit = (Put credit put debit) / cost basis
position management is obvious in these two scenarios
but there is one more situation in the first half of the
($1 - $0.10) / $30 - $1 = 3.1%
contract where we can elevate our returns. This is the
Position Management (Exit Strategies)
situation when share price rises dramatically and we
After entering our put-selling positions we move
close our position mid-contract. This was alluded to
immediately into management mode. Those option
earlier in this article.

Example: Stock Price Falls More
than Three Per Cent Below the Strike Price
F2) Starbucks (SBUX) Price List
In this hypothetical, stock BCI is trading at $51 and the $50

1-month out-of-the-money put is sold for $1.50. The cash
required to secure this put is $5,000.00 - $150 = $4,850.00,
and our unexercised return is $150/$4,850 = 3.1%. Next
we make the assumption that the price dips to $48, four
per cent below the strike price of $50. Since our initial
goal is a return of two to four per cent (if you subscribe
to the BCI methodology), we are now in a position where
we can start to lose money when the underlying is not
behaving as we expected. At this point in time, we
are losing $200 on the stock side if the shares were put
to us, less the $150 premium on the option side. This
computes to a net debit of one per cent. To prevent
further losses, we buy back the option, the first step in all
exit strategy executions. A reasonable cost-to-close (buy
back the option) would be $2.50, two dollar in intrinsic
value (amount the strike is in-the-money) and $0.50 of
remaining time value.
To calculate our returns, we need an options chain or price list like the one for SBUX.
Source: Blue Collar Investor
58
Once we take this action, we now have a net option

debit of $1= ($2.50 - $1.50) or $100 per contract. Since we
are mid-contract, we can use the cash now freed up from
STrATEgIES
securing the original put and use it to secure another put
ES due out the next month. In this hypothetical situation,
in the same contract month to mitigate some of that $100
we will use the same initial trade as above where the
loss maybe even turn it into a gain.
$50 strike was sold on BCI currently trading at $51.

As expiration approaches, the stock price dips below
Exit Strategy Opportunities on or Near Expiration Friday
$50 to $49.75, leaving the strike price in-the-money.
As 4 pm European Time (ET) approaches on expiration
Checking the options chain, we see that to close the
Friday we must be aware of the relationship between
near month $50 put would cost us $0.50 and to open the
the stock price and the strike price. We also must check
next month $50 put would generate $2.50. This would
to see, if there is an upcoming earnings report in the
result in a net option credit of two dollar per share or
following month so we can adhere to our rule of never
$200.00 per contract. This represents a 4.2 per cent,
selling a cash-secured put, if there is an upcoming
one-month return and eliminates the possibility of share
earnings report prior to expiration.
assignment.
If
the
strike
price
is
out-of-the-money
(lower
than current market value), no action is needed as
Summary
the put will expire worthless, freeing up the cash
All exit strategies start with buying back the put originally
to secure another put the next contract month.
sold. We must always be aware of the relationship
Exit strategy decisions are critical if the put is
between the stock price and the strike price when
in-the-money as expiration approaches.
identifying exit strategy opportunities. In addition to this,

time to expiration (Where in the contract are we?) and
Example: Rolling the Option
upcoming earnings reports dates are critical. Mastering
In our second example we discuss the situation when
position management is the third essential skill need to
the strike is in-the-money on or near expiration, with no
become an elite option-seller.
59
BASICS
PerformanceAnalytics
Measure returns and risks with this Open-Source r-Package
Financial data analysis is becoming ever more complex due to not only the sophistication of the data
environment but also because of the race to define more performant financial instruments. Portfolio
managers, analysts, investors, and traders already use statistical software packages such as MATLAB,
SAS, SPSS or even Excel to perform data analysis. Most of these packages provide, at a hefty cost, wide
functionality to measure and display performance and risk of financial instruments.
Dan valcu
Open source financial analysis software has always
Dan Valcu is a Certified Financial Technician

(CFTe), Board Member of the International
Federation of Technical Analysis (IFTA), Founder
and technical analysis consultant with Educofin,
and a private trader. He is the author of the first
book on heikin-ashi Heikin-Ashi How to Trade
without Candlestick Patterns.
been under scrutiny: Is there any good platform to invest
www.educofin.com
time in for above average results? Can these free software

packages deliver results comparable with those provided
by established commercial products?
This article introduces the audience to an R-based
package, PerformanceAnalytics (PA), that provides a
60
BASICS
comprehensive set of functions to
F1) Histogram
analyse performance and risks of

financial instruments (funds, funds
of funds, stocks) in a portfolio.
Why PerformanceAnalytics?
First of all, what is R? It is a
programming
language
and
software
environment
for
analysis
and
and
graphs
data
the
fastest growing statistical platform

these
days
(interactive,
freely
available, open source software).

Professionals
in
different
fields
have developed over 5,000 R-based

packages
with
functionality
ranging from graphics, statistical

data analysis, to biomedical data
analysis,
to
financial
is
analysis.
one
Histogram provides frequency of returns together with normal and skewed distributions.
Source: PerformanceAnalytics R-Package
of
these free packages written with

the goal of providing an easy-to-use
toolbox to measure performance and risk of financial
benchmarks of ones own choice (S&P 500, sector
instruments without compromising on functionality and
indexes, etc.). These files are read and used as input
quality.
to different PA functions to generate performance and
PA is accessible to anyone with basic portfolio
risk tables and charts. Without going into detail we will
management knowledge and has a short learning curve
be using two files with monthly returns that are already
facilitated by a wide range of specialised functions. It
incorporated into the PA package.
meets most common requirements

for portfolio management analysis
and generates useful charts and
F2) PerformanceSummary
tables. If sophisticated calculations

are needed, the R language is the
solution.
PA does not perform backtesting;
it
only
measures
performance
and risks associated with returns

generated by financial instruments
during periods of time. An attractive
feature
of
the
package
is
the
relationship between performance

and risk.
Getting Started
with PerformanceAnalytics
The input to PA are files containing
in
most
cases
monthly
but
even weekly or daily returns of

financial instruments and various
This function provides a combined picture of performance and risk.

61
bASICS
PerformanceAnalytics is an easy to use open source

R-package trying to meet the needs of professional portfolio
managers and other professionals in the field of finance.
Performance Functionality
F3) RelativePerformance
Since each financial instrument

has a longer or shorter life and
is subject to financial risks the
first questions one may have are
How did X perform in time?
and
How
did
perform
in
time relative to its peers and a

benchmark?
The
answers
are
provided by different functions of

PerformanceAnalytics.
A
simple
overview
of
past
returns performance as a bar chart

is generated by chart.Bar function.
A
nicer
and
more
compelling
image of past returns is provided

by chart.Histogram . This function
RelativePerformance provides a snapshot of relative performances to a benchmark.
is quite versatile and provides

additional parameters (methods)
to show distributions of returns
(Figure 1). In the upper left-hand
corner it creates a small qqplot
(A) showing how distribution of
F4) CumReturns
returns compares with a normal

distribution. The main histogram
can have useful distribution curves
such as the normal distribution
(B) and the skewed distribution
of returns (C). The rug (D) is an
additional visual tool to visualise
the number of returns within each
histogram bar.
The chart.PerformanceSummary
function
generates
(Figure
2)
provides
and
comprehensive
picture
dashboard
of
each
components return since a chosen

date together with monthly returns
bar chart described above plus a
This function can be adjusted to show both cumulative returns and performance of one currency unit.
62
drawdown chart.
The function provides flexibility
to select components of a larger
BASICS
instrument such as a fund or a fund
T1) CAPM
of funds. This is a must for everyone

CAPM Statistics (vs. S&P 500)
who wants to assess quickly the
HAM1 to SP500TR
performance and risks associated
HAM2 to SP500 TR
HAM3 to SP500 TR
with a fund or even individual
Alpha
0.006
0.009
0.0
financial instruments.
Beta
0.390
0.338
0.6
A logical question may come up
Beta+
0.300
0.523
0.5
now: Where can I see the relative
Beta-
0.426
0.070
0.5
performance of instrument X to
a benchmark such as S&P 500?
The answer is provided by a call to
chart.RelativePerformance,
which
is another ready-made function

that provides a snapshot of how
funds/individual
stocks/sectors
fared during a chosen period of

time
vs.
the
benchmark
index
(Figure 3). This function is another
R-squared
0.434
0.167
0.4
Annualised Alpha
0.072
0.115
0.1
Correlation
0.659
0.409
0.7
Correlation p-value
0.000
0.000
0.0
Tracking Error
0.113
0.153
0.1
Active Premium
0.041
0.078
0.1
Information Ratio
0.360
0.506
0.5
Treynor Ratio
0.243
0.388
0.2
CAPM provides CAPM statistics relative to an index (S&P 500).

must before deciding which fund to

invest in.
Visuals, far better than words,
add value to marketing and sales and make decisions
portfolio managers and other professionals in the
easier.
is
field of finance. It can also be used by individual
generated by the chart. CumReturns function. It displays
investors who want to measure their investing/trading
cumulative returns of each component of a fund or a
performance against benchmarks or funds.
Another
compelling
performance
chart
group of chosen financial instruments.
To sum it up, this article scratched the surface
The selling argument is Figure 4 that shows the

performance of one currency unit (US Dollar, British
and offered a taste of basic functionality related to

performance.
Pound, Swiss franc, etc.) invested

from the start or from a certain
point in the past.
T2) CAPM
would
CAPM Statistics (vs. Equity Index)
be incomplete and trivial without

functionality
related
to
capital
asset pricing model (CAPM). The
HAM1 to EDHEC LS EQ
HAM2 to EDHEC LS EQ
HAM3 to EDHEC LS EQ
Alpha
0.003
0.002
0.0
function that stands out in a group
Beta
0.762
1.230
1.4
dedicated to this analysis is table
Beta+
0.241
2.138
1.9
CAPM .
Beta-
1.201
-0.221
0.9
R-squared
0.346
0.485
0.6
Annualised Alpha
0.038
0.021
0.0
Correlation
0.588
0.697
0.8
Correlation p-value
0.000
0.000
0.0
Tracking Error
0.076
0.091
0.1
Active Premium
0.020
0.038
0.0
Information Ratio
0.259
0.416
0.1
Treynor Ratio
0.124
0.107
0.1
It relates returns to a chosen

market benchmark and calculates
CAPM statistics. Tables 1 and 2
show CAPM statistics related to
S&P 500 and an equity index,
respectively.
Final Thoughts
PerformanceAnalytics is an easy to
use open source R-package trying
to meet the needs of professional
CAPM can also provide CAPM statistics relative to an own equity index.
Quelle: PerformanceAnalytics R-Package
63
bASICS
The Physical Game

A Good Trader Is a Fit Trader
Many traders today are turning to the benefits of physical fitness to give them the mental and
physical stamina it takes to be successful at trading. Find out how you can easily adopt a new
mindset to take the next step in your trading development, that of your physical fitness.
How Do You Feel Today?
Since 2003 the author has been training private traders
No really. Are you currently sipping on that extra double
in technical analysis and more lately tape reading skills
hit of coffee from Starbucks or your coffee machine,
in Level II. Having traded for many years and currently
squinting out of puffy eyes and nursing a foggy head from
for a Chicago based prop firm, he noted that many, many
having not slept particularly well. Are you alert and feeling
traders fail to understand the true correlation of poor
ready to look at charts, analyse and make key trading
trading and bad judgement and focus on their health.
decisions throughout the day because of that, or do those
Nearly every trader at some point in their careers,
puffy eyes, foggy head and lack of sleep make you wonder
whether part or full time, professional or retail, neglect
why subject yourself to trading in the first place?
their health and fitness. Yet, taking some time each day,
Granted, not all of you reading this will be like the
to do some moderate exercise, can help reduce stress,
above. However, many can truly put their hand on their
keep you more focused, more alert and less self critical
heart and say they and many others have been there.
when things do (and they will) go wrong.
64
BASICS
The benefits for being fit are obvious.
Common Images
a horse, next to some super fit guy who is running at a
There is a common misconception that traders are about
million miles an hour. Yet it need not be like that and in
excess and that we thrive on stress. We are fed images
fact we would recommend that you do not join a gym, as
in the media and in the movies of high-powered sharp
there is nothing more time consuming and in many cases
suited young bucks, partying at night and during the day
beyond what most of us truly need, to keep fit.
pressing a few buttons, making a call and walking away

with a million. This is the extremes of the industry in
Survival of the Fittest
which we work and love or hate it, there are some, not all,
If others can do it, you can. And we will tell you why. For
that are and do live their lives like that many ironically
many years the author was highly unfit, smoked, a weed
not as successfully as they are making out, mostly city
of a man really. He trained people in analysis and trading
traders, going for the lifestyle and ending up with a short
skills all over Europe and beyond. He was in his 40s tired,
term loss ridden career.
exhausted, in fact burned out and stressed beyond belief.
These images lead some to believe that those of us
When 2009 came about and he, like many traders lost
who trade either for someone, or for ourselves, should in
everything as well as his training company, things got to a
some way act, to a lesser degree like that. We still thrive
head. He got pneumonia and pretty much had a breakdown.
off the buzz of trading, the stress of it, the pleasure as the
I say this, not for you to feel sorry for me, but to realise that
endorphins hit us like a train when we get it right, to the
if some super unfit 40 something with bad knees, a stomach
sudden feelings of despair as the train throws us off as
ulcer and trying to piece his life back together from losing
when we get it wrong. We are coming out with extremes
everything, can pull himself back up, trade again with little
here, but let us not neglect the fact that what we do,
to no stress and feel the fittest, healthiest and happiest he
whether it is with our own or someone elses money, is
has ever been then you can do that, too.
really very stressful and difficult, so why on earth should
The benefits for being fit are obvious. We get told
we make that harder by adding more stress and strain on
them day in day out and they are forced upon us by the
our bodies through being unfit.
media 24/7. Most of the time we are lead to believe that

being fit is looking like some Adonis whilst eating a fat free
Bene-Fits
yoghurt. Whereas, you can be fit and healthier without
The fact of the matter is really very simple and obvious;
the need for a crazy diet, or needing to slave yourself to
being fitter and healthier enables us to deal with stress
the nearest gym. Everything the author did, he did from
and mental fatigue far better than if we were not as
home, with no equipment and just some will power and
healthy. We sleep better, have less fraught relationships
knowledge of fitness that he had gained over the years.
and our focus is on the trading, rather than how tired we
The benefits go beyond just the physical. Trading is a joy
feel. The upshot of these benefits are obvious, not just in
to me and I do not get half as stressed as I used to do.
terms of mental and physical benefits, but actually can
Sleep is more solid and waking is almost instant, rather
affect your bottom line too. Think of it this way; if you
than the long drawn out pain it was before.
were more alert and less stressed when trading, chances

are you would become less reactionary to trading and
more focused and selective at what and where you are
going to place your hard earned money on the line.
Why is it then that despite the huge benefits do
many neglect themselves? That is the harder question to
answer and in many cases only you directly can address
that. It is understandable that we all have many pressures
on us and these eat up our time. The last thing we want
Stu whisson
Trainer, trader, author, analyst, musician and
biker rolled into one, created one of Europes
leading online trader training websites. Now he
lives back in Shropshire, remotely trading for
a Chicago based prop firm as well as teaching
traders and working on a BA hons Degree in
Photography.
www.personaltradingsuccess.com
to be thinking of is working out in a gym, sweating like
65
BASICS
why
Choose the
Short Term?
Time Is Money also
in the Financial Markets
In the Long Run we are all dead

(J. M. Keynes). Is not that a good
first reason for choosing trading
the Short Term? To the professional
trader one of the most important
things not the only one to be taken
into consideration at the moment of
selecting what chart to trade in, is
which is the term that will grant larger
opportunities and advantages for being
consistently profitable. In this article,
we are looking at setups in different
time frames.
Selecting the Trading Term
which allows us to achieve that goal and one that gives us
Good trading is based on being consistently profitable over
greater entry opportunities, as to both quantity and quality.
time. Therefore we must choose that specific time frame
Short, Mid and Long Term

The concept term has different meanings that depend
Alvaro Echeverri
Alvaro Echeverri is a full-time trader in Futures,
Futures Options and Currency Options. His
approach to markets is based on a nonautomated high frequency trading and scalping.
Currently he privately manages his own portfolio
while coaching short term traders for the
intraday.
aeab@dr.com
on whether the referred context is taken as macro

or micro, commercial or banking or if it is seen from
investors or speculators standpoint.
For general audiences, and from a wider perspective,
the short term includes everything that goes from the
present day up to one year, mid term from one to ten
years and long term is considered as all that goes from
ten years on.
66
BASICS
One of the most convincing arguments on behalf

of the short term and low time frames trading is just
the profusion of entry points existent in there.
It is also said very long term usually when dealing
If the trader has a highly receptive attitude towards
with economic growth models that are developed within
risk and looks for speeding up the frequency of profit
centuries.
creation, they will ground their trading on technical
For the investor and the speculator in financial
analysis of small charts from one minute (even ticks)
markets, and more specifically for those that make their
to day charts and will be trading in the short term
decisions based on technical analysis, terms are defined
thinking about himself as a speculator. Their analyses of
on the time frames in which different instruments are
fundamentals will be done on specific data releases.
traded. This is a matter of risk tolerance.
Should they trade more conservatively keeping

some degree of risk aversion looking for more
The Investor and the Speculator
consequential profits, will base their analyses both
As traders either being investors or speculators we
on technical aspects and on fundamentals, in longer
may be analytical, methodical, intuitive or aggressive.
charts one day and higher and will be working in the
Mid and long term are generally taken as more

steady, less noisy and safer terms to invest with a
mid and long term more from a standpoint of a position

taker or investor.
high probability of success. Investments take longer to

make profits but in the event of having to accept losses
Multiple Entry Opportunities
there will be a wider margin to get back to positive,
One of the most convincing arguments on behalf of the
while the short term is associated with instability, higher
short term and low time frames trading (from M1 to D1
volatility and high uncertainty.
charts) is just the profusion of entry points existent in
Investor, Speculator, Gambler
Before Start Trading: Select the Proper Chart
Investor: Takes inherent risk on investments and tries
Meticulous execution of a trading system in the short
to minimise it, takes into consideration factors that may
term will increase benefits. In the exercise done here we
adversely affect the results.
can see the differences in productivity between charts in
Speculator: Is aware of significant risks that are unavoidable
the same trading week, understanding productivity as the
and accept them, takes in account factors that most likely
capacity of pulling out profits in a given period based on
will adversely affect the results. Takes higher (calculated)
the amount of pips available in the market. Effectiveness
risk than the Investors in same circumstances.
in achieving those potentially higher results is a direct
Gambler: Is not aware of the risk investment has nor is able
function of the quality of the trading system and its
to anticipate them, takes risks that should not be taken, is
execution when trading on more volatile time frames we
totally exposed to randomness.
have in the short term.

In any case the underlying factor is always productivity,
time optimisation along the process of creating net
Short, Mid and Long Term in the Charts
positive results. We have seen a little sample that

having higher frequency of tradable moves and bigger
Short Term: M1, M5, M15, M30, H1, H4, Daily
pips amount on smaller periods, greater productivity
Mid Term: Daily, Weekly, Monthly
is evident in relation to wider terms under same
Long Term: Monthly, Quarterly, Semi annual, Annual
circumstances.
67
bASICS
there. Entries in small charts appear more frequently
By making a simple inspection of the quantity and
than in the bigger charts. That frequency is what gives
quality of entry points on these time frames traders may
us more opportunities to trade actively any instrument.
boost their performance.

Worthy to say that, like in any other business,
amounts are important only when coupled with quality.
F1) Prices Movement on Daily Chart EUR/USD Spot
In trading, the opportunities must be both abundant

and of quality, understanding quality for this specific
case as having continuous runs of the prices with
significant amount of pips on each of them. Otherwise
that so called opportunities become more in a sort of
drawback.
Optimising the Short Term Potential

We provide the example of Euro/US Dollar, one of the
most actively traded in this market. The Euro-Dollar in
the last three weeks of April 2014 had moderate activity.
In the week that went from Monday the 21st to Friday
the 25th the whole move from Low to High was less
than 70 pips. Even that being the case, the profitability in
trading that pair could have been enhanced depending on
the time frame that would have been traded.
In the trading week from Monday the 21st to Friday the 25th, daily chart shows
that prices were moving within a 69 pips range from its High to its Low. The
continuous and tradable move as has been defined for this example took 63 pips
for that whole period.
In the daily chart (Figure 1) we can see the whole run

took approximately 70 pips (69 exactly) and there was
only one continuous bullish move along four consecutive
days carrying around 63 pips.
For the sake of the example shown here, it will be
taken as a tradable move, all that is continuous, namely,
containing more than one successive candle developed
F2) Prices Movement on 4-Hour Chart EUR/USD Spot
in the same direction in which price is making either

higher highs and lows (notion of a bullish trend) or
lower highs and lows (notion of a bearish trend). Total
pips will be measured from the extreme price (low or
high accordingly to the direction of the move) of the
first candle of the succession, to the extreme price (high
or low accordingly to the direction of the move) of the
last candle of that succession. This is not a measuring
between pivot points.
To assess the movement of prices as one of quality
we will assume that keeping in mind the spread of the
instrument the extent that goes farther than five pips
will give us the possibility of making profits, or at least
of having the chance of getting out of a trade at its
break-even point if the initial profitable trade turns into a
probable losing one.
In the same week examined in the daily chart the 4-hour timeframe gave us
eight tradable moves containing 256 pips. Note that only continuous moves on
consecutive candles with the same direction are taken.
68
Shorter Time Frames

Taking the same period analysed on the daily chart to be
examined now over the H4 chart (Figure 2), we realise that
under the same parameters there were eight continuous
BASICS
moves among bullish and bearish ones that added up to

a total of approximately 256 pips.
We cannot gauge profitability without taking into

account costs. Each one of our entries has its individual
We end the comparison between time frames with
cost, therefore more trades bring with them more costs.
the H1 chart (Figure 3), where we could see a total of 24
Besides that, each shorter time frame trade has smaller
continuous moves where four of them had less than five
net profit margin than a typical mid or long term trade.
pips resulting in 20 tradable moves.
But that is the per trade analysis.
Quantity and quality of entry opportunities on
Notwithstanding that fact, the shorter term is more
potentially profitable moves have been assessed.
profitable as a whole as when trading tiny charts we
Needless to say that the confrontation between different
can place literally hundreds of trades let us say a
timeframes is much more impressive if considering not
week while maybe only one on bigger charts. The more
only the opportunities but the signals coming from each of
opportunities you have to trade your profitable system,
them. As a result, potential profitability is also multiplied
the more money it will give you.
taking in account that every entry signal, depending
Time is money also in financial markets and we
on the trading system, gives not only the possibility of
should take the most of it as it is finite for every human
placing new trades but to scale-in positions as well. In
being, specially should we remember that ...in the Long
that sense, pip accumulation is almost unquantifiable.
Run we are all dead.
A brief collating of these three time frames in the

trading platform has allowed us to infer that short term
small charts let us profit even from less significant
T1) Prices Movements and Pips Amounts on Each Chart
moves. Chances of increasing our positive trading results

arise much more frequently in this short term than in the
mid and long terms.
Run
Pips Day
Pips H4
Pips HI
63
23
15
On top of that, the shorter the trading time frame is,
38
22
the greater the possibilities of placing both trending and
31
30
countertrending trades.
55
33
29
25
28
31
19
13
10
18
F3) Prices Movement on 1-Hour Chart EUR/USD Spot
11
22
12
30
13
16
14
41
15
12
16
11
17
18
18
17
19
17
20
12
Total Pips
63
256
373
Being the 1-hour chart the smallest out of the three that have been studied, we
see here multiplicity of tradable moves with potential profitability. Bigger entry
opportunities are evident when trading this time frame compared to higher time
frames.
In the same time span that the daily chart gave us the chance of taking one single
bullish move of 63 pips, 4-hours chart showed eight potentially profitable moves
covering a total amount of 256 pips, and the 1-hour chart gave us opportunities
on 20 moves to take as much as 373 pips. Multiple chances for speculation as
the time frame gets smaller.
69
People
Hometown: Fort Lauderdale, West Palm Beach, FL

Interests: His children, trading, sports and fitness, motivational and
self-improvement training, music
Trading Style: Quantitative; intermediate to longer-term Momentum
and Trend Following programs, breakout and moving average programs
Twitter: @systemstrader95
The Pros Process

Larry Tentarelli
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.
TRADERS: How long have you been trading?
TRADERS: How do you feel when a trade goes against you?
Tentarelli: For 16 years, starting in 1998. I was also a
Tentarelli: I have very little emotional involvement with
broker with Merrill Lynch from 1999 through 2003.
my losing trades. I know that my style of trading will

always be having losers, but a very good expectancy.
TRADERS: What is your style of trading/investing?
I keep emotions in check, because I manage the losers
Tentarelli: I follow a systematic, price-based Trend Following
to get cut quickly when they start working against me.
process. It is technically driven to the degree that price
I know that when I am wrong in a trade my price
dictates the programs, but I do not trade off traditional
will stop me out, the loss will be contained and move
Technical Analysis of chart patterns or other indicators. I
on. Losers literally are a cost of doing business and
follow fairly simple Moving Average and breakout based
unavoidable. Managing the damage is the key. My
programs. I spent a considerable amount of time researching,
style of trading is to take small losses and hold for big
testing and developing programs that were conducive to my
winning trades.
personality. Over time, I have simplified the programs and

achieved better returns from the simplification. I only trade
TRADERS: How do you feel when a trade goes for you?
price and Moving Averages though. I do not combine it
Tentarelli: Following a quant driven process, it is easy to
with any other methods of trading.
say no emotions, but like everyone else, I like winning
70
PEOPLE
trades, too. I get very detached from my losses quickly,
trading system is the trader himself. I definitely did fit
but I like the Home Run Ball just as much as the next
that bill before I started following price.
guy. Not only is it financially rewarding, but is a nice

confirmation of the programs in real time. When I get into
a trade, I know that anyone can turn into a big winner, if
momentum kicks in.
TRADERS: Do you have any practices that you do

away from the trading screen to help you mentally and
emotionally handle trading?
Tentarelli: Spending time with my two young children
TRADERS: How have these feelings changed over your

trading career? Can you recall how you originally used to
feel and elaborate on how this has changed over time?
evens me out. Also exercise and listen to classical music.
Tentarelli: I turned to a quantitative process because
longer term in nature. Most of my trading is automated to
I was a very poor discretionary trader. For years I
a degree, where entries and exits are pre-set, i.e. buy/sell
committed many of the basic mistakes over trading,
stops for breakouts or trailing stops/stop-losses. If stops
emotional trading, trading off the news or feel. I
get hit, the order is executed and I move on.
Fortunately for me, I do not trade very frequently per

se, because my programs suit my personality, which is
went through two trading stakes, and backed away
Since I follow a few basic programs, I do not get
from trading two or three times along the way. Early
intra-day stress. If I am trading say a 200 day breakout
on, I would personalise my trades in an effort to try to
program or a 40 week Moving Average break, I do not
confirm myself as a successful trader. It did not work
need to look at the screen all day. I do not day or swing
well for me. Now I am on the other side of the fence,
trade at all, and fortunately I make zero discretionary
where I just accept that the future is unknowable and
trades anymore. I put a lot of time into testing and
that all known data is reflected in the current price on
developing my programs, so I do not have to monitor
the screen. I read long ago that the weakest link in any
the markets all day.
Get in touch with
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71
People
Pros trade first not to lose big,

and then to make money.
I also exercise regularly, get deep tissue massages,
trade for other emotional reasons, which is not usually
and listen to classical or relaxing music to decompress.
productive.
TRADERS: Have you always done this?
to consistently and profitably predict anything, and I
Tentarelli: No. I used to spend all night reading news
turned it over to just trading price, my results improved
reports, and analyst opinions and getting mentally and
drastically and my outlook was much, much better. I know
emotionally whipsawed.
that I really do not know anything, but that puts me a step
Once I fully accepted that I, nor anyone else, is able
ahead of those who have not learned this yet. Based on
TRADERS: How have you learnt to deal with the feelings

that come up when trading?
my acceptance of not knowing, I freely follow price and
Tentarelli: The best way that I deal with feelings is to
GDX (Market Vectors Gold Miners ETF) and it meant as
automate the process, and remove myself from the
much to me as reading a can of soup. Nothing.
have no bias. Today I was flipped from long to short in
equation. If I get into a protracted drawdown, I reduce
handling drawdowns or stress, and there is no one size
TRADERS: If you could give aspiring traders one piece of

advice about emotionally handling the market, what would
it be?
fits all. Many like to trade bigger to get back on track,
Tentarelli: I firmly believe the absolute best advice is
but I focus on protecting my downside by losing less
to under trade in every aspect. Trade smaller smaller
when I am in a bad streak, especially at major trend
positions, less open positions, less frequently, etc.
reversals.
Trading can be very emotional and stressful for a number
trading size until it stabilises, or my positions start

working again. I have read different approaches to
of reasons the amount of available data and constant
TRADERS: 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?
news flow, real money on the line, the need to feel like
Tentarelli: Yes. When I gave up trading due to frustration
the stats prove that one is much more likely to go broke
and losses. I realised the markets did not beat me, I beat
quickly. Cut everything in half. Half the risk, positions,
myself. The classic Jesse Livermore line. I firmly believe
size, frequency all of it.
one has to constantly do something.

Most new traders want to get rich overnight, but
that most, if not all of trading over a longer time frame is
We all pay the price of learning how to trade, for me
psychological. Many do not trade to make money. Many
it took years. I learned from Dr. Alexander Elders work

that the goal of all new traders should be to just survive
at first. It is very good advice. Pros trade first not to lose
Larry Tentarelli
Larry Tentarelli has been trading for himself since 1998.
He grew up with close family ties to the Stock Brokerage
Business. He was a Broker with Merrill Lynch in Boca Raton
from 1999 to 2003 and left the retail side of the business,
but continued to study markets and trading. After failing at
many different discretionary, fundamental and shorter term
approaches he learned from Dr. Elders work to preplan
trades when markets were closed. Then he discovered a
systematic automated approach from reading Michael
Covels Trend Following and performed extensive back
testing and simulations to arrive at programs that suit his
personality and longer term time frames well.
72
big, and then to make money. New traders get the roles
reversed, which does not compute. Protect the downside
and let the upside take care of itself.
We would like to thank Larry Tentarelli 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-HAs.
If you are interested in finding more out about Larry
Tentarelli, you can find him:
Twitter: @systemstrader95
People
J. C. Parets
How I Trade False Signals
J. C. Parets is the founder of the asset-management company Eagle Bay Capital based in New York City. He is
a ten year veteran and well-known Market Technician. JCs work has been featured on CNBC, Bloomberg, Fox
Business and Business News Network. He is often quoted in the Wall Street Journal and online media, as well as
on his website www.allstarcharts.com and on Twitter @allstarcharts where he was named by Business Insider as
one of the top 100 Finance People to follow on Twitter. Currently, he is in the process of founding a hedge fund of
his own, which is managed on the basis of traditional price analysis and sentiment. Marko Graenitz interviewed him
on the phone stay tuned for some exciting insights into the mindset and trading of one of the leading technical
traders as of today.
TRADERS: How did you get into trading?
good relative to the stock market. I then went to college
Parets: I grew up in Miami, Florida. Now and then, my
in Connecticut.
father would trade traditional investment funds (mutual

funds). In the late 1970s and early 1980s I first found out
TRADERS: What did you learn during those years?
about it. At that time, though, things were completely
Parets: While at college, I did an internship in the
different on the markets. Interest rates were very high,
wealth-management
well above ten per cent, and investing in bonds was really
I had an interesting time and learned a lot. But I also
74
department
of
Merrill
Lynch.
People
realised that it was simply too big a company for me.
F1) False Breakout from Rising Triangle
I was still young at the time and had little experience,

but even then I was surprised to find that, in spite of
holding certain positions in companies, some people
did not really know what they were actually doing.
While stocks and their companies were being analysed
from a fundamental perspective, at the end of the day
it was mainly all about selling certain products to the
companys clients. My sense was that the analyses did
not generate any specific added value.
TRADERS: Is that why you moved away

from fundamental analysis?
Parets: Yes, I decided to focus on technical analysis which
seemed advantageous to me simply because you can
use technical instruments to directly manage risks. And
Time and again, price hits the resistance area from below, forming increasingly
smaller downside pullbacks. As soon as prices rise above the resistance, this
will traditionally be interpreted as a long signal. However, if there are no followup orders and the upside breakout movement falters, there is a high degree of
probability of a false signal being generated and prices plummeting.
Source: www.allstarcharts.com
that is what matters in the stock market in general and in

trading in particular.
TRADERS: Where did you pick up your knowledge

of technical analysis?
Parets: Sure. The idea is simple and plausible: Invariably,
Parets: I read a lot of books, including the two classics by
the majority of traders. So when a certain pattern emerges
Robert Edwards and John Magee (Technical Analysis of
whether it is a support, resistance, triangle, flag, head
Stock Trends) and by John Murphy (Technical Analysis
and shoulders, or whatever, it will not work according to
of the Financial Markets). Ralph Acampora, too, was one
the textbook except in the rarest of cases. After all, it is
of the guides who had a profound influence on me during
not as simple as that in the markets. More often than not,
that time.
the setups are more likely to function in a certain price
the market tries to make things as difficult as possible for
range rather than at a very precise point. That is the first
TRADERS: How did you know

that you would be able to make it in trading?
insight you should have gained as a trader: Do not use the
Parets: I just put all my energy into it and traded both
signal can be expected.
setups too rigidly but look out for certain areas where the
my own money and that of my clients. However, I was
The second aspect leads us to the reason why
not really successful all the time. I can well remember,
false signals make for such good setups. Let us use the
for example, making several losses when trading options.
classic breakout from a triangle as an example (Figure 1).
But then that is the way the learning curve works. You
Time and again, the price will hit the resistance area
have got to enter the fray, make mistakes and then really
from below, forming increasingly smaller downward
learn from them.
pullbacks. This is bullish since the bulls are increasingly

busy breaking the resistance. As soon as prices rise
TRADERS: What is your basic trading philosophy today?
above resistance, that is traditionally interpreted as a
Parets: Supply and demand are the cornerstones of any
long signal since this barrier has now been removed. In
understanding of the markets. These two quantities are
principle, this is certainly not wrong. It is just that in the
ultimately based on human nature that can be applied to
real world things do not always pan out the way they do
almost everything.
in the textbook. If the price rises above the resistance

and the bulls seemingly have the upper hand but do not
TRADERS: What are your favourite patterns?
place any follow-up orders, and the upward breakout
Parets: Quite clearly, failed patterns.
movement falters, a false signal is highly likely to be

generated.
TRADERS: Failed patterns?

Could you please explain that to us in more detail?
TRADERS: When exactly would you enter the trade?
75
People
overall I would probably not do so well with this safer
F2) False Breakout from Falling Triangle
version. However, if I already enter at the old resistance

line above and the false signal does not work (i.e. the
price continues to rise according to the actual breakout),
I will only have minimal losses that I do not have to
worry about. But if it does work and the price plummets,
I can make a really big profit.
TRADERS: In Figure 1 you mention that there may be a

rapid movement when a false signal is formed. What is the
reason for that?
Parets: This is the key benefit to be derived from trading
Similarly to Figure 1, Figure 2 shows the emergence of a false signal in the case
of a falling triangle.
false signals. If the trade works, very fast movements

may occur generating excellent results for the trader. The
cause of this rapid movement is obvious: Overcoming
the resistance has caused most short traders to leave
Parets: I try to maximise my return/risk ratio (RRR). In the
the market and they are now coming back as prices are
case of Figure 1, I will achieve that by making the entry as
falling. In addition, those traders who have speculated on
soon as price crosses the former resistance line from top
continued rising prices during the breakout movement,
to bottom. That is pretty early, but at the same time my
suddenly find themselves left behind and need to exit
risk is very small and, if successful, I can make a much
i.e. sell to limit their risk. It is like a trap that has snapped
higher profit. Great trades have an RRR of 6:1 and higher.
shut, and the trader needs to get out quickly, all of which
exacerbates the price decline. Obviously, the whole thing
TRADERS: Why do not you wait for additional confirmation

for example, for the price to cross below the rising
triangle line?
also works vice versa for falling triangles (Figure 2) as
Parets: If I were to wait that long, the RRR would be a
TRADERS: Does that mean

that false signals can function universally?
lot worse. Of course, the hit rate will then be higher, but
well as for many other price patterns.
Parets: Yes, exactly. That is what makes this so interesting

and helps to find many good setups. Let us take another
example, the classic head and shoulders pattern. Here,
F3) Classic Head and Shoulders Pattern
the key area is the neckline. If price falls below the neck
line, there will be a classic short signal (Figure 3). Things
will be getting interesting if this pattern fails (Figure 4).
Again, it is not unusual here for a quick countermovement
to occur in the opposite direction, a movement which will
provide excellent RRRs. A wonderful large-scale example
of this was found in 2010 in the S&P 500 (Figure 5). After
the formation of a classic head and shoulders pattern that
was seen by more or less everybody at the time, there
was a downward break of the neckline at the end of June
2010. I well remember how this signal caused reputable
analysts to announce the beginning of a bear market.
TRADERS: But things turned out differently...

Parets: Yes, indeed. Prices were only able to maintain that
The classic head and shoulders formation appears as a top-forming pattern,
indicating falling prices once the price level violates the neckline.
76
new-low level for a few days. Thereafter, the market kept

going up. In ten months, the market rose by about 300
points, based on the neckline of the head and shoulders
People
pattern, i.e. by almost 30 per cent. The risk that traders
F4) Head and Shoulders False Signal
had to incur for that when crossing the neckline in July,

however, was only about 40 points if the position was
secured below the breakout low. But in my trades I usually
go even further to achieve the highest possible RRR and
set my stop even more aggressively.
TRADERS: Now that is intriguing and will really be of interest

to many of our readers. How exactly do you go about it?
Parets: Let us take the example in Figure 4. Suppose
the price goes back up to the neckline again after the
downward break. Once the price is slightly above that
level, I can see the false signal as a given and go long.
But I do not place the stop at the low of the previous
breakthrough movement that would be too far away.
Instead, I put the stop almost directly below the area of
the neckline. That way, I have a tiny absolute risk with
Similarly to the triangle pattern, there may also be a false signal in the case of
the head and shoulders pattern.
relatively enormous opportunity for profit.
TRADERS: That is right, the RRR is sensationally high in this

case. But is not it true here that you will constantly be stopped
out as soon as there is the smallest counter movement?
resistances and other chart marks. This is where I often
Parets: Well, that will happen now and then. But my
individual positions.
set price targets. Since I only do a few trades at the same

time, I can really focus on the trade management of the
experience has been that the rebound above the neckline,

i.e. my entry point, is the crucial trigger. After all, it will
become clear at this point that the previous signal in this
TRADERS: Do you also use other setups to find good

opportunities for trades?
case a head and shoulders short signal

is very likely to have failed. And
if that is really the case, then the
F5) Head and Shoulders False Signal in the S&P 500
upward counter movement should

now occur quickly. If that does not
happen and prices fall below the
neckline once more, there will again
be a high risk of the false signal
being a false signal and prices
possibly falling after all, as originally
indicated by the pattern. So once
prices are below the neckline again,
they usually fall to the low of the
first downward breakout movement
anyway and then even further, which
is why I do not include this area in
my stop in the first place.
TRADERS: That sounds plausible,

thank you so much for the explanation.
When do you exit such a trade?
Parets: I usually scale out of my
trades; for example, at previous
After the formation of a classic head and shoulders pattern, there was a downside break of the neckline at
the end of June 2010 (see arrow). This caused reputable analysts to announce the beginning of a bear market,
but what happened was the exact opposite: The short-term downside breakthrough turned out to be a false
signal and marked the start of a rally.
77
People
The market tries to make

things as difficult as possible
for the majority of traders.
momentum
known to many traders. However, that is not the end of risk
divergences. For this, I just use the 14-period Relative
management, but only the beginning. Another important
Strength Index according to Welles Wilder, the RSI(14), and
aspect is correlations as well as the overnight risk that
look out for divergences against price. If price develops new
you run as a trader. In theory, anything can happen
highs, for example, while the indicator does not form any
overnight. To allow that to be measured, the benchmark
new highs, there is such a divergence. Ideally, of course,
I use for each position is twice the Average True Range
there are a divergence and a false signal at the same time.
for a period of 14 days, the ATR(14). The aggregate of
Parets:
Another
method
is
detecting
all open positions allows me to assess what risk I take
TRADERS: How do you find good setups?
home. Almost always, the actual risk is, of course, much
Parets: For one, I look through hundreds or even
lower, but in extreme scenarios double the ATR is quite a
thousands of charts. For another, we have developed
realistic level.
a screener to help us in our search. Unfortunately, this

markets are fractal and trades based on this can occur
TRADERS: You mentioned that you take into account

correlations. How exactly does that work?
on all time levels, there are basically enough trading
Parets: My goal is for the correlations of my strategies
opportunities that can be found again and again.
or, specifically, my positions to be as close to zero as
search can hardly be automated though. But since the
possible. In practice, this will, of course, hardly be possible
TRADERS: Do you use market or limit orders?
since somehow the trades are always at least slightly
Parets: That all depends on how liquid the stock traded
positively or negatively correlated with each other. But
is. When I trade extremely liquid stocks like Apple or
on the whole, it is a good goal to keep the correlations at
Google, I usually simply use market orders, but for
least low. When each strategy is profitable, but makes a
illiquid stocks or options I use limit orders.
profit at a different time, I will have a nice overall capital

development without any large drawdowns. In addition,
TRADERS: What does your risk management look like?
my short trades serve to protect me like a hedge in case
Parets: I risk a maximum of one per cent of my trading
of unforeseen events by generating profits while long
capital per trade. That is the general consensus and well
positions are recording losses.
TRADERS: Which is the most

important concept in trading you
would suggest that beginners should
understand?
Parets: Keep your ego under control.
Or better still, have no ego at all, when
it comes to playing the markets. After
all, it is all about making money, not
about being right. This is the most
important concept there is. If I need
to exit a trade with an RRR of six or
higher at a loss three times in a row,
I just could not care less because
I know that I will hit the jackpot at
some point even if I am right on my
trades in much less than 50 per cent
of all cases. Focus rather on what
78
People
you can control, i.e. your risk, and define this precisely
the side of the majority. That is why it is often interesting
before every trade. Those who do not do so run the risk of
to do exactly the opposite of what most people do. So if,
their short term trade turning into a long term unplanned
for example, only four of 25 analysts recommend buying
investment if they miss the exit; that is exactly what I
a particular stock, this bearish sentiment is usually a good
have seen with traders plenty of times. Once your trading
indicator for you to take a look at the stock for possible
account is 50 per cent in the red, you need to achieve a
long trades.
100 per cent return just to be break-even again. Never

forget that.
This will become even more clear when we look

at how many economists in spring 2014 had expected
interest rates to rise for the following six months. In fact,
TRADERS: Have you ever regretted moving away

from fundamental analysis?
all 67 of the 67 experts interviewed did expect interest
Parets: No, absolutely not. Quite the contrary. Analysts
have gone down significantly throughout that period (as
are usually inclined to follow the herd and very much rely
of 17th September 2014). So if all the experts agree, then
on what is conventional wisdom. The reason for this is
I would rather take the other side of the trade. As a trader,
that their career will soon be threatened if they go out
I do not care what others think because I do not have to
on a limb and turn out to be wrong. So they prefer to say
justify myself to anyone. This is another bit of freedom
what everyone is saying, and when in doubt, they err on
that this profession gives you.
rates to rise! And what happened? So far, interest rates
Preview
Preview
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thenext
nextIssue
Issue
COVER
COVER
STORY
STORY
PEOPLE
PEOPLE
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79
COLUMN
On Form and Technique

in Poker and Trading
Think of poker as a martial art. Trading too, but let us
start with poker first.
The metaphor is appropriate on many levels: You
have one-on-one confrontations that resemble physical
combat. You have gain or loss of profit comparable to gain
or loss of honour. You have emotional pain comparable
to physical pain. You have displays of dominance and
Justice Jack Sparrow Litle
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
submission. And disparities of skill, training, discipline and

talent are the main determinants of long run outcomes. If
you are a winning poker player, you also have something
weekend after having a few brewskis, talking smack with
else drawn from martial arts: Ritualised discipline.
your old buddies, versus the fun of preparing for, and
The martial artist is steeped in ritual discipline. It
winning, a championship. Same game, different worlds.
begins as soon as he enters the dojo. By the time he steps
The martial artist is further instructive in that he makes
on the mat, his body, mind and spirit are all prepared for
substantial long term investments in form and technique.
combat. As a poker player, the poker room is your dojo.
One could argue that the essence of any martial art IS
The table is your mat. When you walk into that room, or
form and technique. Much of martial arts practice is the
as you make the journey from home to room, you are in
execution of Kata, a Japanese word which literally means
a state of mental preparation. When you sit down at that
form. Poker players and traders have Kata too. Or at
table, the fighting begins.
least they should
At the poker table you never know how big a hand
The more that form and technique are perfected, the
is going to be. Most confrontations are small, with
more that proper reaction becomes intuitive. As such,
quick withdrawal. Sometimes hours go by where little
martial arts are grounded in the concept of automaticity,
of consequence happens. But a major confrontation
by which your mind, body and muscles use hard-wired
could come about at any time. In the next five minutes,
routines to execute complex patterns on command.
half your stack (or the whole thing) could be at risk. You
Automaticity,
coupled
with
experience,
is
the
want your mind, body and senses in peak form during a
difference between master and novice. It is the same in
fight. You want your head clear, distractions put aside,
trading. Dickson G. Watts said: Genius consists of seeing
so you can make razor sharp decisions and act fluidly in
instantly the vital point. But by that definition, genius in
the moment. Think how different this is from the average
the context of a craft is something we all can aspire to.
poker player mentality. The drinkers, the slackers, the late
Instantly seeing the vital point is a matter of form and
night addicts. The sloppy tourists hoping to get lucky.
technique, coupled with vision and experience. Such is
And think of the similarities to trading, where there
why master practitioners can make huge decisions in a
are sins of commission and sins of omission. Missing a
matter of minutes, or even seconds, whereas the lesser
true opportunity, due to lack of vigilance, persistence, or
skilled might agonize for days.
preparation, can be as harmful to your full-cycle P&L as

taking an unnecessary large loss.
How do you get to that exalted state? There are no

shortcuts. You practice, and contemplate, and practice some
Most traders do not understand this. Like the average
more. You learn the proper forms, the Kata, from someone
poker player, their attitude is somewhere between
who knows them. And then you do the hard work of creating
motivated and lackadaisical. They are more interested
the literal, physical neuron and synapse structures within
in having fun or killing time than being a serious
your own brain that allow for instant access at a future time.
competitor. You can certainly have a lot of fun being a
This is why Bruce Lee said: I fear not the man who
serious competitor but it is a different kind of fun. Think
has practiced 10,000 kicks once, but I fear the man who
of the fun of a pick-up basketball game on a barbecue
has practiced one kick 10,000 times.
80

Traders September 2015

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Traders September 2015

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Interview: J. C. Parets How I Trade False Signals P.

Your Personal Trading Coach

Do You Need Life Insurance in the Markets?

The Stop-Loss Controversy

Swissquote Ltd is authorised and regulated in the UK by the Financial Conduct

what Trading is About (Apart From Money)

Maximise your opportunity with

Built by traders, for traders

How to Get a Job in Proprietary Trading

46 The Best of Both Worlds

Dave Landry wants to capture both short term and

50 Narrow Range Breakout

David Pieper teaches you what is important and how to

54 Generate Monthly Cash Flow by Selling Stock Options

In this article Alan Ellman discusses cash-secured puts..

Regarding the ever more complex financial data analysis, Dan

64 The Physical Game

Stu Whisson explains how to develop your trading with the

66 Why Choose the Short Term?

70 The Pros Process Larry Tentarelli

J. C. Parets is the founder and president of Eagle Bay

iNtErNAtioNAL tECHNiCAL ANALySiS CoNFErENCE IN TOKYO

oiL PriCES AT NeW 6.5 YeAr LOWS

FIBONACCI eXTeNSION S&P 500

CFD Spoofers Fined over 7 Million by UK Court

The large layered orders, which were never intended

(FCA) is entitled to permanent injunctions and penalties

to trade and which were used to stimulate the price

totalling 7,570,000 against three Hungarian traders and a

movement of the relevant shares, were then cancelled

Swiss investment firm for unfair trading practices.

and the process would start over again, typically aimed at

The technique consisted of entering and trading of

moving the share price in the opposite direction. In this

orders in relation to shares traded on the London Stock

way the actions consistently resulted in buying shares at

Exchange in such a way as to create a false or misleading

lower prices and selling shares at higher prices than would

impression as to the supply and demand for those shares,

enabling them to trade those shares at an artificial price.

The traders accessed the relevant trading platforms via

The traders typically used a mixture of large and small

Direct Market Access (DMA) brokers. DMA allows clients

orders entered on one side of the LSEs order book to

direct access to exchanges and other trading platforms.

create a false impression of supply or demand in a

They did not trade directly in shares but used a derivative

particular stock. These orders were not intended to be

instrument called a Contract for Difference (CFD), the price

traded. The large orders were carefully placed at prices

of which precisely matches the price of the underlying share.

close enough to the best bid or offer prevailing on the

Source: www.financemagnates.com, written by Avi Mizrahi

LSE at the time to give a false impression of supply and

HiGH FrEQUENCy trADiNG AND MArKeT SPIKeS

DoW JoNES iN tiGHtESt rANGE

NOTHING BUT Hot Air?

Saxo Bank announced the appointment of Sren Kyhl as Chief

GAIN Capital limits omnibus accounts for institutional clients.

Operating Officer (COO) and member of the Management Board

The company will scrap the Dealbook 360 platform, while

effective from 1st January 2016. His appointment will further

supporting institutional white labels via City Indexs Advantage

strengthen the organisation and streamline the banks digital and