Traders January 2015

Interview: Jens Rabe My Way to Successful Options Trading P.
62
ind
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Trade
01
15
e Your
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a
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b
Em
ns
Emotio
P. 56
Your Personal Trading Coach

Nr. 01, January 2015 | www.tradersonline-mag.com
Bitcoin Trading
Taming a Wild Market P. 38
Optimised Bollinger
Band Strategies
Feather Your Own Nest P. 34
TRADERS Your Personal Trading Coach | www.tradersonline-mag.com
Your Basic Success Factors
Keep the Risk

under Control
P. 6
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EDITOrIAL
www.tradersonline-mag.com 01.2015
Ioannis kantartzis
Editor-in-chief
Does Trading Make People Happy?

Wham, another year gone. Depending on when you read the current issue of
TrADErS Christmas, New years Eve, or New years Day is just around the corner.
Maybe you are just like many other traders who simply cannot stop thinking of the yearend rally even amid all the feasts and festivities. Or, you may find the time during the
quiet days between Christmas and New years to reect on your very own trading year:
Did you follow your trading rules?
Were you able to improve your trading process?
What mistakes did you make and what can you learn from them?
Ultimately, these and others like it are the questions that you will constantly need
to address on the long and rocky road to becoming a successful trader. Only those who
keep on working to improve themselves and their performance, will be able to survive in
the long term. But does that automatically make you happy as a trader?
In the quiet days ahead, why not try consciously appreciating what you already
have, instead of always chasing what you would like to have. We often overlook how
well-off we are while we trade, analyse, and plan away. Many studies have shown that
money alone cannot make people happy so make sure that trading is not your only
source of happiness.
Happiness cannot be bought, at least not permanently. Instead, it requires you to
appreciate the moment in which you happen to live. The past and the future are nothing
but hollow words. The former is memories that cannot be brought back to life by any
power in the world, while the latter is visions and expectations that may come true with
varying degrees of probability. The only thing we can be sure of is the moment. And if you
are happy in the moment that you trade on the stock exchange because you enjoy trading,
then that is the right thing. It is in those moments that trading brings lasting happiness
even if you do not make millions with it. So the answer to the question whether trading
makes you happy is another question: Do you feel happy when you trade?
On that note, we wish you an exciting, successful and, most importantly, happy
trading year 2015!
good Trading,
TABLE OF CONTENTS
62
18
TABLE OF CONTENTS
January 2015
COVERSTORY
Keep the Risk under Control

In our cover story, Christian Stern explores ways to
professionally avoid severe losses and minimise the risk of
extended streaks of losses. Furthermore, he explains how to
intelligently manage position size, as this is one of the turning
keys to achieving long term success in the markets.
24
News
Find the latest notes and
announcements from around the world
of trading in our News section.
INSIGHTS
14 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.
TOOLS
26 New Products

The Latest Trading Technology
18 Transaction Data Compression
28 Book Review
Dirk Vandycke displays the use of charts given in the world

of trading and investing with the basics of how they are
constructed.
The Monetary System by JeanFranois Serval and Jean-Pascal

Trani
22 Trading Seasonalities
30 Appreview
Thomas Bopp shows the two encouraging candidates:

GBP/USD short and stock Krones long.
CBOE Mobile
TABLE OF CONTENTS
Publisher
Lothar Albert
PEOPLE
60 The Pros Process

Part 25: Anne-Marie Baiynd
62 Jens Rabe My Way to Successful Options Trading

In TRADERS 11/2014 we published a cover story about

options, written by Jens Rabe. Marko Graenitz interviewed
him in his trading room. Enjoy some insights about how
he managed to shift his career from selling insurance to
professionally writing options for a living.
Subscription Service
www.traders-mag.com;
www.tradersonline-mag.com;
abo@traders-mag.com; Tel: +49 (0) 931 45226-15
Address of Editorial
and Advertising Department
TRADERS media GmbH
Barbarastrasse 31a
97074 Wuerzburg, Germany
Contact:
E-mail: ioannis.kantartzis@traders-mag.com
Phone: +44 (0) 7798631716
Mobile: +30 (0) 6932 315450
Editor-in-Chief
Ioannis Kantartzis
STRATEGIES
34 Optimized Bollinger Band Strategies

Christian and Andreas Weiss provide you a somewhat unusual

method of trading that they picked up in the USA which is
similar to the term to feather ones own nest.
38 Bitcoin Trading

Bitcoin and the general concept of crypto currencies are one

of the hottest topics in finance right now. Maik Schwaebe
shows how to master them.
42 Trading Emerging Trends with the Bowtie Pattern

Dave Landry explains how getting on board emerging trends,

this time with the Bowtie Pattern.
BASICS
48 Murreys Mathematical System

Oscar Cuevas reveals Murreys mathematical system with

which support and resistance levels are calculated.
52 The Traders Technical Arsenal Part 11

This time Azeez Mustapha discusses the Standard Deviation

and the Stochastic Oscillator.
56 Trader Mind Part 1

Steve Ward explains how emotions are essential to the

decision making process and how they keep our brains
focused on critical information in trading.
Editors
Katharina Boetsch, Leanne Chesterman, Prof. Dr.
Guenther Dahlmann-Resing, Corinne Endrich, Rolf
Ganzer, Marko Graenitz, Lena Hirnickel, Sandra
Kahle, Inessa Liss, Rodman Moore, Stefan Rauch,
Katja Reinhardt, Karin Seidl, Tina Wagemann,
Christine Weissenberger, Nadine Wiget
Articles
Thomas Bopp, Richard Chignell, Oscar Cuevas,
Julian Komar, Dave Landry, Azeez Mustapha,
David Pieper, Maik Schwaebe, Christian Stern, Dirk
Vandycke, Steve Ward, Andreas Wei, Christian
Weiss
Pictures
apops, basketman23, Brian Jackson, denis_smirnov,
Greg Epperson, IMaster, ivan kmit, kuklos, lassedesignen,
Massimo Cavallo, olavs, olly, opicobello, wmedien,
Wrangler, zhu difeng / www.fotolia.com
Price data
www.captimizer.de; www.esignal.com;
www.metaquotes.net; www.tradesignalonline.
com; www.tradestation.com
ISSN
1612-9415
Disclosure
The information in TRADERS is intended for
educational purposes only. It is not meant to
recommend, promote or in any way imply the
effectiveness of any trading system, strategy or
approach. Traders are advised to do their own
research and testing to determine the validity
of a trading idea. Trading and investing carry
a high level of risk. Past performance does not
guarantee future results.
2014 TRADERS media GmbH,
Barbarastrasse 31a, 97074 Wuerzburg, Germany
COvErSTOry
keep the risk

under Control
your Basic Success Factors
In our cover story, Christian Stern shows how to

protect your capital professionally while significantly
reducing the risk of having to go through major losing
streaks. In addition, managing your position size
intelligently will give you an important tool
for achieving long term success in the
stock market.
The Principles of Risk and Money Management
on the subject and examine whether this method can be
Risk and money management (RMM) describes the art of
used for his/her trading. The Kelly criterion, or the Kelly
using our most important trading asset, for example our
formula, is well known in the field of sports betting and
capital, intelligently and above all safely. We define both
was published by scientist John Larry Kelly Jr. in 1956.
risks and opportunities and risks in terms of ratios and
It is aimed at optimal profit maximisation when placing
try to match them perfectly for the development of our
bets or, of course, entering trades that can be expected to
portfolio. Using RMM allows us to identify healthy and
be profitable. The approach can be described by a simple
yet powerful position sizes, enabling us to achieve long
mathematical formula:
term success. While good traders may well fail because

of poor risk management, good planning will protect
F=2*P-1
beginners against serious and likely damage.

where F is the fraction of the capital to be risked and
The Kelly Criterion
P is the probability of a profit, i.e. our hit rate.
In connection with the risk and money management that
If our hit rate is a quite realistic 65 per cent, the
is elementary for traders, approaches such as the Kelly
optimum size of the bet for each position is calculated as
Criterion keep emerging. The author would like to elaborate
follows:
F = 2 * 0.65 - 1 = 0.3
Christian Stern
A full-time trader with about twelve years of
market experience, Christian Stern is in charge
of securities trading and of the training division
of Trading Stars, focusing on imparting basic and
expert knowledge for successful trading.
christian@trading-stars.de
So according to the Kelly criterion, we should risk 30

per cent of our capital in our first trade. This approach
is purely oriented to which investment may lead to the
optimum growth of the equity curve of our portfolio and
calculates the position size only on the basis of the hit
rate of our trading. So the essence of the Kelly approach
is that an existing advantage (hit rate > 50%) is always
coverstory
T1) Letting Losses Run
However, the HR cannot be used
T2) Limiting Losses
to make a valid statement about the

Trade Number
Profit/Loss in Euros
Trade Number
Profit/Loss in Euros
quality or profitability of a trader.
20
90
George Soros once said: I am
10
80
probably right in no more than half
30
-20
of all cases, but I simply make a lot
30
-30
of money when I'm right, and I lose
-140
-20
as little money as possible when I
10
-40
am wrong. The examples in Tables
20
80
-130
90
20
-20
10
20
10
-10
Result
-110
Result
200
1 and 2 illustrate that even excellent

HRs may result in losses; they show
why you should not solely rely on the
hit rate nor, for that matter, base
your trading on it. The inclusion of
absolute profits and losses seems
This trader takes profits quickly and frequently,

but lets losing positions run, generating a
negative result at a hit rate of 80 per cent.
This trader, however, suffers whole series of

losses but imposes strict limits on them and
achieves a profit with a hit rate of only 40 per cent.
Source: www.trading-stars.de
indispensable.
Important Index in
Trading: the Profit Factor
Since the HR can only provide limited
information about the quality of our
being risked; the greater this is, the larger the position
trading, the author, in calculating the profit factor, also
size should be. However, why this consideration runs
considers the average absolute profit a nd loss, allowing
contrary to the principles of money and risk management,
him to obtain valid information on profitability. The
for example the protection and preservation of capital,
formula for the profit factor is:
will become clear once we examine what the system is

based on namely, the hit rate.
Profit Factor =
Number of winning trades

-Profit
x
Number of losing trades
Loss
The Hit Rate: More Myth than Reality?

The hit rate (HR) is described as a generally important
index in trading and indicates the relationship between
A PF > 1 is profitable. The higher this figure, the

better the trader works in his trading approach.
winning and losing trades in percentage terms. It is made

up of the quotient of the number of wins divided by the
Also Helpful in Trading: the Risk/Reward Ratio
number of losses. If, for example, five out of ten trades
Usefully complementing the profit factor, the risk/
end up being profitable, we have achieved an HR of 50
reward ratio (RRR) may also describe the general quality
per cent. If, on the other hand, seven out of ten trades end
of individual trades. It reflects the ratio of the absolute
up being profitable, the hit rate will be 70 per cent.
reward to the absolute risk, allowing it to be an index

for determining the quality of a trade. Risk is thus given
the number 1, the reward is divided by the risk and so
represented by a multiple of 1. This means that the RRR
can give information about whether a trade is worth it
T3) Hit Rate, RRR and Profit Factor
in the first place.

Key Figure
HR in %
RRR
PF
Generally speaking, an RRR of 2:1 up to 3:1 is considered

40
45
50
1.5:1
1.5:1
1.5:1
1.23
1.5
In this example, the trader makes an average profit of 30 euros and a loss of 20
euros, i.e. an RRR of 1.5. A hit rate (HR) of 40 per cent is sufficient here to not
suffer any loss (profit factor, PF = 1).
to be desirable. In order to trade successfully over the long

term, we have to have the following ratio of RRR to HR:

An RRR of 1 requires an HR of > 50%
An RRR of 1.5 requires an HR of > 40%


Coverstory
Honest Identification of Risk and Reward per Position
F1) Example
To a large extent, risk can be calculated in absolute terms,

representing as it does the distance between the entry
and the stop-loss in euros (pips/ticks x tick size in euros).
In addition, there are all the fees for entering and exiting
the position those, too, should be known in advance or
be requested from the broker. Unknowns also include
a potential slippage (rate difference when executing
the order) and the emergence of gaps. Since we cannot
calculate these two factors in absolute terms, the author
recommends a theoretical per cent mark up to be on
the safe side. The reward, too, can be determined along
those lines. However, note the spread of the underlying
asset (difference between buying and selling price).
100 euros can be made in a trade (reward), but the risk incurred by stopping out
is 50 euros. The ratio of reward to risk is now 2:1.
The Experiment: Six Traders in One Room

But not only the statistical key figures and theories need to
be considered. In practice, these may change in the future
and trading will be affected by other negative factors, as is
to maximise profits but not to keep the risk small or
illustrated by the following experiment: In a closed system
minimise it, running contrary to the principles of RMM. A
(market), six traders trade the EUR/USD with a market
modified version of the Kelly formula takes into account
maker, a CFD broker, for example. Each trader starts with
the important items of the PF, the average profit and loss,
a portfolio of 2000 euros and has a long term hit rate of 50
and could provide a remedy. That version is as follows :
per cent at an RRR of 1:1. 0.05 lots are always traded and
the spread is one pip (0.0001 USD). We will now let our
F = WP - (LP / POR)
six traders get on with the job and, from today, let them
trade for a few years under the conditions specified. All the
while, the capital development emerges in Figure 2.
Although the traders all work with the same key
Where F still represents the fraction of the capital to

be risked and WP continues to stand for win probability. In
addition, there are LP = loss probability and POR (payoff
figures (!), happenstance may cause equity to develop very

differently. Think of a simple bet when
tossing a coin although heads and
tails each occur with a probability
F2) Equity Curves of the Simulation
of 50 per cent, long sequences may

make the practical result appear to be
unexpected. Whereas the red trader
wins, all the others lose. This is due to
spread comparable to the zero in the
classic roulette game. So the broker
(shown here in blue) regularly makes
some extra money, each time taking
a small portion of our traders capital.
Overall, though, the market maker runs
a lucrative business and is the real
winner in this experiment. So always
keep an eye on the cost of your trading.
The Optimised Kelly Approach

Lets get back to the Kelly criterion.
As you have seen, it is only designed
Figure 2 shows the capital development of our six traders. In addition, the broker (blue) also gets his share.
coverstory
HR = 50%, RRR 2:1
F3) Exponential Development
F = 0.5 - (0.5 / 2) = 0.5 - 0.25 = 0.25
Capital (exponential)
220
So according to the modified

Kelly approach, we are supposed to
200
risk 25 per cent of our portfolio for
180
each position, which our gut feeling

tells us is far too much. But wheres
160
the
140
The
Kelly
approach
ignores the possibility of larger

losing streaks (drawdowns) than
120
100
catch?
have previously occurred in history

2
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
Risk (per Trade)
4.5
and risks the portfolio from that point

in time when reality is adversely
different from the statistics.
Exponential Development
of the Equity Curve
In general, the stock market literature
3.5
advises traders to risk around one

3
to two per cent of their capital per

position, increase order sizes along
2.5
2
with
increasing
portfolios
(and
minimise them in case of any losses

2
10
12
14
16
18
20
22
24
26
28
30
32
34
36
38
40
Figure 3 shows the capital development in the exponential system at an RRR of 2:1. 20 winning trades are
followed by 20 losses with the risk being calculated at two per cent per trade, depending on the size of the
portfolio.
incurred). Basically, this approach

is perfectly okay and protects your
money against a total loss (Figure 3).
In the case of a winning streak,
the capital and also the risk taken for
each position increase exponentially
while any losses that occur minimise
ratio) = average profit divided by average loss. Lets make
the risk per trade. So in an exponential system such as
another simple example calculation:
the Kelly approach, for example, you can very quickly

enjoy considerable growth by using the so-called
compounding effect. However, this also increases the
Compounding Effect
The compounding effect will come about when interest
income is not distributed to investors but is added to the
investment and reinvested. Since interest is also earned on
the interest, the return on the investment will increase.
For example, an investment of 10,000 euros made for one
year at an interest rate of three per cent will result in the
following interest income:
300.00 euros; return: 3.0 per cent
(annual credit for accrued interest)
(quarterly credit for accrued interest)
(daily credit for accrued interest)
10
absolute risk incurred with each positive trade.
Linear Development of the Equity Curve

The linear approach is different from the exponential
system. Here risk is determined only once, dependent on
capital, and that is in the first trade. Later, the amount
of risk remains the same. With winning streaks being
the same, the resulting absence of the compounding
effect will cause returns to be smaller, too. However, the
advantage for the trader is a constant amount of risk.
While the absolute high in the account and also the final
amount are somewhat lower in the linear system, the
bottom line is that there is a similarly positive result.
But besides the psychological advantage of small
and constant amounts of risk, there is another benefit
Coverstory
to the linear approach. Position
F4) Linear System
sizes remain stable and do not rise

along with profits as they do in the
exponential system. This means
that the buying and selling cost that
depends on trading volume, will also
170
160
150
remain low.
The author himself is looking
140
for trading systems whose account
130
history resembles a mathematical

linear,
account
making
Capital (linear)
180
low-fluctuation
development
possible,
which is of a major psychological
120
110
100
10
12
14
16
advantage in terms of a trading that

is relaxed and uses capital sparingly.
18
20
22
24
26
28
30
32
34
36
38
40
24
26
28
30
32
34
36
38
40
Risk (per Trade)
Initial Risk per Position

Furthermore, the author wants to
discuss the extremely important

calculation of the initial risk and
show, why this should be as small
as possible. In the example (Table

4), you can see a sample portfolio
of 5000 euros. If a low initial risk is
chosen (one per cent), the trader will
survive prolonged losing streaks,
whereas with a higher (ten per cent)
10
12
14
16
18
20
22
Figure 4 shows the capital development in the linear system at an RRR of 2:1. As is the case in F3), 20 winning
trades are followed by 20 losses, but the risk is only initially calculated as a function of the size of the portfolio
and will then remain unchanged.
initial risk he/she could in theory

be broke as early as after the tenth
trade. So when it comes to the
the optimal position sizes (lot sizes) is key. Be sure then to
Diversification Minimising Risks,

Maximising Rewards, Steadying Trading
choose the lowest possible initial risk of one per cent of
Not for nothing did Mr Markowitz receive a Nobel Prize
your portfolio value for each position.
for his work on diversification as early as 1990. In terms
proper implementation of a good RMM, the calculation of
of financial mathematics and stock markets, the term
Required Capital and Minimum Account Requirements
stands for spreading capital or investments over various
With a good broker, a CFD account of 500 euros may
underlying assets or strategies. Using this distribution
already be enough for trading the DAX. The most
can minimise the overall risk and significantly increase
important parameter that you should watch out for is

the relevant tick size of the particular financial product,
i.e. the absolute changes in the account when the
T4) Initial Risk and Losses
product moves around the smallest possible unit. While

this tick size is 12.50 euros a tick (half a point) or 25.00
Portfolio Value in Euros: 5000
euros per point in the DAX future, a finely scalable CFD
Losses in order
of magnitude
only changes 25 per cent per DAX point. So capital

requirements depend on the underlying asset traded
(tick size), the distance to the stop-loss (maximum
loss), and the position size (lot size) with small accounts
possibly having a limiting effect and making some
trades impossible.
Probability
50%
25%
12.5%
6.25%
1% Initial risk
-50
-100
-150
-200
10% Initial risk
-500
-1000
-1500
-2000
Choose the lowest possible initial risk per position.

11
coverstory
markets, a cluster risk will form that
F5) High Correlation
you should consider jointly.
The Overall Level of Investment

If worst comes to worst, you must
also be able to cope with a worstcase scenario and assume that all
open positions and those yet to be
opened will run into the stop-loss.
The resulting loss represents the
maximum risk of your portfolio and
should never be more than ten per
cent. This means that if you always
risk one per cent of your account per
More often than not, stocks of the same or a similar industry are highly positively correlated, as is shown by
the example of the German car manufacturers.
Source: www.tradesignalonline.com
trade, you may only have a maximum

total of ten trades in your order book
at the same time.
the chances of sustainability and profitability. Since
How Can I Implement

These Theories in a Viable Way?
diversification has this quality, it is a subject that is
Many traders work intensively on the perfect entry
one of the principles that successful advanced market
signal and will open a position once it is found. However,
players need to follow. Of special importance here is
successful traders first analyse what can be planned in the
the correlation of the markets and the underlying assets,
stock market, for example just the exit in case of loss. For
and both positive and negative connections should
that purpose, you use a consistently thought-through risk
be observed and jointly taken into account from the
and money management system made up of the modules
perspective of risk calculation. Think, for example, of the
presented here. Especially beginners should first aim at
stock markets and the DAX and Dow Jones indices. In
linear capital development and not risk more than one
general, these underlying assets behave similarly and
to two per cent of the initial account balance for each
rise or fall together. If you now speculate long in both
position. If the investment has then been earned for the

first time after a few years (100 per
cent return), the author recommends
a payout of the profit and a switch
F6) Low Correlation
to the exponential system, using the

compounding effect.
Conclusion
While the aggressiveness of the
Kelly formula makes it unsuitable
for trading, it does give us an insight
into
the
mathematical
handling
of risk and money management.

Professional traders should aim
at linear equity curves to ensure
regular capital growth and ride out
losing streaks easily. That way, you
can invest your capital in a relaxed
Different market segments such as, for example, gold (commodity) and the US leading index S&P 500 (stocks)
may have a negative correlation, causing them to contribute to diversification.
12
and yet sensible way to survive in

the capital market over the long
term.
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 doesnt 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.
14
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
Weaver: Do not talk too much and do not assume that you
education providers. We provide websites for individuals
know what the candidate wants to learn. I am stressing
and 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. We also offer free initial consultations and
of coaching sessions begin. This is a great way to get to
product demonstrations to anyone interested in our services.
for both private trading coaches and larger trading
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: Do you have an idea

what can we expect in the future coaching market?
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.
15
advertorial
Trading from the Top

Keep It Simple
As serious traders, we need to think, simplify and focus. Think about a set of trading
rules and apply them to our charts. Simplify the analysis techniques and focus on
the best trading opportunities that best fit our set of rules. This process needs to be
efficient and effective to give the best chance of covering multiple markets or contracts
in the shortest possible time.
The first step is finding a trading platform and chart
reflected in the way we set up our charts for scanning.
provider that allow integrated access to the markets
Simply put, all necessary info is easily viewable with a
and the ability to move throughout multiple time
list of products as well as the charts we use to find trading
frame charts with ease. Why? Well, it means we get
opportunities. Our workspace is set up with monthly,
a grip of the bigger picture trend and save ourselves
weekly and daily charts spread over at least two to
from walking in front of the proverbial bus. We use
three monitors; each chart shows up as a decent size for
TradeStation because of its dynamic market scanning
maximum effect and clarity. Nice and simple.
tools and the way it simplifies analysis across multimarkets and instruments.
The Setup
We are from the school of keeping things simple, yet
The trading world is awash with strategies and
detailed enough to cover our bases. This philosophy is
indicators some so convoluted that when you see

them on a chart they look like a
birds nest not simple! We use
three types of indicators on all of
F1) The Daily Chart
our charts. These arent proprietary

indicators, but the stock standard
Moving Average (10, 20, 50 and 200
period), MACD (Moving Average
Convergence Divergence) and RSI
(Relative Strength Index). Whether
you prefer the Parabolic SAR or the
CCI (Commodity Channel Index)
for your charts, TradeStation has
them all. We suggest not using too
many though, just use what you feel
comfortable with and make sure
your charts remain uncluttered.
For swing trading we tend to
look at the daily, weekly and monthly
Here is the daily chart of silver with multiple indicators like moving averages, MACD and RSI.
Source: TradeStation
16
charts. The daily chart is our go to

chart as it is the one that is used by
ADvErTOrIAL
short, medium and long term traders alike. Hence it gets
F2) Watchlist Using TradeStation radarScreen
the most view time and so it takes a front seat on our

layout.
Unique Functionality
The beauty of the TradeStation platform is that it allows
us to scan an entire list of products with ease; by linking
the symbols on the chart to the symbols in our watch list,
it takes just five to ten minutes to scan the many markets
we trade regularly. The ability for traders to simply click
the next symbol and the charts change in unison makes it
so much easier and it allows us to focus on what we need
to be doing, which is finding the very best trades based
on our strategy rules. A surprising number of charting
packages do not have this crucial functionality.
The Optimal Setup

There are a number of intricacies when it comes to
We can click on any one of these symbols that we trade and all of our daily,
weekly and monthly charts change simultaneously to that symbol.
Source: TradeStation
scanning the charts for potential trades. The main one is;
what kind of conditions to look for?
First and foremost, we look for optimal chart
structure on all three time frames. The most basic
decision based on only three potential outcomes that is
explanation
trending,
we can buy, sell or sit out. Being able to use these multiple
smooth-flowing and thus, more predictable charts as
timeframes to scan quickly means that we can remain
in the example in Figure 1. If it is clear that there is not
focused on the task at hand and make our decisions faster.
optimal chart structure on any of the daily, weekly or
This means its less time staring at charts and more time
monthly timeframes then we simply move on to the
to enjoy life!
means
looking
for
good
next chart.
Second, we look for price to interact with the moving
averages (MA) in such a way that we enter long or short
when price is nearing its equilibrium zone a zone we
Craig Cobb
define in and around the 10 and 20 MA. If price is close
Craig Cobb is a trader and mentor at Trade With

Precision. See Craig in action on one of many
trading webinars or join our free newsletter at
www.tradewithprecision.com
to this zone on two out of three time frames, it indicates

that we may be getting close to having enough reasons to
pull the trigger on a trade.
At the end of the day, as traders, we need to be one
thing and one thing only; decisive. We have to make that
17
insights
Transaction Data Compression

Theres More to Charts than Price and Time
Nowadays, the use of charts is a given in the world of trading and investing. Computer technology paved the way
to fast, even real-time charting in the graphical representation of price evolution of exchange traded products.
Even the most conservative fundamental oriented long term investor can be caught taking a peek at a price chart
at least once in a while. Charts are taken so much for granted that few people care to descend to the basics of
how they are constructed. But it is in those basics that new techniques can be found to synthesise data.
Price data gets charted in multiple different ways. And
more rewarding because computers cant read charts
each type of chart has its own disciples and acolytes
and charts do have a subjective edge by time scale and
stating the advantages over other types. The most widely
interval they happen to have.
used price chart depicts candles or bars on a time axis.
But no matter how we look at it, transactions are
Others, like Renko and Point & Figure charts got rid of the
the basic material out of which all of those charts are
evenly distributed time on the x-axis, though they keep
made up. It is by going back to this atomic level that we
some kind of a progressing time idea on that axis.
discover common ground for the different chart types
Besides the fact that charts might be useful, being

able to algorithmically analyse the data can be even
18
and, while we are at it, might think of some new types

and applications.
insights
F1) Lossy Character of Transaction Data Compression
The same resulting candle can be summarising numerous different patterns of underlying data. Put another way, the original data can never be retrieved from the
summarised. The compression is one-way, losing information.
Source: www.chartmill.com
Transactions
But these advantages come at a cost. When you take
At the most basic level of price data we have transactions,
a look at Figure 1, a single candle can be the product
and transaction data.
of different sets of transaction data. Put the other
Transaction data states at what time how many
way around, we cannot ever get the transaction data
shares changed hands and at what price. A broad
back from the compressed data. This is called a lossy
market equity can easily have tens of thousands
compression. It is one-way and irreversible. So as soon
of transactions in one single day. To keep things
as interval data is used (as most indicators do), one
manageable, transaction data is compressed over equal
should realise that two errors are made. First there is the
time intervals. The first (open), highest, lowest and last
time redistribution of volume. It is as if we view volume
(close) price in such an interval is recorded, as is the
as uniformly distributed over the interval. Depending on
total amount of shares traded in the interval (volume).
what interval is used, this error can be insignificant (for
This interval compression is called OHLCV (open, high,
example with a 1-minute interval) or a big deal (on a day
low, close and volume) compression.
based interval, volume is very often U-shaped). Secondly
This kind of compression has advantages such as
there is the error of price redistribution of volume. Most
synthesizing large amounts of data

into a few single numbers while
zooming out of the noise of every
F2) Further Lossy Compression of Already Compressed Transaction Data
single transaction behind it.

Also, compressed data is more
easily stored and transported.
Next, compression goes hand in
hand with scale and visibility. There
is no use in looking at a chart showing
one year of atomic transactions. The
details would obscure the message
the chart has to offer.
And, lastly, as Figure 2 shows,
we can further compress already
compressed data to ever larger
intervals. So weekly candles can be
calculated from daily ones without
the need for the original transaction
data. In fact each transaction can be
seen as a candle with open, high,
low, close being the same number
and keeping its respective volume.
We dont need the original data to further compress already compressed transaction data. The resulting
candle can be calculated by extracting the open of the opening (first) candle, the lowest low, the highest high
and the close of the closing (last) candle for the interval.
19
insights
We cant ever get transaction

data back from compressed data.
indicators, working on interval data, imply that at every
classic time driven compression showing one candle
price reached in the interval, an equal amount of shares
per day.
got exchanged.
In the middle part of the chart price driven transaction

data compression is shown, where one candle is formed for
What Interval?
each 0.25 interval in price. This is the type of compression
Now the next observation is the degree of freedom on
used by Renko and Point & Figure charts (though they
how to define intervals. First they dont have to be based
employ an extra rule to decide on trend changes).
on equal time intervals, nor does the way the intervals are
defined have to be constant through time.
Finally the figure shows volume driven compression

in its lower part. Each candle represents the compression
In Figure 3, three different types of transaction data
of 50,000 shares traded (of course approximately,
compression are depicted. In the upper part, there is the
because only by chance would transaction volumes form

exact batches of 50,000). So what happened was that
transactions were grouped by having 50,000 volume in
F3) Comparison of a Time Driven Compression
total, or having a total price range of 0.25. This can be

done from candles as well as from transactions. So one
can switch the compression type easily while zooming
out to bigger and bigger candles.
Wrap Up
We descended to the basics of how candles and bars got
in place. In doing this, we discovered there is no limit on
how we can play with compression rules, dictating the
way transaction data is grouped into candles or other
candles are regrouped into bigger ones. Here are a few
ideas to start experimenting:

Price driven compression neednt be based on

an absolute price range (such as 0.25 in Figure 3).
Percentage, ATR (Average True Range), or other
relative measures could be used.
Time driven compression could use candles on

different time intervals such as 21 days or 13 weeks,
you name it. They even could be formed on new
events, mood on a forum or social medium. There is
no end to how we can group data in candles. A rule
could be as simple as counting a constant number
of transactions to form a candle (a pretty useless but
Comparison of a time driven compression of one candle a day (upper chart),

price driven compression of one candle per 0.25 close price interval (middle
chart) and volume driven compression giving one candle per 50,000 traded
shares (lower chart).
20
strong example of diversity of possible compression

rules).

Different types of compression (or different rules

with the same type). So in a clear trend aboard a
winning position we could use volatility charting
INSIgHTS
based on time driven compression, while a price
Dirk vandycke
driven volatility compression might be shown on the

chart when looking to enter on breakouts. What this
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.
means is that one chart could adapt its compression

rules on the go.

This brings up the fact that literally every technical rule

or indicator could be used to steer the compression
dirk@monest.net
on a chart. And with it new and different ways to

look at the same data. For instance candles might be
constructed on the free float volume of a stock. Giving
a candle for one set of transactions representing the
And then Something New
entire free float.
Always keep in mind though that when transactions are
Compression rules might give different weights to
compressed, a mere five numbers (one interval) might
different transactions. Leaving some out entirely (for
stand for hundreds to even thousands of transactions,
example having zero weight).
possibly hiding a lot.
The starting point of the interval is another degree of
An entirely different approach, instead of tuning
freedom. It could be anchored to the beginning of a
our compression rules, would be to start developing
new day (as is usually the case). But it might as well
indicators based on transactions, instead of interval
always start exactly five days ago, leaving us with a
data. Some examples are the ChartMill Value indicator,
synthetic week candle for every day. In our free float
freely available at www.chartmill.com, which was
example above, each candle might count back the
discussed in the November 2011 issue and Effective
free float in past volume to start its interval, giving us
Volume, to which an article will dedicated in one of the
a candle every day.
upcoming issues.
21
insights
Trading Seasonalities
Part 18: GBP/USD Short and Stock Krones Long
The British Pound has shown weakness against the US-dollar for some time now and therefore
it is our first short-candidate of the New Year. Based on seasonality the MDAX-title Krones AG
should rise in the months to come and is therefore our first long-candidate of 2015.
Trading Idea GBP/USD
F1) Trading Idea GBP/USD
The
first
trading
idea
can
be
implemented with a small forexaccount or CFDs. The British Pound

against the US-dollar has been
in a downtrend since 2014 and at
the moment a consolidation at the
support level of 1.57 GBP/USD is
developing. Based on seasonality we
recommend a short position at the
start of the New Year with a holding
period of 70 days. The average profit
of a position with a holding period
from 31st December until 10th March
The currency pair GBP/USD is in a downtrend since the middle of June. A trend continuation could be possible
starting on 31st December that is the day when you could enter a short position with a holding period until
10th March 2015.
Source: www.lp-software.de
22
was 358 pips in the past years, the

maximum profit was 1268 pips. The
hit rate is a moderate 75 per cent. A
correct signal to the downside would
insights
mean that the downtrend since May
F2) Trading Idea Krones
be continued.
Figure 1 shows the seasonal
line since 1980 that formed a high
(dotted red line). If the downtrend
were broken at the day of the entry
it would be ideal to enter short at the
blue resistance area at 1.60. But even
if the weakness of the British pound
continues,
the
downtrend
may
develop further to the downside at

least based on the angle of fall of the
seasonal line, that shows a bottom
on 10th March.
The average loss of such a
position was 230 pips in the past
After the new all-time-high the stock of Krones AG could offer a second chance to enter at a favourable price.
The stock should stay in your portfolio until 30th April 2015.
Source: www.lp-software.de
years and that should be the stop

loss after the entry. At maximum we
expect a drop to the next support
at 1.48 until the exit day. Based on the current price this
than eleven per cent, whereas the average loss was only
means a profit potential of about 1200 pips. The data of
seven per cent the maximum profit was 26 per cent.
the Commitment-of-Traders(CoT)-report shows larger
In
November
several
analysts
recommended
positions of the commercials on the buy side, but the
the stock as a buy-candidate. Independent Research
historical comparison shows that the volume is not big
calculated a profit target of 86 EUR. Technical analysis
enough to be a real bottom.
confirms this, as the stock has room to the upper trend

border. It would be ideal, if price consolidated until 16th
Trading Idea Krones
January to the break-out-level at 76 EUR and then the
The second trading idea is the German MDAX-share
trend would continue. The stop loss should be placed
Krones AG. The company plans, develops and produces
at eight per cent below the entry, ideally at the green
machines as well as ready-to-go-facilities for all areas of
support line at 75.50 EUR.
the bottling- and packaging-technology and beverage

industry. The company is one of the world wide leaders
of this industry.
T1) Seasonal Trades of the Month
The stock made a new all-time-high at the beginning

of November after defending the support level between
Instrument
GBP/USD
Krones
63 and 65 EUR. In Figure 2 you can see the uptrend line
Direction
Short
Long
where the price bounced off that trend line.
Entry
31.12.2014
16.01.2015
Exit
10.03.2015
30.04.2015
The stock has a dividend yield of 1.19 per cent and

could be bought on 16th January and held for 104 days
%-Win
75%
88.24%
exiting on 30th April. Based on the last 17 years of data
History in years
17
there were only two losses. The average profit was more
Average profit
358 Pips
11.77%
Maximum profit
1268 Pips
26.03%
Average loss
230 Pips
7.23%
Maximum loss
917 Pips
10.68%
Holding period
70 days
104 days
Update
On 7th and 19th January you can have a look at the update on
www.tradersonline-mag.com. We also discuss the question
of the best entry and the placing of the stop-losses.
Table 1 shows the key facts of both trading ideas.

Source: www.trademinerpro.com
23
insights news
Yacuna Introduces Cryptocurrency Exchange for Ultracoin

The future of cryptocurrencies starts with Yacuna.com:
hybrid PoW/PoS distribution method makes it accessible
The UK-based and regulated trading platform for digital
to both miners and investors who are willing to trust in
currencies launched a new market for the emerging
the growing XBT/UTC market and the increasing trading
cryptocurrency Ultracoin. Customers can now seamlessly
volume of Ultracoins. Ultracoin features a 30 second
exchange Ultracoins into Bitcoins in a secure, safeguarded
confirmation time which makes it as appealing as cash.
and trusted environment at Yacuna.com. Ultracoin was
Ultracoin confirmations are 20 times faster than Bitcoin,
first founded in February 2014 with the goal of a truly
and many times faster than Dogecoin and Litecoin.
convenient, fast, and decentralised cryptocurrency. The
Source: www.yacuna.com
Saxo Bank Launch NDD Style DMA Trading
IG Group launches a collateral offering
Saxo Bank will launch multiple new NDD style accounts
IG Group has launched a collateral service allowing
designed for clients seeking Direct Market Access (DMA) by
clients to use existing shareholdings on their stockbroking
trading anonymously on best in class liquidity sourced from
platforms as margin to open new contracts for difference
the worlds top banks and specialist market makers. With
(CFDs) or financial spread bets. CFDs and spread bets
this offering, Saxo provides clients with a choice of pricing
are flexible contracts which allow a client to speculate on
structures; clients can either trade on raw market spreads
the movement of an asset, up or down, without having to
plus volume based commissions, or trade on the same DMA
take ownership of it.
liquidity with an all-inclusive spread. Additionally, Saxo
This new offering means stockbroking clients can use the
Bank is now also offering investors a SaxoMT4Linked
value of their investment portfolios as margin on over
account. This allows clients to combine use of MT4 as an
10,000 markets that IG Group offers, without needing to
execution harness for FX and CFDs, with trading on Saxo
sell their shares.
Banks proprietary platforms. This provides clients with an
Clients will be able to use up to 95 percent of the value of
opportunity to access the full universe of tens of thousands
their shares to cover the margin required to fund leveraged
of additional products, including Equities, Futures, Options,
trades. This opens up the opportunity for traders to take
Fixed Income and ETFs. All trades flow to a single multi-
more active positions or reduce risk without needing extra
product, cross-collateralised, margin account.
capital.
Source: www.fxstat.com
Source: www.iggroup.com
How to regulate a 75 trillion industry...

The new Payment Systems Regulator (PSR) today sets out how it proposes to regulate the 75
trillion payments industry when it becomes fully operational on 1 April 2015. The proposals will
further the PSRs three objectives: to promote competition, to promote innovation, and to ensure that
payment systems are developed and operated in the interests of service-users. The
PSRs proposals, alongside initiatives from the Financial Conduct Authority and
Competition and Markets Authority, will help create a more competitive banking
industry. Open for consultation until 12 January 2015, the package of measures
focuses on driving industry strategy and encouraging innovation; opening up the
ownership, control and governance of payment systems; and providing fairer and
more open direct access to payment systems as well as increasing transparency.
Payment systems enable people to spend and transfer money. They underpin the UKs
everyday financial activity.
Source: www.fxstat.com
24
Insights news
Several Awards for BATS

BATS Chi-X Europe was honored in three separate annual awards rankings, winning Hall of Fame Outstanding Trading
Venue at The Trades annual Leaders in Trading awards; Best Trading Platform or Venue at the Banking Technology
Awards; and receiving a special commendation as Newcomer/Innovator of the Year at the 10th
annual Funds Europe Awards. The exchange has won eight industry awards this year.
Source: www.batstrading.co.uk
ETF Securities awarded Best ETP Provider

ETF Securities, one of the worlds leading, independent providers of Exchange Traded
Products (ETPs), has been awarded the Best Exchange Traded Product Provider by
Shares Magazine. The awards, which took place at the Grosvenor House Hotel on 13
November, celebrate the best of the UKs financial services industry and are voted for by
Shares readers. ETF Securities worked closely with investors and IFAs to ensure they provide
them with innovative and cost-effective investment solutions that meet their needs.
Source: www.etfsecurities.com
WikiBusiness to list on the Canadian Securities Exchange

WikiBusiness announced that the company is in the
company. Plans call for an expansion of the present board
process of preparing for a listing on the Canadian
and management before the projected listings.The listings
Securities Exchange (CSE) to take place in January 2015.
on the CSE and FSE are part of the companys strategy to
WikiBusiness has formed a Canadian holding company
ensure a full roll out of WikiBusiness, as the independent
with the assistance of Canadian law firm MillerThompson,
and dynamic Business Encyclopaedia. WikiBusiness is an
and partner, Glen Lekach. Auditing for the company is
extensive and dynamic Business Encyclopaedia for private
being managed by MNP LLP, Senior Vice President, David
individuals and business professionals. WikiBusiness
Danziger. The Canadian Securities Exchange offering will
gives people access to consolidated historical, factual and
coincide with a listing on the Quotation Board of the
financial business knowledge and data combined with
Frankfurt Stock Exchange scheduled for early January
real time news about companies.
2015 as well. WikiBusiness has seen a strong interest in the
Source: www.wikibusiness.org
A union of two global leaders

IronFX Global, Limassol hosted a special inauguration event at its global
headquarters, in commemoration of its official partnership with FC Barcelona,
one of the worlds most successful football clubs. The inauguration took
place in the presence of Javier Faus, Vice President of FC Barcelona, and
the IronFX senior management team. After unveiling a dedicated plaque,
FCB Vice President Javier Faus was given an exclusive tour of the 2,000
square meter office space, and was presented with a personalized gift in
celebration of the global partnership a handcrafted ornament symbolic of
the legendary union of football supremacy with trading leadership. During the tour, Javier Faus also viewed an attractive
photo exhibition showing the global reach of IronFX, via more than 60 local offices worldwide.
Source: www.ironfx.com
25
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News from the World of Technology
Admiral Markets UK brings you MetaTrader 5 with lots of
of one of the worlds first 40Gb Ethernet technology FX
new capabilities and increased working speed. MetaTrader
solutions. Installed in Tokyo (TY3) with ADS Securities new
5 was developed by Metaquotes Software corp as a full-
OREX platform it offers an ultra-low-latency solution for
featured downloadable platform designed to provide online
forex traders. The deployment in TY3 uses 40Gb network
traders with fast and reliable access to various markets
cards and allows for each tick from multiple liquidity venues
from one and the same application. Integrated into Admiral
to be processed with dramatically reduced delays as the
Markets robust ECN liquidity network (same as Admiral.
additional bandwidth mitigates microbursts in volatile
Prime) MetaTrader 5 offers considerable benefits to traders
market conditions. 40Gb technology has been selectively
and provides significant advantages over competing
used in other low latency asset classes, but the set-up
platforms: advanced charting options (including custom
costs have always been high. Recent design changes have
chart time frame support), highly customisable order entry
lowered the datacentre footprint and increased capacity
settings with liquidity-based precise execution strategies,
providing cost effective performance benefits.
one-click trading feature, depth of market and order book
ADS Securities aims to lead the market in user friendly
trading features, opportunity to edit orders directly from
but sophisticated trading platforms. It provides a range of
the chart screen, thousands of free trading strategies,
institutional and retail forex trading services with wholly
scripts and indicators instantly available for download
owned or partner company offices in Abu Dhabi, Hong
from MQ5 coding language community (The Codebase),
Kong, Singapore and London. For more information
and powerful EA testing environment (MetaTrader5
about the technology go to www.ads-securities.com.
Strategy Tester). For further information, please visit

www.admiralmarkets.com.
Thomson Reuters announced the release of StarMine

SmartEconomics, a model that generates more accurate
ADS Securities and Fixnetix are claiming a step forward
forecasts of macroeconomic data and FX rates. This is
for the FX industry with the design and implementation
the first time that Thomson Reuters StarMine has applied

its SmartEstimates methodology to economic data and
FX rates to help professional investment managers
ADS Securities
generate investment ideas and mitigate risks. StarMine

SmartEconomics gives its users enhanced intelligence by
providing guidance on what surprises may lay ahead in
important economic releases and FX rates. Marrying the
breadth of Thomson Reuters Datastream economic data
with Reuters polling data, StarMine SmartEconomics
rigorously assesses the historical accuracy of each
forecast contributor at every point in time on every
poll in which the contributor had a forecast. These
historical accuracy scores determine the weight that each
forecaster receives in the SmartEstimate. Backtests show
that the SmartEstimate for economics and FX correctly
predicts the direction of macro surprises relative to the
consensus forecast over 60 per cent of the time when
26
TOOLS
the SmartEstimate is significantly different from the

consensus. For performance over the past year, the
FXCM Mobile App
success rate reached 75 per cent or more on some of the

most significant indicators such as US non-farm payrolls.
For more information, go to www.thomsonreuters.com.
X Open Hub announces a launch of a new tool
available in XOH environment. The new application is
a result of a fruitful partnership with Trading Central, a
leading investment research provider to financial market
professionals. The app is a unique combination of TC Feed,
TC Indicator and XOH trading capabilities all three in one
application. Actionable content, user friendly interface,
customizable time frames, ability to fill in orders based on
TC levels these are not the most important features of
this application. The main point is to save traders time and
allow them to trade directly from the application without
However, instead of financial assets, the platform offers
the necessity of switching to the platform. No user set-up
locations. Instead of prices or rates, it offers temperatures.
and configuration is needed, unlike other platforms. To
The trader then predicts, if the real temperature at expiry
learn more, visit www.xopenhub.pro.
will rise or fall from the offered temperature in the

option. Recent studies by economists at Penn States
FXCM has launched an updated version of its Trading
Smeal College of Business and College of Earth and
Station
include
Mineral Sciences have tested whether futures markets
the latest range of in-house developed Real Volume
Mobile
application.
Improvements
can be used to accurately forecast the weather, and, so
indicators. It was first launched for Android users, but
far, they have found the markets to be just as accurate
FXCM has promised a version for iPhone as well. As part
as major forecasting services. For more information visit
of the Real Volume series, clients will have access to: Real
www.weathika.com or www.spotoption.com.
Volume indicator, Transactions indicator, Market Movers,

Directional Real Volume, and On Balance Real Volume.
Additional details can be found at www.fxcm.com.
Weathika
SpotOption, a binary options platform provider,

announces the launching of their latest white label,
Weathika. Weathika.com collects data from thousands of
local weather stations throughout all major urban areas in
the United States. SpotOptions technology, and trading
engine, was the perfect fit for this up and down
weather
prediction
game.
SpotOptions
traditional
platform technology provides financial assets and their

rates, through connectivity with top feed providers. The
trader chooses the asset, examines the given option price,
and predicts, if the price will rise or fall by the expiry. With
the latest breakthrough, Weathika, it works very similarly.
27
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The Monetary System

Analysis and New Approaches to regulation
by Jean-Franois Serval and Jean-Pascal Trani
Written by respected authors Jean-Franois Serval
The
Monetary
System:
Analysis
and
New
and Jean-Pascal Trani, this important text provides an
Approaches to Regulation is the latest title by the
in-depth analysis of the definition of money and how
authors of La Monnaie Virtuelle qui nous Fait Vivre
money operates, taking a courageous and controversial
(The Virtual Currency that is Our Lifeblood), a book that
stance in presenting the contemporary implementation
was used extensively by senior treasury staff in several
of money as a social contract, governed by laws and
countries.
regulations set by our society.
The Current Financial Situation

The recent global financial crisis raised still-lingering
Authors
questions on how to balance actions based on short-term
Jean- Franois Serval is President of Serval & Associs,
decision-making against the uncertainty of impending
a European accounting practice and a founder and head

of United States operations of Constantin Associates, a
multinational accounting firm. He sits on several advisory
boards.
Jean-Pascal Trani is President of Aloe Private Equity. He
has held senior executive positions at Veolia nergie and
was head of Vivendis Media and Multimedia divisions,
before becoming CEO of the Viventures Partners venture
capital arm. Ten years ago, he created a group managing
green investments in Asia and Europe.
28
long-term change in the economic environment. In

this book Jean-Franois Serval and Jean-Pascal Trani
address a number of key questions about the current
financial situation, outlining the conceptual basis
required to build a new and more stable financial
system, paving the way for a fiscal policy model that
places emphasis on rotation rather than on inventories
of financial instruments that would result in improved
tax policies.
The authors explore the historical context of money
and reveal how transactions work in todays global
TOOLS
economic environment. The Monetary System is a

compelling work that answers a number of key questions
about our current financial situation: What underpinning
of democratic society facilitated a transition to the
economic realities of today? What were the major drivers
that characterised the current economic impasse? How
can one forecast future trends? What can be done to
fix the present economic system? Based on exhaustive
research, the book offers an overview to the present
economic situation throughout the world that is defined
by slow growth, rising debts, and low inflation. The
authors envisage a healthy economic future and put
forward a new model for the global economy.
Conclusion
Using this contemporary model of money as a social
contract, The Monetary System is a comprehensive
resource that gives banking professionals, as well as
others interested in the topic, keen insight into our
current economic situation and offers an understanding
of the factors that can help shape a sound financial
future.
Bibliography
Title:
The Monetary System
Subtitle:
Analysis and New Approaches to Regulation
Author:
Jean-Franois Serval and Jean-Pascal Trani
Pages:
312 pages
60.00, Hardback
Price:

9781118867921
Release:
November 2014
Publisher:
Wiley
ISBN:
29
TOOLS
NEW PRODUCTS
WEBREVIEW
SOFTWAREREVIEW
CBOE Mobile
BOOKREVIEW
APPREVIEW
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
Lets 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.
defined overview of all important US-indices including
30
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 appss 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
31
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
recommended because they offer the ability to learn
short and understandable and they are complemented
about options in a fun way especially for beginners.
with graphics so efficient learning is guaranteed. Every
And if you just want to stay updated on the most traded
topic 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
32
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strategies
Optimised Bollinger
Band Strategies
Feather Your Own Nest
Bollinger Bands are certainly well known by many traders. In this article two
authors provide you a somewhat unusual method of trading that they picked
up in the USA. You may be familiar with the term to feather ones own
nest. This is similar to the following strategy.
Bollinger Bands
from the empirical standard deviation. The calculated
The base of the strategy are the Bollinger Bands,
standard deviation is multiplied with a predetermined
developed in the 80s by John Bollinger. Based on normal
factor (Bollinger recommends using a value of two) and
distribution, the strategy emanates from the fact that
this value is afterwards added or subtracted with the
current market prices of a bond with higher probability
previously calculated average.
are situated near the mean value of the past market price
rather than further away from it.
Modification of the Standard Parameters
To identify market price trends, three values are
The authors use the Bollinger Bands with the following
used. First of all, average price is usually calculated
settings: Instead of the average price of the last 20
with the 20 day moving average. Afterwards, the market
days, they will select the last 55 days (depending on the
price is encircled by two further bands calculated
Fibonacci numbers). The standard deviation is changed
34
strategies
from 2.0 to 0.2. They leave out the
F1) Market Entry and Exit of the Strategy
middle Bollinger Band. This gives

them two very narrow bands, which
they draw in blue.
Imagine now, that these bands
were a river. These are therefore
also shown in blue. This will enable
you to better internalise the strategy.
With this strategy you wait until the
candles have come completely to the
other side of the river. This means
that, the candles body must not
touch the flow, which means that it
may no longer be wet. Only when
a complete candle stays outside the
river and with it on the other side,
also on the dry side, will we start
with this strategy.
After the first dry candle, the market entry (green line) is placed over the high of this candle and the stop
(red line) 20 pips beneath as well as below the Bollinger Bands. The first exit is carried out at 20 pips with a
risk-reward ratio (RRR) of 1:1 (blue line), the second exit at 40 pips profit (blue dotted line) with a RRR of 1:2.
Source: AgenaTrader
Market Entry, Stop and

Risk-Reward Ratio (RRR)
You enter into a long position when
market prices have crossed the river from bottom to
found that a position that they can continue to run often
top. You buy a lot when exceeding the maximum rate
turns again in the opposite direction and thus gives back
of the first dry candle. The initial stop sits below the
all profits. The trader should therefore use a stop-loss as
lower Bollinger Band. The stop should be a multiple of
a sort of trailing stop below the last candles as soon as
five pips, so choose at 17 pips distance from the market
80 to 90 per cent of the movement to the target market
entry price 20 pips stop-loss. You measure this distance
price is achieved. This means that he/she gives back
for the market entry price and then put your target in the
as little as possible from gains already achieved. This
same ratio to stop for the duration

of the trade. Your RRR is thus 1:1.
For positions in the direction of the
F2) Profit Secured Shortly before Target Reached
short side, the same rules apply

inversely.
Various studies have shown that
this strategy works well in the Forex
market particularly in the majors,
so EUR/USD, GBP/USD, USD/JPY,
USD/CAD and USD/CHF. The authors
mainly
choose
the
15-minute
period as a time unit. They have not

adequately tested other time units
or markets. You should not risk more
than one to three per cent per trade
with this method.
Now you might wonder, why
first of all a RRR of 1.0 is chosen,
although the authors have observed
that the trend often continues more
than the target. The authors have
After reaching about 80 to 90 per cent of the distance to the target market price, the stop is put below the low
of the current candle. Here, a small profit was achieved although it would otherwise have been stopped out
at a loss below the Bollinger Band.
Source: Flattrader (FXFlat)
35
STrATEgIES
Book Review
low margin requirement for CFDs and Forex allows

In 2012, Andreas and Christian
Weiss book So optimieren Sie Ihr
Trading on the subjects of trading
systems, technical analysis and
risk management was published.
Pages: 224
ISBN: 9783864700033
Price: 34,90
Publisher: Brsenbuchverlag
Release Date: 26.03.2012
you to set up your portfolio in a diversified manner.

For example, you can enter these orders early in the
morning and go to work. In the evening you can see
whether your target market price has been reached or
not.
Three Per Cent Risk per Trade

Another modification is to apply the strategy with a
fixed percentage risk per trade. One possibility would be
risking three per cent per trade; which means that on a
$10,000 account you risk $300 per trade.
So if the stop-loss lies at 20 pips, the position size is
calculated as follows: $300 / 20 pips = $15 per pip. The lot
size can be adjusted accurately to ensure that for each
ensures that he/she only goes out of the position when
trade the same risk is taken, regardless of whether the
the trailing stop is reached. This has the advantage that
stop stays at 20 or 50 pips away. Trading with a mini lot
it can definitely save a portion of the profits just before
(10,000), 15 lots can be traded. In microlots (1000) it would
reaching the profit target. In Figure 2 we see that the
be 150 lots.
position would have been stopped out at a loss, but it

still came out through a meaningful stop setting with a
Elimination of the Risk and Partial Exits
small profit.
Market entry and provision of stop-loss take place
It is certainly difficult to find an ideal solution
as described above. The first take profit is set with
because you can never catch the optimal market entry
half of the position at a RRR of 1:1 and the second half
or exit. In the following lines, the authors show some
with a RRR of 1:2. Example: Stop-loss at 20 pips loss,
variants of this strategy. You can place these trades
first take profit at 20 pips profit with 50 per cent and
with the so-called OCO order (One Cancels the
the second take profit at 40 pips. After reaching the
Other) or secured order. You dont need to continue
first profit target, you drag the stop to break-even, for
observing the trade. You can also simultaneously
example on purchase price. From now on you cant
enter various trades in more underlying assets. The
lose with the overall trade. The aim of this approach

is the elimination of risk for a little
less profit.
In the classic use of the strategy
F3) Combination with Multi-Time Frame Approach
with a RRR of 1:2, you get a potential

gain of $600 in a risk of $300 per
trade.
If you change your exits as
described, you could achieve a
maximum profit of 450 dollars
and the risk is reduced to $0 (after
reaching the first profit target). You
sell half of the position at a profit of
$150 and have the opportunity to win
from it further $300.
More Alternatives
Use the same market entry and stop
Short market entry after the first dry candle under the yellow band. Market entry occurs with the first dry
candle over the blue (15-minute) Bollinger Band.
Source: AgenaTrader
36
as before, then sell 50 per cent of

the total position upon reaching the
target profit of a RRR of 1:2. After
STrATEgIES
reaching the target profit, you drag the stop to breakeven. Exit to the second half of the position arises
Strategy Snapshot
Strategy Name:
Optimised Bollinger Bands
Strategy Type:
Based on indicator; trend-following
Time Frame:
Usually 15 minutes
or multi-time frame approach
Setup:
Market entry after the first dry candle (long

and short), stop on the other side of the river,
Entry:
Long: above the high of the first dry candle

Short: below the low of the first dry candle
Stop-Loss:
Multiple of 5 pips on the other side of Bollinger

Bands or alternative strategy
strategy. You complement your setup (15-minute chart)
Take Profit:
1: 1 or 2: 1 or alternative strategy
with another yellow Bollinger Band in the higher time
Trailing Stop:
Only active after reaching 80-90% of the

distance to the market price target
Exit:
Limit order at take profit price
Risk and
Money Management:
Max. 3% risk per trade, only one position

(long or short)
Average Number
of Signals:
1-5 per day (15-minute chart)
either, a) at break-even, or b) the closing market price

of the first dry candle on the other side of the river
(Bollinger Bands). You hereby secure a partial profit with
the additional option of further gains from longer trend
movements, hence feathering your nest.
Multi-Time Frame Approach

Another interesting variant is the following trading
frame of one hour with the same parameters (55; 0.2).

This second Bollinger Band serves to generate market
entry signals and the other provides a trend filter. It is
traded in the 15-minute chart. As soon as the market
price is above the yellow band, there is an upward
trend. If the market prices are under the yellow band,
the downtrend is intact. A trendless phase a so-called
sideways movement occurs, if prices stay within both
Bollinger Bands.
combination with the optimisation opportunities arising

through the addition of various filters.
Market Entry and Stop-Loss
Through the combination of different time frames,
This trading strategy is a combination of the blue and
one can benefit from longer lasting period of trends as
the yellow Bollinger Bands, which are shown as blue
well as short term market price movements. Furthermore,
and yellow rivers. Once the market price breaks out of
the higher time frame is used as a filter to specify the
the yellow, you open a long position. The candle must
direction of the trend for the smaller time frame. Then
no longer touch the band. The stop-loss is defined by
only trades are disposed to get into the overridden trend
the blue Bollinger Bands in the 15-minute time frame.
direction. This leads to an increased hit rate, since minor
This means that the long position is closed as soon as
corrections are filtered out and consequently not traded.
the market price below the blue river closes, thus the
Bollinger Bands. The candle has to be a dry candle.
Only such a signal is valid. Conversely, short positions
are opened as soon as the closing market price of the
15-minute candle closes below the yellow river. The
position is stopped out as soon as the market price
closes above the blue river.
Re-Entry
Andreas Weiss
Andreas Weiss studied economics with majors in
investment banking and portfolio management.
At CapTrader he is responsible for market
analysis, creation and optimisation of trading
strategies in discretionary and automated
trading, managed accounts and portfolio
management.
andreas.weiss@captrader.com
Furthermore, there is the possibility that a signal is

generated to re-enter a trade. Here, a new long position is
opened as soon as the market prices close above the blue
Bollinger Bands once again. Conversely, a short position
is opened as soon as prices close below the blue band,
wherein again the candle should not touch the Bollinger
Bands.
Conclusion
The strategy presented here can be applied on the one
Christian Weiss
Christian Weiss is Managing Director at CapTrader.
He studied international business administration
with majors in risk management and finance. His
focus is primarily equities, Forex and futures trading.
He combines discretionary methods (Fibonacci,
Ichimoku & Andrews Pitchfork) with automated
systems.
christian.weiss@captrader.com
hand in the classic, simple form; on the other hand, in
37
STrATEgIES
Bitcoin Trading
Taming a Wild Market
Bitcoin and the general concept of crypto currencies are one of the hottest topics
in finance right now. The battle surrounding this subject is fierce and ideological,
involving powerful forces and is far from over. But with Bitcoin prices likely to continue
its rollercoaster ride, there is no need for traders to have a personal opinion in either
direction to profit from one of the worlds most volatile underlyings.
Maik Schwaebe
Different opinions and visions make prices move and
Maik Schwaebe has been trading equities

since 1997 and later added commodities
and currencies to his repertoire. His main
focus is on mechanical trading approaches.
A regular contributor on seekingalpha.com,
he also manages the Wikifolios German Top
Momentum and Pure Hedge.
the unclearer the future the more volatile the price. One
mschwaebe@gmx.com
of the most controversial debates over the past twelve

months or so has been Bitcoin and the potential of its
underlying technology. While many people believe that
so-called crypto currencies represent the future of not
only money but also economic transactions in general,
38
strategies
others
are
more
sceptical
and
F1) Bitcoin, 4 Hour Interval, Fall of 2014
perceive it as a scam or a shady tool

to finance illegal activities.
This wide variation in opinion
is one of the reasons why Bitcoin is
moving the way it is, with regular
price swings that leave most penny
stocks in the dust. With developers,
entrepreneurs,
banks,
regulators
and central banks trying to get a grip

on the subject, the future continues
to be wide open.
Thankfully, we as traders dont
have to have an opinion; if anything,
it is actually a disadvantage to have
one as it can cloud your judgment
and make you ignore or overlook
This shows the Bitcoin price with an 18-period channel throughout a relatively calm phase. L marks position
changes from short to long and S changes from long to short. Seven of those nine signals ended in a profit,
returning on average 8.1 per cent after commissions and slippage versus -3.75 for the two losses suffered.
Soruce: MetaTrader
patterns that contradict your opinion.

So lets concentrate on the aspects
that make Bitcoin such a special
trading vehicle and find a way to profit from it.
to first find an efficient venue to trade on and then use

that venues data as inputs to determine the suitability of
The Pros and Cons
your strategy. Depending on your country of residence,
First of all, there is relatively limited trading volume and
you will have a few options to either sign up with one
market capitalisation in Bitcoin. With only a few hundred
of the major Bitcoin exchanges or go through one of the
thousand units being traded over several different
increasing number of Forex brokers that offer CFDs on
exchanges per day and a market value of just around $5
the Bitcoin price. Exchanges often offer lower transaction
billion, there is not a lot of space for institutional sized
costs but sometimes lack a convenient way of using
participants to play this market.
leverage and shorting.
Hedge Funds and HFT (High Frequency Trading)-
It is also crucial to keep an eye on the grade of ownership
Outfits being limited to arbitrage strategies is great news
one enters when going long Bitcoin. If your coins will be
for individual traders because trading opportunities or
stored in a so called hot wallet, they could easily be stolen
edges usually tend to disappear once Wall Streets best
in a hack attack, which is exactly what led to the demise
brains and billions in firepower get involved, especially in
of the largest Bitcoin exchange Mt. Gox last spring. Many
rule based, algorithmic trading.
exchanges now claim to store the majority of funds in cold
Another positive fact is that Bitcoin is the only underlying

that is truly traded worldwide at any given moment. Stocks
wallets on servers separate from the operations front end

and should therefore be impossible to breach.
can jump around a lot overnight, and even super liquid
To completely sidestep this problem, one could
currencies can be subject to huge weekend gaps; theoretically
choose to only trade Bitcoin via CFDs that are based on the
Bitcoin will never have this problem as market moving news
price movement and never imply any direct ownership.
can be priced in immediately, 365 days per year.
But this seems to be the more expensive way to trade
However, an immature market and the absence of
Bitcoin as some CFD shops charge a fix numerical fee of
institutional liquidity creates many difficulties too, and
up to 6$ per Bitcoin and transaction, which when charged
those have to be addressed in order to trade this market
on a 300$ vehicle will kill any strategy.
profitably. Due to it being a young, unregulated and
Another
big
factor
to
watch
is
the
slippage
decentralised market, there is a variety of competing
experienced when trading, which is usually more extreme
exchanges that post individual bids and asks and trade
in illiquid, low volume markets. The strategy introduced
very different volumes of Bitcoin per day.
in this article will use stop orders at important resistance
As quotes and transaction costs are very important

variables to any trading strategy, it is recommended
and support levels to enter and exit trades, which makes

slippage an even larger danger.
39
strategies
It is, on the other hand very crucial to follow every
Strategies in this area often use moving averages
signal in trend following strategies as a few good trades
(MA) as directional filters or entry signals. Depending
can make or break a year. So as long as we keep it in
on period, this makes only limited sense with Bitcoin as
check we will have to accept slippage as price moving
those indicators are lagging and might not detect a trend
dynamically in our desired direction.
early enough. For those reasons, one should favour a
The authors broker of choice acts as a liquidity

provider for a couple of exchanges. Participation happens
channel breakout strategy, easily applicable with stop

buy and stop sell orders.
via CFDs so there is no risk of losing the actual coins. A fix
The period of time that defines our channel should be
0.5 per cent transaction fee per round turn is charged with
kept rather short to create signals that are more reactive.
no additional costs for borrowing to short or financing
The author has used 3-day highs and lows in a lot of
margin trades.
variations before, which seems like a fair starting point.
Average slippage over the past 20 trades or so has
To make the system less static we will transfer this rule
been at 0.15 per cent per round turn, but we will assume
into a faster time frame by applying a 18-period MA on
0.25 per cent to be on the safe side. These costs will be
a 4-hour chart, for a rolling channel defined by the last
used as inputs to validate our strategy and backtests
three days absolute high and low. Figure 1 shows that
were performed using the same brokers historical data.
channel and the signals it generated over the past three

months.
What Approach to Take?
A single rule that simple is not likely to work perfectly
The type of strategy you choose depends on the pattern
all the time, and a quick look on the results confirms this.
you identified, and in our case, there are not a lot of
While this 3-day channel works well most of the time, it
choices. We are dealing with a highly volatile instrument
really struggled throughout the bubble moves that Bitcoin
that has no problems ten-folding in two months or being
experienced around the end of 2013.
cut in half in a day, which immediately eliminates mean-
With volatility being both an opportunity and a risk
reversion types of strategies and points to the trend
at the same time, it only makes sense to put volatility
following approach.
into a comparable perspective. To achieve this we will

put a slight spin on the traditional
Average True Range indicator (ATR)
and calculate it off per cent values
F2) Bitcoin and Its Per Cent ATR, Nov 2013 to Nov 2014
instead of absolute ones.
1200
long
short
So with a close of $300 and a
1000
range of $6, our ATR will be two
800
per cent instead of $6 so that we

have a more accurate expression of
600
range of a volatile price. This reading

stores volatility in a better way than
400
comparing an absolute value to the
200
0
04.11.2013
10
9
8
7
6
5
4
3
2
1
0
04.11.2013
most recent close. Averaging those

04.01.2014
04.03.2014
04.05.2014
04.07.2014
04.09.2014
04.11.2014
us a pretty good indication of the last

two weeks volatility, and over the
course of the last year this average
fluctuated between 0.8 and 8.
With ranges that different it
becomes
04.01.2014
04.03.2014
04.05.2014
04.07.2014
04.09.2014
04.11.2014
The colouration indicates the systems position on the Bitcoin price; blue means long, orange means short.
Naturally, there occur more position changes during volatile periods, as defined by an ATR indicator above
4.0. This indicator is crucial to determine how aggressive we pursue trends and our rules should probably be
modified when volatility drops significantly over an extended period.
Source: Authors graphic
40
numbers over a period of 86 will give
obvious
that
we
will
have to adjust our parameters at

times, and after reviewing our per
cent ATR, we can say that spikes
over a value of 4.0 only happen in
particularly unsettled times. We
will use this threshold to tune our
strategies
The type of strategy you choose

depends on the pattern you identified.
strategy to be more sensitive to short term trends.
Conclusion
Whenever our per cent ATR is above 4.0 we will shrink
Before jumping head first into the Bitcoin experience,
our channel period down to four 4-hour candles in
please consider all the pros and cons of trading this market.
order to catch fast moving trends in highly volatile
Find a venue or institution that you can get comfortable
environments. Figure 2 shows our systems final long/
with, consider all expenses and security issues that
short periods directly on the Bitcoin price and the
you might encounter. Do your own research on trading
corresponding per cent ATR.
volumes, slippage etc. and then backtest whichever
But even with periods as short as 16 hours, our
strategy you want to pursue with that institutions data.
channel highs and lows can still at times be 50 or more
The rules outlined here should be seen as an inspiration
per cent apart from each other. Using only the reverse
or a base for doing your own research and not a complete
signal as an exit rule would be extremely dangerous
and secure trading system.
which is why we will apply a simple ten per cent fix stop-
Even while trading, pay close attention to slippage
loss (SL) on entry, safeguarding our capital in the worst
and changes in the nature of how Bitcoin trades; after
case scenario.
all this is a very immature market and one year of

reliable patterns does not guarantee anything for the
Results and Considerations
future.
This simple set of rules achieved a total return of +917.6
And last but not least, keep the capital allocated to
per cent after commission and slippage over a period of
any Bitcoin strategy within your own pain limits because
375 days from November 2013 to November 2014. The
after all, trading crypto currencies is still more of an
deepest drawdown accounted to -44.8 per cent, which
experiment than a safe investment. But with all those
was recovered within 20 days. Five out of 89 trades
precautions in place, one should be well prepared to
ended with our worst case stop loss of -10 per cent being
profit off Bitcoins wild swings, without having to pick a
tripped while 20 trades of 89 returned over ten per cent.
side in the heated debate over the future of money.
The winning rate of about 44 per

cent is sufficient because the huge
difference in average wins (11.7 per
cent) versus average losses (-4.2
per cent) makes this method highly
profitable.
The parameters used here were
chosen rather intuitively and are
not optimised, but even after trying
a couple of different values (ATR
period 50, lower or higher thresholds
between slow and fast environments
and different channel periods), the
general tendency of the strategy
remains very positive. Considering
the
total
drawdown,
return
one
and
should
maximum
actually
calculate the committed capital rather

careful to keep temporary losses in a
more acceptable range (see Figure 3).
F3) System Equity with Half Position Size, Past 12 Months

350
300
250
200
150
100
0
10
20
30
40
50
60
70
80
90
100
This is the trade-to-trade equity curve for our system, over the same period as in Figure 2. Only half the
available capital is invested and commission of 0.5 per cent and slippage of 0.25 per cent is included. The
result looks extremely promising but as with any system that has a hit rate below 50 per cent it is extremely
important to catch every trade, as a few big wins can make or break the performance.
Source: Authors graphic
41
STrATEgIES
Trading Emerging Trends

with the Bowtie Pattern
A Simple Technique to Detect and get Onboard gradual Changes in Trends
In the previous articles, we discussed that only short term market forecasts are viable. However, through proper
money and position, management positions can be held for weeks, months, and even years should the trend
continue. This proper money management involved the use of stops, taking partial profits, and the slowly widening
of trailing stops as the positions became more and more profitable. After that we looked at how to get on board
established trends with Trend Knockouts (TRADERS 09/2014) and Persistent Pullbacks (TRADERS 10/2014). And, in
the last article we looked at how to get onboard emerging trends with the First Thrust Pattern (TRADERS 11/2014). In
this article we will keep with the theme of getting on board emerging trends, this time with the Bowtie Pattern.
Dave Landry
When the Trend Ends a New One Often Begins
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.
Trends do not last forever. Eventually they exhaust
www.davelandry.com
42
themselves and quite often, a new trend in the opposite

direction emerges. However, established trends can often
last much longer and go much further than most anticipate.
Trying to buy a market because it is low or sell short a market
because it is high is a losers game. The good news is that
the market will leave clues that a trend is turning and will
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Strategies
waiting for the market to reverse so they can get off the
F1) Trend Transitions
hook. Bottom pickers and top pickers who missed the

Shorts
top or bottom and do not want to pay up are also waiting

Downtrend Begins
First Correction
Uptrend
Downtrend Resumes
for some sort of meaningful correction. Unfortunately

for these traders, the meaningful correction may never
come. Often, once markets begin to roll over, they only
pull back very briey before resuming their new trend. The
old market participants will soon be forced out at adverse
prices and the bottom/top pickers must pay up or risk being
Longs
left behind. By waiting for the market to have an obvious

Uptrend Continues
Downtrend
First Corrections
Uptrend Begins
When an old trend ends, a new one often emerges.

Source: The Laymans Guide To Trading Stocks
rollover as evidenced by the Bowtie moving averages, you

avoid the pitfalls associated with picking tops/bottoms.
By looking to enter at the rst signs of a correction rather
than waiting for something more substantial, there is
the potential for your position to be helped along by the
predicament of the aforementioned traders.
Indicators vs. Illustrators

Before we look at the rules and an example, keep in
usually have a minor correction before resuming its new
mind that all price indicators have lag. Therefore, the
trend. Looking to enter after that minor correction and only
world indicator is a misnomer. It simply shows what
if the new trend shows signs of resuming is the goal of the
is happening with price, an illustrator, if you will. So,
authors transitional patterns. This is illustrated in Figure 1.
the Bowtie moving averages crossing over (read further)

suggests that the trend has changed. A quick glance at
Emerging Trends: Sometimes an Event, Sometimes a Process
the price bars will usually confirm that it has.
As discussed in the last article, markets in major trend

transitions often begin with a sharp thrust in the new
The Moving Averages
direction. This often catches participants off guard.
For this pattern, a 10-day simple moving average, a 20-day
Sometimes though, the trend change can be more of a
exponential moving average, and a 30-day exponential
process than an event. This can still catch participants off
moving average are used. The author likes the 10-day
guard. They assume that the market is just resting before
simple moving average since it gives a true average price
it mounts another leg higher (or lower for shorts). Just like
of the stock for the past two weeks (ten trading days). For
the First Thrust as the new trend begins to emerge, they
longer term moving averages, the exponential moving
find themselves trapped on the wrong side of the market,
averages are preferred since they front weight the data.

Therefore, although they take into consideration the
longer term trend, they are faster to catch up with price,
F2) Moving Average Bowtie
since more credence is given to more current data. Do not

worry about the math. Moving averages are available in
even the most basic charting packages.
The Rules
The goal of the Bowtie setup is to get on a new trend early.
You wait for the market to show signs that it has changed
direction of its longer term trend and then enter on the
slightest correction. Entering new trends is risky, but the
payoff can be tremendous, if you catch a new trend early.
Through the use of multiple moving averages, it was
When the moving averages cross over a short period of time, they give the
appearance of a bowtie.
Source: Dave Landrys 10 Best Swing Trading Patterns & Strategies
44
discovered that they would often come together and spread

out in the opposite direction as the market was making
a major transition. That is, they would go from proper
Strategies
downtrend order the faster moving

averages
(shorter
periods)
F3) Moving Average Bowtie
below
the slower moving averages (longer

periods) to proper uptrend order
(3)
the faster moving averages above the

slower moving averages (Figure 2).
When
this
happens
over
short period of time, it gives the

appearance of a Bowtie. After the
(2)
Bowtie forms, it suggests that the

market has made a major trend shift.
10 SMA
However, it is still prone to correct.
20 EMA
Therefore, you seek to enter after a
30 EMA
minor correction.
Here are the rules for buys, short
sales are reversed:
30 EMA
(1)
20 EMA
1. The
market
significant
should
low.
make
Longer
term
or ideally all-time lows are the

best. This helps to ensure that
10 SMA
When the moving averages form a Bowtie (1) it suggests that the trend has changed. Look to enter after
(at least) a one-bar pullback (2) but only on a trigger (3). The market must trade above the prior days high.
Source: The Laymans Guide To Trading Stocks
the most amount of people are

on the wrong side of the market
when the new trend begins to
an all-time high (1). Everyone who owns the stock
emerge.
2. Referring to Figure 3, the moving averages should
is at a profit. However, the momentum has slowed
converge and spread out again, shifting from proper
as evidenced by the fact that the stock hasnt made
downtrend order (10 SMA < 20 EMA < 30 EMA) to proper
much forward progress on a net net basis for over
uptrend order (10 SMA > 20 EMA > 30 EMA). Ideally,
a month. It also has formed a double top. Classical
this should happen over a period of three to four days.
technical analysis used with a setup as trigger
This
creates
the
appearance
of a Bowtie in the averages.

3. The market must make a lower
F4) Short Trade Kodiak Oil & Gas Corp. (KOG)
low and a lower high. In other

words, it must make at least a
one-bar pullback. Note, in some
cases, markets that only make a
lower high (vs. a lower low and a
lower high) may be considered.
This is especially true when the
previous day is a wide-range bar
and/or when the trend is turning
fast.
4. Once qualications for (2) have
been met, go long above the
high of (2).
Trade Example
Lets take a look at an example
(Figure 4). Kodiak (KOG) makes
The stock makes an all-time high (1) but begins to turn down. This action creates a Bowtie in the moving
averages (2) and it suggests that the trend had changed. After a one-bar pullback (3) you look to enter (4) as
the new trend emerges.
Source: Telechart Platinum
45
Strategies
One Caveat: Look for First Thrust First
F5) Look for First Thrust First
The Bowtie moving averages are

great for catching gradual changes in
trend. They help to illustrate a trend
change that might not be initially
obvious by looking at the chart
alone. As discussed in the previous
article, sometimes the trend change
can happen more abruptly. It is an
event vs. a process. Therefore,
when analysing a market, always
look for First Thrusts first. Notice
in Figure 5 that the First Thrust has
already triggered while the Bowtie
is still forming.
Gold or Arrows?
Keep in mind when trading emerging
trends that there is a chance that
Bowties are designed to catch gradual changes of trend. On abrupt changes in trend, make sure you look for
a First Thrust Pattern first vs. waiting for a Bowtie to form.
Source: Telechart Platinum
what appears to be an emerging new

trend might just be a correction in the
longer term trend. You are a bit of a
pioneer. And, like the American
Pioneers, you are either going to get
usually makes for more powerful trades. The moving
the gold or arrows in your back. The good news is that
averages come together and spread out going from
all major tops or major bottoms will have a First Thrust,
uptrend proper order (10 SMA > 20 EMA > 30 EMA) to
Bowtie, or other emerging trend patterns. Therefore, the
downtrend proper order (10 SMA < 20 EMA < 30 EMA)
chance of the gold makes it all worthwhile.
over a short period of time (2), giving the appearance
With just a little experience, you will nd Bowties very
of a Bowtie. The stock makes a higher high and a
easy to recognise. Paying attention to the Bowtie moving
higher low (3). This is actually part of a pullback that
averages in the indices will help keep you on the right
is already in progress. The stock triggers an entry (4)
side of the market. Through the use of multiple moving
as the low of (3) is taken out decisively. The new trend
averages, Bowties often catch gradual changes in trends
begins to emerge.
early. Because they are visually easy to recognise, they

are a great pattern for those new to trading emerging
trends.
Strategy Snapshot
Strategy name:
Bowtie Strategy
Strategy type:
getting onboard emerging trends
Time horizon:
daily chart
Setup:
major low (better all-time low), then SMA 10

and EMAs 20 and 30 converging, crossing, and
spreading out again within several days
Entry:
lower low and lower high (at least 1-bar

pullback), long above the high of the pullback
Stop-Loss:
below the low of the pullback
Take Profit:
optional partial take profit
Trailing-Stop:
optional partial trailing stop
Risk and Money

Management:
max. 2% risk per trade
Looking ahead
Now that established and emerging trends have been
discovered, the next article will look at the third phase
of trends, accelerating trends. We look at how to
recognise and get aboard these trends using the authors
Accelerating Momentum Strategy. Then, we will discuss
how to pick the best stocks and other markets to trade.
Without a plan and money management the best setups
in the world are useless. Therefore, we will discuss
money and position management in more detail. Without
the discipline to follow a plan, your trading results will be
random at best. So last, but certainly not least, we will
discuss trading psychology.
46
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BASICS
Murreys Mathematical System

Study of Support and resistance Based on Harmonic Patterns
The use of support and resistance is one of the most commonly used tools in technical
analysis, as it provides the investor with technical points before price touches them. Their use is
extended to determine market entry points but also to liquidate positions (target to be reached
or maximum amount of money to be lost). Most of the time, these levels are calculated by using
mathematical formulas enabling the generation of several levels based on past price evolution.
As examples for these formulas we have the Fibonacci sequence or the Gann angles. The
current article will be dedicated to one of these techniques, Murreys mathematical system.
Oscar Cuevas
Murreys Mathematics
Oscar Cuevas is a computer engineer and

provides online webinars on Expert Advisor
programming. He has also been a content
developer and trading strategies programmer in
Visual Chart for more than fi ve years.
The following system was developed by T. Henning Murrey
sistemas@visualchart.com
in his book Murrey Math Trading System for All Traded

Markets. This system is basically a method looking for
harmonic price patterns. Once one of these patterns is
found, a group of supports and resistances is generated in
relation to the figures most significant points.
48
BASICS
Lets start with an explanation of the pattern we
and lower value. This size must be specified at
are looking for: Murreys intention with his system is
the scale of the value obtained in point 2.
translating the study of musical rhythm to sequences
Step 4: Determining the base and height of the square.
analysis in the price. To do so, he generates a figure on the
Once we have the previous elements at our
price chart in order to represent the eight note succession
disposal, we will proceed to the calculation of the
in the musical scale (which is known as an octave).
base and height of the square. This process requires
The figure in question is a square divided in eight
a series of mathematical calculations and as their
parts of equal size so that the octave is represented.
explanation can be a bit boring, we will avoid this
The target of all this is to generate barriers in the price
explanation. For those, interested in the process, it
forecasting.
can be found in the programming algorithm.
In the following section, we are going to explain the

building up process of the harmonic square. Later on, we
Step 5: Dividing the square in octaves.

After having extracted the base and height of the
will explain how to interpret the price reaction on each
square, the following step will be dividing the
level (or note, following up with the symphonic similitude)
figure in eight parts of equal size with which we
and the consequences issued from this result.
will be able to represent the size of the octave.

The process is simple as it essentially consists
Construction of the Harmonic Square
of dividing the height into eight proportional
In this article you will find the algorithm developed for
segments.
the construction of the harmonic square in Visual Chart

5. Nevertheless, we are going to try to explain briefly
Once we have the lines forming the Murrey square,
the creation process of this figure. The sequence to be
we can draw them over the chart. In Figure 1 you can see
followed is described next:
how a 64 bar compression is represented.
Step 1: Locating the

extreme points.
In function of a certain
F1) The Harmonic Square in IBEX 35 Future 1-Minute Chart
period of bars to be studied,

we look for the higher and
lower price of this period.
Step 2: Determining

the corresponding fractal.
Once the highest point has

been found, we need to
find the position it occupies
inside the rhythmic scale
suggested by Murrey and
translate this value to the
corresponding point. The
scales list can be found in
the previously mentioned
programming code.
Step 3: Calculating the

displacing range.
The following step will be

calculating the displacing
range between the higher
In the chart above corresponding to the IBEX 35 futures chart in 1-minute compression, we saw a drawing of
a 64 period (8*8) harmonic square. For the pattern study the extreme values between the period A and B are
taken into account. The indicator calculates the base (around 10,640) and the height of the square, returning
a superior level around 10,720. Then, the square is divided in eight sections. After point B, the lines of the
square will be extended for 64 bars. These lines will finally be the visible ones when applying the indicator.
Source: Visual Chart
49
bASICS
If we take a closer look to the example, the square

has been calculated by using the higher and lower prices
The price contact with each of these points has a different

lesson as we will explain further on.
between points A and B. The indicator designed for Visual

Chart 5 runs a study starting up in point B back through
Analysis of Support and Resistance Levels in Murrey System
64 previous bars and draws the figure for this interval. In
As we have stated earlier on, the extension of the main
the chart of the IBEX future we notice the representations
lines of the harmonic square will be the most helpful
of the figure coloured in green. The square is crossed
element for our price behaviour study. Murrey provides
by a series of lines, following the specifications given
each of the lines with a different weight so that each line
by Murrey. As a consequence, a series of crossovers are
has higher or lower influence than the others.
formed and these crossovers are forming, according to
In Figure 2 you can see the lines Murrey Math applied
the author, the key points of the figure. These points will
to a 15-minute chart of the Euro Bund. This will help us in
be the source for the creation of supports and resistances
monitoring the price reaction on each of the levels.

Lets study the characteristics of each group:
to be studied.
This representation is merely artistic but it doesnt
help identifying the source of the different levels. In
Lines 0/8P and 8/8P
order to distinguish them from each other, each level
These two lines are the extreme levels of the square.
receives a name going from 8/8P to 0/8P, as we can
Both are support and resistance key levels and as a
see in the drawing. These levels will be drawn over the
consequence very difficult levels to overcome. Its
64 subsequent bars after the appearance of the harmonic
price auctions outside the square both levels will work
square so that it corresponds to the influence period.
in the opposite sense, in fact, line 0/8P will turn into a
After 64 new bars, we calculate a new square again,
strong resistance level and 8/8P a strong support level.
generating the following extreme values and repeat the

process again.
The result will be a sequence of levels being calculated
In Figure 2, these lines are drawn in red. Point C

and point I represent this situation. In point C, the
price touches several times the level 8/8P, and even

every 64 bars (or whichever period we estimate adequate).
though finally the level is broken,

its interest as a strong resistance
point is evident. The price reaction
in point I is even more interesting:
F2) Murrey Math Lines in Euro Bund Future 15-Minute Chart
price breaks out of the level, but

is attracted back two days later by
the strength of this support.
Lines 1/8P and 7/8P

These new lines are also quite

relevant.
the
price
They
most
are
studied
auctions
normally
levels.
If
above/below
these levels, it will probably

reach the levels 0/8P and 8/8P
respectively. However, if price
gets closer to them but does
not overcome them, a strong
In this chart corresponding to the Euro Bund Future continuous chart in 15 minutes compression, we can
see the Murrey lines projected on the price. The period of the study is 704 bars (88 * 8). Once the interval is
finished, the square is calculated again thus generations new support and resistance lines (points D and G).
The more relevant lines are wider. The levels in red (8/8P y 0/8P) are the stronger resistance barriers; this
circumstance is evident especially during April.
Source: Visual Chart
50
movement
direction

in
can
the
be
opposite
expected.
In Figure 2, these lines are

coloured
in
Green
and
are
wider. In point A we notice how
BASICS
The use of patterns is often seen in nature and is not

necessarily based in scientific hypotheses, but is instead related
to human behaviour, and is common in technical analysis.
price bounces by reaching the level 7/8P. Theoretically,
8/8P. A reversion movement is to be expected when
in order to have a rebound, this level should not be
price gets close to this level (providing the fact that
overcome, however, in this case it is. This fact leads
the movement has started in previously mentioned
us to think that a margin of error factor of X points is to
levels).
be used before developing the trading management.

However point G is a perfect example of a price
An example of the above situation occurs in
bounce after touching 7/8P. Point B and point F are
point E. After price fails from line 8/8P, a retracement
breakout examples deriving from a price extension
takes place when reaching the level 4/8P. It is interesting
towards lines 8/8P and 0/8P respectively. This can be
to observe that in the reversion movement, price stops
considered a proper level but we shall no forget the
again in the level 5/8P, movement that could have resume
error margin previously mentioned.
in to a bracketing market, if price had not bounce again
Lines 2/8P and 6/8P
in the lower extreme of the congestion zone (level 3/8P).
These levels are considered of less importance by the
However, the bearish movement is stronger and extends
author, even though price can change its direction
the range towards the lower extreme of the square (level
when reaching them. In Figure 2, these lines are grey
0/8P).
coloured but we have not considered them relevant.

However, if we take a closer look at the chart, price
Conclusions
reactions occur at these levels. An example can be
One of the most interesting aspects when analysing
studied at the beginning of April just after the turn-
the price reaction on the lines of the harmonic squares
around in point A.
is to take into account that the generation of the
Lines 3/8P and 5/8P
pattern is a consequence of the previous phase of the
The author describes these two points as the limits
price movement. However, we are reminded that the
in price bracketing movements. Therefore, we can
harmonic square is based on the study of the music
consider that, while price moves inside the channel
octave thus theoretically there should not be a direct
limits of these two levels, the underlying asset
relation between the generation of the model and its
is in a congestion zone (non-trending). Likewise,
consequence in market price movement. However, we
the breakout of this channel can involve a new
note that the use of patterns is often seen in nature and
distributions process. In Figure 2, these lines are
is not necessarily based in scientific hypotheses, but is
coloured in violet. In the example, the lateral
instead related to human behaviour, and is common in
movements are not significant and consequently
technical analysis.
price does not remain time enough inside this range.

An example of this could be found in May 20th, after
the reversion in points G.
Programming Code
Line 4/8P
This line also acquires special relevance as it is
Link to the programming code: www.tradersonline-
considered as in important resistance zone during the

distribution process started up in the zones 0/8P or
m a g . c o m / d o w n l o a d / e _ t r a 01 _ b a s i c s _ c u e v a s _
programmingcode.txt
51
bASICS
The Traders Technical Arsenal

Common Indicators in MetaTrader Part 11
This piece discusses the Standard Deviation and the Stochastic Oscillator, as both
work in MetaTrader, which continues to increase in popularity (especially version 4.0).
In most cases, the indicators default parameters are used.
Standard Deviation (StdDev)
smaller. The indicator is therefore used to determine the
Standard Deviation is an analytical tool that measures
gravity or vulnerability of an extant bias/trend.
the volatility of the price. It also measures the amount of
According to one source, this indicator is normally used
variability or dispersion around an average. What we call
as a constituent of other indicators, like Bollinger Bands.
dispersion is the actual value minus the average value.
Thus, when Bollinger Bands are calculated, the value of the
When the Standard Deviation becomes higher, it means
symbol standard deviation is added to its Moving Average.
the dispersion/variability is greater. When the Standard
Sometimes a particular trading instrument may be very
Deviation is lower, it means the dispersion/variability is
active or it may be very inactive. This fact is reflected
52
BASICS
Resisting temptation to trade irrationally trains us to deal

with tougher market situations we might face in the future.
when the value of the indicator is low: It shows that the
the default colour of MediumSeaGreen). The default
instrument is inactive (in an equilibrium phase). We may
parameters are period 20 and Simple Moving Average.
want to stay away from the market when the indicator
You can see how the indicator responds to changes in the
appears flat (and pay attention to the market when the
price actions. When the market is inactive, the indicator
indicator rises), since a flat market does not make sense to
appears almost flat, moving sideways. When the market is
the trend follower. The household mouse is of no value to
active, the indicator slopes upwards whether the dominant
the professional hunter. The trend follower can then look
activity is bullish or bearish. An increase in the market
forward to the time when there would be an increase in the
activity is noticed as soon as the indicator rises an action
market activity (when there would be a breakout). When
that has immediate effect on open positions. A dry plank is
the value of the indicator is high, it shows that the market
affected by the fire as soon as it is exposed to it.
is currently active, but it could enter an inactive phase very

soon. This is one way of using the indicator.
The Standard Deviation is best used with another good

indicator, for example the Moving Average Convergence
Divergence (MACD). The MACD confirms a trend and also
Computation:
shows when a trend changes; therefore more dependable
StdDev (i) = SQRT (AMOUNT (j = i - N, i) / N)
signals can be generated when it is combined with the

Standard Deviation. This helps us resist the temptation to
AMOUNT (j = i - N, i) = SUM ((ApPRICE (j) - MA (ApPRICE
trade irrationally. Resisting temptation to trade irrationally
(i), N, i)) ^ 2)
trains us to deal with tougher market situations we might

face in the future. The MACD signifies a bearish bias
Whereas:
when the signal line and the histogram are below the zero
StdDev (i): Standard Deviation of the current bar
line; it signifies a bullish bias when the signal line and the
SQRT: square root
histogram are above the zero line. It should be borne in
AMOUNT(j = i - N, i): sum of squares

from j = i - N to i
N: smoothing period
F1) The Standard Deviation in AUD/CAD
ApPRICE (j): the applied price of the

j-th bar
MA (ApPRICE (i), N, i): any moving
average of the current bar for N
periods
ApPRICE (i): the applied price of the
current bar
Changes in the market volatility
would be reflected in the Standard
Deviation, for a current trend would
be very strong when the value of
the indicator is high. In Figure 1,
the Standard Deviation is placed
in the AUD/CAD 4-hour chart (with
The StdDev is placed in the AUD/CAD 4-hour chart (with the default colour of MediumSeaGreen). The default
parameters are period 20 and Simple Moving Average. You can see how the indicator responds to changes in
the price actions. When the market is inactive, the indicator appears almost flat, moving sideways. When the
market is active, the indicator slopes upwards whether the dominant activity is bullish or bearish.
Source: www.metaquotes.net
53
bASICS
instrument to its price range over a
F2) StdDev and the MACD in GBP/JPY
given time period. The greater the

number of periods calculated by
the indicator, the slower its reaction
to changes in the price. In a strong
bull market, a trading instrument
reaches higher highs and lower
highs, and so is the Stochastic
Oscillator. In a strong bear market,
a trading instrument reaches lower
lows and lower highs, and so is the
Stochastic Oscillator.
We see the combination of the MACD with the Standard Deviation in the GBP/JPY hourly chart, plus how they
work together to generate dependable bearish and bullish signals.
This
indicator
can
help
us
pinpoint where a strong bias might

thin out or end, and this is done as it
shows an overbought or an oversold
situation in the market. When the
price is seriously oversold, some
mind that when the Standard Deviation rises seriously, it
fearful bears may panic and quickly truncate their
can mean two things. It can mean the resumption of the
positions at early signs of rallies. When the quail hears
extant dominant bias or a coming change in the dominant
the voice of the farmer, it slinks away in panic. There
bias. In Figure 2, we see the combination of the MACD
are two lines in the Stochastic which act like the MACD
with the Standard Deviation in the GBP/JPY hourly chart,
signal lines one is faster and the other is slower. The
plus how they work together to generate dependable
faster line crosses the slower line up or down now and
bearish and bullish signals.
then.
In Figure 3, you can see how the Stochastic Oscillator
Stochastic Oscillator
looks like in the daily chart of Gold. The default parameters
The Stochastic Oscillator is an analytical tool which
are 5,3,3 (%K period = 5, %D period = 3, Slowing = 3), with
compares a closing price of a particular trading
Simple Moving Average in it, and Low/High as price field.

The indicator lines can be changed to
your preferred colours. The indicator
is scaled from zero to 100. The default
F3) The Stochastic Oscillator in Gold
levels are 80 and 20. The market is

considered overbought when the
price goes above the level 80 and the
market is considered oversold when
the price goes below the level 20.
Above the level 80 or below the level
20, there is a possibility of a trend
reversal or a significant pullback.
Computation:
You can see how the Stochastic Oscillator looks like in Gold daily chart. The indicator lines can be changed to
your preferred colours. It is scaled from zero to 100. The default levels are 80 and 20. The market is considered
overbought when the price goes above the level 80 and the market is considered oversold when the price goes
below the level 20.
54
%K = 100[(C - L14) / (H14 - L14)]

C: the most recent closing price
L14: the low of the 14 previous
trading sessions
BASICS
H14: the highest price traded during
F4) The Stochastic Oscillator Period 20 in gold
the same 14-day period

%D: 3-period moving average of %K
Other Uses for

the Stochastic Oscillator
Overbought
and
oversold
signals are more dependable in

consolidating
trending
markets
markets.
than
Apart
in
from
overbought and oversold readings,

there are many other ways to use
the Stochastic Oscillator. Some may
use the Stochastic Oscillator 5,3,3
to
confirm
conspicuous
bearish
The more the number of periods calculated by the Stochastic Oscillator, the slower its reaction to changes in
the price. Nevertheless, this can filter out some bogus signals, causing fewer but better trading possibilities.
This is shown in the same Gold daily chart. This time around the readings/signals of the indicator are quite
different but the signals generated come with improved hit rate.
and bullish biases, and follow the

trend rather than going against it.
This is because a highly trending
trading instrument may be in an overbought or oversold
when deliberately holding long positions when the
condition for a long time, causing the mean reversion
markets are weak? You do not deliberately jump into the
trader to get kicked in the butt.
river and then complain of coldness. There other rational
As mentioned earlier, the more the number of periods

calculated by the Stochastic Oscillator, the slower its
uses for this wonderful indicator, especially when it is

combined with another indicator.
reaction to changes in the price. Nevertheless, this can

filter out some bogus signals, causing fewer but better
Conclusion
trading opportunities, as effort to make consistent profits
The fact is, success in the markets is within the grasp of
with numerous signals that have a low hit rate could be
everyone but it requires effort. When we make effort to
a Sisyphean experience. This is shown in the same Gold
understand how a particular indicator works in different
daily chart (let us check Figure 4). Here, the number of
market conditions, we would find it easier to interpret
periods has been increased to 20. This time around the
those market conditions and make logical decisions that
readings/signals of the indicator are quite different but
would have positive impact on our portfolios. The more
the signals generated come with an improved hit rate.
the markets become challenging, the more progress we
Towards the end of October 2013, the Stochastic period
make. The challenges that increase are the catalyst that
20 became overbought by going above the level 80.
makes us enjoy more success as traders. We are happy
When bearish candles started forming, it was evident
to be devoted to the markets. The next article in this
that some were still willing to purchase Gold at that level
series will discuss Volumes and Williams Percentage
and it would be wise to sell it to them. There was a nice
Range.
bearish run following that. Ironically, Gold is best sold to

the one who appreciates its value.
In another example, traders who like to follow the
lines of least resistance may also want to set the level of
the Stochastic to 50 only (with period 20), just like some
do with the Relative Strength Index (RSI). They are bullish
only when the Stochastic lines are above the level 50; and
vice versa. When the Stochastic is below the level 50,
they do not want to hold any long positions because that
Azeez Mustapha
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.
azeez.mustafa@analytics.instaforex.com
would come with certain consequences. Why complain
55
bASICS
Trader Mind
Embrace Your Emotions Part 1
Emotions! How many times have traders been told that emotions are bad, emotions get in the
way of trading, successful traders are less emotional. Yet Steve Ward explains how emotions
are essential to the decision making process and how they keep our brains focused on critical
information. Emotional factors in decision making can serve a purpose. In classic Steve Ward
fashion he grounds his guidance in solid neuroscientific research explanation. (Linda Raschke,
President at LBR Group Inc, CTA, from the foreword to TraderMind, November 2014)
Can You Help Me Trade Without Emotion?
can feel hungry and yet not eat anything. You can have
We work with a lot of traders in one-to-one coaching and
a sense of fear and yet still enter the market, or a feeling
workshops and one repeating request that we encounter
of anxiety when in the market, and still stay in a trade.
is Can you help me to trade without emotion? In a
Emotions bring an urge for action but we do not have
recent online seminar 79 per cent of attendees indicated
to take that action. It is possible, with practise, through
that they would like to be able to trade without emotion.
developing emotional awareness, and learning how to
Is this the same for you? Would you also like to be able to
regulate more extreme emotions, combined with some
trade without emotion?
commitment to your strategy, to feel an emotion and to
No trader has ever lost or made money solely based
not have to act upon it.
on emotion it takes action to pull the trigger. The

feeling of an emotion and the taking of an action are
The Neuroscience of Emotion
separate events and it is possible to feel a feeling and act
Neuroscience research over recent years has resulted in
differently. You can feel tired and yet get out of bed. You
some big shifts in thinking on the role that emotions play
56
BASICS
in decision making and these shifts
F1) The Information Processing Pathway In The Brain
have implications for you as a trader.

Emotions have evolved as ways
for your brain to make sense of the
world around you, they keep your
brain focused on critical information,
and enable you to act on that
information, to gain what you desire
and avoid what you fear. You need an
emotional factor in decision making
to appreciate the possible outcomes
of a decision. Most real life decisions
cannot be based entirely on logic
as the information that you have is
The image shows how your brain processes information. And not only is emotion a key part of this process,
it is the first part of it.
Source: TraderMind
usually incomplete or ambiguous,

and that is certainly true in the
markets. George Soros has stated
that he relied on his emotions a lot in his investment
Figure 1 shows how your brain processes information,
process because of the inadequacy of knowledge in the
and not only is emotion a key part of this process, it is the
markets.
first part of it. You are feeling, before you are thinking.
Preview
of the next Issue
COVERSTORY
PEOPLE
Mind Fitness Training for Traders
Interview: Mark Mobius
Having a good trading method and the mechanical skills and
Mark Mobius, Ph.D., is executive chairman of the
knowledge alone are not enough to be a successful trader.
Templeton Emerging Markets Group. Dr. Mobius has
Dealing with the uncertainty, novelty and change in the markets,
been investing in global emerging markets for more
and coping with the emotional highs and lows of winning and
than 40 years. He has received numerous industry
losing requires a strong psychology mind fitness. In our cover
awards, and written several books. Next issue, we
story, Steve Ward will discuss how traders can achieve this.
will discuss his take on investing.
The February/March issue of TrADErS will be published on 20th February 2015.

57
bASICS
References
1. Emotions are essential to the decision process
(1) Descartes Error, Antonio Damasio, Vintage, 2006
2. Emotions are data they provide messages about
(2) Seo, Myeong-Gu and Barrett, Lisa Feldman. Being

Emotional During Decision Making Good or Bad?
your experience
3. Emotions cannot be controlled but they can be
regulated/managed
An Empirical Investigation, PubMed Central 50, no4

(2007): 923-940
(3) Peffer, Gilbert and Fenton-OCreevy, Mark (2012). xDelia
Final Report: Emotion-Centred Financial Decision
Making and Learning. Open University, CIMNE, Milton
Keynes UK
(4) Emotional Intelligence 2.0, Travis Bradberry and Jean
Greaves, TalentSmart, 2009
(5) Mindfulness: A Practical Guide To Finding Peace In A
Frantic World Mark Williams, Piatkus Books, 2011
Because emotion is a key, and actually useful,

component of your decision process your goal in trading
should therefore, not be to trade without emotion as that,
even if it were possible, would actually compromise the
effectiveness of your decisions. Rather we would suggest
that the goal is to work with your emotions, to be more in
tune with them, to improve your ability to coordinate and
refine your thinking and feeling processes to enhance
your decision making (2).
Emotional Awareness
Emotions help you to decipher whether something is a
The first step towards being able to work with your
risk to be managed (fear) or an opportunity to be taken
emotions and manage them more effectively is to develop
advantage of (excitement) and that is very useful in
a greater awareness of them, to start to notice them.
trading. Knowledge communicated via emotions either
Research with traders suggests that the focus on emotions
explicitly or implicitly enables you to make fast and
in trading should be the development of greater self-
efficient decisions.
awareness of emotional states not the elimination of them

(3). According to Dr Travis Bradberry only 36 per cent of
The New Emotions and Trading Paradigm
people, who he studied in his research on self-awareness,
From the relevant neuroscience research three key
were able to accurately identify their emotions as they
guiding principles emerge that we believe are important
happened. For the other two thirds of people this lack of
for you to understand and act upon, if they are to enhance
emotional awareness, who are less skilled at recognising
their decision making and performance;
their emotions in real time, means that they are far more
likely to be driven and controlled by their emotions (4).
How about you? How is your emotional awareness?
F2) What Makes An Emotion?
A simple first step towards developing your emotional

awareness could be to start Checking In, at times
through the day.
Emotions can be seen as having four components
as shown in Figure 2 (5). There is an inter-play between
thoughts, feelings, impulses and physical response that
he suggests create your emotional experience. One way
of developing your emotional awareness is to periodically
stop and start to notice, pay attention to the elements of
your emotional experience, ask yourself;
There is an inter-play between thoughts, feelings, impulses and physical

response that he suggests create your emotional experience.
Source: Mark Williams, Mindfulness: A Practical Guide To Finding Peace In A Frantic World, 2011
58
What thoughts am I noticing?
What feelings are present?
What impulses am I aware of?
What physical responses do I have?

You could also develop your awareness based upon
the emotions as data idea in a very simple three step

process:
BASICS
1.
What am I feeling right now in this moment?
Body Scan
2.
What is the message/data behind the feeling?
3.
What effective action should I take?
Lie down on your back, making yourself comfortable.
Another way to develop your emotional awareness

could be throughout the day keep a running record of
whatever emotions you notice, writing them down,
creating a ticker tape of emotional data. Alternatively,
you can just start to notice your emotions in the
moment, naming them as you experience them, a
process known as affect labelling, and as you will see
in part 2 of this series is a very effective emotional
regulation strategy.
If you want to gain a deeper emotional awareness
then the mindfulness body scan practise is a great
way of doing so. This practise has multiple benefits for
traders. Firstly the mere act of practising is creating the
metacognitive, awareness and attention, capabilities
for you to be able to regulate your emotions more
effectively. Secondly, through repeating the practise
you are developing changes to your brains function
and structure for example to your amygdala (the
emotional radar) that will impact how you process
emotions, reducing your emotional reactivity. Thirdly,
with the focus of this practise on the body you are
developing your interceptive ability, the ability of your
brain to be aware of your internal physical signals. A
high level of interoceptive ability has been linked
to the ability to regulate emotions awareness first,
regulation second.
Close your eyes, if you feel comfortable doing so. (NB

some people may prefer, or find it more comfortable
doing the practise sitting down that is perfectly OK)
Take a few moments to bring your attention to the physical
sensations in your body, noticing the points of contact
between your body and whatever you are lying on.
Remind yourself of the intention behind the practise, to
develop an awareness of your experience, without any
need to change it. To notice all the sensations within your
body as you scan through it.
Start by bringing an awareness to your breath, and to
the sensations in your abdomen. Becoming aware of the
changing patterns in your breathing as you breathe.
Imagine a spotlight of attention, and bring this to your
feet and toes, noticing sensations present there, and
investigating them with a sense of curiosity.
Now bring this attention to your legs, then abdomen, lower
back, chest, upper back, arms, hands, shoulders, neck
and face. Each time spending 20 to 30 seconds noticing
any sensations that are there, exploring and investigating
without having to actively look for any sensations.
If you become aware of any tension in the body, see how
it is if you breathe into them.
As with all mindfulness practises, if at any time you
notice your mind wanders, simply acknowledge where it
has wandered to, and then gently return it back to the part
of the body you intended to focus on.
Since I have been working on the mindfulness

exercises one thing I have noticed is a reduction in my
be fearful when others are greedy, and greedy when
emotional swings. Equities Trader, London
others are fearful states Warren Buffet, and Mark Cook,

interviewed in Stock Market Wizards talks about how
Developing emotional awareness is the first step
he uses his own fear to know when the right time to buy
towards embracing emotions. It is also a precursor to
is. He figures that if he is feeling scared, then most of
being able to regulate them which becomes important
the market probably is too. Being in tune with your own
as emotions move towards the extremes although
emotions can put you in tune with the market, and enable
interestingly, awareness alone actually acts as a regulator
you to get an edge from it.
helping you to reduce the impact of more extreme and

intense emotions on your trading decisions, reducing the
number of bad trades you make, and then subsequent
spirals that can occur as you seek to correct them and
recover losses.
Emotional Awareness and Market Sentiment

Developing your own emotional awareness can also
help you to get a greater awareness of the emotions,
Steve Ward
Steve is one of the worlds leading experts in
trading performance and psychology, having
spent the last 10 years working with traders
and fund managers in banks, funds, energy
companies and proprietary trading groups across
the globe.
www.highperformanceglobal.com
the sentiment, of the market. We simply attempt to
59
People
Hometown: Charlotte, NC
Interests: How things work everything
Trading Style: Day and short term swing
Website: www.thetradingbook.com
The Pros Process

Part 25: Anne-Marie Baiynd
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.
Chignell: How long have you been trading?
react the same way if I cannot find anything significant
Baiynd: This September makes it nine years.
to nullify why I entered the trade, I will continue to stay

in the trade.
Chignell: What style of trading/investing do you

practice (technically driven, fundamental, systematic, a
combination)?
Chignell: How have these feelings changed over your

trading career?
Baiynd: Technically driven with some attention to
Baiynd: I was a very emotional trader who thought she
fundamental performance.
was not emotional at all. The worst kind of trader selfdeceived makes for a lot of losses. When I figured out
Chignell: How do you feel when a trade goes against you?
who I thought I was and who I really was, the road to
Baiynd: Truthfully, I am always a little anxious when a
success began. But not before I had lost a great deal of
trade goes against me for any period of time say more
money. It was a slow process for me, but I never gave up.
than a week or so. I begin to immediately look for reasons
Chignell: How do you feel when a trade goes for you?
Chignell: Do you have any practices that you do away from

the trading screen to help you mentally and emotionally
handle trading?
Baiynd: What can I say, I live in a heightened sense of
Baiynd: I try to disconnect completely from my screens
awareness, if I am engaged in the market in any form or
when I am away. Whether it is at the end of the day
fashion. I constantly look for reasons I might be wrong. I
or when I take time away. I spend so much time in a
that I might be wrong. If I cannot find anything significant,

I will sit on my hands.
60
People
When I figured out who I

thought I was and who I really was,
the road to success began.
heightened sense of awareness, that I exhaust myself at
that we are wired to wait until the last minute, and that
the end of the day, and in order to replenish and be sharp
we cant stand being wrong so we must re-engineer our
the following day or week, I must disconnect.
minds to manage those facts.
Chignell: Have you always done this?
We would like to thank Anne-Marie Baiynd for sharing about
Baiynd: Definitely not. I learned that less is more when
the way she tackles the market from an emotional/mental
I believed that more is better. I burned myself out and
side of things and for her willingness to allow us to post this as
got very sick from 20 hour days, and thinking about
a free resource in the hope that traders who have been in the
the market through interrupted sleep for the remaining
market for less time or are thinking of entering can perhaps
four hours. My body finally told me it was time to create
pick up some A-HAs.

If you are interested in finding more out about Anne-Marie
balance or I was not going to be able to enjoy retirement.
Baiynd, you can find her:
Chignell: If not, how have you learnt to deal with the

feelings that come up when trading?
Twitter: @AnneMarieTrades
Baiynd: Feelings are real and must be managed; if they
Blog / site: http://www.thetradingbook.com
are suppressed, they rise up in the worst places. I learn

to listen to my centre. The solar plexus and lower back
are spaces that I feel a lot of physical tension, so I work
through mentally why I might be feeling that building in
myself. If I realize it is a feeling coming from fear or worry,
I immediately stop what I am doing and begin to triage
the event. I know that sounds antiseptic, but it really isnt.
It is about learning to understand myself, and why I feel a
certain way. Usually, if my gut begins to tell me that I am
wrong, I usually am, so I have learned to listen to my core.
Chignell: Can you describe a time in your trading life which

really rammed home the point that so much of trading
comes down to psychological factors?
Baiynd: When I became technically proficient but still
could not stay green week over week, I knew I was
missing the really important part. It is not about the
knowledge base, but the execution events that make or
break the trader. And execution, consistent execution
over time, cannot continue, if personal and psychological
management are not made paramount.
Chignell: If you could give aspiring traders one piece of advice

about emotionally handling the market, what would it be?
Baiynd: Dont be afraid of your emotions. Dont stifle
them. That doesnt work. Our success is not about how
much knowledge we have, but how we make decisions
when our senses are heightened by fear or anxiety.
Realize that we are wired to take risks in the wrong places;
Anne-Marie Baiynd
Anne-Marie Baiynd, president and CEO of TheTradingBook.
com, focuses her successful trading system around use
of support and resistance and wave patterns recognition
in the market. Her trading systems combine the proper
use of simple indicators to create highly effective models,
even in volatile markets. Ms. Baiynd began her career as a
neuroscience researcher, and has been a corporate speaker
and trainer, VP of sales, and CEO of a recruiting firm. She
was introduced to technical trading in 2005 and began
trading full-time soon after. Presently, Ms. Baiynd divides her
time between being an active trader, developing automated
trading systems for grey and black box environments, and
mentoring traders through rigorous training programs with
small group and one-on-one instruction. She speaks to
and advises proprietary traders, portfolio managers, and
hedge fund managers. Ms. Baiynds daily routine includes
the management of a premium educational blog for day
and swing traders through TheTradingBook.com, which is
focused on the application of her high probability trading
strategies. Her books, The Trading Book, and its companion
workbook, The Trading Book Workbook, provide a simple and
successful solution based on the mastery of a few technical
indicators. Ms. Baiynd has a BA in applied mathematics and
her Masters work includes statistics, biostatistics, and
behavioral studies.
61
PEOPLE
Jens rabe
My Way to Successful Options Trading
In TRADERS 10/2014, we published a cover story

about options trading written by Jens Rabe of
optionsstrategien.com. Today, we will present an
interview with him that, among other things, is all
about how he managed to make the leap from a trained
insurance specialist to a professional options writer. He
will also show us a few instructive trades.
TRADERS: When did you first come into
contact with the stock market?

Rabe: That was in the mid-1990s and originated
from a mix of interest and boredom.
TRADERS: Boredom?
Rabe: Well, at the time I was doing my national service in
the German army, completing basic training. During one
of the weekends in the barracks when I had nothing to do,
I was leafing through some books on the stock market
and immediately got the bug. It was the time when the
new market evolved and an enthusiasm for stocks was
palpable in Germany. So I was still in the army when I
made my first trade.
TRADERS: Do you remember how you did on this trade?

Rabe: Yes, I do. It was a warrant on the German mark
against the US dollar and a tip in a magazine caused me
to enter. After a few weeks, my position was 70 or 80 per
cent profitable and I exited the trade.
62
PEOPLE
TRADERS: A good winning trade

right at the start
how did that make you feel?
F1) Where Is the Market NOT Going?
Rabe: Very good, of course. And

like any raw beginner, I instinctively
started
to
do
the
maths
and
concluded that I was going to be rich

before long: If you can make 80 per
cent in just a few weeks, then that
will be in a year, and so on. I am
sure you know what I mean.
TRADERS: Yes, that is sort of the

norm, but is also very dangerous, of
course. However, we assume that you
didnt quit your day job right away
actually, what were you doing after
basic training?
Rabe: I was selling insurance and
basically, everything was going quite
well in this job. But I also did quite
As an option seller, I ask myself where the market is not likely to go. After the DAX has broken downwards
through the 8900-point mark, the market is unlikely to rise above the break-off edge at 9400 points in the
coming weeks. Accordingly, you could write call options quoted out of the money with strike prices in this
area. If volatility falls, a profit can be achieved that way with the DAX price unchanged.
well with my trading. After all, it was

the time of the New Market and I
made quite a lot of money up to the
year 2000 at least by my own standards at the time. In
In the wake of sharply rising prices and margins, I then
2001, though, I lost everything again, the classic story of
felt that some contracts were getting too expensive in
that time, so to speak.
the years 2004 and 2005, which meant that I was no

longer able to implement my risk management the way
TRADERS: How did you cope with that?
I wanted to. So I moved on to trading futures spreads
Rabe: Well, accepting such losses wasnt easy. At

first
thought, of
course,
that
the stocks were to blame for my

loss, but obviously that isnt true.
F2) Selling a gold Call in a Downtrend
Nevertheless, I first kept looking

for other instruments. Eventually,
I came to know someone whose
advice was to trade commodities.
The key point that fascinated me was
that a commodity cannot ever fall
to zero, as is possible with equities
since commodities are always worth
something.
TRADERS: When was this and how

did you do initially in your commodity
trading?
Rabe: In 2002, I started to trade
commodity futures on an endof-day basis, and basically made
money on that from the beginning.
On 17th September 2014 (first vertical blue marker), a call was sold with a strike of 1335 (red horizontal marker) at
a then-current gold price of around 1235 USD/ounce. The price of gold fell further in the next few days and was
able to be bought back as early as 13 trading days later i.e. far ahead of its expiry date, 24th Nov 2014 (second
vertical blue marker) at a minimal residual value.
Source: www.TradeNavigator.com, www.optionsstrategien.com
63
People
The most important thing was to

experience the peripherals the mood on
the floor, the behaviour of share prices.
and just a little later to trading options and I have stayed
TRADERS: What did you learn there?
with the latter to this day.
Rabe: First, of course, all the basics, and then the

trading techniques. But that was not the decisive factor
TRADERS: Did you teach yourself how to do all these

things?
in my view. Rather, the most important thing was to
Rabe: No, not quite. At some important key points,
behaviour of share prices; why they go up or down and
other traders have helped me a lot to develop a proper
when institutional investors buy or sell. You were able to
understanding. For example, I had a mate who was a
actually tell whether it was an uptrend or a downtrend
market maker on Eurex. He explained to me in a simple
day without looking at the price. All this made it possible
and intelligible manner how all these things worked, and I
for me to gain a completely new perspective on the
ended up being really fascinated by futures trading. Later,
markets and on how everything works. Each trader had
I once joined my friend and fellow-trader Michael Voigt
different strategies, which was incredibly exciting. While
on the trading floor in Chicago where I got to know a few
some made 300 trades a day, there were also traders who
traders. I promptly asked, if it was possible to learn the
only executed one trade a week. And every one of them
trading techniques there and thats how I came to spend
knew exactly what he was doing. That was exactly what
many a week in Chicago in the years 2006-2008 in order
I wanted to do!
experience the peripherals the mood on the floor, the
to complete my training there.
TRADERS: Alongside your trading,

you continued to work for the
insurance company. When did you
take the plunge to become a full-time
trader?
F3) Selling a Coffee Call in a New Downtrend
Rabe: That was in 2007. My plan was

to allow myself one year to become
successful. My motto was: Either
Ill make it or I wont. I sold my
Porsche and switched to a small car.
Also, I rented an office from the very
beginning so as not to trade from
the kitchen table at home but do a
truly serious and professional job
with clear strategies just the way I do
to this day.
On 20th August 2014 (first vertical blue marker) a call was sold with a strike of 270 (red horizontal marker)
at a coffee price of then 185. The options remaining time to maturity at this point was still more than eleven
weeks. As early as 27th August 2014, i.e. only six trading days later, however, the trend again seemed to turn
upwards so that the trade was smoothed with a small loss for reasons of risk provisioning.
64
TRADERS: This bold step ultimately

enabled you to achieve what so
many dream of long term success
in trading. So the next question is an
People
the market. It may quickly rise when
F4) Further Performance of Coffee Future
markets collapse and panic reigns,

but usually it will revert to its long
term mean value faster than many
had believed during the collapse.
And since volatility influences the
price of an option significantly, you
can, in the event of high volatility,
collect
correspondingly
high
premium as a writer which, when

there is a decrease in volatility, will
be lower again. The same applies
to fast rising prices since, unlike
the situation in stocks, things may
Prices continued to rise after the end of the trade (see Figure 3) for another few days only to drop sharply and
form new highs once again in October. Even if the option is highly likely to expire worthless on the expiry date,
it was good to end the trade prematurely since this would have become necessary later at a much higher loss.
get volatile in both directions in the

commodity markets.
TRADERS: Do you have an example to

illustrate this mechanism?
Rabe: Yes, but lets stay with stocks.
When markets fall as they did, for
obvious one: Which strategy did you use or are you still
using to achieve that?
example, in mid-October (Figure 1), I dont ask myself
Rabe: The most important thing is that you have some
the opposite question where is the market not likely to
sort of advantage over the other market participants.
go? This question tends to be easier to answer.
how far down they are likely to go. Instead, I ask myself
In my case, it is a statistical advantage. As a seller of
To stay with the example in Figure 1: After the market
options, also known as a writer, my advantage is that
has broken downwards through the support at 8900
many of these contracts ultimately expire worthless.
points, there are not likely to be any new all-time highs
When that happens, I can post the option premium
anytime soon. However, this level is too far away to write
initially collected as a profit. What benefits us here is the
options since the premiums to be collected are minimal.
effect that volatility always reverts to its mean value in
However, the market is also unlikely to go above 9400
Key Terms
Call: Option on Rising Prices.
Covered Call: Option strategy, where an investor holds an underlying asset (for example share) and additionally, sells a call
on it (writing an option). This causes additional premiums to be collected from the sale of an option. At the same time,
the maximum return is limited since the value of the entire construct will not increase any more, if on the exercise date the
underlying is above the strike price of the option sold.
Futures Spreads: With a futures spread the trader buys and sells one futures contract each and participates in the development
of the price difference between these two contracts.
Greeks: Sensitivity Ratios for Options. You indicate the change in the option price with respect to the change in risk factors.
Examples: sensitivity to underlying price (Delta), volatility (Vega), remaining time to maturity (Theta).
Put: Option on Falling Prices.
Weekly Option: Weekly options are usually listed on a Thursday and have a maximum life span of up to five weeks. The
only time that no weekly options are placed is always the week with a normal expiry day on which the standard options
expire anyway. During a trading month, there is now instead of the previous one original maturity of an option, an expiry date
of a series of options on every Friday. Except for the short original maturity, weekly options now have the same features as
conventional puts and calls.
66
People
points in the next three to four weeks. Accordingly, I could
real advantage in the market. Both approaches are rarely
therefore write call options with strike prices in this range
successful in the long term.
that were clearly quoted out of the money according to

the time of analysis (10th October 2014). When I write a
TRADERS: Do you also trade weekly options?
call option, I will get the option premium and may post
Rabe: Yes, that is something that really complements my
it completely as a profit if the DAX is not quoted above
strategy. When you use weekly options, you are closer to
9400 points at maturity. During the original maturity, I
the market since the original maturity is so much shorter,
will also benefit when volatility falls. That way, I can even
you can manage things more actively and benefit more
make a profit with a DAX price unchanged.
from time decay. This means that weekly options are

definitely an interesting tool for option traders.
TRADERS: What are the advantages of an option writers

strategy over other trading strategies?
TRADERS: What does your risk management look like?
Rabe: My view is that option-writer strategies make it
Rabe: The main problem for the writer of options is that
easier to let profits run. Anyone who is familiar with risks
the potential risk of loss is nearly unlimited. So generally
and has really understood trading knows how to limit
speaking, I usually exit, if my position sustains a loss of
losses but letting profits really run is a fine art. When
100 per cent and hence the premium of the option has
selling options, profit per trade is limited from the start,
doubled. I sometimes use charting with weekly options,
so I can fully concentrate on controlling losses. Not for
but with longer-dated options these levels are not
nothing is the hit rate for writer transactions much higher
accurate enough due to the other determining factors like
than for other trades, which also makes the approach
volatility and original maturity. As a result, I rather use
easier psychologically.
fixed values such as the aforementioned 100 per cent as

a stop-loss.
TRADERS: What markets do you trade?

so basically, options on stock indices, liquid individual
TRADERS: What does your trading look like in a portfolio

context?
stocks and on all major futures as well as on ETFs. I place
Rabe: At any moment in time, the option trading
almost all my trades on the US markets.
software I use makes sure that I know my overall risk
Rabe: I trade everything on which there are liquid options
TRADERS: Do you use other

strategies besides pure writer
transactions?
F5) Selling a Call on AUD/USD
Rabe: I have four to five strategies

that I use depending on the market
environment. The most important
thing is to really use any strategy only
when the time happens to be right
for it. For example, you should only
trade covered calls in bull markets
and short puts at the beginning of
a bull market or during the extreme
phase of a crash.
Other
strategies
include
strangles, calendar spreads, and

earnings trading. I think that too
many traders make the mistake of
being tied to only one strategy or
one underlying. Most of the time
this means that they will either be
incapable of taking any action or will
constantly be trading without any
On 24th September 2014 (first vertical blue marker), call options with a strike of 0.925 (red horizontal marker)
were sold at a then-current AUD price of 0.8835, following a strong downtrend on a correction day. The sharp
price drop had caused volatility to rise strongly so that a declining volatility could be expected in the event
of a weakening trend or an end of the trend. Prices fell initially for another few days, but then went into a
sideways trend. Due to the declining volatility and the time-value loss, options could be bought back as early
as 23 trading days later at the targeted profit of 80 per cent of the option premium, although the original idea
of further falling prices had not materialised.
67
People
You get a unique perspective on the economy

and society and you see the big picture.
for all the positions in the market. I track my exposure
position with a huge loss. On Tuesday, share prices were
for the entire portfolio, which may include ten to
falling ...
50 positions, via the classical indices, the so-called

Greeks.
TRADERS: Whats your daily routine like?

Rabe: In general, my working day is from 7.30 am to
TRADERS: If you could choose a market environment that

you like best, what would it be?
6 pm, but I dont work non-stop. First, I go through
Rabe: Clearly, the time immediately after a crash. Then
from the previous evening, write down any necessary
the option premiums are at their highest and begin to
adjustments that may be needed and think about new
fall for some time to come. This was the situation at the
trades or trading ideas that might happen to make sense.
beginning of 2009, and it turned out to be my best trading
Then I either do some sports or read books or articles.
year so far. But 2008, the year of the crash itself, was also
When the US stock markets open in the afternoon, Ill
a very good year, since there were also instances of high
enter my orders. Basically, though, something new
volatility in the market and hence a perfect environment
happens every day in one way or another, so its never
for option sellers.
boring.
TRADERS: Where do you see any disadvantages in your

option-writer trading approach?
TRADERS: Finally, can you let us know what fascinates you

most about the stock market?
Rabe: Actually, this is no real disadvantage, but it is safe
Rabe: Sure. As a trader you get to know what happens in
to say that it is hardly possible to make a lot of money fast
the markets and in the world and what events have what
by using this strategy. After all, the maximum profit an
impact. You get a unique perspective on the economy
option seller can make is always limited to the premium.
and society and you see the big picture. Obviously,
And thats why you never remember your winning trades
trading itself is also fun, but to me it is still only a means
but invariably only the losses that may be much higher
to an end its purpose is to make money, and it is not
sometimes.
there for the fun of it. Alongside my trading, I built up a
my checklists, check my positions and any changes
company in recent years that advises other companies
TRADERS: Can you give us an example of a large losing

trade you remember?
on issues of security and also trains interested clients to
Rabe: Yes, of course. A stark example was a wheat short
interesting people and create new enthusiasm for the
call back in 2007, if my memory serves me right. The
subject. And I have the impression that that makes me a
market was up, so I traded counter-cyclically, which, of
better and, above all, more reflective trader. Otherwise,
course, was stupid. After my position had been opened,
though, my life does not always revolve around work
the price kept going up and I started the weekend with
and the markets, since I also want to spend time with my
a large accounting loss. On Saturday and Sunday I was
wife and our three children. Trading is one of the best
extremely nervous, all the time checking the weather and
jobs in the world provided you dont make yourself a
precipitation outlook since prices at that time had gone
slave to the markets.
be professional traders. That way, you also get to know
up because of a persistent drought. Unfortunately, there

hadnt been any rain until Monday and I closed out the
68
The interview was conducted by Marko Graenitz.
MArkET rAP
Is Trading a lonely Experience?

TrADErS Cup Winners tell you
that is mostly a Team Affair...
It is easier to make money if you start with a good mentor: but mentors that make millions on their own and still accept to
teach, are really few in the industry. More common to find a good system since an Algo can easily be duplicated and sold.
But when you speak to the TRADERS CUP winners you understand that in the end there is also a hope for the average Joe:
maybe you will not make a fortune but you can still learn how to make money.
We organize in Italy and in many
making
other European countries since 1999
you find people, like for example
the TRADERS CUP, a real money
Giuseppe Minnicelli, that have a
real
trading
competition
machine,
very
seldom
which
higher bright education and a real
in 2015 will reach its 17th edition
grasp of what counts in finance and
(www.traders-cup.it)
will
in life. Giuseppe Minnicelli is also
be sponsored also by TRADERS
and
it
a part time painter and his trading
MAG UK. I audited more than 5000
room is filled with his masterpieces.
accounts of traders coming from UK,
But average successful traders are a
Germany, Switzerland, France, Spain
pain in the neck if you talk to them
and Italy.
about life, arts or politics.
Dr. Emilio Tomasini is Adjunct Professor of Corporate

Finance at the University of Bologna, Italy, where he is
also Chief Editor of the Italian TRADERS edition. He is a
leading authority in Europe for quantitative trading and
now he writes in English his legendary stock picks on
www.volatilitystocks.com
Out of this competition some
Second thing you realize is that
of the most famous traders around,
in the long run success depends also
met the glory that they deserved like
from a team work: successful traders
Achille Capecce who made dozens
tend to meet and form a group
of millions in trading or the latest
for obvious scale economies you
interesting message: you can make
winner, Giuseppe Minnicelli, who in
have in trading together with other
money for sure, the amount of that
35 trading days transformed a 5.000
successful traders. If you are lucky
will depend on your focus and skills.
euro account in an almost 55.000
and you enter such a group you can
But in the end, you can. It is why we
euro account trading mostly Italian
make good money, even if it is rare
invite you to join our next edition
and French biotechnology stocks.
you will become a top trader. So good
of the TRADERS CUP that will also
When you are facing such successful
news is that you can learn, bad news
have an English standing for English
traders, first thing that springs to
is that you will not learn everything
traders. Competition will start in
mind is if trading skill is transferable,
because in the end there is nothing
May 2015 and end in October 2015,
which is logical as you too you want
to learn. If you were born to be a top
award-giving will be at the Milan
to make millions.
trader you already would be a top
Stock Exchange in late October 2015.
trader and you would not be hovering
Good luck ! Either as a mentor or as
around looking for a mentor.
a student you need to see how real
First thing you realize when you

speak to a top trader is that you will
never be like him since what you lack
is focus. A top trader is a real money
So
like
trading
TRADERS
CUP
competition
trading is in the biggest European
convey
real money competition.
an
69
COLUMN
Why Everybody
Should Be Trading
Julian komar
Julian Komar has been into technical analysis and

trading for over three years. He has a private blog:
blog.julian-komar.de
What is more successful in the long term: Trading
The goal in trading is to find a method as well as a
or Investing? I do not have a firm definition of those
system to answer these questions. This system has to have
two terms. Investing is often described as long term
a positive expectation to achieve a profit in the long term.
Buy&Hold, whereas trading is the short term buying and
But that is not all many traders are in that position already
selling. But both methods have a buy and sell decision in
without being successful. Another important risk factor is
common. The question regarding investing is: Do you sell
your own self in entrepreneurship as well as in trading. If
at all or is it a decision without an exit plan? Therefore I
an exit from a business is necessary, then you really have to
would like to call it trading and Buy&Hold.
do it. Furthermore, you have to strike at the right moment
My own definition of trading develops continually. But
and start your business or your trade.
I know one thing for sure: It is the only method to survive
Trading is the only way to act risk-aware and to take
in the financial markets in the long term. Buy&Hold is
your financial faith in your own hand. Risk is priority this
not. I personally do not know the development of the
is independent from the method of decision (fundamental/
next years. I cannot predict the future and I do not have
technical, system trading/individual decisions). In my
a crystal ball. The only thing I know is that prices will
opinion trading is the only way to protect and increase
move.
your capital in the long term. But I am not saying that you
Buy&Hold investors are always subject to risk: stock

market crashes and long term falling prices. Investors
need to become a daytrader. There are many and also

long term ways to trade.
always assume that prices will rise in the long term and
One important thought that I read several times in
they do not have a plan for an exit or a risk limitation.
the Wizards of Wallstreet (book series of Jack Schwager)
But as the example of Japan shows us, this can be the
is the conviction that your capital is in the best hands
case: 20 years of decreasing prices. Who can hang on that
possible, if you look after it yourself. You do not want to
long? Is Buy&Hold the right way?
leave your money to somebody else. Can you say that
I am convinced that you have to think risk-aware:
for yourself? How about your confidence in your trading?
When will I exit a position, if the assumptions of my trade
Often traders lose sight of their goals of capital
turn out to be wrong? The goal is to earn money in the
preservation and long term augmentation. They focus
long term and not to lose. Therefore I have to think like a
on action, technique or treat it as a hobby. But there
manager: Which investments turned out to be successful
is only one thing more to say: Never play with money.
and which investments should I cancel? Where are the
Trading is a business and you have to invest much time
markets that offer good possibilities and when is the right
to become a good trader. If you are not ready to do so,
situation to open a trade? Those are the thoughts that
you have to trust your money to someone who is already
occupy my mind.
successful.
70
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Interview: Jens Rabe My Way to Successful Options Trading P.

Your Personal Trading Coach

TRADERS Your Personal Trading Coach | www.tradersonline-mag.com

Your Basic Success Factors

Keep the Risk

Enjoy free money? 100,000 of it?

Fixed Odds Betting Spread Betting

Bespoke corporate solutions

Does Trading Make People Happy?

Did you follow your trading rules?

Were you able to improve your trading process?

Keep the Risk under Control

We talked to Chris Weaver, CEO of My Trading Zone, about his

The Latest Trading Technology

18 Transaction Data Compression

Dirk Vandycke displays the use of charts given in the world

The Monetary System by JeanFranois Serval and Jean-Pascal

Thomas Bopp shows the two encouraging candidates:

60 The Pros Process

Part 25: Anne-Marie Baiynd

62 Jens Rabe My Way to Successful Options Trading

In TRADERS 11/2014 we published a cover story about

34 Optimized Bollinger Band Strategies

Christian and Andreas Weiss provide you a somewhat unusual

Bitcoin and the general concept of crypto currencies are one

42 Trading Emerging Trends with the Bowtie Pattern

Dave Landry explains how getting on board emerging trends,

48 Murreys Mathematical System

Oscar Cuevas reveals Murreys mathematical system with

52 The Traders Technical Arsenal Part 11

This time Azeez Mustapha discusses the Standard Deviation

56 Trader Mind Part 1

Steve Ward explains how emotions are essential to the

keep the risk

In our cover story, Christian Stern shows how to

The Principles of Risk and Money Management

on the subject and examine whether this method can be

Risk and money management (RMM) describes the art of

used for his/her trading. The Kelly criterion, or the Kelly

using our most important trading asset, for example our

formula, is well known in the field of sports betting and

capital, intelligently and above all safely. We define both

was published by scientist John Larry Kelly Jr. in 1956.

risks and opportunities and risks in terms of ratios and

It is aimed at optimal profit maximisation when placing

try to match them perfectly for the development of our

bets or, of course, entering trades that can be expected to

portfolio. Using RMM allows us to identify healthy and

be profitable. The approach can be described by a simple

yet powerful position sizes, enabling us to achieve long

term success. While good traders may well fail because

beginners against serious and likely damage.

The Kelly Criterion

P is the probability of a profit, i.e. our hit rate.

In connection with the risk and money management that

If our hit rate is a quite realistic 65 per cent, the

is elementary for traders, approaches such as the Kelly

optimum size of the bet for each position is calculated as

Criterion keep emerging. The author would like to elaborate